-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HjRZG4Kkkygi4J+U+53sXFAAPUWt8SMtO2aDjaYRN32Yo8NpyZhjT0Y5cphIPksC Sc/tBkf4vMvCWPzlb1nZ+w== 0000950135-98-006401.txt : 19981228 0000950135-98-006401.hdr.sgml : 19981228 ACCESSION NUMBER: 0000950135-98-006401 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19981224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK PLUS CORP CENTRAL INDEX KEY: 0001065633 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 043430576 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-64663 FILM NUMBER: 98775332 BUSINESS ADDRESS: STREET 1: 234 COPELAND ST CITY: QUINCY STATE: MA ZIP: 02169 BUSINESS PHONE: 6177864000 MAIL ADDRESS: STREET 1: 234 COPELAND ST CITY: QUINCY STATE: MA ZIP: 02169 FORMER COMPANY: FORMER CONFORMED NAME: NETWORK PLUS INC DATE OF NAME CHANGE: 19980709 S-1/A 1 NETWORK PLUS CORP. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1998 REGISTRATION NO. 333-64663 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 NETWORK PLUS CORP. (Exact Name of Registrant as Specified in its Charter) ------------------------ DELAWARE 4813 (State or Other Jurisdiction of (Primary Standard Industrial 04-3430576 Incorporation or Organization) Classification Code Number) (I.R.S. Employer Identification No.)
------------------------ 234 COPELAND STREET, QUINCY, MASSACHUSETTS 02169; (617) 786-4000 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ------------------------ JAMES J. CROWLEY, ESQ. EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER 234 COPELAND STREET QUINCY, MASSACHUSETTS 02169 (617) 786-4000 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) ------------------------ WITH A COPY TO: JEFFREY N. CARP, ESQ. HALE AND DORR LLP 60 STATE STREET BOSTON, MASSACHUSETTS 02109 (617) 526-6000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE 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, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER SHARE(1) AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(2) - ---------------------------------------------------------------------------------------------------------------------------------- 13.5% Series A Cumulative Preferred Stock Due 2009..................... 58,276 shares $1,000 $58,276,000 $17,192 - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended. (2) Of this amount, $11,800.00 was 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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER BY ANY SELLING STOCKHOLDER TO SELL OR THE SOLICITATION BY ANY SELLING STOCKHOLDER OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED DECEMBER 23, 1998 PROSPECTUS NETWORK PLUS CORP. 58,276 SHARES 13.5% SERIES A CUMULATIVE PREFERRED STOCK DUE 2009 ------------------------ This Prospectus relates to the resale of 58,276 shares (the "Preferred Shares") of 13.5% Series A Cumulative Preferred Stock Due 2009 (the "Series A Preferred Stock") of Network Plus Corp., a Delaware corporation ("Network Plus" or the "Company"), by certain selling stockholders (the "Selling Stockholders"). The Selling Stockholders acquired the Preferred Shares in a transaction exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"). The Preferred Shares may be sold from time to time by the Selling Stockholders in brokers' transactions, in transactions with market makers, in block placements, or otherwise, at market prices prevailing at the time of the sale or at prices otherwise negotiated. See "Selling Stockholders" and "Plan of Distribution". The Company will not receive any of the proceeds from the sale of the Preferred Shares by the Selling Stockholders. The Company has agreed to bear certain expenses in connection with the registration of the Preferred Shares being offered and sold by the Selling Stockholders. Any broker-dealer that participates in a distribution of the Preferred Shares and other participating broker-dealers and the Selling Stockholders may be deemed to be "underwriters" within the meaning of the Securities Act, and any profit from any such resale of Preferred Shares and any commissions or concessions received by any such person may be deemed to be underwriting compensation under the Securities Act. Upon a sale of any Preferred Shares by a Selling Stockholder pursuant hereto, (i) such Preferred Shares will have been registered under the Securities Act and, therefore, such Preferred Shares will generally be freely transferable by holders thereof and not bear a legend regarding restrictions on transfer, (ii) holders of such Preferred Shares will not be entitled to certain rights of the Selling Stockholders under the Registration Agreement (as defined), which rights with respect to such Preferred Shares will terminate on sale of such Preferred Shares and (iii) such Preferred Shares will not contain any provisions regarding the payment of Special Dividends (as defined). Dividends on each Preferred Share accrue from the date of original issuance of such Preferred Share at a rate of 13.5% per annum of the Specified Amount (as defined) and are payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year, commencing December 1, 1998. Dividends are payable in cash, except that on each dividend payment date occurring on or prior to September 1, 2003, dividends may be paid, at the Company's option, either in cash or by allowing such dividends ("Accumulated Dividends") to be added to the Specified Amount, which shall initially be equal to the liquidation preference. (Continued on next page) ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE PREFERRED SHARES. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ The date of this Prospectus is , 1998 3 (Continued from front cover) The Preferred Shares will be redeemable at the option of the Company, in whole or in part, at any time on or after September 1, 2003, at the redemption prices set forth herein, plus accumulated and unpaid dividends thereon, if any, to the redemption date. The Preferred Shares will be subject to mandatory redemption on September 1, 2009. In addition, the Company is required to use all or a specified portion of the proceeds of any Senior Notes Offering or Public Equity Offering (each as defined) to redeem the Preferred Shares at the redemption prices and upon the terms set forth herein. See "Description of the Series A Preferred Stock -- Optional Redemption" and "Description of the Series A Preferred Stock -- Mandatory Redemption". The Series A Preferred Stock ranks senior to all other classes of equity securities of the Company outstanding upon consummation of the Initial Offering (as defined below). The Company may not authorize any new class of Parity Stock (as defined) or Senior Stock (as defined) without the approval of the holders of at least a majority of the shares of Series A Preferred Stock then outstanding, voting or consenting, as the case may be, as one class. The Series A Preferred Stock ranks junior to all debt and other liabilities of the Company and any subsidiary of the Company. As of September 30, 1998, reflecting the Initial Offering (as defined below), (i) the total liabilities of the Company, including trade payables, were $23.6 million and (ii) the total liabilities of the Company's subsidiary, including trade payables, were $23.6 million, approximately $4.0 million of which represented secured obligations. On October 7, 1998, the Company entered into a New Revolving Credit Facility (as defined), which provides for borrowings of up to $60.0 million. See "Capitalization" and "Description of Certain Indebtedness". There are currently no borrowings outstanding under the New Revolving Credit Facility. The Company is a holding company that conducts substantially all its operations through subsidiaries, and the Preferred Shares are effectively subordinated to all obligations of the Company's subsidiaries (including trade payables). The Certificate of Designation permits the Company and its subsidiaries to incur substantial amounts of additional debt and other liabilities. See "Description of the Series A Preferred Stock". The Preferred Shares were originally issued and sold on September 3, 1998 in a transaction exempt from registration under the Securities Act (the "Initial Offering"). Accordingly, the Preferred Shares may not be reoffered, resold or otherwise pledged, hypothecated or transferred in the United States unless registered under the Securities Act or unless an applicable exemption from the registration requirements of the Securities Act is available. The Preferred Shares are being registered under the Securities Act for sale hereunder to satisfy certain obligations of the Company under the Registration Agreement (as defined). Pursuant to the Registration Agreement, the Company is generally required to maintain the effectiveness of the registration statement under the Securities Act of which this Prospectus is a part until the earlier of (i) two (2) years from the date of such effectiveness or (ii) the date on which all Preferred Shares have been sold pursuant to such registration statement (the "Expiration Date"). The Preferred Shares constitute a new issue of securities with no established trading market. Any Preferred Shares not sold pursuant hereto prior to the Expiration Date will remain outstanding. To the extent that Preferred Shares are sold pursuant hereto prior to the Expiration Date, a holder's ability to sell Preferred Shares not sold pursuant hereto could be adversely affected, and the holders of any such Preferred Shares will continue to be subject to the existing restrictions on transfer and the Company will have no further obligation to such holders to provide for the registration under the Securities Act of the Preferred Shares. See "Registration Rights". No assurance can be given as to the liquidity of the trading market for the Preferred Shares. 4 NOTICE TO INVESTORS Selling Stockholders wishing to sell Preferred Shares pursuant hereto may be required to provide certain information to the Company concerning the plan of distribution. Such Selling Stockholders must also comply with the prospectus delivery requirements of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Selling Stockholder in connection with resales of Preferred Shares. The Company has agreed to make this Prospectus (as it may be amended or supplemented) available to any such Selling Stockholder that requests copies of such Prospectus for use in connection with any such resale. See "Plan of Distribution". The Company believes that none of the Selling Stockholders is an "affiliate" (as such term is defined in Rule 405 under the Securities Act) of the Company. There has been no public market for the Preferred Shares. There can be no assurance as to the liquidity of any markets that may develop for the Preferred Shares, the ability of holders to sell the Preferred Shares, or the price at which holders would be able to sell the Preferred Shares. The Company does not intend to apply for listing of the Preferred Shares for trading on any securities exchange or for inclusion of the Preferred Shares in any automated quotation system. The National Association of Securities Dealers, Inc. ("NASD") has designated the Preferred Shares as securities eligible for trading in the Private Offerings, Resales and Trading through Automatic Linkages ("PORTAL") market of the NASD and the Company has been advised that Goldman, Sachs & Co., Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (collectively, the "Initial Purchasers") have heretofore acted as market makers for the Preferred Shares. The Company has been advised by each of the aforesaid market makers that it currently intends to continue to make a market in the Preferred Shares. Future trading prices of the Preferred Shares will depend on many factors, including, among other things, prevailing interest rates, the Company's operating results and the market for similar securities. Historically, the market for securities similar to the Preferred Shares has been subject to disruptions that have caused substantial volatility in the prices of such securities. There can be no assurance that any market for the Preferred Shares, if such market develops, will not be subject to similar disruptions. See "Risk Factors -- Absence of Public Market". The Company will not receive any proceeds from, and has agreed to bear certain expenses of, the sale of the Preferred Shares by the Selling Stockholders. NO OFFER TO SELL IS BEING MADE BY ANY SELLING STOCKHOLDER, NOR WILL ANY SELLING STOCKHOLDER ACCEPT ANY OFFER TO PURCHASE, IN ANY JURISDICTION IN WHICH ANY SUCH OFFER OR SALE WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. i 5 FORWARD-LOOKING STATEMENTS This Prospectus includes "forward-looking statements", including statements containing the words "believes", "anticipates", "expects" and words of similar import. All statements other than statements of historical fact included in this Prospectus including, without limitation, such statements under "Summary", "Risk Factors", "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere herein, regarding the Company or any of the transactions described herein, including the timing, financing, strategies and effects of such transactions and the Company's growth strategy and anticipated growth, are forward-looking statements. Important factors that could cause actual results to differ materially from expectations are disclosed in this Prospectus, including, without limitation, in conjunction with the forward-looking statements in this Prospectus and/or under "Risk Factors". The Company does not intend to update these forward-looking statements. ------------------------ Network Plus and the Network Plus logo are registered service marks of the Company and Simplicity Pricing is a service mark of the Company. This Prospectus also makes reference to trade names, trademarks and service marks of other companies, which are the property of their respective owners. ------------------------ AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (the "Registration Statement", which term shall include all amendments, exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the rules and regulations promulgated thereunder, covering the Preferred Shares. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to in the Registration Statement are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Company is subject to the informational requirements of the Exchange Act, and in accordance therewith is required to file reports and other information with the Commission. All reports and other information filed by the Company with the Commission may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, NW, Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such documents can be obtained at the public reference section of the Commission, 450 Fifth Street, NW, Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, including the Company, that file electronically with the Commission. While any Preferred Shares remain outstanding, the Company will make available, upon request, to any holder and any prospective purchaser of Preferred Shares the information required pursuant to Rule 144A(d)(4) under the Securities Act during any period in which the Company is not subject to Section 13 or 15(d) of the Exchange Act. Potential investors may also obtain a copy of the Certificate of Designation governing the Series A Preferred Stock and the Exchange and Registration Rights Agreement referred to herein by writing to the Company at 234 Copeland Street, Quincy, Massachusetts 02169, Attention: Chief Financial Officer. ------------------------ THE COMPANY WAS INCORPORATED IN DELAWARE IN JULY 1998, AND ITS WHOLLY OWNED OPERATING SUBSIDIARY, NETWORK PLUS, INC., WAS INCORPORATED IN MASSACHUSETTS IN MARCH 1990. THE ADDRESS OF THE COMPANY'S PRINCIPAL EXECUTIVE OFFICE IS 234 COPELAND STREET, QUINCY, MASSACHUSETTS 02169, AND ITS TELEPHONE NUMBER IS (617) 786-4000. ii 6 SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial data, including the financial statements and related notes, appearing elsewhere in this Prospectus. Unless otherwise indicated, all references to the Company or Network Plus refer to Network Plus Corp., a Delaware corporation, and its wholly-owned subsidiary Network Plus, Inc., a Massachusetts corporation ("NPI"). Please refer to the Glossary for the definitions of certain terms used herein and elsewhere in this Prospectus. THE COMPANY OVERVIEW Network Plus, founded in 1990, is a facilities-based integrated communications provider ("ICP") offering switched long distance, data and enhanced telecommunications services. The Company's customers consist primarily of small and medium-sized businesses located in major markets in the Northeastern and Southeastern regions of the United States. The Company also provides international wholesale transport and termination services to major domestic and international telecommunication carriers. In addition, the Company intends to offer local services on a commercial basis beginning in late 1998. As of September 30, 1998, the Company served over 39,000 customers representing in excess of 180,000 access lines and 30,000 toll-free numbers. All customers are directly invoiced by the Company on a Network Plus bill. As of September 30, 1998, the Company had a 201-person sales force located in 12 regional offices, and in 1997 had total revenue of $98 million. The Company purchases network components where justified by the volume of originating and terminating traffic and leases components where it has a more limited volume of such traffic. The Company has switches in Quincy, Massachusetts and Orlando, and intends to add switches throughout the second half of 1998 and continuing through 1999 in Atlanta, Chicago, Los Angeles and New York City as well as multiple local traffic switches in the Northeastern and Southeastern regions of the United States. In September 1998, over 60% of the Company's revenue was generated by customer traffic carried on its network, and the Company expects this percentage to increase as the Company further expands its facilities-based infrastructure. The Company recently entered into two 20-year indefeasible right-of-use ("IRU") agreements pursuant to which it acquired 625 route miles of dark fiber (1,830 digital fiber miles), that, when fully deployed and activated, will form a redundant fiber ring connecting major markets throughout New England and the New York metropolitan area and provide the Company with significant transmission capacity. The Company believes that, because of its large and highly focused sales force and superior customer support, the Company will be successful in rapidly acquiring new customers, cross-selling local services to its existing long distance customers, continuing to migrate "off-net" long distance customers to its network, cross-selling enhanced products and services and maintaining a high rate of customer retention. The Company experienced a compounded annual growth rate in customers in the three-year period ended December 31, 1997 of 68%. The Company's business strategy is to leverage its eight-year operating history, existing customer base and substantial in-region experience to (i) be a one-stop ICP offering comprehensive bundled voice and data solutions, (ii) acquire and retain market share through its direct sales force and focused customer service, (iii) enhance its facilities-based infrastructure where economically advantageous and continue the migration of traffic to its network, (iv) build and retain market share through advanced technologies and an advanced operational support system, (v) target the market of small and medium-sized businesses, which the Company believes to be underserved, with a focus on the Northeastern and Southeastern regions of the United States, (vi) increase international wholesale sales and (vii) expand through strategic acquisitions and alliances. 1 7 RISK FACTORS An investment in the Series A Preferred Stock involves a high degree of risk. Investors should carefully consider the matters set forth under "Risk Factors". THE SERIES A PREFERRED STOCK This Prospectus covers 41,350 outstanding Preferred Shares and 16,926 shares that may be issued as dividends on Preferred Shares. Upon a sale of any Preferred Shares by a Selling Stockholder pursuant hereto, (i) such Preferred Shares will have been registered under the Securities Act and, therefore, such Preferred Shares will generally be freely transferable by holders thereof and not bear a legend regarding restrictions on transfer, (ii) holders of such Preferred Shares will not be entitled to certain rights of the Selling Stockholders under the Registration Agreement, which rights with respect to such Preferred Shares will terminate on sale of such Preferred Shares and (iii) such Preferred Shares will not contain any provisions regarding the payment of Special Dividends. See "Description of the Series A Preferred Stock". Issuer........................ Network Plus Corp. Securities Offered............ The Selling Stockholders are offering up to 58,276 shares of 13.5% Series A Cumulative Preferred Stock Due 2009, par value $.01 per share. Liquidation Preference........ $1,000 per share. Dividends..................... Dividends on the Series A Preferred Stock accrue at a rate of 13.5% per annum of the Specified Amount thereof and will be payable quarterly in arrears on March 1, June 1, September 1 and December 1 of each year, commencing December 1, 1998. Dividends are payable in cash, except that on each dividend payment date occurring on or prior to September 1, 2003, dividends may be paid, at the Company's option, either in cash or by allowing such dividends ("Accumulated Dividends") to be added to the Specified Amount, which shall initially be equal to the liquidation preference. It is not anticipated that the Company will pay any dividends in cash for any period ending on or prior to September 1, 2003. Ranking....................... The Series A Preferred Stock ranks senior to all other classes of equity securities of the Company outstanding upon consummation of this Offering. The Company may not authorize any new class of Parity Stock or Senior Stock without the approval of the holders of at least a majority of the shares of Series A Preferred Stock then outstanding, voting or consenting, as the case may be, as one class. See "Description of the Series A Preferred Stock -- Ranking". The Series A Preferred Stock ranks junior to all indebtedness and other liabilities of the Company and any subsidiary of the Company. As of September 30, 1998, reflecting the Initial Offering, (i) the total liabilities of the Company, including trade payables, were $23.6 million and (ii) the total liabilities of the Company's subsidiary, including trade payables, were $23.6 million, approximately $4.0 million of which represented secured obligations. On October 7, 1998, the Company entered into a New Revolving Credit Facility (as defined), which provides for borrowings of up to $60 million. 2 8 There are currently no borrowings outstanding under the New Revolving Credit Facility. See "Capitalization" and "Description of Certain Indebtedness". Optional Redemption........... The Series A Preferred Stock will be redeemable at the option of the Company, in whole or in part, at any time on or after September 1, 2003 at the redemption prices set forth herein plus accumulated and unpaid dividends, if any, to the date of redemption. Mandatory Redemption.......... The Series A Preferred Stock is subject to mandatory redemption at its Specified Amount, plus, without duplication, accumulated and unpaid dividends, if any, on September 1, 2009 out of any funds legally available therefor. If the Company consummates a Senior Notes Offering (as defined), the net proceeds of which (excluding underwriting or other placement fees and proceeds placed in escrow at the closing thereof pursuant to the terms of such offering) received by the Company exceed $100 million, the Company must redeem the outstanding Series A Preferred Stock with the net proceeds of such offering at a redemption price of 108% of the Specified Amount thereof, plus, without duplication, accumulated and unpaid dividends to the date of redemption. If the Company consummates any Public Equity Offerings (as defined) on or before September 1, 2001, the Company must apply the first $25 million of net proceeds from such Public Equity Offering or Offerings and 50% of each dollar of net proceeds in excess of $25 million (excluding underwriting or other placement fees and calculated on a cumulative basis beginning with the first such Public Equity Offering) to redeem the Series A Preferred Stock at the prices set forth herein plus accumulated and unpaid dividends, if any, to the date of redemption. Change of Control............. In the event of a Change of Control, holders of the Series A Preferred Stock will have the right to require the Company to purchase their Series A Preferred Stock, in whole or in part, at a price equal to 101% of the Specified Amount thereof, plus, without duplication, accumulated and unpaid dividends, if any, to the date of purchase. Voting Rights................. Except as described below, and other than as otherwise required by Delaware law, holders of the Series A Preferred Stock will have no voting rights. The Certificate of Designation will provide that, upon the failure of the Company (1) to pay dividends for six or more dividend periods (whether or not consecutive), (2) to satisfy any mandatory redemption obligation with respect to the Series A Preferred Stock, (3) to comply with the covenants set forth in the Certificate of Designation or (4) to make certain payments on certain indebtedness, the holders of the outstanding shares of Series A Preferred Stock, voting together as a class, will be entitled to elect to serve on the Board of Directors the lesser of (x) two additional members of the Board and (y) that number of directors constituting 25% of the members of the 3 9 Board; and the size of the Board will be immediately and automatically increased by such number. See "Description of the Series A Preferred Stock -- Voting Rights". Certain Covenants............. The Certificate of Designation contains certain covenants that, among other things, will limit the ability of the Company and its subsidiaries to incur additional indebtedness, issue stock in subsidiaries, pay dividends or make other distributions in respect of Junior Stock, repurchase Junior Stock, make certain investments, enter into certain transactions with affiliates, sell assets of the Company and its subsidiaries, and enter into certain mergers and consolidations. Registration Covenant......... Pursuant to the Registration Agreement, the Company has agreed to use its best efforts to cause the Preferred Shares to be registered under the Securities Act so as to permit resales by the Selling Stockholders. If the Company is not in compliance with its obligations under the Registration Agreement, Special Dividends will accrue on the Series A Preferred Stock under certain circumstances. If the registration statement under the Securities Act of which this Prospectus is a part is declared effective by the Commission on the terms and within the period contemplated by this Prospectus, no Special Dividends will accrue. See "Description of the Series A Preferred Stock -- Registration Covenant". Warrants...................... The Series A Preferred Stock was initially issued as a part of a Unit. Each Unit consisted of (i) one share of Series A Preferred Stock, (ii) 7.75 Initial Warrants and (iii) 15 Contingent Warrants. Each Warrant entitles the holder thereof to purchase one share of Common Stock from the Company at an exercise price of $0.01 per share, subject to adjustment. The Contingent Warrants are currently held in escrow for the benefit of holders of the Series A Preferred Stock. On each Contingent Warrant Release Date, the Contingent Warrant Escrow Agent will release the Applicable Percentage of the Contingent Warrants and any other Contingent Warrant Escrow Property on a pro rata basis (for purposes of which any shares of Series A Preferred Stock redeemed or repurchased prior to such date by the Company shall be deemed to be issued and outstanding and held by the Company) to the holders of the issued and outstanding shares of Series A Preferred Stock on the immediately preceding Contingent Warrant Release Record Date. Contingent Warrants not released to holders will be canceled. The Series A Preferred Stock and the Initial Warrants will trade separately as of the date on which the registration statement with respect to the Preferred Shares is declared effective. Neither the Initial Warrants nor the Contingent Warrants may be traded prior to their registration under the Securities Act or pursuant to an applicable exemption therefrom. The Company has no present intention to register either the Initial Warrants or the Contingent Warrants under the Securities Act. See "Descrip- 4 10 tion of the Series A Preferred Stock", "Description of the Warrants" and "Description of Capital Stock". For additional information regarding the Series A Preferred Stock, see "Notice to Investors", "Description of the Series A Preferred Stock" and "Federal Income Tax Considerations". 5 11 SUMMARY FINANCIAL DATA (in thousands, except per share data) The following table presents summary financial data for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the nine month periods ended September 30, 1997 and 1998. The financial and balance sheet data for the years ending December 31, 1995, 1996 and 1997 have been derived from financial statements (including those set forth elsewhere in this Prospectus) that have been audited by PricewaterhouseCoopers LLP, independent accountants. The financial statements as of December 31, 1996 and 1997 and for each of the years in the three year period ended December 31, 1997 and the report of PricewaterhouseCoopers LLP relating thereto are included elsewhere in this Prospectus, and the summary financial data presented below are qualified in their entirety by reference thereto. The financial data presented for the years ended December 31, 1993 and 1994 and the nine month periods ended September 30, 1997 and September 30, 1998 are derived from the unaudited financial statements of the Company and in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's results of operations and financial condition for those periods. The data for the nine month period ended September 30, 1998 are not necessarily indicative of results for the year ending December 31, 1998 or indicative of future periods. The summary financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements, including the notes thereto, of the Company appearing elsewhere in this Prospectus. For periods prior to the formation of the Company on July 15, 1998, the financial data reflect the financial statements of Network Plus, Inc., the Company's wholly-owned subsidiary, as it was the sole operating entity.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- ------- ------- STATEMENTS OF OPERATIONS DATA: Revenue......................................... $14,427 $30,754 $49,024 $75,135 $98,209 $73,921 $79,588 Costs of services............................... 7,120 16,061 35,065 57,208 78,106 58,193 59,234 Selling, general and administrative............. 7,233 11,631 17,697 19,230 25,704 16,370 20,099 Depreciation and amortization................... 67 180 276 533 994 581 1,449 ------- ------- ------- ------- ------- ------- ------- Operating income (loss)......................... 7 2,882 (4,014) (1,836) (6,595) (1,223) (1,194) Interest income................................. 13 37 202 95 86 77 62 Interest expense................................ (5) (2) (40) (313) (557) (330) (781) Other income, net............................... 30 102 7,859 3,529 3,917 72 69 Provision for income taxes...................... (3) (167) (312) (60) (42) (42) (430) ------- ------- ------- ------- ------- ------- ------- Net income (loss)............................... 42 2,852 3,695 1,415 (3,191) (1,446) (2,274) Preferred stock dividends and accretion......... -- -- -- -- -- -- (598) ------- ------- ------- ------- ------- ------- ------- Net income (loss) applicable to common stockholders.................................. $ 42 $ 2,852 $ 3,695 $ 1,415 $(3,191) $(1,446) $(2,872) ======= ======= ======= ======= ======= ======= ======= Net income (loss) per share applicable to common stockholders Basic and diluted............................. $ -- $ 0.29 $ 0.37 $ 0.14 $ (0.32) $ (0.14) $ (0.29) ======= ======= ======= ======= ======= ======= ======= Pro forma net income (loss) per share applicable to common stockholders Basic and diluted............................. $ -- $ 0.18 $ 0.24 $ 0.09 $ (0.21) $ (0.09) $ (0.18) ======= ======= ======= ======= ======= ======= ======= Weighted average shares outstanding Basic and diluted............................. 10,000 10,000 10,000 10,000 10,000 10,000 10,000 ======= ======= ======= ======= ======= ======= =======
6 12
DECEMBER 31, ----------------------------------------------- SEPTEMBER 30, 1993 1994 1995 1996 1997 1998(1) ------- ------- ------- ------- ------- ------------- BALANCE SHEET DATA: Cash and cash equivalents......................... $ 215 $ 1,232 $ 1,608 $ 2,241 $ 1,502 $26,804 Current assets.................................... 2,545 9,264 16,441 19,771 28,521 43,122 Property and equipment, net....................... 819 1,435 1,507 3,075 6,957 10,659 Working capital................................... 1,592 4,388 2,369 1,621 (3,128) 21,352 Total assets...................................... 4,647 11,264 18,005 22,915 35,581 54,177 Other long-term obligations....................... 14 24 11 664 3,623 1,875 Redeemable Series A Preferred Stock (2)........... -- -- -- -- -- 33,739 Total stockholders' equity (deficit).............. 539 2,117 3,922 4,101 309 (3,207)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------- --------------- 1993 1994 1995 1996 1997 1997 1998 ------ ------- ------ ------ ------ ------ ------ OTHER FINANCIAL DATA: Capital expenditures............................. 815 813 860 2,135 3,363 3,035 5,160 EBITDA (3)....................................... 104 3,164 4,121 2,226 (1,684) (493) 386 Net cash provided by (used for) operating activities..................................... 1,689 1,904 2,463 (316) 184 (877) (1,867) Net cash provided by (used for) investing activities..................................... (1,949) 368 (184) (647) (6,927) (3,027) 4,355 Net cash provided by (used for) financing activities..................................... 19 (1,255) (1,903) 1,596 6,004 2,525 22,814 Ratio of earnings to combined fixed charges (4)............................................ 1.5x 23.4x 20.4x 3.7x (2.9)x (1.7)x (0.2)x
- --------------- (1) Reflects (i) the Initial Offering (after deducting discounts and offering expenses payable by the Company totaling $2.5 million) and the application of the net cash proceeds therefrom, including the repayment of $9.8 million of borrowings under the Former Bank Credit Facility (see "Description of Certain Indebtedness"), (ii) the payment of a $5.0 million dividend to the Company's stockholders and the reinvestment of $1.9 million by one of the Company's stockholders (representing such stockholder's approximate net after-tax proceeds of the dividend) in the form of a long-term loan to the Company and (iii) the tax effect of the Company's conversion from an S Corporation to a C Corporation. (2) Series A Preferred Stock with an initial liquidation preference of $40.0 million was issued by the Company as part of the Units offered in the Initial Offering. Each Unit consists of one share of Series A Preferred Stock, 7.75 Initial Warrants and 15 Contingent Warrants, each Warrant to purchase one share of Common Stock. A value of $4.65 million was allocated to the Warrants, representing the portion of the purchase price of the Units allocated to the Initial Warrants, less $0.3 million of the costs associated with the Initial Offering allocable to the Initial Warrants. A de minimis value was ascribed to the Contingent Warrants. No assurance can be given that the value allocated to the Initial Warrants will be indicative of the price at which the Initial Warrants may actually trade. Costs of $2.2 million associated with the Initial Offering have been allocated to the Series A Preferred Stock. (3) EBITDA consists of net income (loss) before net interest, income taxes, depreciation and amortization. Management believes that EBITDA is a useful financial performance measure for comparing companies in the telecommunications industry in terms of operating performance, leverage, and ability to incur and service debt, because it provides an alternative measure of cash flow from operations. EBITDA should not be considered in isolation from, or as a substitute for, net income (loss), net cash provided by (used for) operating activities or other consolidated income or cash flow statement data presented in accordance with generally accepted accounting principles ("GAAP") or as a measure of profitability or liquidity. EBITDA does not reflect working capital changes and includes non-interest components of other income (expense), most of which are non-recurring. These items may be considered significant components in understanding and assessing the Company's results of operations and 7 13 cash flows. EBITDA may not be comparable to similarly titled amounts reported by other companies. (4) For purposes of calculating the ratio of earnings to combined fixed charges, "earnings" represent net income (loss) before income taxes plus combined fixed charges, and combined fixed charges consist of interest expense, preferred stock dividends and accretion of issuance costs and discount, and the interest portion of operating lease rentals. For the year ended December 31, 1997, earnings were insufficient to cover combined fixed charges by $3.1 million. For the nine months ended September 30, 1997 and 1998, earnings were insufficient to cover combined fixed charges by $1.5 million and $1.8 million, respectively. 8 14 RISK FACTORS In addition to the other information in this Prospectus, prospective investors should consider carefully the following risk factors: NEGATIVE CASH FLOW AND OPERATING LOSSES The Company had operating losses in each of the years ending December 31, 1997, 1996 and 1995 and negative cash flow in the year ended December 31, 1997, and there can be no assurance that the Company will achieve or sustain profitability or generate positive cash flow in the future. The Company expects to incur significant expenditures in the future in connection with the acquisition, development and expansion of its network, information technology systems, employee base, services and customer base. To the extent the Company's cash needs exceed the Company's available cash and existing borrowing availability, the funding of these expenditures will be dependent upon the Company's ability to raise substantial financing. The Company estimates that, for 1998 and 1999, capital required for expansion of its infrastructure and services and to fund negative cash flow will be approximately $140 million. At December 31, 1997, the Company had approximately $1.5 million in cash and cash equivalents available for such purposes. In addition, the Company continues to consider potential acquisitions or other arrangements that may fit the Company's strategic plan. Any such acquisitions or arrangements are likely to require additional equity or debt financing, which the Company will seek to obtain as required and may also require that the Company obtain the consent of its debt holders. The Company may be required to apply all or a portion of any such financing to redeem all or a portion of the Series A Preferred Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Business Strategy". SUBSTANTIAL FUTURE CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING; SUBSTANTIAL LEVERAGE The Company's ability to meet its projected growth is dependent upon its ability to secure substantial additional financing in the future. The Company believes that its current cash resources and available cash from the New Revolving Credit Facility (see "Description of Certain Indebtedness"), together with the proceeds of the Initial Offering, will be sufficient to fund the Company's operating losses and planned capital expenditures through the 18-month term of the New Revolving Credit Facility. The Company does not expect to have sufficient available cash to repay such facility at maturity. Accordingly, the Company expects that it will be required to refinance the full $60.0 million of such facility. The Company currently expects to have additional financing requirements beyond the maturity date of the New Revolving Credit Facility. To meet its future financing requirements, sources of funding may include public offerings or private placements of equity or debt securities, bank loans and additional capital contributions from new or existing stockholders. The Company may be required to apply all or a portion of any such financing to redeem all or a portion of the Series A Preferred Stock. There can be no assurance that additional financing will be available to the Company or, if available, that it can be obtained on a timely basis, on terms acceptable to the Company, and within the limitations contained in the Company's commercial lending agreements and the Certificate of Designation. Failure to obtain such financing could result in the delay or abandonment of the Company's development and expansion plans and could have a material adverse effect on the Company. The Company's business plan for the next 18 months is to a large extent dependent upon the availability of the New Revolving Credit Facility. There can be no assurance that the New Revolving Credit Facility or the financing available thereunder will remain available to the Company through any given period. In the event the New Revolving Credit Facility ceases to be available to the Company, the Company believes that its cash resources will be sufficient to fund the Company's operating losses and capital expenditures for only a limited time. In such event, the Company would be unable to implement its growth strategy in accordance with its projected schedule, if at all. See "Busi- 9 15 ness -- Growth Strategy". Accordingly, the failure of the Company to maintain the availability of such facility would have a material adverse effect on the business and prospects of the Company. After giving effect to proposed borrowings under the New Revolving Credit Facility, the Company will have a significant amount of indebtedness outstanding. In addition, as a result of its growth strategy, the Company expects to incur additional indebtedness in the future. The Company's ability to make cash payments with respect to its outstanding indebtedness and the Series A Preferred Stock, and to repay its obligations on such indebtedness and preferred stock at maturity, will depend on its future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond the Company's control. On or prior to September 1, 2003, the Company may pay dividends on the Series A Preferred Stock by allowing such dividends to be added to the Specified Amount of the Series A Preferred Stock. It is not anticipated that the Company will pay any dividends in cash for any period ending on or prior to September 1, 2003. Accordingly, the Specified Amount of the Series A Preferred Stock and the cash dividend obligation in respect thereof may increase significantly. If the Company is unable to service its indebtedness or other obligations, it will be forced to examine alternative strategies that may include actions such as reducing or delaying capital expenditures, restructuring or refinancing its indebtedness or preferred stock, or seeking additional debt or equity financing. There can be no assurance that any of these strategies could be effected on satisfactory terms, if at all. The degree to which the Company is leveraged could have important consequences to the holders of the Securities, including the following: (i) the Company will have significant and increasing cash interest expense and significant principal repayment obligations with respect to outstanding indebtedness; (ii) the Company's degree of leverage and related debt service obligations could limit its ability to plan for, and make it more vulnerable than some of its competitors to the effects of, an economic downturn or other adverse developments; (iii) any cash flow from the operations of the Company may need to be dedicated to debt service payments and might not be available for other purposes; and (iv) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements or other purposes could be impaired. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Business Strategy". HOLDING COMPANY STRUCTURE The Company is a holding company with no material sources of income or assets other than the stock of its subsidiary, and the Securities will be obligations exclusively of the Company. Since all of the Company's operations are conducted through its subsidiary, the Company's cash flow and its ability to meet its own obligations, including payment of dividends on the Series A Preferred Stock, are dependent upon the earnings of its subsidiary and the distributions of those earnings to the Company, or upon loans or other payments of funds made by such subsidiary to the Company. The Company's subsidiary is a separate and distinct legal entity and will have no obligation, contingent or otherwise, to pay any dividends or make any other distributions to the Company or to otherwise pay amounts due with respect to the Series A Preferred Stock or to make funds available for such payments. Future debt instruments of the Company's subsidiary likely will impose significant restrictions that affect, among other things, the ability of the Company's subsidiary to pay dividends or make loans, advances or other distributions to the Company. The Certificate of Designation permits the Company's subsidiaries to enter into agreements containing such restrictions. See "Description of Certain Indebtedness". The ability of the Company's subsidiary to pay dividends and make other distributions also will be subject to, among other things, applicable state laws and regulations. The Series A Preferred Stock will be structurally subordinated to all existing and future indebtedness, trade payables, preferred stock and other obligations of the Company's subsidiary (including, without limitation, the New Revolving Credit Facility). Therefore, the Company's right 10 16 and the rights of its creditors, including the holders of the Series A Preferred Stock, to participate in the assets of the subsidiary upon the subsidiary's liquidation or reorganization will be subject to the prior claims of the subsidiary's creditors and holders of preferred stock, if any, except to the extent that the Company may itself be a creditor with recognized claims against the subsidiary, in which case the claims of the Company would still be effectively subordinated to any security interests in or mortgages or other liens on the assets of such subsidiary and would be subordinate to any indebtedness of the subsidiary senior to that held by the Company. As of September 30, 1998, reflecting the Initial Offering, the total liabilities of the Company, including trade payables, were $23.6 million, and (ii) the total liabilities of the Company's subsidiary, including trade payables, were $23.6 million, approximately $4.0 million of which represented secured obligations. On October 7, 1998, the Company entered into the New Revolving Credit Facility, which provides for borrowings up to $60.0 million. There are currently no borrowings outstanding under the New Revolving Credit Facility. See "Description of Certain Indebtedness". The Certificate of Designation limits, but does not prohibit, the incurrence of additional indebtedness by the Company and its subsidiary. Therefore, both the Company and its subsidiary will retain the ability to incur substantial additional indebtedness, and the Company expects that it and its subsidiary may incur substantial additional indebtedness in the future. ABILITY TO PAY DIVIDENDS ON THE SERIES A PREFERRED STOCK The ability of the Company to pay any dividends is subject to applicable provisions of state law, and its ability to pay cash dividends on the Series A Preferred Stock will be subject to the terms of any indebtedness of the Company then outstanding. The ability of the Company to pay cash dividends is dependent upon the receipt of cash from its Subsidiary. See "Risk Factors -- Holding Company Structure". The ability of the Company to pay cash dividends is also in part dependent upon the continued availability of the New Revolving Credit Facility, and there can be no assurance that such facility will remain in effect. See "Risk Factors -- Substantial Future Capital Requirements; Need for Additional Financing; Substantial Leverage". Under Delaware law the Company is permitted to pay dividends on its capital stock, including the Series A Preferred Stock, only out of its surplus, or in the event that it has no surplus, out of its net profits for the year in which a dividend is declared or for the immediately preceding year. Surplus is defined as the excess of a company's total assets over the sum of its total liabilities plus the par value of its outstanding capital stock. In order to pay dividends in cash, the Company must have surplus or net profits equal to the full amount of the cash dividends at the time such dividend is declared. Delaware law permits the Board of Directors of the Company to revalue the Company's assets and liabilities from time to time to their fair market value in order to create surplus. The Company cannot predict what the value of its assets or the amount of its liabilities will be in the future, nor the amounts of its net profits, and, accordingly, there can be no assurance that the Company will be able to pay cash dividends on the Series A Preferred Stock. TAX CONSEQUENCES OF DISTRIBUTIONS WITH RESPECT TO THE SERIES A PREFERRED STOCK It is anticipated that the redemption price of the Series A Preferred Stock will exceed its issue price (i.e., the portion of the purchase price of a Unit sold in the Initial Offering that was initially allocated to the Series A Preferred Stock). As a result, a holder will be required to treat such excess as a series of constructive distributions on the Series A Preferred Stock occurring over the term of such stock. The Company intends to treat the redemption price as the amount that will be paid upon retirement of the Series A Preferred Stock on September 1, 2009. As a result, the difference between the issue price of the Series A Preferred Stock and its redemption price on September 1, 2009, will constitute constructive distributions on the Series A Preferred Stock to U.S. Holders over the period commencing on the issue date thereof and ending on September 1, 2009. To the extent of the Company's current and accumulated earnings and profits (as calculated for Federal income tax purposes), the amount of each consecutive distribution will be includable in a holder's income as 11 17 ordinary dividend income at the time such distribution is deemed to occur, notwithstanding that the cash attributable to such income will not be received by the holder until a subsequent period. RANKING OF THE SERIES A PREFERRED STOCK The Company's obligations with respect to the Series A Preferred Stock are subordinate and junior in right of payment to all present and future indebtedness of the Company and its subsidiaries, but will rank senior to existing equity securities of the Company. In the event of bankruptcy, liquidation or reorganization of the Company, the assets of the Company will be available to pay obligations on the Series A Preferred Stock only after all holders of indebtedness, and all other creditors, of the Company have been paid, and there may not be sufficient assets remaining to pay amounts due on any or all of the Series A Preferred Stock then outstanding. See "-- Substantial Future Capital Requirements; Need for Additional Financing; Substantial Leverage" and "Description of the Series A Preferred Stock -- Ranking". While any shares of Series A Preferred Stock are outstanding, the Company may not authorize, create or increase the authorized amount of any class or series of stock that ranks senior to or pari passu with the Series A Preferred Stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up without the consent of the holders of a majority of the outstanding shares of Series A Preferred Stock. However, without the consent of any holder of Series A Preferred Stock, the Company may create additional classes of stock, increase the authorized number of shares of preferred stock or issue a new series of stock that ranks junior to the Series A Preferred Stock with respect to the payment of dividends and amounts upon liquidation, dissolution or winding up. CERTAIN FINANCIAL AND OPERATING RESTRICTIONS The Certificate of Designation and the New Revolving Credit Facility impose operating and financial restrictions on the Company and its subsidiaries. These restrictions affect, and in certain cases significantly limit or prohibit, among other things, the ability of the Company or any subsidiaries to incur additional indebtedness, issue stock of any subsidiaries, create liens on its assets, pay dividends or make other distributions, sell assets, engage in mergers or acquisitions or make investments. Failure to comply with any of these restrictions could limit the availability of borrowings or result in a default thereunder. In addition, the terms of any debt or equity financings undertaken by the Company to meet its future cash requirements could restrict the Company's operational flexibility and thereby adversely affect the Company. See "Description of Certain Indebtedness" and "Description of the Series A Preferred Stock". MANAGEMENT OF RAPID GROWTH Subject to the sufficiency of its cash resources, the Company intends to continue to rapidly expand its business. The Company's future performance will depend, in large part, upon its ability to implement and manage its growth effectively. The Company's rapid growth has placed, and in the future will continue to place, a significant strain on its administrative, operational and financial resources. The Company anticipates that, if successful in expanding its business it will be required to recruit and hire a substantial number of new sales and other personnel. Pursuant to the Company's growth strategy, the Company currently intends to increase the size of its sales force from 201 as of September 30, 1998 to approximately 400 by the end of 1999. Failure to retain and attract additional qualified sales and other personnel, including management personnel who can manage the Company's growth effectively, and failure to successfully integrate such personnel, could have a material adverse effect on the Company. To manage its growth successfully, the Company will also have to continue to improve and upgrade operational, financial, accounting and information systems, controls and infrastructure as well as expand, train and manage its employee base. In the event the Company is unable to upgrade its financial controls and systems adequately to support its anticipated growth, the Company could be materially adversely affected. See 12 18 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Business Strategy". LACK OF EXPERIENCE OFFERING LOCAL AND OTHER TELECOMMUNICATIONS SERVICES The Company's strategy includes offering additional telecommunications services, including local service and Internet access. The Company has limited experience providing local service and Internet access. To be successful, the Company must compete successfully with companies that have greater financial resources and experience than the Company. To provide these additional services, the Company expects that it will be necessary to make upgrades to its network in advance of the receipt of any revenue. In addition, the provision of certain of these services may involve technical requirements with respect to which the Company has little experience. The provision of these services must also be successfully integrated into the Company's business. There can be no assurance that the Company's future services will receive market acceptance in a timely manner, if at all, or that prices and demand for these services will be sufficient to provide profitable operations. See "Business -- Business Strategy", "Business -- Service Offerings -- Planned Services" and "Business -- Network -- Anticipated Network Expansion". ABILITY TO SECURE AND MAINTAIN INTERCONNECTION AND PEERING ARRANGEMENTS The Company's success will depend upon its ability to develop and expand its network infrastructure and support services in order to offer local telecommunication services, Internet access and other services. Executing the Company's business strategy will require that the Company enter into agreements, on acceptable terms and conditions, with various providers of infrastructure capacity, in particular, interconnection agreements with ILECs and peering agreements with internet service providers ("ISPs"). No assurance can be given that all of the requisite agreements can be obtained on satisfactory terms and conditions. The Company must enter into agreements for the interconnection of the Company's network with the networks of the ILECs covering each market in which the Company intends to offer local service. As of November 23, 1998, the Company had entered into interconnection agreements with Bell Atlantic with respect to Massachusetts, New Hampshire, Rhode Island and New York; with Southern New England Telephone with respect to Connecticut; and with Bell South with respect to Florida and Georgia. The Company expects to execute additional interconnection agreements throughout 1999. There can be no assurance that the Company will successfully negotiate such additional agreements; the failure to secure and maintain such agreements could have a material adverse effect on the Company's ability to become a single source provider of telecommunications services. Peering agreements between the Company and ISPs will be necessary in order for the Company to exchange traffic with ISPs without having to pay transit costs. The basis on which the large national ISPs make peering available or impose settlement charges is evolving as the provisioning of Internet access and related services has expanded. Recently, companies that have previously offered peering have reduced or eliminated peering relationships and are establishing new, more restrictive criteria for peering. Furthermore, if increasing costs and other requirements associated with maintaining peering with the major national ISPs develop, the Company may have to comply with those additional requirements in order to continue to maintain any peering relationships it negotiates. Failure to establish and maintain peering relationships would cause the Company to incur additional operating expenses or abandon certain elements of its strategy, which could have a material adverse effect on the Company. See "Government Regulation". DEPENDENCE UPON SUPPLIERS AND OTHER SERVICE PROVIDERS The Company relies on other companies to supply certain key components of its network infrastructure, including telecommunications services, network capacity and switching and networking equipment, which, in the quantities and quality demanded by the Company, are available only 13 19 from sole or limited sources. The Company is also dependent upon ILECs and other carriers to provide telecommunications services and facilities to the Company and its customers. The Company has from time to time experienced delays or other problems in receiving telecommunications services and facilities which it requests, and there can be no assurance that the Company will be able to obtain such services or facilities on the scale and within the time frames required by the Company at an affordable cost, or at all. As the Company expands its service offerings to include local services, it will compete increasingly with ILECs, which will serve as a disincentive for such entities to cooperate with the Company. Any failure to obtain such components, services or additional capacity on a timely basis at an affordable cost, or at all, would have a material adverse effect on the Company. See "Business -- Competition" and "Government Regulation". In September 1998, approximately 40% of the Company's revenue was attributable to the resale of long distance service provided by Sprint Communications Company L.P. ("Sprint"). The current agreement with Sprint, which became effective as of February 1998, terminates in February 2000, and there can be no assurance that this agreement will be extended on terms acceptable to the Company, if at all. Early termination of the Company's relationship with Sprint could have a material adverse effect on the Company. See "Business -- Network -- Sprint Agreement". The accurate and prompt billing of the Company's customers is dependent upon the timeliness and accuracy of call detail records ("CDRs") provided by any carrier whose service the Company resells. There can be no assurance that the current carriers will continue to provide, or that new carriers, including ILECs, will provide, accurate information on a timely basis, and any such carrier's failure to do so could have a material adverse effect on the Company. RELIANCE ON LEASED TRANSPORT FACILITIES AND IRUs Because the Company leases a portion of its transport capacity, it is dependent upon the availability of fiber optic transmission facilities owned by ILECs, competitive local exchange carriers ("CLECs") and other fiber optic transport providers who lease their fiber optic networks to service providers such as the Company. Many of these entities are, or may become, competitors of the Company. See "-- Competition". The Company recently entered into two 20-year IRU agreements pursuant to which it acquired dark fiber mileage, and may enter into additional IRU agreements in the future. Integration of fiber mileage acquired pursuant to IRU agreements into the Company's network will subject the Company to the risk that the owners of the underlying facilities, who may be competitors of the Company, will not maintain, or will deny the Company access to, such facilities. The risks inherent in this approach include, but are not limited to, the possible inability to negotiate and renew favorable supply agreements, and dependence on the timeliness of the ILECs, CLECs or other fiber optic transport providers in processing the Company's orders for customers who seek to utilize the Company's services. See "Business -- Network". DEPENDENCE ON RIGHTS-OF-WAY AND OTHER THIRD PARTY AGREEMENTS To further develop its network, the Company may need to obtain local franchises and other permits, as well as rights to utilize underground conduit and aerial pole space and other rights-of-way and fiber capacity from entities such as ILECs and other utilities, railroads, long distance companies, state highway authorities, local governments and transit authorities. There can be no assurance that the Company will be able to obtain and maintain such franchises, permits and rights needed to implement its business strategy on acceptable terms. Although the Company does not believe that any such arrangements would be canceled or would not be renewed as needed, cancellation or non-renewal of such arrangements could materially adversely affect the Company's business in the affected area. See "Business -- Network -- Anticipated Network Expansion" and "Government Regulation". 14 20 COMPETITION The Company operates in a highly competitive environment and currently does not have a significant market share in any of its markets. Most of its actual and potential competitors have substantially greater financial, technical, marketing and other resources (including brand or corporate name recognition) than the Company. Also, the continuing trend toward business alliances in the telecommunications industry and the absence of substantial barriers to entry in the data and Internet services markets could give rise to significant new competition. The Company's success will depend upon its ability to provide high-quality services at prices competitive with those charged by its competitors. In addition, the long distance industry is characterized by a high level of customer attrition or "churn"; the Company's revenue has been, and is expected to continue to be, affected by churn. In addition, the Company faces the following specific competitive risks: - - Effect of New Rate Plans. AT&T Corp. ("AT&T"), MCI WorldCom, Inc. ("MCI"), Sprint and other carriers have implemented new price plans aimed at residential customers with significantly simplified rate structures, which may have the impact of lowering overall long distance prices. There can be no assurance that long distance carriers will not make similar offerings available to the small to medium-sized businesses that the Company primarily serves. - - Need to Compete with Incumbent Providers. In the local telecommunications market, the Company's primary competitor initially is expected to be the ILEC serving each geographic area. ILECs are established providers of dedicated and local telephone services to all or virtually all telephone subscribers within their respective service areas. If the ILECs are allowed additional flexibility by regulators to offer discounts to large customers through contract tariffs, decide to engage in aggressive volume and term discount pricing practices for their customers, or seek to charge competitors excessive fees for interconnection to their networks, the revenue of competitors to the ILECs, including the Company, could be materially adversely affected. If future regulatory decisions afford the ILECs increased access services pricing flexibility or other regulatory relief, such decisions could also have a material adverse effect on competitors to the ILECs. - - Entrance of Large Long Distance Companies Into the Local Market. The Company will also face competition or prospective competition in local markets from other carriers, many of which have significantly greater financial resources than the Company. For example, AT&T, MCI and Sprint have each begun to offer local telecommunications services in major U.S. markets using their own facilities or by resale of the ILECs' or other providers' services. - - Local Competition from Other Providers. In addition to long distance service providers, entities that currently offer or are potentially capable of offering local switched services include companies that have previously operated as competitive access providers, cable television companies, electric utilities, microwave carriers, wireless telephone system operators and large customers who build private networks. These entities, upon entering into appropriate interconnection agreements or resale agreements with ILECs, including RBOCs, could offer single-source local and long distance services, similar to those offered or proposed to be offered by the Company. - - Larger and More Competitive Companies Resulting from Telecommunications Mergers. A continuing trend towards business combinations and alliances in the telecommunications industry may create significant new competitors to the Company. Many of these combined entities will have resources far greater than those of the Company. These combined entities may provide a bundled package of telecommunications products, including local and long distance telephony, that is in direct competition with the products offered or proposed to be offered by the Company, and may be capable of offering these products sooner and at more competitive rates than the Company. - - The Competitive Implications of Other Technologies. The Company will also face competition from fixed wireless services; wireless devices that do not require site or network licensing; cellular, 15 21 personal communications service ("PCS"), and other commercial mobile radio service ("CMRS") providers; and Internet telephony. - - Entrance of the Regional Bell Operating Companies into the In-Region Long Distance Market. Section 271 of the Telecommunications Act prohibits any RBOC from providing long distance service that originates (or, in certain cases, terminates) in one of its in-region states until the RBOC has satisfied certain statutory conditions in that state and has received the approval of the FCC. To date, the FCC has denied several applications for such approval; however, the Company anticipates that a number of RBOCs will file additional applications for in-region long distance authority in 1998 and 1999. Once the RBOCs are allowed to offer widespread in-region long distance services, both they and the largest IXCs will be in a position to offer single-source local and long distance service. - - Entrance of Foreign Companies into U.S. Markets. New FCC rules went into effect in February 1998 that make it substantially easier for many non-U.S. telecommunications companies to enter the U.S. market, thus potentially further increasing the number of competitors. - - Intense Competition in Data and Internet Markets. The market for data communications and Internet access services is also extremely competitive. There are no substantial barriers to entry, and the Company expects that competition will intensify in the future. See "Business -- Competition", "Business -- Industry Overview" and "Government Regulation". THE TELECOMMUNICATIONS ACT AND OTHER REGULATION Telecommunications services are subject to significant regulation at the federal, state, local and international levels, affecting the Company and its existing and potential competitors. Delays in receiving required regulatory approvals or the enactment of new and adverse legislation, regulations or regulatory requirements may have a material adverse effect on the Company's financial condition, results of operations and cash flow. In addition, future legislative, judicial and regulatory agency actions could alter competitive conditions in the markets in which the Company is operating or intends to operate in ways that are materially adverse to the Company. In particular, the Company faces the following regulatory risks: - - Need to Comply with Federal Regulations. The Company is regulated at the Federal level by the FCC. It is required to obtain and maintain an FCC 214 license in connection with its international services, and is currently required to file and maintain both domestic and international tariffs containing the currently effective rates, terms and conditions of service for its long distance services. The FCC generally retains the right to sanction a carrier or revoke its authorization if a carrier violates applicable laws or regulations. - - Legal and Administrative Burden of Compliance with Diverse State Regulations. The Company's telecommunications operations are also subject to various state laws and regulations. The Company must obtain and maintain certificates of public convenience and necessity from regulatory authorities in most states in which it offers intrastate service. In most states, the Company must also file and obtain prior regulatory approval of tariffs for intrastate services. The Company must update or amend its tariffs when rates are adjusted or new products are added to services offered by the Company. Challenges by third parties to the Company's Federal or state tariffs and complaints about the Company's practices could cause the Company to incur substantial legal and administrative expenses. - - Failure to Obtain Prior Regulatory Approval of Corporate Reorganization. The FCC and numerous state agencies also impose prior approval requirements on transfers of control, including pro forma transfers of control and corporate reorganizations, and assignments of regulatory authoriza- 16 22 tions. The Company did not obtain prior approval for its July 1998 corporate reorganization to create a holding company structure whereby Network Plus Corp., a Delaware corporation, became the holding company of Network Plus, Inc., a Massachusetts corporation. The Company has filed the necessary papers at the FCC and the relevant state commissions seeking nunc pro tunc (retroactive) approval of its reorganization into a holding company structure on the grounds that the transaction serves important business needs of the Company and enhances the Company's ability to market and provide services more efficiently. The Company believes that its applications will be approved in due course, although there can be no assurance that such approval will be obtained. In the unlikely event that retroactive approval is not obtained from one or more regulatory bodies, the FCC or a state commission may impose fines or penalties, and a state commission may require temporary cessation of business operations of the Company in its jurisdiction pending such approval, any of which events could result in reduced revenue. Such impact on the Company's revenue could have a material adverse effect on the value of the Company's securities, including the Series A Preferred Stock. - - Difficulty Predicting the Impact of the Telecommunications Act and Other Regulatory Changes. The Telecommunications Act has resulted in comprehensive changes in the regulatory environment for the telecommunications industry as a whole, and will have a material impact on the local exchange industry and the competitive environment in which the Company operates. The concept of competitive provisioning of local exchange services is a relatively new development in the telecommunications industry, and the Company cannot predict how the relevant provisions of the Telecommunications Act will be interpreted and implemented by the FCC, state regulators, courts and the ILECs. See "Business -- Competition", "Business -- Industry Overview" and "Government Regulation". The Company's cost of providing long distance service, and its revenue from providing local services, will both be affected by changes in "access charges" and universal service. If the Federal and state regulations requiring the local exchange carriers to provide equal access for the origination and termination of calls by long distance subscribers change or if the regulations governing access charge rates or universal service contribution change, such changes could have a material adverse effect on the Company's financial condition, results of operations and cash flow. - - Uncertainty of the Evolving Regulatory Environment. On July 18, 1997, the United States Court of Appeals for the Eighth Circuit overturned many of the rules the FCC had established pursuant to the Telecommunications Act. The Eighth Circuit decision substantially limits the FCC's jurisdiction and expands state regulators' jurisdiction to set and enforce rules governing the development of local competition. As a result, it is more likely that the rules governing local competition will vary substantially from state to state. If a patchwork of state regulations were to develop, it could increase the Company's cost of regulatory compliance and could make entry into and conduct of business in some markets more expensive than in others. The U.S. Supreme Court heard oral arguments to review the Eighth Circuit's decision in October 1998. There can be no assurance as to how the U.S. Supreme Court will act on the appeal or that the outcome of the appeal will not have a material adverse effect on the Company's financial condition, results of operation and cash flow. DEPENDENCE ON BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS Integrated management information and processing systems are vital to the Company's growth and its ability to monitor costs, bill customers, provision customer orders and achieve operating efficiencies. As the Company continues its transition to the provisioning of integrated communications services, the need for sophisticated billing and information systems will increase significantly. The cost of implementing such systems has been, and is expected to continue to be, substantial. Also, the Company's plans for the development and implementation of its internal systems rely on the delivery of products and services by third party vendors. Failure of these vendors to deliver the required information in a timely and effective manner and at acceptable costs, failure of the 17 23 Company to adequately identify and integrate all of its information and processing needs, failure of the Company's related processing or information systems, or the failure of the Company to upgrade systems as necessary could have a material adverse effect on the Company. The Company is dependent upon the prompt collection of payment of its customers' bills and, in turn, upon the creditworthiness of its customers and the continued implementation of adequate revenue assurance programs. The failure of its customers to pay their bills in a timely manner or the Company's failure to accurately assess the creditworthiness of its customers and implement adequate revenue assurance programs could have a material adverse effect on the Company. In 1997, the Company's provision for doubtful accounts increased by $3.0 million, principally relating to two customers and an increase in the estimate of bad debt reserve consistent with the growth in revenue. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Management Information Systems, Provisioning, Billing and Collections". DEPENDENCE ON KEY PERSONNEL The Company believes that its success will depend to a significant extent upon the abilities and continued efforts of its management, particularly Robert T. Hale, Jr., the Company's Chief Executive Officer and President, Robert T. Hale, the Company's Chairman of the Board, and other members of its senior management team. None of the Company's executive officers is subject to an employment agreement with the Company providing for the officer's continuing employment. The loss of the services of any of such individuals could have a material adverse effect on the Company. The success of the Company will also depend, in part, upon the Company's ability to hire and retain additional key personnel, including senior management, technical and sales personnel, who are also being sought by other businesses. Competition for qualified personnel in the telecommunications industry is intense. Difficulty in hiring and retaining such personnel could have a material adverse effect on the Company. See "-- Management of Rapid Growth", "Business -- Employees" and "Management". IMPACT OF TECHNOLOGICAL CHANGE The telecommunications industry has been, and is likely to continue to be, characterized by rapid technological change, frequent new service introductions and evolving industry standards. Increases or changes in technological capabilities or efficiencies could create an incentive for more competitors to enter the facilities-based local exchange business in which the Company intends to compete. Similarly, such changes could result in lower retail rates for telecommunications services, which could have a material adverse effect on the Company's ability to price its services competitively or profitably. Future technological changes, including changes related to emerging wireline and wireless transmission and switching technologies and Internet-related services and technologies, also could have a material adverse effect on the Company. The Company relies and will continue to rely in part on third parties (including certain of its competitors and potential competitors) for the development of and access to communications and networking technology. The effect of technological changes on the business of the Company cannot be predicted with any degree of certainty. The Company believes its future success will depend, in part, on its ability to anticipate or adapt to such changes and to offer, on a timely basis, services that meet customer demands and evolving industry standards. There can be no assurance that the Company will obtain access to new technology on a timely basis or on satisfactory terms, or that the Company will be able to adapt to such technological changes, offer such services on a timely basis or establish or maintain a competitive position. Any technological change, obsolescence or failure to obtain access to important technologies could have a material adverse effect on the Company. See "Business -- Industry Overview". 18 24 YEAR 2000 COMPLIANCE Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer hardware and software will need to be modified prior to the year 2000 in order to remain functional. There can be no assurance the Company will not incur significant unanticipated costs in achieving year 2000 compliance. Furthermore, if the hardware or software comprising the Company's network elements acquired from third-party vendors, the software applications of the long distance carriers, LECs, or others on whose services the Company depends or with whom the Company's systems interface, or the software applications of other suppliers, are not year 2000 compliant, it could affect the Company's systems, which could have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Impact of Year 2000". STRATEGIC INVESTMENTS; BUSINESS COMBINATIONS In furtherance of its growth strategy, the Company may pursue acquisitions of, or joint ventures or strategic alliances with, companies engaged in businesses similar or related to the business of the Company. As consideration for such acquisitions, the Company may be required to assume liabilities, incur additional indebtedness or issue equity securities. There can be no assurance that the Company will be able to obtain such financing. Such acquisitions, combinations or alliances, if consummated, could increase the Company's indebtedness and could divert the resources and management of the Company and would require integration with the Company's existing networks and services. There can be no assurance that any acquisitions, combinations or alliances will occur or, if consummated, would be on terms favorable to the Company or would be successfully integrated into the Company's operations. See "Business -- Business Strategy -- Expand Through Strategic Acquisitions and Alliances". DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS The Company's success in attracting and retaining customers requires that the Company provide adequate reliability, capacity and security in its network infrastructure. The Company's networks and the networks upon which it depends are subject to physical damage, power loss, capacity limitations, software defects, breaches of security (by computer virus, break-ins or otherwise) and other factors, certain of which may cause interruptions in service or reduced capacity for the Company's customers. Interruptions in service, capacity limitations or security breaches could have a material adverse effect on the Company. See "Business -- Network". CONTROL BY EXISTING STOCKHOLDERS; DEADLOCK; ANTITAKEOVER PROVISIONS All of the outstanding Common Stock is owned or voted by Robert T. Hale and Robert T. Hale, Jr., each an Officer and Director of the Company. Consequently, management will have complete control over all of the Company's affairs and will have the ability to control the election of all members of the Company's Board of Directors and the outcome of all corporate actions requiring stockholder approval. Because the outstanding Common Stock is owned equally by the Company's two stockholders, the failure of such stockholders to agree on a matter that requires the approval of the holders of a majority of the outstanding shares of Common Stock would result in a deadlock, which could have the effect of preventing or delaying the Company from taking any action on the matter. Such a deadlock could have a material adverse effect on the Company. See "Management" and "Stock Ownership". Robert T. Hale and Robert T. Hale, Jr. will have the authority to amend the Company's Certificate of Incorporation and By-Laws to include certain provisions that may have the effect of discouraging, delaying or making more difficult a change in control of the Company or preventing the removal of incumbent directors even if holders of the Warrants or other securities of the Company 19 25 were to deem such action to be in the best interests of the Company. Among other things, the Certificate of Incorporation may be amended to provide for a classified Board of Directors. In addition, the Certificate of Incorporation allows the Board of Directors to issue shares of preferred stock and fix the rights, privileges and preferences of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Any such issuance of shares of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. In addition, the Certificate of Incorporation and By-Laws could be amended to, among other things, limit the manner in which directors may be nominated by the stockholders and limit the manner in which proposals may be made at stockholder meetings. The Company may also elect to be subject to Section 203 of the Delaware General Corporation Law, which could have the effect of delaying or preventing a change of control of the Company. To the extent that these provisions discourage takeover attempts, they could deprive stockholders of opportunities to realize takeover premiums for their shares or could depress the market price of the Company's securities. FUNDING OF REPURCHASE OBLIGATIONS; ABSENCE OF SINKING FUND; REDEMPTION OF SERIES A PREFERRED STOCK UPON MATURITY There is no sinking fund with respect to the Series A Preferred Stock, and in September 2009 all outstanding shares thereof will become subject to mandatory redemption by the Company. Also, upon the occurrence of certain earlier events, including a change in control of the Company, the Company will be required to offer to repurchase all or a portion of the outstanding Series A Preferred Stock. The source of funds for any such payment at maturity or earlier repurchase is expected to be the Company's available cash or cash generated from operating or other sources, including, without limitation, borrowings or sales of assets or equity securities of the Company. There can be no assurance that sufficient funds will be available at the time of any such event to make such purchase or to make any other required payment. See "Description of the Series A Preferred Stock". In addition, limitations imposed by other debt obligations of the Company may limit the Company's ability to repurchase the Series A Preferred Stock. ABSENCE OF PUBLIC MARKET The Preferred Shares are a new issue of securities for which there is currently no established market. There can be no assurance as to (i) the liquidity of any market that may develop, (ii) the ability of the holders of Preferred Shares to sell any of their Preferred Shares, or (iii) the price at which the holders of Preferred Shares would be able to sell such shares. The Company does not presently intend to apply for listing of the Preferred Shares on any national securities exchange or on The Nasdaq Stock Market. The Initial Purchasers have advised the Company that they presently intend to make a market in the Preferred Shares. The Initial Purchasers are not obligated, however, to continue to make a market in such shares, and any such market-making may be discontinued at any time at the sole discretion of the Initial Purchasers and without notice. Accordingly, no assurance can be given as to the development or liquidity of any market for the Preferred Shares. If a market for the Preferred Shares were to develop, such shares could trade at prices that may be higher or lower than their initial offering price depending on many factors, including prevailing interest rates, the Company's operating results and prospects for its performance, the market for similar securities and general economic conditions. Historically, the market for securities such as the Preferred Shares has been subject to disruptions that have caused substantial volatility in the prices of similar securities. There can be no assurance that, if a market for any of the Preferred Shares were to develop, such a market would not be subject to similar disruptions. 20 26 USE OF PROCEEDS The Company will not receive any proceeds from the sale of Preferred Shares by the Selling Stockholders pursuant hereto. The net proceeds to the Company of the Initial Offering were approximately $37.5 million. The Company used $9.8 million of the net proceeds of the Initial Offering to pay down borrowings outstanding under the Former Bank Credit Facility. Interest under the Former Bank Credit Facility was payable at the prime rate or available LIBOR options through maturity on May 1, 2001. The Company intends to use the remainder of the net proceeds to finance its anticipated expansion, including the expansion of its local telecommunications infrastructure, information technology systems and sales force. Pending application of the net proceeds of the Initial Offering as described herein, the Company intends to use a portion of such proceeds to temporarily repay revolving indebtedness and to invest the remainder of such proceeds in short-term, interest-bearing, U.S. government securities and other short-term, investment grade securities. Because of the number and variability of factors that may determine the Company's use of the net proceeds of the Initial Offering, management will retain a significant amount of discretion over the application of the net proceeds. There can be no assurance that such applications will not vary substantially from the Company's current plans. See "Risk Factors -- Control by Existing Stockholders; Deadlock; Antitakeover Provisions", "Risk Factors -- Negative Cash Flow and Operating Losses" and "Risk Factors -- Substantial Future Capital Requirements; Need for Additional Financing; Substantial Leverage". DIVIDEND POLICY On September 2, 1998, the Company paid a dividend to Robert T. Hale and Robert T. Hale, Jr. in the aggregate amount of $5.0 million, of which $1.9 million was reinvested by one of the stockholders in the form of a long-term loan to the Company. For the foreseeable future the Company intends to retain its earnings for its operations and expansion of its business and it does not expect to pay dividends on its Common Stock (other than in amounts necessary to enable the Company's stockholders to pay taxes and related tax preparation expenses in respect of income allocated to such stockholders through the date the Company's status as an S Corporation ceased). The payment of any future dividends will be at the discretion of the Board of Directors, except as required by the terms of the Series A Preferred Stock, and will depend upon, among other factors, the Company's earnings, financial condition, capital requirements and general business outlook at the time payment is considered. In addition, the Company's ability to pay dividends will depend upon the amount of distributions, if any, received from NPI or any future operating subsidiaries of the Company. The Company intends to exercise its option to make dividend payments on the Series A Preferred Stock prior to September 1, 2003 by allowing such dividends to be added to the Specified Amount of the Series A Preferred Stock. The New Revolving Credit Facility will, and any future indebtedness incurred by the Company may, restrict the ability of the Company to pay dividends. See "Description of Certain Indebtedness", "Description of the Series A Preferred Stock" and "Description of Capital Stock". 21 27 CAPITALIZATION The following table sets forth the total cash and cash equivalents, marketable securities and investments and capitalization of the Company as of September 30, 1998, and reflects (i) the Initial Offering (after deducting discounts and offering expenses payable by the Company totaling $2.5 million) and the application of the net cash proceeds therefrom, including the repayment of $9.8 million of borrowings under the Former Bank Credit Facility, (ii) the payment of a $5.0 million dividend to the Company's stockholders and the reinvestment of $1.9 million by one of the Company's stockholders (representing such stockholder's approximate net after-tax proceeds of the dividend) in the form of a long-term loan to the Company and (iii) the tax effect of the Company's conversion from an S Corporation to a C Corporation. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements, including the notes thereto, of the Company and NPI appearing elsewhere in this Prospectus. See "Use of Proceeds", "Description of Capital Stock" and "Description of Certain Indebtedness -- Stockholder Loan".
SEPTEMBER 30, 1998 ------------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Cash and Cash Equivalents, Marketable Securities and Investments............................................... $26,871 ======= Debt: Current Portion of Long-Term Debt and Capital Lease Obligations and Former Bank Credit Facility(1)............ $ 4,025 ======= Long-Term Debt and Capital Lease Obligations, Net of Current Portion................................................... $ -- Long-Term Note Payable to Stockholder....................... 1,875 Redeemable Preferred Stock 13.5% Series A Cumulative Redeemable Preferred Stock due 2009, $0.01 par value, 50,000 shares authorized, 40,000 shares issued and outstanding, as adjusted(2).......... 33,739 Stockholders' Equity: Common Stock, $.01 par value, 20,000,000 shares authorized; 10,000,000 shares outstanding.............. 100 Additional Paid-In Capital................................ -- Warrants(2)(3)............................................ 4,359 Accumulated Deficit....................................... (7,666) ------- Total Stockholders' Equity (Deficit)................... (3,207) ------- Total Capitalization.............................. $32,407 =======
- --------------- (1) If the New Revolving Credit Facility had been in place on September 30, 1998, approximately $45 million of the $60 million in total borrowings contemplated by such facility would have been available. (2) Series A Preferred Stock with an initial liquidation preference of $40 million was issued by the Company as part of the Units sold in the Initial Offering. Each Unit consists of one share of Series A Preferred Stock, 7.75 Initial Warrants and 15 Contingent Warrants, each Warrant to purchase one share of Common Stock. A value of $4.65 million was allocated to the Warrants, representing the portion of the purchase price of the Units allocated to the Initial Warrants, less $0.3 million of the costs associated with the Initial Offering allocable to the Initial Warrants. A de minimis value was ascribed to the Contingent Warrants. No assurance can be given that the value allocated to the Initial Warrants will be indicative of the price at which the Initial Warrants may actually trade. Costs of $2.2 million associated with the Initial Offering have been allocated to the Series A Preferred Stock. (3) Represents the portion of the purchase price of the Units allocated to the Initial Warrants (as described in note 2 above), less $0.3 million of the cost associated with the Initial Offering allocable to the Initial Warrants. 22 28 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following table presents selected financial data for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the nine month periods ended September 30, 1997 and 1998. The financial and balance sheet data for the years ending December 31, 1995, 1996 and 1997 have been derived from financial statements (including those set forth elsewhere in this Prospectus) that have been audited by PricewaterhouseCoopers LLP, independent accountants. The financial statements as of December 31, 1996 and 1997 and for each of the years in the three year period ended December 31, 1997 and the report of PricewaterhouseCoopers LLP relating thereto are included elsewhere in this Prospectus, and the selected financial data represented below are qualified in their entirety by reference thereto. The financial data presented for the years ended December 31, 1993 and 1994 and the nine month periods ended September 30, 1997 and September 30, 1998 are derived from the unaudited financial statements of the Company and in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company's results of operations and financial condition for those periods. The data for the nine month period ended September 30, 1998 are not necessarily indicative of results for the year ending December 31, 1998 or indicative of future periods. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements, including the notes thereto, of the Company appearing elsewhere in this Prospectus. For periods prior to the formation of the Company on July 15, 1998, the financial data reflect the financial statements of Network Plus, Inc., the Company's wholly-owned subsidiary, as it was the sole operating entity.
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- ------- ------- STATEMENTS OF OPERATIONS DATA: Revenue......................................... $14,427 $30,754 $49,024 $75,135 $98,209 $73,921 $79,588 Costs of services............................... 7,120 16,061 35,065 57,208 78,106 58,193 59,234 Selling, general and administrative............. 7,233 11,631 17,697 19,230 25,704 16,370 20,099 Depreciation and amortization................... 67 180 276 533 994 581 1,449 ------- ------- ------- ------- ------- ------- ------- Operating income (loss)......................... 7 2,882 (4,014) (1,836) (6,595) (1,223) (1,194) Interest income................................. 13 37 202 95 86 77 62 Interest expense................................ (5) (2) (40) (313) (557) (330) (781) Other income, net............................... 30 102 7,859 3,529 3,917 72 69 Provision for income taxes...................... (3) (167) (312) (60) (42) (42) (430) ------- ------- ------- ------- ------- ------- ------- Net income (loss)............................... 42 2,852 3,695 1,415 (3,191) (1,446) (2,274) Preferred stock dividends and accretion......... -- -- -- -- -- -- (598) ------- ------- ------- ------- ------- ------- ------- Net income (loss) applicable to common stockholders.................................. $ 42 $ 2,852 $ 3,695 $ 1,415 $(3,191) $(1,446) $(2,872) ======= ======= ======= ======= ======= ======= ======= Net income (loss) per share applicable to common stockholders Basic and diluted............................. $ -- $ 0.29 $ 0.37 $ 0.14 $ (0.32) $ (0.14) $ (0.29) ======= ======= ======= ======= ======= ======= ======= Weighted average shares outstanding Basic and diluted............................. 10,000 10,000 10,000 10,000 10,000 10,000 10,000 ======= ======= ======= ======= ======= ======= ======= Pro forma net income (loss) per share applicable to common stockholders Basic and diluted............................. $ -- $ 0.18 $ 0.24 $ 0.09 $ (0.21) $ (0.09) $ (0.18) ======= ======= ======= ======= ======= ======= =======
23 29
DECEMBER 31, ----------------------------------------------- SEPTEMBER 30, 1993 1994 1995 1996 1997 1998(1) ------- ------- ------- ------- ------- ------------- BALANCE SHEET DATA: Cash and cash equivalents......................... $ 215 $ 1,232 $ 1,608 $ 2,241 $ 1,502 $26,804 Current assets.................................... 2,545 9,264 16,441 19,771 28,521 43,122 Property and equipment, net....................... 819 1,435 1,507 3,075 6,957 10,659 Working capital................................... 1,592 4,388 2,369 1,621 (3,128) 21,352 Total assets...................................... 4,647 11,264 18,005 22,915 35,581 54,177 Other long-term obligations....................... 14 24 11 664 3,623 1,875 Redeemable Series A Preferred Stock (2)........... -- -- -- -- -- 33,739 Total stockholders' equity (deficit).............. 539 2,117 3,922 4,101 309 (3,207)
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------------------ --------------- 1993 1994 1995 1996 1997 1997 1998 ------ ------ ------ ------ ------ ------ ------ OTHER FINANCIAL DATA: Capital expenditures............................. 815 813 860 2,135 3,363 3,035 5,160 EBITDA (3)....................................... 104 3,164 4,121 2,226 (1,684) (493) 386 Net cash provided by (used for) operating activities..................................... 1,689 1,904 2,463 (316) 184 (877) (1,867) Net cash provided by (used for) investing activities..................................... (1,949) 368 (184) (647) (6,927) (3,027) 4,355 Net cash provided by (used for) financing activities..................................... 19 (1,255) (1,903) 1,596 6,004 2,525 22,814 Ratio of earnings to combined fixed charges (4)............................................ 1.5x 23.4x 20.4x 3.7x (2.9)x (1.7)x (0.2)x
- --------------- (1) Reflects (i) the Initial Offering (after deducting discounts and offering expenses payable by the Company totaling $2.5 million) and the application of the net cash proceeds therefrom, including the repayment of $9.8 million of borrowings under the Former Bank Credit Facility (see "Description of Certain Indebtedness"), (ii) the payment of a $5.0 million dividend to the Company's stockholders and the reinvestment of $1.9 million by one of the Company's stockholders (representing such stockholder's approximate net after-tax proceeds of the dividend) in the form of a long-term loan to the Company and (iii) the tax effect of the Company's conversion from an S Corporation to a C Corporation. (2) Series A Preferred Stock with an initial liquidation preference of $40.0 million was issued by the Company as part of the Units offered in the Initial Offering. Each Unit consists of one share of Series A Preferred Stock, 7.75 Initial Warrants and 15 Contingent Warrants, each Warrant to purchase one share of Common Stock. A value of $4.65 million was allocated to the Warrants, representing the portion of the purchase price of the Units allocated to the Initial Warrants, less $0.3 million of the costs associated with the Initial Offering allocable to the Initial Warrants. A de minimis value was ascribed to the Contingent Warrants. No assurance can be given that the value allocated to the Initial Warrants will be indicative of the price at which the Initial Warrants may actually trade. Costs of $2.2 million associated with the Initial Offering have been allocated to the Series A Preferred Stock. (3) EBITDA consists of net income (loss) before net interest, income taxes, depreciation and amortization. Management believes that EBITDA is a useful financial performance measure for comparing companies in the telecommunications industry in terms of operating performance, leverage, and ability to incur and service debt, because it provides an alternative measure of cash flow from operations. EBITDA should not be considered in isolation from, or as a substitute for, net income (loss), net cash provided by (used for) operating activities or other consolidated income or cash flow statement data presented in accordance with generally accepted accounting principles ("GAAP") or as a measure of profitability or liquidity. EBITDA does not reflect working capital changes and includes non-interest components of other income (expense), most of which are non-recurring. These items may be considered significant components in understanding and assessing the Company's results of operations and 24 30 cash flows. EBITDA may not be comparable to similarly titled amounts reported by other companies. (4) For purposes of calculating the ratio of earnings to combined fixed charges, "earnings" represent net income (loss) before income taxes plus combined fixed charges, and combined fixed charges consist of interest expense, preferred stock dividends and accretion of issuance costs and discount, and the interest portion of operating lease rentals. For the year ended December 31, 1997, earnings were insufficient to cover combined fixed charges by $3.1 million. For the nine months ended September 30, 1997 and 1998 earnings were insufficient to cover combined fixed charges by $1.4 million and $2.4 million, respectively. 25 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion and analysis should be read in conjunction with the financial statements and related notes and other detailed information regarding the Company included elsewhere in this Prospectus. The discussion and analysis contains statements of a forward-looking nature relating to future events or the future financial performance of the Company. Actual events or results may differ materially from such statements. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth under the caption "Risk Factors", which could cause actual results to differ materially from those indicated in the forward-looking statements contained herein. For periods prior to the formation of the Company on July 15, 1998, the financial data reflect the financial statements of Network Plus, Inc., the Company's wholly-owned subsidiary, as it was the sole operating entity. OVERVIEW The Company was founded in 1990 as an aggregator of AT&T long distance services, reselling AT&T branded products primarily to small and medium-sized businesses. As an aggregator of AT&T services, customers were billed and serviced by AT&T. The Company derived its profits through 1993 by obtaining volume discounts on bulk purchases of long distance services from AT&T and passing along a portion of these discounts to its customers. In 1993, the Company entered into an agreement with Sprint and in 1994 began to resell Sprint telecommunications services. As a reseller of Sprint, the Company began provisioning, servicing and billing customers under the Network Plus name. Volume discounts offered by Sprint enabled the Company to offer low-cost, high quality, long distance services at favorable rates to its customers. In addition, by servicing its own customers, the Company was better able to meet customer needs and control costs. In mid-1996, in addition to provisioning customer traffic onto Sprint's network ("off-net" traffic) as a switchless reseller of Sprint long distance services, the Company initiated the deployment of its own long distance network and began operating as a switch-based provider in certain states, switching customer traffic on its own facilities ("on-net" traffic). The Company's decision to deploy switches was based on economic efficiencies resulting from customer concentrations and traffic patterns. Installation of telephony switches was completed in Quincy, Massachusetts in June 1996, servicing the Northeastern region of the United States, and Orlando, Florida in November 1997, servicing the Southeastern region of the United States. As a switch-based provider, the Company is able to lower its direct transmission costs. Expansion of the Company's existing network is planned in those areas of the United States in which the Company already has significant volumes of originating or terminating traffic. Additional interexchange, international and local switches are planned for installation throughout the fourth quarter of 1998 and continuing through 1999. The Company recently entered into two 20-year indefeasible right-of-use ("IRU") agreements pursuant to which it acquired 625 route miles of dark fiber (1,830 digital fiber miles). When the fiber is fully deployed and activated, it will form a redundant fiber ring connecting major markets throughout New England and the New York metropolitan area, providing the Company with significant transmission capacity. See "Business -- Network -- Current Network -- Fiber and Transport". The Company has also sold wholesale services for international traffic since 1997. The Company intends to continue to add services to maintain and enhance its position as an integrated communications provider ("ICP"). The Company's strategic initiatives include expanding its service offerings to include local exchange and Internet services. By providing local exchange and Internet services, the Company will offer a single-source solution for all of the telecommunica- 26 32 tion needs of its customers. By expanding its service offerings, the Company believes it can improve customer retention and market share, while simultaneously reducing overall transmission costs. The Company sells its services through a direct retail sales force, an international wholesale sales force and a reseller and independent agent sales force. As the Company expands its network facilities, the Company intends to increase its sales force to approximately 400 members by year end 1999. The investment in the sales force, expansion of the existing network and addition of local exchange, Internet and other services will require significant expenditures, a substantial portion of which will be incurred before related revenue is realized. As these expansion plans are undertaken and the revenue base grows, periods of operating losses and negative cash flows from operations are anticipated through at least the first three quarters of 1999. See "Risk Factors -- Negative Cash Flow and Operating Losses" and "Risk Factors -- Substantial Future Capital Requirements; Need for Additional Financing; Substantial Leverage". RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain financial data as a percentage of revenues:
THREE MONTHS NINE MONTHS ENDED ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, ------------- ------------- --------------------- 1998 1997 1998 1997 1997 1996 1995 ----- ----- ----- ----- ----- ----- ----- Revenue....................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Costs of services............................. 74.8 80.5 74.4 78.7 79.5 76.1 71.5 Selling, general and administrative........... 29.9 23.6 25.3 22.1 26.2 25.7 36.1 Depreciation and amortization................. 1.8 1.0 1.8 0.8 1.0 0.7 0.6 Operating loss................................ (6.5) (5.2) (1.5) (1.7) (6.7) (2.5) (8.2) Other income (expense)........................ (0.4) (0.4) (0.8) (0.2) 3.5 4.4 16.4 Income (loss) before income taxes............. (7.0)% (5.6)% (2.3)% (1.9)% (3.2)% 1.9% 8.2%
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997 Revenue. Revenue increased 11.2% to $27.3 million for the three months ended September 30, 1998 from $24.5 million for the three months ended September 30, 1997. Revenue for the three months ended September 30, 1997 included approximately $3.1 million from two customers with whom the Company did not do business in 1998. One was a high volume, low margin customer which ceased to be a customer of the Company in December 1997, and the other was a specialized international customer with whom the Company terminated its service agreement in October 1997 due to collection problems. Exclusive of the revenue from these two former customers, revenue increased by 27.5% from period to period. The Company's customers totaled approximately 39,000 at September 30, 1998 and 29,000 at September 30, 1997. The components of revenue in each year reflect the Company's initiative to become a facilities-based services provider. In the three months ended September 30, 1998, on-net revenue and on-net billed customer minutes were 65.9% and 53.5%, respectively, of total revenue and minutes. In the three months ended September 30, 1997, the corresponding on-net revenue and minutes represented 27.3% and 23.6%, respectively, of total revenue and minutes. It is expected that long distance minutes and revenue attributable to on-net customer traffic will exceed 75% of the totals by the first quarter of 1999. The Company also anticipates that revenue growth will progressively increase through the fourth quarter of 1998 and in each quarter of 1999 as a result of a significant increase in the size of the Company's direct sales force and more extensive product offerings. Costs of Services. Costs of services for the three months ended September 30, 1998 totaled $20.4 million, an increase of 3.3% from the $19.8 million incurred in the corresponding period in 1997. Costs of services includes costs of origination, transport and termination of on-net and off-net 27 33 traffic, exclusive of depreciation and amortization. As a percentage of revenue, costs of services decreased to 74.8% in 1998 from 80.5% in 1997, reflecting the increase in on-net traffic, the reduced costs of carrying off-net traffic and a reduction in costs of originating and terminating traffic. On-net revenue, as described above, increased significantly as a percentage of total revenue. As a percentage of revenue, costs of services related to domestic on-net revenue are significantly less than those of off-net revenue. That on-net percentage, however, combines domestic traffic with international wholesale traffic. As a percentage of on-net revenue, costs of services on international wholesale traffic are higher than the corresponding percentage for domestic traffic. International wholesale traffic is expected to grow at rates in excess of domestic traffic, which will raise the overall costs of services as a percentage of total revenue related to on-net traffic. Costs of originating and terminating traffic have declined in part as a result of provisions mandated by the Telecommunications Act of 1996. Finally, increased competition in the long distance telecommunications industry resulted in slightly lower pricing in 1998, as compared to 1997. Selling, General and Administrative. Selling, general and administrative expenses increased by 41.4% to $8.2 million for the three months ended September 30, 1998 from $5.8 million for the three months ended September 30, 1997, and increased as a percentage of revenue to 29.9% from 23.6% for the corresponding periods. Within selling, general and administrative expenses, the largest component is personnel and related expenses, which combines all wages and salaries, along with commissions earned by the Company's sales force. These expenses increased by 51.7% from 1997 to 1998, reflecting an increase in the number of employees. Other expenses within selling, general and administrative expenses increased as a result of the Company's ongoing growth. In April 1998, the Company commenced its initiative to expand its 96-member sales force and, as of September 30, 1998, the sales force had increased to 201 members. The Company expects to further expand its sales force to approximately 300 by year end 1998 and to approximately 400 by year end 1999. Variable expenses, including commissions paid to independent marketing representatives and the provision for doubtful accounts, are expected to increase with future sales growth. In addition, the Company expects to expend a significant amount of funds through 1999 towards the recruitment of personnel, marketing, advertising and promotion, and professional services in conjunction with its growth plans and initiatives to expand its service offerings. It is expected that there will be a time lag between the incurring of these expenses and any resulting increase in revenue. See "Risk Factors -- Management of Growth". Depreciation and Amortization. Depreciation and amortization increased to $498,000 for the three months ended September 30, 1998 from $257,000 for the three months ended September 30, 1997, reflecting the Company's network build out and capital additions to the Company's internal computer systems. Future depreciation expense will increase as assets related to the Company's network expansion plans are placed into service. Interest. Interest expense, net of interest income, increased to $153,000 for the three months ended September 30, 1998 from $136,000 for the three months ended September 30, 1997. This increase resulted from interest on capital leases entered into in the latter half of 1997 to finance network additions and internal computer systems, interest incurred related to notes payable entered into in December 1997, and additional interest related to higher levels of revolving credit borrowings in 1998, offset somewhat by interest earned on investments held in September 1998. Income Taxes. In the three months ended September 30, 1998, income taxes of $295,000 were provided. In September 1998, the Company converted from an S Corporation to a C Corporation, and a $480,000 provision for deferred taxes was recorded to reflect the change in status. Offsetting this provision were tax credits recorded at statutory rates for both Federal and state taxes. Prior to conversion, income taxes were provided solely for state tax purposes. State income taxes in the comparable period of 1997 totaled $17,000. Net Loss and Net Loss Applicable to Common Stockholders. As a result of the aforementioned increases in revenue, operating expenses, depreciation and amortization, interest income and 28 34 expense, the Company incurred a net loss of $2.2 million for the three months ended September 30, 1998, compared to a net loss of $1.4 million for the three months ended September 30, 1997. In September 1998, the Company accrued dividends to be paid in the form of additional shares of Series A Preferred Stock, totaling $450,000, and recorded $148,000 of accretion of offering expenses and discount on this preferred stock issued September 3, 1998. The resulting net loss applicable to common stockholders for the three months ended September 30, 1998 was $2.8 million, compared to a $1.4 million loss in the corresponding period in 1997. EBITDA. Earnings before net interest, taxes, depreciation and amortization ("EBITDA") decreased $274,000 to negative $1,255,000 for the three months ended September 30, 1998 from negative $980,000 for the three months ended September 30, 1997. This decrease was due to the changes in revenues, network development, operations and selling, general and administrative expenses discussed above. NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1997 Revenue. Revenue increased 7.7% to $79.6 million for the nine months ended September 30, 1998 from $73.9 million for the nine months ended September 30, 1997. Revenue for the nine months ended September 30, 1997 included approximately $9.9 million from two customers, described above, with whom the Company did not do business in 1998. Exclusive of the revenue from these two former customers, revenue increased by 24.4% from period to period. The components of revenue in each year reflect the Company's initiative to become a facilities-based services provider. In the nine months ended September 30, 1998, on-net revenue and on-net billed customer minutes were 57.3% and 41.4%, respectively, of total revenue and minutes. In the nine months ended September 30, 1997, the corresponding on-net revenue and minutes represented 23.4% and 17.8%, respectively, of total revenue and minutes. Costs of Services. Costs of services for the nine months ended September 30, 1998 totaled $59.2 million, an increase of 1.8% from the $58.2 million incurred in the corresponding period in 1997. As a percentage of revenue, costs of services decreased to 74.4% in 1998 from 78.7% in 1997, reflecting the increase in on-net traffic, the reduced costs of carrying off-net traffic and a reduction in costs of originating and terminating traffic. Costs of originating and terminating traffic have declined in part as a result of provisions mandated by the Telecommunications Act of 1996. Finally, increased competition in the long distance telecommunications industry resulted in slightly lower pricing in 1998, as compared to 1997. Selling, General and Administrative. Selling, general and administrative expenses increased by 22.8% to $20.1 million for the nine months ended September 30, 1998 from $16.4 million for the nine months ended September 30, 1997, and increased as a percentage of revenue to 25.3% from 22.1% for the corresponding periods. Within selling, general and administrative expenses, the largest component is personnel and related expenses, which combines all wages and salaries, along with commissions earned by the Company's sales force. These expenses increased by 25.5% from 1997 to 1998, reflecting an increase in the number of employees. In April 1998, the Company commenced its initiative to expand its 96-member sales force, and as of September 30, 1998, the sales force had increased to 201 members. Other expenses within selling, general and administrative expenses increased as a result of the Company's ongoing growth. Depreciation and Amortization. Depreciation and amortization increased to $1,449,000 for the nine months ended September 30, 1998 from $581,000 for the nine months ended September 30, 1997, reflecting the Company's network build out and capital additions to the Company's internal computer systems. Interest. Interest expense, net of interest income, increased to $719,000 for the nine months ended September 30, 1998 from $253,000 for the nine months ended September 30, 1997. This increase resulted from interest on capital leases entered into in the latter half of 1997 to finance 29 35 network additions and internal computer systems, interest incurred related to notes payable entered into in December 1997, and additional interest related to higher levels of revolving credit borrowings in 1998, offset somewhat by interest earned on investments held in September 1998. Income Taxes. In the nine months ended September 30, 1998, income taxes of $429,000 were provided. In September 1998, the Company converted from an S Corporation to a C Corporation, and a $480,000 provision for deferred taxes was recorded to reflect the change in status. Offsetting this provision were tax credits recorded at statutory rates for both Federal and state taxes. Prior to conversion, income taxes were provided solely for state tax purposes. State income taxes in the comparable period of 1997 totaled $42,000. Net Loss and Net Loss Applicable to Common Stockholders. As a result of the aforementioned increases in revenue, operating expenses, depreciation and amortization, net interest expense, the Company incurred a net loss of $2.3 million for the nine months ended September 30, 1998, compared to a net loss of $1.4 million for the nine months ended September 30, 1997. In September 1998, the Company accrued dividends to be paid in the form of additional shares of Series A Preferred Stock totaling $450,000 and recorded $148,000 of accretion of offering expenses and discount on this preferred stock issued September 3, 1998. The resulting net loss applicable to common stockholders for the nine months ended September 30, 1998 was $2.9 million, compared to a $1.4 million loss in the corresponding period in 1997. EBITDA. EBITDA increased $894,000 to $324,000 for the nine months ended September 30, 1998 from negative $570,000 for the nine months ended September 30, 1997. This increase was due to the changes in revenues, network development, operations and selling, general and administrative expenses discussed above. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Revenue. Revenue increased by 30.7% to $98.2 million in 1997 from $75.1 million in 1996, primarily related to an increase in the Company's customer base. The Company's customers totaled approximately 30,000 at the end of 1997 and 19,000 at the end of 1996. Revenue in 1996 also included approximately $1.8 million related to the amortization of credits received through AT&T sales promotions on three-year contracts that were fully amortized by year end 1996. Costs of Services. Costs of services increased to $78.1 million in 1997 from $57.2 million in 1996, a 36.5% increase, and increased as a percentage of revenue to 79.5% in 1997 from 76.1% in 1996. The increase as a percentage of revenue resulted from several factors. Revenue in 1996 included $1.8 million of nonrecurring revenue derived from the amortization of the AT&T credits described above. In mid-1996, the Company began to operate its own network, incurring start up costs related to investment in these facilities. The first network switch, deployed in Quincy, Massachusetts in June 1996, did not begin to carry any significant traffic until late 1996. A second switch, deployed in Orlando, Florida in November 1997, did not carry any significant traffic in 1997. In 1997, the Company began to transmit international traffic through the Quincy switch, which generates percentages significantly below domestic on-net traffic. In addition, initiatives undertaken to provision existing customer traffic from off-net to on-net generally did not commence until the latter part of 1997 and, consequently, the improved percentages generated by on-net traffic did not significantly impact the results for the year. Finally, increased competition in the long distance telecommunications industry resulted in slightly lower pricing in 1997, as compared to 1996. Selling, General and Administrative. Selling, general and administrative expenses increased by 33.7% to $25.7 million in 1997 from $19.2 million in 1996, and increased as a percentage of revenue to 26.2% in 1997 from 25.6% in 1996. Personnel and related expenses, the largest component of selling, general and administrative expenses, decreased by 1.5% from 1996 to 1997. A decrease in the direct sales force was principally offset by an expansion of administrative services, including customer service and provisioning personnel, to support the revenue growth. Sales offices were 30 36 added in 1997 in conjunction with the November 1997 deployment of the Company's switch in Orlando, Florida. Other selling, general and administrative expenses also increased as a result of the revenue and personnel growth, including rent and utilities for additional offices and commissions paid to independent marketing representatives. The provision for doubtful accounts increased by $3.0 million in 1997 from 1996, principally relating to two former customers and an increase in the estimate of the bad debt reserve proportionate to the increase in revenue. In November 1997, the Company fully provided for the receivables from these two former customers. The Company ceased its relationship with one of these customers based upon diminishing payment experience and the customer's inability to provide worthy collateral. Subsequently, this former customer ceased operations. The other customer's receivable was fully reserved when a collection arrangement was not honored and additional disputes arose. Depreciation and Amortization. Depreciation and amortization expense increased to $994,000 in 1997 from $533,000 in 1996 as a result of capital additions for the Company's network build-out and internal computer systems. The Company's internal computer hardware was significantly upgraded in November 1997. Future depreciation expense will increase as assets related to the Company's network expansion plans are placed into service. In August 1997, upon review of the Company's experience and expectations for upgrades and replacement of equipment, including information gathered during the process of financing such equipment, the Company changed its estimate of the useful life of its switching equipment from 12 years to 5 years. The Company also reviewed publicly available industry data on telecommunications equipment, which confirmed that the estimate of useful lives of the Company's telecommunications equipment, which was entirely switching equipment at that time, reasonably approximated 5 years. The Company also assessed that there had been no significant decline in the market value of its switching equipment since purchased and that the market value exceeded the net book value of the equipment at the time of the change in estimate. This was confirmed by the Company's ability to enter into a sale and leaseback of the switches for the approximate book value, completed at the same time as the change in estimate. Depreciation expense in the nine months ended September 30, 1997 was approximately $114,000 less than what would have otherwise been reported had the change been previously made. Interest. Interest expense, net of interest income, increased from $217,000 in 1996 to $471,000 in 1997. This interest relates to a higher level of revolving credit borrowings in 1997, interest on capital leases entered into in the latter half of 1997 and interest incurred related to notes payable entered into in December 1997. Other Income (Expense). Other income totaled $3.9 million in 1997 and $3.5 million in 1996, both principally related to warrants, as follows. In 1995, the Company transferred (the "Transfer") certain customers to whom it provided long distance and toll free telecommunications services pursuant to certain AT&T resale contracts (the "AT&T contracts") to Tel-Save Holdings, Inc. ("Tel- Save"). Concurrent with the Transfer, the Company's obligations to AT&T under the AT&T contracts were terminated without obligation or liability on the part of the Company. Prior to the time of this transaction, there was no value recorded in the financial statements related to these customers. In consideration of the Transfer, the Company received four separate warrants to purchase a total of 1,365,000 shares of Tel-Save common stock at an exercise price of $4.67 per share (after reflecting stock splits through December 31, 1997). Each warrant vested separately based on the retail revenue generated by Tel-Save with respect to the transferred customers, which had to exceed specified levels for three consecutive months. The warrants expired at various dates through 1997. In addition to the Warrant Agreements, the Company was subject to a Voting Rights Agreement whereby Tel-Save retained the right to hold and vote the stock until the Company informed Tel-Save it wished to sell the stock. Upon receiving such notice from the Company, Tel- 31 37 Save was obligated either to purchase the stock at the price offered by the Company or, alternatively, to deliver the common stock certificates to the Company. In 1996, the vesting requirements were met with respect to the first three warrants. The vesting requirement for the first warrant was met at the end of the third quarter of 1996, entitling the Company to purchase 600,000 shares of Tel-Save common stock. The Company exercised this warrant and sold the related common stock, which had previously been registered, resulting in net proceeds and other income of $1.4 million in the third quarter of 1996. The vesting requirements with respect to the second and third warrants were met in November 1996. The second warrant entitled the Company to purchase 300,000 shares of Tel-Save common stock prior to January 8, 1997. The third warrant entitled the Company to purchase 150,000 shares of Tel-Save Common stock prior to June 10, 1997. The warrants were valued upon vesting at approximately $2.1 million using the Black-Scholes valuation model. The significant assumptions in the valuation model were an interest rate of 5.1%, warrant lives reflecting the respective expiration periods, expected volatility of 50% and no dividend rate. At December 31, 1996, the warrants had not yet been exercised and, based upon the belief that the common stock underlying the warrants would become marketable in 1997, the Company classified the warrants as investments (available-for-sale securities). The value of the warrants at December 31, 1996 approximated the fair value recorded by the Company at the date of vesting. Other income of $2.1 million related to the second and third warrants was recognized in the fourth quarter of 1996. On January 6, 1997, the Company exercised the second and third warrants and paid Tel-Save the total exercise price of $2.1 million. In June 1997, the Company believed it met the vesting requirements with respect to the fourth warrant, entitling the Company to purchase 315,000 shares of Tel-Save common stock; the Company exercised this warrant on June 4, 1997 and paid Tel-Save the exercise price of $1.5 million. On November 7, 1997, Tel-Save filed a registration statement with the SEC, listing the Company as a selling shareholder with respect to 765,000 shares (the total shares purchased by the Company, after reflecting stock splits, under the second, third and fourth warrants). Following the registration of the common stock, the Company intended immediately to sell the shares of Tel-Save, as it had done previously with respect to the shares acquired upon exercise of the first warrant. Accordingly, all activities necessary for the transfer of the certificates were completed and the Company issued a demand to Tel-Save for the common stock certificates or, alternatively, requested that Tel-Save purchase the shares. Throughout the remainder of the fourth quarter, Tel-Save refused to deliver the common stock certificates to the Company. Accordingly, as of December 31, 1997, the Company no longer considered the Tel-Save shares as available-for-sale securities and considered them to be non-marketable due the unsuccessful attempts to obtain and sell the shares. In order to take physical possession of the Tel-Save common stock certificates, the Company filed a lawsuit against Tel-Save in January 1998. On June 24, 1998, a settlement agreement was signed between the parties pursuant to which the Company received a total of $9.5 million from Tel-Save. As part of the settlement, Tel-Save returned the $1.5 million exercise price paid by the Company during 1997 in its attempt to exercise the fourth warrant, and cancelled that warrant. In addition, Tel-Save issued the remaining 450,000 shares to the Company and simultaneously repurchased such shares for a negotiated payment of $8.0 million. Following the June 1998 settlement, there are no continuing obligations between the parties. Accordingly, the Company's investment in Tel-Save at December 31, 1997 was valued at the final negotiated payment of $9.5 million received pursuant to the settlement. This settlement resulted in other income of $3.8 million recorded in the fourth quarter of 1997, equal to the total cash received, less cash paid by the Company, less the valuation previously recorded in 1996. Net Loss. As a result of the aforementioned increases in revenue, operating expenses, depreciation and amortization, interest income and expense, the Company incurred a net loss of 32 38 $3.2 million for the year ended December 31, 1997, compared to net income of $1.4 million for the year ended December 31, 1996. EBITDA. EBITDA was negative $1.7 million for the year ended December 31, 1997 compared to positive $2.2 million for the year ended December 31, 1996. This decline was due to the changes in revenue, network development, operations and selling, general and administrative expenses and other income discussed above. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenue. Revenue increased by 53.2% to $75.1 million in 1996 from $49.0 million in 1995, primarily related to an increase in the customer base. The Company's customers totaled approximately 19,000 at the end of 1996 and 9,000 at the end of 1995. In 1995, the Company's revenue was entirely generated from off-net traffic. In 1996, the Company installed its first network switch, but less than 1% of 1996 revenue was generated on-net. Revenue in 1996 and 1995 also included approximately $1.8 million and $3.3 million, respectively, related to the amortization of credits received through AT&T sales promotions. Costs of Services. Costs of services increased to $57.2 million in 1996 from $35.1 million in 1995, a 62.6% increase, and increased as a percentage of revenue to 76.1% in 1996 from 71.5% in 1995. The increase as a percentage of revenue resulted from the inclusion in revenue of non-recurring AT&T credits of $3.3 million in 1995 as compared to $1.8 million in 1996. Also contributing to the percentage increase were start up costs in 1996 related to the installation of the Company's first network switch, which was deployed in June 1996. Selling, General and Administrative. Selling, general and administrative expenses increased by 8.6% to $19.2 million in 1996 from $17.7 million in 1995, but decreased as a percentage of revenue to 25.6% in 1996 from 36.1% in 1995. Personnel and related expenses, the largest component of selling, general and administrative expenses, decreased by 6.7% from 1995 to 1996, reflecting a decrease in the direct retail sales force. Other selling, general and administrative expenses increased as a result of revenue growth. Depreciation and Amortization. Depreciation and amortization increased to $539,000 in 1996 from $276,000 in 1995, related to $2.1 million of capital expenditures in 1996, including $1.5 million for switching equipment. Interest Expense. In 1996, when the Company entered into and first began to borrow under its Former Bank Credit Facility (as defined below), net interest expense resulted, totaling $217,000. In 1995, the Company did not have any revolving credit borrowings and generated interest income, net of interest expense on long-term debt, of $162,000. Other Income. Other income totaled $3.5 million in 1996 and $7.9 million in 1995. In 1995, the Company provided long distance services to certain customers ("DNS Customers") pursuant to an AT&T Distributed Network Services Resale Contract (the "DNS Contract"). In June 1995, the Company transferred the DNS Contract to EqualNet Holdings Corp. for cash totaling approximately $8.4 million, and EqualNet Holdings Corp. became the provider of long distance services to the DNS Customers. Prior to the time of this transaction, there was no value recorded in the financial statements related to the DNS Customers. Concurrent with the transfer of the DNS Contract, the Company's obligations to AT&T pursuant to the DNS Contract were terminated and, accordingly, the $8.4 million was recognized as miscellaneous income when received. In a separate transaction in 1995, the Company transferred (the "Transfer") certain customers to whom it provided long distance and toll free telecommunications services pursuant to certain AT&T resale contracts (the "AT&T contracts") to Tel-Save Holdings, Inc. ("Tel-Save"). Concurrent with the Transfer, the Company's obligations to AT&T under the AT&T contracts were terminated without obligation or liability on behalf of the Company. Prior to the time of this transaction, there was no value recorded in the financial statements related to these customers. In 33 39 consideration of the Transfer, the Company received four separate warrants to purchase a total of 1,365,000 shares of Tel-Save common stock at an exercise price of $4.67 per share (after reflecting stock splits through December 31, 1997). Each warrant vested separately based on the retail revenue generated by Tel-Save with respect to the transferred customers, which had to exceed specified levels for three consecutive months. The warrants expired at various dates through 1997. In addition to the Warrant Agreements, the Company was subject to a Voting Rights Agreement whereby Tel-Save retained the right to hold and vote the stock until the point in time when the Company informed Tel-Save it wished to sell the stock. Upon receiving such notice from the Company, Tel-Save was obligated either to purchase the stock at the price offered by the Company or, alternatively, to deliver the common stock certificates to the Company. In 1996, the vesting requirements were met to exercise the first three warrants. The vesting requirement with respect to the first warrant was met at the end of the third quarter of 1996, entitling the Company to purchase 600,000 shares of Tel-Save common stock. The Company exercised this warrant and sold the related common stock, which had previously been registered, resulting in net proceeds and other income of $1.4 million in the third quarter of 1996. The vesting requirements with respect to the second and third warrants were met in November 1996. The second warrant entitled the Company to purchase 300,000 shares of Tel-Save common stock prior to January 8, 1997. The third warrant entitled the Company to purchase 150,000 shares of Tel-Save common stock prior to June 10, 1997. The warrants were valued upon vesting at approximately $2.1 million using the Black-Scholes valuation model. The significant assumptions in the valuation model were an interest rate of 5.1%, warrant lives reflecting the respective expiration periods, expected volatility of 50% and no dividend rate. At December 31, 1996, the warrants had not yet been exercised and, based upon the belief that the common stock underlying the warrants would become marketable in 1997, the Company classified the warrants as investments (available-for-sale securities). The value of the warrants at December 31, 1996 approximated the fair value recorded by the Company at the date of vesting. Other income of $2.1 million related to the second and third warrants was recognized in the fourth quarter of 1996. Net Income. As a result of the aforementioned increases in revenue, operating expenses, depreciation and amortization, and interest income and expense, net income decreased $2.3 million, or 62%, to $1.4 million for the year ended December 31, 1996, from $3.7 million for the year ended December 31, 1995. EBITDA. EBITDA was $2.2 million for the year ended December 31, 1996 compared to $4.1 million for the year ended December 31, 1995. This decrease was due to the changes in revenue, network development, operations and selling, general and administrative expenses and other income discussed above. 34 40 QUARTERLY RESULTS The following table sets forth certain unaudited financial data of the Company for each of the quarters in 1996 and 1997 and for the first three quarters of 1998. This information has been derived from unaudited financial statements that, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information. The operating results for any quarter are not necessarily indicative of results to be expected for any future period. Income taxes are included in other income (expense), net.
QUARTER ENDED ------------------------------------------------ MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1996 1996 1996 1996 --------- -------- --------- -------- (IN THOUSANDS) Revenue......................................... $17,128 $17,782 $18,687 $21,538 Costs of services............................... 13,865 12,901 13,909 16,533 Selling, general and administrative............. 5,137 4,468 4,346 5,273 Depreciation and amortization................... 105 130 136 168 ------- ------- ------- ------- Operating income (loss)......................... (1,979) 283 296 (436) Interest income................................. 21 16 20 37 Interest expense................................ (62) (83) (85) (84) Other income (expense), net..................... 7 23 1,400 2,100 ------- ------- ------- ------- Net income (loss)............................... $(2,013) $ 239 $ 1,631 $ 1,617 ======= ======= ======= =======
QUARTER ENDED ------------------------------------------------ MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1997 1997 1997 1997 --------- -------- --------- --------- (IN THOUSANDS) Revenue......................................... $24,740 $24,641 $24,540 $24,288 Costs of services............................... 19,110 19,330 19,753 19,913 Selling, general and administrative............. 5,127 5,440 5,803 9,334 Depreciation and amortization................... 156 168 257 413 ------- ------- ------- ------- Operating income (loss)......................... 347 (297) (1,273) (5,372) Interest income................................. 22 38 17 9 Interest expense................................ (83) (93) (154) (227) Other income (expense), net..................... (9) 20 19 3,845 ------- ------- ------- ------- Net income (loss)............................... $ 277 $ (332) $(1,391) $(1,745) ======= ======= ======= =======
QUARTER ENDED ---------------------------------- MARCH 31, JUNE 30, SEPT. 30, 1998 1998 1998 --------- -------- --------- (IN THOUSANDS) Revenue......................................... $25,202 $27,103 $27,283 Costs of services............................... 18,836 19,992 20,406 Selling, general and administrative............. 5,544 6,391 8,164 Depreciation and amortization................... 468 483 498 ------- ------- ------- Operating income (loss)......................... 354 237 (1,785) Interest income................................. 3 9 50 Interest expense................................ (285) (293) (203) Other income (expense), net..................... 12 (109) (263) ------- ------- ------- Net income (loss)............................... $ 84 $ (156) $(2,201) ======= ======= =======
35 41 The Company could experience quarterly variations in revenue and operating income as a result of many factors, including the introduction of new services by the Company, actions taken by competitors, the timing of the acquisition or loss of customers, the timing of additional selling, general and administrative expenses incurred to acquire and support new or additional business and changes in the Company's revenue mix among its various service offerings. Many of the factors that could cause such variations are outside of the Company's control. The Company plans its operating expenditures based on revenue forecasts, and a revenue shortfall below such forecasts in any quarter could adversely affect the Company's operating results for that quarter. LIQUIDITY AND CAPITAL RESOURCES OVERVIEW OF HISTORICAL CASH REQUIREMENTS Since commencing operations in 1990, the Company has experienced significant growth. Prior to 1994, the Company operated solely as an aggregator of AT&T services and funded its growth principally with cash provided from operating activities. In 1994, the Company became a reseller of Sprint services, requiring additional funding to support the development of an infrastructure to support provisioning, billing and servicing of customers billed under the Network Plus name. Cash requirements in 1994 and 1995 were financed primarily by cash credits received in 1993 and 1994 under AT&T promotions and by transfers of AT&T contracts and customers to other telecommunications companies in 1995. These transfers resulted in the receipt by the Company of a cash payment of $8.4 million and warrants to purchase common stock of Tel-Save. In 1996, the Company further expanded its infrastructure and began to deploy its own network. To support 1996 cash requirements, NPI entered into a $7.0 million revolving credit agreement with Fleet National Bank ("Fleet") and a term loan for $1.0 million with Fleet to allow for its initial purchase of network facilities, and entered into a financing transaction involving the sale and lease back of the Quincy switch. Cash flows in 1996 were supplemented by the exercise of Tel-Save warrants and the subsequent sale of the underlying common stock, resulting in total net proceeds of $1.4 million. In 1997, the Company continued to expand its network and infrastructure. In addition, $3.6 million was expended to exercise additional warrants for common stock of Tel-Save. Cash needs in 1997 were met through the addition of capital leases, including a financing transaction involving the sale and lease back of the Company's two switches, utilization of a revolving credit facility, refinancing of a portion of accounts payable to Sprint into a short-term promissory note (the "Sprint Note") and receipt of loans totaling $1.8 million from the Company's stockholders (the "Stockholder Loans"). On May 1, 1998, NPI entered into a $23.0 million revolving credit agreement with Fleet (the "Former Bank Credit Facility"). Borrowings under this line were used to repay the Sprint Note and the Stockholder Loans. FINANCIAL CONDITION Total assets were $54.2 million at September 30, 1998 compared to $35.6 million at December 31, 1997 and $22.9 million at December 31, 1996. Accounts receivable increased by $2.0 million from 1996 to 1997, related to revenue growth, and declined by $2.0 million in the first nine months of 1998 due to improved collections. Prepaid expenses, other current assets, and accrued liabilities all increased in relation to revenue growth. Accounts payable fluctuations were due to timing of payments. Investments represent the value ascribed to the exercised Tel-Save warrants. As described above, the investment was liquidated for cash in the amount of $9.5 million in June 1998 and was valued at December 31, 1997 at the amount of cash received. At December 31, 1996, the investment was valued at estimated fair value of $2.1 million using a Black-Scholes valuation model. 36 42 Property and equipment totaled $10.7 million at September 30, 1998, $7.0 million at December 31, 1997, and $3.1 million at December 31, 1996. Capital expenditures in the first nine months of 1998 totalled $5.2 million, principally related to payments made toward switches and network equipment being installed in the fourth quarter. The increase in property and equipment in 1997 relates primarily to approximately $2.5 million in network additions and $1.9 million in computer equipment additions, net of depreciation, both of which were financed through capital leases entered into in 1997. Upon entering into the capital lease for the network equipment, the Company repaid a term loan entered into in 1996. Property and equipment is expected to grow through 1998 and beyond, as the Company adds additional switches and other equipment to its existing network. The Company owns its switches, located in Quincy, Massachusetts and Orlando, pursuant to a sale-leaseback arrangement with Chase Equipment Leasing, Inc. The Company initially purchased the switches for an aggregate purchase price of $3.5 million and subsequently transferred title to the switches to its lender and leased back the switches for five years. At the end of the lease term, the Company has the option to purchase the switches for nominal consideration. Payments under this lease arrangement totalled approximately $68,000 in 1997 and require ongoing payments of approximately $68,000 per month. The Company received a waiver from the lender for a violation of a financial covenant under its capital leases which requires no two consecutive quarters with net losses. At September 30, 1998, Company has classified the entire capital lease liability as current based on the expectation that the Company will repay the entire obligation in December 1998. The Company expects to refinance the obligation prior to year end 1998. During 1997, additional capital was required to continue to expand the Company's business. Additional liquidity was achieved by the issuance of notes payable. In December, the Company issued a promissory note to Sprint for the repayment of $4.6 million previously classified as accounts payable. The note's maturity was September 1998. The note's remaining balance of $3.7 million was repaid on May 1, 1998 from borrowings under the Former Bank Credit Facility in effect at that time, as described below. In December 1997, the Company borrowed $1.8 million pursuant to the Stockholder Loans. Interest was paid monthly at the prevailing prime rate. The Stockholder Loans, including accrued interest, were also repaid on May 1, 1998. In January 1996, NPI entered into a revolving credit agreement with Fleet, which provided for borrowings of up to $7.0 million, including letters of credit. This agreement was due to expire on May 31, 1998 and was refinanced in May 1998, as described below. Borrowings under this line in excess of $5.0 million were subject to a formula-based arrangement based upon a percentage of accounts receivable. Interest was payable monthly at Fleet's prime rate or available LIBOR options. The maximum borrowings under the agreement in 1997 and 1996 were $5.0 million and $3.0 million, respectively. At December 31, 1996 the loan balance was $2.0 million, with no outstanding letters of credit. At December 31, 1997, the loan balance was $4.5 million, with letters of credit of $120,000 outstanding. Cash provided by operating activities in the first nine months of 1998 totaled $7.6 million, principally due to the $9.5 million received in late June related to the Tel-Save warrant settlement, offset by working capital changes. At September 30, 1998, outstanding letters of credit totaled $1.2 million. On May 1, 1998, NPI entered into the Former Bank Credit Facility with Fleet and terminated the previously existing agreement. This agreement was in turn terminated on October 7, 1998 upon entering into a new revolving credit agreement, described below. The Former Bank Credit Facility had a term of three years and provided for borrowings of up to $23.0 million, subject to a formula- based arrangement based upon a percentage of accounts receivable. Interest was payable monthly at Fleet's prime rate or, at the Company's option, 1.75% above prevailing LIBOR rates. Proceeds from this financing were used to repay the Sprint Note and the Stockholder Loans. At September 30, 1998, there were no borrowings under the Former Bank Credit Facility, with letters of credit of $1.2 million outstanding. 37 43 In August 1998, the Company paid a dividend in the aggregate amount of $5.0 million. As a result, $2.5 million was distributed to each of Robert T. Hale and Robert T. Hale, Jr. Following receipt of the dividend, Robert T. Hale, Jr. reinvested $1.9 million in the Company (representing approximately the distribution to Robert T. Hale, Jr., net of his estimated tax liability resulting from such distribution), in the form of a long-term loan to the Company; such loan, including interest, will be payable 10 days after the redemption of the Series A Preferred Stock. The dividend distribution was funded out of existing cash resources and the Fleet revolving credit facility. See "Description of Certain Indebtedness" and "Certain Transactions". The Company consummated the offering of Units including the Preferred Shares (the "Initial Offering") on September 3, 1998. The net proceeds to the Company of the Initial Offering, after deducting commissions and offering expenses, were approximately $37.5 million. The Company used $9.8 million of the net proceeds of the Initial Offering to pay down borrowings under the Fleet agreement. The Company expects to use the remainder of the net proceeds to finance the Company's anticipated expansion, including the expansion of its local telecommunications infrastructure, information technology systems and sales force; and for working capital. Prior to the Initial Offering, the Company was an S Corporation and, as a result, did not pay corporate Federal income taxes. Instead, the Company's stockholders were liable for their share of taxes in respect of the Company's taxable income. The Company had similar tax status in certain states that recognize S Corporation status. Accordingly, in each year prior to 1998 the Company distributed, and for the 1998 period prior to September 1998 the Company will distribute, to its stockholders cash in amounts sufficient to enable the Company's stockholders to pay Federal and state taxes on income of the Company attributable to the stockholders and related tax preparation expenses. The Company does not expect the distribution for the 1998 period prior to September 1998 to be material. During the years ended December 31, 1997, 1996 and 1995, the Company distributed an aggregate of $601,000, $1.2 million and $1.9 million, respectively, to its stockholders. Dividends on the Series A Preferred Stock occurring on or before September 1, 2003 may be paid, at the Company's option, either in cash or by allowing such dividends to be issued in the form of additional preferred stock. It is not anticipated that the Company will pay any dividends in cash for any period ending on or prior to September 1, 2003. On October 7, 1998, the Company entered into a loan agreement with Goldman Sachs Credit Partners L.P. and Fleet (the "New Revolving Credit Facility"), concurrent with the closing of which the Company terminated the Former Bank Credit Facility. The New Revolving Credit Facility has a term of 18 months. Under the New Revolving Credit Facility, $30 million of the $60 million is available based upon a percentage of accounts receivable. Interest is payable monthly at one percent above the prime rate. The New Revolving Credit Facility requires the Company, among other things, to meet minimum levels of revenues and earnings before interest, taxes, depreciation and amortization, and not to exceed certain customer turnover levels and debt to revenue ratios. See "Description of Certain Indebtedness -- New Revolving Credit Facility". The Company's ability to meet its projected growth is dependent upon its ability to secure substantial additional financing in the future. The Company estimates that, for 1998 and 1999, capital required for expansion of its infrastructure and services and to fund negative cash flow will be approximately $140 million. The Company believes that its current cash resources and available cash from the New Revolving Credit Facility (see "Description of Certain Indebtedness"), together with the proceeds of the Initial Offering, will be sufficient to fund the Company's operating losses and planned capital expenditures through the 18-month term of the New Revolving Credit Facility. The Company believes it will be in compliance with all covenants under the New Revolving Credit Facility throughout its term. The Company does not expect to have sufficient available cash to repay such facility at maturity. Accordingly, the Company expects that it will be required to refinance the full $60.0 million of such facility. The Company currently expects to have additional financing requirements beyond the maturity date of the New Revolving Credit Facility. To meet its future financing requirements, sources of funding may include public offerings or private placements of 38 44 equity or debt securities, bank loans, capital leases and additional capital contributions from new or existing stockholders. The Company may be required to apply all or a portion of any such financing to redeem all or a portion of the Series A Preferred Stock. There can be no assurance that additional financing will be available to the Company or, if available, that it can be obtained on a timely basis, on terms acceptable to the Company, and within the limitations contained in the Company's commercial lending agreements and the Certificate of Designation. Failure to obtain such financing could result in the delay or abandonment of the Company's development and expansion plans and could have a material adverse effect on the Company. EXPANSION OF SERVICES AND FUTURE CASH REQUIREMENTS The Company's strategic initiatives include the deployment of additional long distance and international switches, the deployment of local switches, the offering of new services such as local exchange and Internet access services, the expansion of its sales force and other personnel and significant investment in its information technology systems. These initiatives will require a substantial amount of capital for, but not limited to, the installation of network switches and related equipment, fiber, personnel additions and funding of operating losses and working capital. The Company believes that net proceeds from the Initial Offering, together with cash flow generated from operations and borrowings available under the New Revolving Credit Facility, will be sufficient to fund the Company's working capital needs, planned capital expenditures and interest expense through the 18-month term of the New Revolving Credit Facility. The actual amount of capital expenditures and the timing of such expenditures will depend on several factors, including equipment and fiber availability, economic conditions, competition and regulatory developments. The Company may also require additional financing, which may include public or private debt and equity financings, to enter into strategic alliances, acquire assets or businesses or make investments toward achieving its strategic objectives. There can be no assurance, however, that the Company will be able to raise sufficient funds or do so on acceptable terms. Failure to obtain such financings could result in the delay or abandonment or the Company's development and expansion plans. Furthermore, there can be no assurance that actual capital needs and expenditures will not be significantly higher than the Company's current estimates. See "Risk Factors -- Negative Cash Flow and Operating Losses" and "Risk Factors -- Substantial Future Capital Requirements; Need for Additional Financing; Substantial Leverage". IMPACT OF YEAR 2000 YEAR 2000 COMPLIANCE Many computer systems experience problems handling dates beyond the year 1999. Therefore, some computer hardware and software will need to be modified prior to the year 2000 in order to remain functional. The Company is currently accessing the implication of Year 2000 issues on operations, in order to determine the extent to which the Company may be adversely affected. The Company expects to finish the assessment process by December 31, 1998. Based on the internal assessment, which is substantially complete, the Company believes that the majority of its software applications will be Year 2000 compliant by June 30, 1999. However, there can be no assurance that all systems will function adequately beginning in the year 2000. There can also be no assurance that the Company will not incur significant unanticipated costs in achieving Year 2000 compliance. Though limited testing of systems has been performed to date, the Company had developed its systems with Year 2000 in mind, thus minimizing its impact. The Company may conduct further testing and/or an external audit following the conclusion of its internal assessment. To date there have been a limited number of hours devoted to Year 2000 issues, with no additional cost expended in systems upgrades directly relating to Year 2000 issues. Present estimates for further expenditures of both employee time and expenses to address Year 2000 issues are not expected to have a material impact on the operations and cash flows of the Company. All expenditures will be expensed 39 45 as incurred and they are not expected to have a significant impact on the Company's ongoing results of operations. If the hardware or software comprising the Company's network elements acquired from third-party vendors, the software applications of the long distance carriers, local exchange carriers or others on whose services the Company depends or with whom the Company's systems interface, or the software applications of other suppliers, are not Year 2000 compliant, it could affect the Company's systems, which could have a material adverse effect on the Company. The Company is undertaking an informal survey of the Year 2000 compliance status of its suppliers, with responses indicating Year 2000 compliance at this time. In addition, the Company has reviewed the following information concerning Sprint, solely as disclosed in its public filings. The Year 2000 issue may affect the systems and applications of Sprint's customers, vendors or resellers, such as the Company. Sprint has completed an inventory and Year 2000 assessment of its principal computer systems, network elements, software applications and other business systems. Sprint expects to substantially complete the renovation of these computer systems, software applications and the majority of the network elements and other business systems by year-end 1998. Year 2000 testing commenced in the third quarter of 1998 and will be completed during 1999. If compliance is not achieved in a timely manner by Sprint or any significant related third party, the Year 2000 issue could have a material adverse effect on the Company's operations. Based on its assessments to date, the Company believes that it will not experience any material disruption as a result of Year 2000 issues in internal processes, information processing or interface with key customers, or with processing orders and billing. At present, the Company has not developed contingency plans but intends to determine whether to develop any such plan by March 1, 1999. There can be no assurance that Year 2000 issues will not have a material adverse effect on the Company's business, results of operations and financial condition. 40 46 BUSINESS THE COMPANY OVERVIEW Network Plus, founded in 1990, is a facilities-based integrated communications provider ("ICP") offering switched long distance, data and enhanced telecommunications services. The Company's customers consist primarily of small and medium-sized businesses located in major markets in the Northeastern and Southeastern regions of the United States. The Company also provides international wholesale transport and termination services to major domestic and international telecommunication carriers. In addition, the Company intends to offer local services on a commercial basis in certain states beginning in late 1998. As of September 30, 1998, the Company served over 39,000 customers representing in excess of 180,000 access lines and 30,000 toll-free numbers. All customers are directly invoiced by the Company on a Network Plus bill. As of September 30, 1998, the Company had a 201-person sales force located in 12 regional offices, and in 1997 had total revenue of $98 million. In July 1998, Network Plus Corp. was incorporated in Delaware as a holding company. All of the Company's operations continue to be conducted through its Massachusetts operating subsidiary, Network Plus, Inc. The Company purchases network components where justified by the volume of originating and terminating traffic and leases components where it has a more limited volume of such traffic. The Company has switches in Quincy, Massachusetts and Orlando, and intends to add switches throughout the remainder of 1998 and continuing through 1999 in Atlanta, Chicago, Los Angeles and New York City as well as multiple local traffic switches in the Northeastern and Southeastern regions of United States. In September 1998, over 60% of the Company's revenue was generated by customer traffic carried on its network, and the Company expects this percentage to increase as the Company further expands its facilities-based infrastructure. The Company recently entered into two 20-year indefeasible right-of-use ("IRU") agreements pursuant to which it acquired 625 route miles of dark fiber (1,830 digital fiber miles), that, when fully deployed and activated, will form a redundant fiber ring connecting major markets throughout New England and the New York metropolitan area and provide the Company with significant transmission capacity. The Company believes that, because of its large and highly focused sales force and superior customer support, the Company will be successful in rapidly acquiring new customers, continuing to migrate "off-net" long distance customers to its network, cross-selling local services to its existing long distance customers and maintaining a high rate of customer retention. The compounded annual growth rate for the number of customers from year end 1994 to year end 1997 was 68%. The Company's business strategy is to leverage its eight-year operating history, existing customer base and substantial in-region experience to (i) be a one-stop ICP offering a comprehensive array of bundled voice and data solutions, (ii) acquire and retain market share through its direct sales force and focused customer service, (iii) enhance its facilities-based infrastructure where economically advantageous and continue the migration of traffic to its network, (iv) build and retain market share through advanced technologies and an advanced operational support system, (v) target the underserved market of small and medium-sized businesses, with a focus on the Northeastern and Southeastern regions of the United States, (vi) increase international wholesale sales and (vii) expand through strategic acquisitions and alliances. NETWORK INFRASTRUCTURE The Company pursues a capital-efficient network deployment strategy that involves owning switches and acquiring or leasing fiber optic transmission facilities on an incremental basis to satisfy customer demand. The Company believes that its switch-based, lease-or-acquire transport strategy provides significant competitive advantages. By owning network components, the Company is able to generate higher operating margins and maintain greater control over its network operations. The Company structures its network expansion decisions in a manner designed to (i) reduce up-front 41 47 capital expenditures required to enter new markets, (ii) avoid the risk of stranded investment in under-utilized fiber networks and (iii) enter markets and generate revenue and positive cash flow more rapidly than if the Company first constructed its own facilities. Where market penetration does not economically justify the deployment of its own network, the Company utilizes the networks of alternative carriers. In addition to its 625 route miles of dark fiber, Network Plus currently owns and maintains (i) a Northern Telecom, Inc. ("Nortel") international gateway and interexchange switch in Quincy, Massachusetts, and (ii) a Nortel interexchange switch in Orlando. The Company is currently deploying both a Nortel international gateway and interexchange switch in Los Angeles and a Nortel interexchange switch in Chicago. The Company has a Network Operations Center in Quincy, Massachusetts, which monitors the Company's entire network from a central location, increasing the security, reliability and efficiency of the Company's operations. The Company is also planning the deployment of local switching facilities throughout the Northeastern and Southeastern regions of the United States. The Company intends to further expand its network in geographic areas where customer concentrations or traffic patterns make expansion economically advantageous. SERVICES Network Plus offers retail telecommunications services primarily to small and medium-sized businesses. Retail offerings currently include long distance and toll-free services (both with and without Advanced Intelligent Network ("AIN") features), multiple access options, calling and debit card, paging, data, and custom management control features. The Company plans to add local exchange services, Internet services and additional AIN features in the latter part of 1998 and into 1999. The Company also offers international wholesale services primarily to interexchange carriers ("IXCs") and international telecommunications carriers. In September 1998, retail and wholesale offerings accounted for approximately 73% and 27%, respectively, of the Company's total revenue. LARGE AND GROWING SALES FORCE As of September 30, 1998, Network Plus had a 201-member, highly focused sales force consisting of a 190-person direct retail sales force, a six-person international wholesale sales force and a five-person agent and reseller sales force. The Company's sales approach is to build long-term relationships with its customers, with the intent of becoming the single-source provider of their telecommunications services. The Company trains its sales force in-house with a customer-focused program that promotes increased sales through both customer attraction and customer retention. All members of the sales force are given incentives through a commission structure under which commissions are paid on an ongoing basis for as long as the customer continues to purchase services from the Company. This "lifetime residual" is intended to motivate the sales force to remain actively involved with customers and participate in the customer retention and support process. The Company believes that this customer support-focused commission structure and in-house training are unique in the industry and provide the Company with a competitive advantage in attracting and retaining customers. The sales force currently is located in eight offices and, by year end 1999, the Company intends to open additional sales offices and expand its sales force to approximately 400 members. The Company expects that it will continue to utilize a modular sales force structure and that existing employees with substantial sales experience will manage new sales offices, ensuring a continuation of the Company's customer-focused culture. The Company's sales force director, regional sales directors, branch managers and team leaders have an average employment tenure of over five years with the Company. MANAGEMENT Robert T. Hale, Jr., the Company's President, Chief Executive Officer, Director and co-founder, has more than 10 years of experience in the telecommunications industry. Robert T. Hale, the Company's Chairman and co-founder, has more than eight years of experience in the telecommunications industry, is a Director and former Chairman of the 600-member Telecommunications 42 48 Reseller Association ("TRA") and has been Chairman of the TRA's Underlying Carrier Committee since 1992. Network Plus's eight-member Executive Officer group has an average employment tenure of more than three years with the Company and an average of over 11 years of experience in the telecommunications industry. The Company believes that the quality, tenure and teamwork of its management team will be critical factors in the implementation of its expansion strategy. MARKET OPPORTUNITY As a result of the Telecommunications Act of 1996 (the "Telecommunications Act") and other federal, state and international initiatives, numerous telecommunications markets have been opened to competition. In addition, the increasing globalization of the world economy, along with an increased reliance on data transmission and Internet access, has expanded the traditional telecommunications markets. After completing its planned expansion, the Company expects to have 18 sales offices in 12 states in the Northeastern and Southeastern regions of the United States. According to New Paradigm Resources Group, Inc., at year end 1996 there were approximately 8.7 million business lines in the Company's markets in the Northeastern region (the New England states, New York and New Jersey) and 4.8 million business lines in the Company's markets in the Southeastern region (Florida, Georgia, North Carolina, South Carolina and Tennessee). The Company anticipates significant demand for its services, based on its belief that small and medium-sized businesses are not aggressively targeted by large providers and are underserved with respect to customer service and support. BUSINESS STRATEGY Network Plus intends to undertake an aggressive growth strategy to meet its goal of becoming the ICP of choice providing one-stop telecommunications solutions to customers in its markets. The Company's future success will depend upon its ability to implement this strategy. Unlike many emerging telecommunications companies, the Company has an eight-year operating history. The Company believes that the collective talent and telephony experience of its management and employee base provide a competitive advantage and position the Company to effectively implement its growth strategy, which includes the following: PROVIDE INTEGRATED TELECOMMUNICATIONS SERVICES A key element in the Company's growth will be the implementation of a marketing and operating plan that emphasizes an integrated voice and data telecommunications solution. To a large extent, customers the Company expects to target have not previously had the opportunity to purchase bundled services from a single provider. The Company believes that these customers will prefer one source for all of their telecommunications requirements, including products, billing and service. The Company intends to be the single source of, and provide a consolidated bill for, integrated local, long distance and other telecommunications services, in addition to providing a single point of contact for customer service, product inquiries, repairs and billing questions. The Company believes that one-stop integrated communications services will enable it to further penetrate its existing markets, expand its customer base, capture a larger portion of its customers' total expenditures on telecommunication services and increase customer retention. EXPAND SALES FORCE AND FOCUS ON CUSTOMER SERVICE The Company intends to significantly expand its sales force to both acquire and support a growing customer base. The Company's sales force consisted, as of September 30, 1998, of 201 members and is expected to grow to approximately 400 by year end 1999. To support its customer base, the Company provides customer service 24 hours per day, 365 days per year, and estimates that its customer service representatives currently have an average response time for answering incoming calls of under 15 seconds. In addition, the commission structure of the Company's direct retail sales force is designed to promote a high level of ongoing customer care 43 49 and to assure that the sales staff remains actively involved in the customer service process. Similarly, the compensation of customer support personnel is designed to promote a high level of ongoing customer care and retention. The Company believes that its sales and customer service processes have resulted in a customer retention rate that is higher than that of many competitors and differentiate the Company as a customer-focused ICP, giving it a competitive advantage. ENHANCE FACILITIES-BASED INFRASTRUCTURE The Company intends to continue migration of customer traffic to its own network and to cross-sell new services, such as local service, to its customers. Expansion of the Company's facilities-based infrastructure with fiber and switches will increase the proportion of telecommunications traffic that is originated or terminated on its network, which the Company believes will result in higher long-term operating margins and greater control over its network operations. The Company's approach to network design is structured to minimize the capital investment necessary to provide service, avoid spending capital where not economically justifiable, better match the commitment of capital to the onset of revenue-generating activities and generate cash flow more quickly. Throughout the remainder of 1998 and continuing through 1999, the Company intends to enhance its facilities by purchasing and installing numerous Nortel and Lucent switches. See "-- Network -- Anticipated Network Expansion". CONTINUE INVESTING IN ADVANCED TECHNOLOGIES AND AN ADVANCED OPERATIONAL SUPPORT SYSTEM Network Plus expects to continue to invest in advanced technologies that provide strategic advantages by integrating the Company's network facilities with its operational support system ("OSS") to enhance service response time. The Company intends to deploy Nortel's Service Builder throughout its network infrastructure, which will elevate the Company's network from a state-of-the-art SS7 network to a next-generation intelligent network. Service Builder will also permit the rapid deployment of "designer" intelligent network products and services such as nationwide "follow me" numbers and Time-of-Day Routing, as well as accelerate the Company's compliance with legally mandated services such as local number portability ("LNP"). To support integrated provisioning and customer care for all products and services, the Company is developing an open scalable client/server Oracle-based platform that is expected to better integrate its operations, both geographically and among departments. The Company believes that these technologies will provide a long-term competitive advantage by allowing a more rapid implementation of switched local services in its markets, shortening the time between the receipt of a customer order and the generation of revenue and enabling a higher level of focused customer care. TARGET UNDERSERVED MARKETS WITH A SUPER-REGIONAL FOCUS Network Plus intends to continue targeting small and medium-sized businesses in the Northeastern and Southeastern regions of the United States, its primary service areas, while expanding into other markets in the Mid-Atlantic region, Illinois and California. The Company will seek to be among the first to market integrated communications services in many of its markets. The Company believes that the Northeastern and Southeastern regions are particularly attractive due to a number of factors, including (i) the population density in the Northeast; (ii) a large number of rapidly growing metropolitan clusters in the Southeast, such as Atlanta, Miami/Fort Lauderdale and Orlando; and (iii) the relatively small number of significant competitors to the incumbent local exchange carriers ("ILECs"). In addition, the Company believes that small and medium-sized businesses have been underserved by large competitors with respect to customer service and support, and that its emphasis on customer service, support and satisfaction provides it with a distinct competitive advantage. The Company also believes that ILECs, such as regional Bell operating companies ("RBOCs"), and the largest national carriers primarily concentrate their sales and marketing efforts on residential and large business customers and that the market for small and medium-sized businesses is generally less competitive. 44 50 INCREASE INTERNATIONAL WHOLESALE SALES The Company intends to continue targeting the sale of both international and domestic termination and transport services to wholesale customers such as large IXCs and international telecommunications carriers. The Company believes that the international market represents a growing opportunity as a result of the rapidly increasing globalization of the world economy. The Company's international department is focused on the development of offshore telecommunications relationships that provide the Company with lower international termination costs as well as greater price stability than can be obtained from U.S.-based carriers. These relationships are being leveraged by the Company to obtain revenue through the domestic termination of offshore- originated traffic, in addition to their primary role of enabling the Company to offer international termination to its customers. The Company has already made significant investments in its international network capabilities, including a Nortel international gateway switch in Quincy, Massachusetts and lease and indefeasible right of use ("IRU") arrangements for international submarine cable capacity in TAT 12/13 and Americas I in the Atlantic Ocean and TPC-5 in the Pacific Ocean, as well as various subsidiary feeder cable systems. In addition to increasing revenue, the Company expects that its strategy of selling international wholesale services will lower the cost of carrying all its international traffic and result in more attractive service offerings in its core retail markets. As of June 1, 1998, the Company provided its international wholesale services to 13 domestic and foreign telecommunications carriers, and in September 1998 such services accounted for 27% of the Company's revenue. EXPAND THROUGH STRATEGIC ACQUISITIONS AND ALLIANCES As part of its expansion strategy, the Company plans to consider acquisitions, joint ventures and strategic alliances in telecommunications, Internet access and other related service areas. The Company believes that acquisitions of, and joint ventures and other strategic alliances with, related or complementary businesses may enable it to more rapidly expand by adding new customers, new services, additional customer service and technical support capabilities, and additional cash flow. The acquisitions could be funded by cash, bank financing or the issuance of debt or equity securities. The Company is evaluating and often engages in discussions regarding various acquisition opportunities but is not currently a party to any agreement for a material acquisition. SERVICE OFFERINGS The Company offers retail telecommunications services primarily to small and medium-sized businesses. The Company's retail service offerings currently include long distance and toll-free services (both with and without AIN), multiple access options, calling and debit card, paging, data, and custom management control features. The Company plans to add local exchange service, Internet services and additional AIN features in the latter part of 1998 and into 1999. The Company also offers wholesale international and domestic termination and transport services primarily to major domestic and international telecommunications carriers. CURRENT SERVICES Retail Services. As of September 30, 1998, the Company provided retail telecommunications services to over 39,000 customers, primarily small and medium-sized businesses located in the Northeastern and Southeastern regions of the United States. Retail services are sold through the Company's direct retail sales force and, to a lesser extent, through resellers and independent marketing representatives. In September 1998, retail telecommunications services accounted for 73% of the Company's revenue. The Company's retail services include the following: - LONG DISTANCE: The Company offers a full range of switched and dedicated domestic (interstate) and international long distance services, including "1+" outbound origination and termination in all 50 states along with global termination to over 225 countries. Long 45 51 distance services include interLATA services, and, where authorized, intraLATA toll services. Additional long distance features include both verified and non-verified accounting codes, collect calling, station-to-station calling, third-party calling and operator-assisted calling. - TOLL-FREE SERVICES: The Company offers a full range of switched and dedicated domestic (interstate) toll-free services, including toll-free origination and termination in all 50 states, international toll-free origination from 61 countries including Canada, and toll-free directory assistance. AIN enhanced toll-free services include the following features: Command Routing, Dialed Number Identification Service ("DNIS"), Area Code/Exchange Routing, Real Time Automatic Number Identification Delivery, Day-of-Year Routing, Day-of-Week Routing, Time-of-Day Routing and Percentage Allocation Routing. - ACCESS OPTIONS: The Company offers its long distance and toll-free customers multiple access options including dedicated access at DS0, DS1, DS3 and E1 speed(s) and switched access. Dedicated access service customers have the option of incorporating ISDN Primary Rate Interface Protocol and switched access service customers have the option of incorporating the ISDN Basic Rate Interface Protocol. - CALLING CARD AND DEBIT CARD SERVICES: The Company offers nationwide switched access customized calling card services and debit card services. Customers have the option of calling cards that are personalized, branded or generic. - PAGING SERVICES: The Company offers advanced wireless paging services, including digital and alphanumeric paging, personal identification number ("PIN") services, voice mail, news and sports feeds, and local geographic coverage through and including national geographic coverage. Paging services offered by the Company are provided through PageMart, Inc. - DATA SERVICES: The Company offers advanced data transmission services, including private line, point-to-point and Frame Relay Services. Data services have multiple access options including dedicated access at DS0, DS1, DS3 and E1 speed(s) and switched access. Frame relay services are designed for bandwidth needs that vary over time and for inter-networking geographically dispersed networks and equipment. Frame relay services offered by the Company are provided through Sprint. - CUSTOM MANAGEMENT CONTROL FEATURES: All of the Company's customers have the option of customized management reporting features including interstate/intrastate area code summaries, international destination matrix, daily usage summaries, state summaries, time of day summaries, duration distribution matrix, exception reporting of long duration calls, and incomplete and blocked call reporting. - LOCAL SERVICES: The Company is currently providing resold local services in Connecticut, Florida, Massachusetts, New Hampshire, New York and Rhode Island. International Wholesale Services. The Company offers international wholesale termination and transport services primarily to major domestic and international telecommunications carriers. The Company believes its international wholesale service offering is a strategic element in its overall plan to expand its network and to generate and retain customer traffic. The Company intends to build on its relationships with large domestic and international carriers to purchase increased capacity and to otherwise support its international service offerings. In addition, the Company expects that its provision of comprehensive international services will lower the cost of carrying international traffic and result in more attractive service offerings in its core markets. PLANNED SERVICES Facilities-Based Local Services. The Company intends to begin offering facilities-based local service in 1999 in Connecticut, Florida, Georgia, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Tennessee and Vermont. The Company intends to deploy local facilities and 46 52 enter into additional interconnection agreements in target market areas as market conditions warrant. As part of its plan to offer facilities-based local exchange services, the Company (i) has obtained authority to provide local service in Massachusetts, New Hampshire, Rhode Island, Connecticut, Florida and New York and is currently in the process of obtaining CLEC status in the remaining New England States, New Jersey, Georgia, Pennsylvania and Tennessee, and (ii) has entered into interconnection agreements (for the purpose of gaining access to the unbundled network elements necessary to offer facilities-based local exchange services) with Bell Atlantic for Massachusetts, New Hampshire, New York and Rhode Island; with Southern New England Telephone for Connecticut; and with Bell South for Florida and Georgia. The Company has also commenced either the negotiation of interconnection agreements, or the process of identifying agreements the Company may choose to opt into, with respect to those other states where the Company has obtained, or is in the process of obtaining, CLEC status. See "Risk Factors -- Lack of Experience Offering Local and Other Telecommunications Services", "Risk Factors -- Reliance on Leased Transport Facilities and IRUs", "Risk Factors -- Lack of Interconnection and Peering Agreements", "Risk Factors -- The Telecommunications Act and Other Regulation" and "Government Regulation". Internet Services. In 1999, the Company intends to begin offering customers Internet access, including high quality dedicated and dial-up Internet connection and IP transport. Advanced Local Services. In connection with its local exchange service offering, the Company intends to offer value added local exchange services on both a resale basis (where such services are made available for resale) and on a switched-facilities basis, including the following: ISDN, Centrex, Trunk Line Service, Voice Mail (unbundled network element only), Hunt Sequencing, Three Way Calling, Call Forwarding, Call Waiting, Speed Dial, Voice Dialing, All Call Blocking, Selective Blocking, Foreign Exchange, Call Trace and Caller ID. SALES AND MARKETING OVERVIEW The Company's sales force seeks to provide its existing and potential customers with a comprehensive array of telecommunications services customized for the increasingly convergent voice and data marketplace. The Company's customers consist primarily of small and medium-sized businesses that have telecommunications expenditures of less than $10,000 per month. The Company believes that RBOCs and large long distance carriers historically have not concentrated their sales and marketing efforts on this business segment, which the Company believes represents a significant portion of the telecommunications market. Through its sales force and its eight-year operating history, the Company believes it has established itself as a recognized provider of high- quality, competitively priced long distance services, with a reputation for responsive customer care. The Company's sales and marketing approach is to build long-term business relationships with its customers, with the intent of becoming the single source provider of all their telecommunications services. The Company trains its sales force in house with a customer-focused program that promotes increased sales through both customer attraction and customer retention. In addition, all members of the sales force are given incentives through a commission structure under which commissions are paid on an ongoing basis for as long as a customer continues to purchase services from the Company. This "lifetime residual" is intended to motivate the sales force to remain actively involved with customers and participate in the customer retention and support process. The Company believes that its customer support-focused commission structure and in-house training are unique in the industry and provide the Company with a competitive advantage in attracting and retaining customers. Members of the Company's sales force are assigned to one of the following sales groups: (i) the direct retail sales force, which markets the Company's retail telecommunications services directly to end users; (ii) the reseller and independent agent sales force, which markets the 47 53 Company's telecommunications services to resellers, independent marketing representatives, associations and affinity groups; and (iii) the international wholesale sales force, which sells the Company's international telecommunications services on a wholesale basis to major domestic and international telecommunications carriers. SALES CHANNELS DIRECT RETAIL SALES. The Company's direct retail sales force markets the Company's retail telecommunications services directly to end users. As of September 30, 1998 the Company employed 201 direct sales representatives working in 12 regional offices. By year end 1999, the Company intends to open additional sales offices. This anticipated expansion will result in a sales force with approximately 400 direct retail sales personnel located in offices throughout the Northeastern and Southeastern regions of the United States. See "Risk Factors -- Management of Rapid Growth". The sales force is led by Robert T. Hale, Jr., who has over 10 years of telecommunications sales experience. The direct sales force is divided into two regions: (i) a Northeastern region, headed by a regional sales director with over seven years of telecommunications sales experience with the Company; and (ii) a Southeastern region, headed by a regional sales director with over seven years of telecommunications sales experience with the Company. Each of the Company's existing 12 sales offices is headed by a branch manager and is further sub-divided into smaller sales teams, each of which is headed by a team leader who directly oversees the day-to-day sales activities of his or her team and acts as a mentor to its members. Teams generally consist of eight to 10 sales representatives. The Company's direct retail sales force has a proven management structure based on a "growth from within" philosophy. As the Company opens a sales office in a new geographic area, it identifies a branch manager and team leader to head the new office. New branch managers are typically chosen from among the Company's experienced team leaders, and team leaders are typically chosen from among the Company's experienced sales representatives. Because these new positions represent promotion opportunities, the Company has been successful in opening new offices with management teams having significant Network Plus work experience. As branch managers and team leaders relocate to offices in new geographic areas, they hire new sales representatives from the area. All new sales representatives are required to receive formal in-house training, where they are expected to gain a thorough knowledge of the Company's services and the telecommunications industry. After formal training, sales representatives are permitted to pursue customers but are required to participate in a continuing mentoring program. The Company believes this philosophy is a competitive advantage in the attraction and long-term retention of sales personnel. The Company also telemarkets its long distance services, primarily to small businesses and residential users. As of September 30, 1998, telemarketing activities were conducted by 10 employees located at the Company's telemarketing center in Largo, Florida, which was established in the fourth quarter of 1997. 48 54 The following chart sets forth each existing and targeted new Company office location, the planned opening date for each targeted new office, the number of direct sales representatives currently located in each office and the number of direct retail sales representatives intended to be located in each office at year end 1998 and 1999.
DIRECT RETAIL SALES STAFF ----------------------------------------------- TOTAL AT PLANNED PLANNED TARGET OFFICE SEPTEMBER 30, TOTAL AT YEAR TOTAL AT YEAR OFFICE LOCATION OPENING DATE 1998 END 1998 END 1999 - ------------------------------------ ------------- ------------- ------------- ------------- Atlanta, GA......................... Existing 21 32 40 Fort Lauderdale, FL................. Existing 20 30 35 Nashua, NH.......................... Existing 13 16 15 Norwalk, CT......................... Existing 8 20 25 Orlando, FL......................... Existing 16 20 30 Providence, RI...................... Existing 16 20 22 Quincy, MA.......................... Existing 63 70 80 Largo, FL........................... Existing 10 20 20 Worcester, MA....................... Existing 10 20 20 Jacksonville, FL.................... Existing 13 20 20 New York, NY........................ Existing 8 20 48 Springfield, MA..................... Existing 3 12 15 Undetermined........................ Q2 1999 0 0 15 Undetermined........................ Q2 1999 0 0 15 ------- ------- ------- Totals.............................. 201 300 400 ======= ======= =======
RESELLER AND INDEPENDENT AGENT SALES. The Company's reseller and independent agent sales force markets the Company's telecommunications services to various resellers, independent marketing representatives, associations and affinity groups. The focus of the reseller and independent agent sales force is to locate established, high-quality organizations with extensive distribution channels in order to market the Company's telecommunications services to both a broader geographic range of potential customers and a greater number of potential customers than could be reached by the direct retail sales force. The Company sells its services on a wholesale basis to resellers, which in turn sell such services at retail to their customers. The Company generally sells its services to independent marketing representatives, associations and affinity groups on a retail basis. Use of independent marketing representatives allows the Company to reduce its marketing and other overhead costs. As compensation for their services, independent marketing representatives generally receive a commission on their sales. The Company employs stringent selection criteria and attempts to carefully monitor and control the activities of its resellers and independent marketing representatives to ensure compliance with laws, industry standards, and corporate policies. The Company believes that the number of complaints it has received regarding the methods and practices of its agents is negligible in comparison with that of many other telecommunications companies. The Company's reseller and independent agent sales force is split into three regions: (i) a Northeastern region, headed by a regional sales director with seven years of telecommunications sales experience with the Company; (ii) a Southeastern region, headed by a regional sales director with three years of telecommunications sales experience with the Company; and (iii) a West Coast region, headed by a regional sales director with eight years of telecommunications sales experience with the Company. The Company commenced sales through resellers and independent marketing representatives in 1996, and the Company currently has five salespeople dedicated to this market segment. In September 1998, sales through the Company's reseller and independent agent sales force accounted for 13% of the Company's revenue. 49 55 INTERNATIONAL WHOLESALE SALES. The Company's international wholesale sales force markets the Company's international telecommunications services to both international and domestic telecommunications providers. The international wholesale sales force is focused on developing customer and vendor relationships with the top tier IXCs as well as RBOCs and selected financially stable second tier IXCs. In September 1998, international wholesale sales accounted for approximately 27% of the Company's revenue. The Company's international wholesale sales force is headed by the Vice President and General Manager of International Services, who has over 16 years of experience in international telecommunications sales, service and networks. In addition, this sales group includes three specialized international wholesale sales representatives, each of whom has over four years of telecommunications sales experience with the Company. As of September 30, 1998, the Company had six sales people in its international wholesale sales force. SALES FORCE COMPENSATION All sales persons, regardless of sales group, are compensated with both a salary and a residual commission structure based on each customer's continued use of the Company's services. The compensation of members of the Company's sales force is therefore increasingly reliant over time on the retention of existing customers. It is the Company's belief that this "lifetime residual" motivates each sales person to remain actively involved with customers and participate in the customer support process. The Company believes this approach to commissions is unique in the industry and provides the Company with competitive advantages including (i) enhanced relationships, which increase cross-selling opportunities; (ii) reduced customer service and support costs; and (iii) increased customer retention. SIMPLICITY PRICING The Company utilizes a flat-rate per-minute pricing structure for long distance and certain other services, which the Company refers to as Simplicity Pricing. The Company believes this simplified pricing structure assists in the sales process and gives the Company a competitive advantage over larger long distance competitors which historically have used complex pricing structures featuring either distance-sensitive calling charges or myriad base rates and discounting schemes. The Company strives to deliver this Simplicity Pricing on a timely invoice in a format that is user-friendly. MARKETING AND ADVERTISING Historically, because the Company has been successful in relying upon its sales force to obtain additional customers and increased name recognition, the Company has refrained from undertaking significant advertising efforts. The Company is actively involved in numerous charitable and community events, which the Company believes increase recognition of the Company in particular geographic regions. The Company has no immediate plans to allocate significant resources to direct advertising efforts. CUSTOMER BASE RETAIL CUSTOMERS As of September 30, 1998, the Company had over 39,000 retail customers, which the Company internally segments by monthly revenue into (i) a National Account segment (over $1,000 of usage per month), (ii) a Major Account segment (between $250 and $1,000 of usage per month) and (iii) a Small Business/Residential Customer Account segment (under $250 of usage per month). This segmentation is designed to ensure that those customers generating higher monthly revenues experience a higher level of proactive customer care. 50 56 INTERNATIONAL WHOLESALE CUSTOMERS As of June 1, 1998, the Company provided wholesale international telecommunications services to 13 national and international telecommunications carriers. International wholesale telecommunications services include international transport and termination services for domestic carriers and domestic transport and termination services for international carriers. During September 1998, wholesale telecommunications services accounted for 27% of the Company's revenue. The Company strives to establish close working relationships with its wholesale international customers. Once the Company interconnects with a carrier customer, the carrier may utilize the Company on an as-needed basis, depending upon the pricing offered by the Company and its competitors, as well as capacity. The Company has been tested and approved as an authorized carrier for, and included in the routing tables of, all of its long distance and international carrier customers. During the years ended December 31, 1997, 1996 and 1995, the Company had one retail customer that accounted for approximately 10% of the Company's revenue. In the first nine months of 1998, the Company had one wholesale customer that accounted for approximately 12% of the Company's revenue. The Company expects that this customer will be the only customer accounting for more than 10% of its revenue during the full year 1998. CUSTOMER SUPPORT The Company maintains an emphasis on customer care to differentiate itself from its competitors, especially larger providers, and to increase customer retention. The Company provides 24-hours-per-day, 365-days-per-year customer support primarily through its customer service department in Quincy, Massachusetts. At the Company's customer support center, customers' calls are answered by experienced customer care representatives, many of whom are cross-trained in the provisioning process. Support staff are trained to work with the Company's sales force and be proactive in the customer support process. In addition to calls made by the Company's sales department, members of the customer support staff proactively seek to contact national customers monthly and major customers quarterly to help ensure a high level of satisfaction with the Company. The Company's customer support team is organized to help ensure that the most knowledgeable personnel handle support requests from the largest customers. The customer support staff utilizes a sophisticated management information system to access all customer information including contact information, customer rates, trouble ticket systems, accounts receivable and billing history. In addition, the Company utilizes a provisioning system that maintains a complete history of a customer's provisioning and allows real-time access to information concerning each transaction with the LEC or underlying carrier. The Company believes that its customer support and provisioning systems enhance the Company's customer retention rate. The Company monitors and measures the quality and timeliness of customer interaction through quality assurance procedures. Pick-up times for incoming calls, lengths of calls and other support information is automatically monitored by the Company's automated call distribution system ("ACD"). The Company's ACD also prioritizes incoming support requests, assuring that the Company's largest customers receive support in the most expedient manner. The Company's customer support department consists of five discrete areas: National Accounts Management, Major Accounts Management, Small Business and Residential Accounts Management, Repair Desk, and Save and Win-Back Team. The Company's Customer Service Department is managed by the Director of Customer Service, who has six years of sales and customer service experience with the Company. Additional members of the Customer Service Management team include (i) the National Accounts Manager, who has five years of sales and customer service experience with the Company; (ii) the Major Accounts Manager, who has four years of sales and customer service experience with the Company; (iii) the Small Business and 51 57 Residential Accounts Manager, who has two years of sales and customer service experience with the Company; (iv) the Repair Desk team members, each of whom has a minimum of two years of customer service experience with the Company; and (v) the Save and Win-Back team members, each of whom has a minimum of four years of sales and customer service experience with the Company. Customer support agents are required to complete an intensive formal in-house training program before interacting with customers and are required to participate in a continuing mentor program. Customer support personnel are expected to have a thorough knowledge of the Company's services and to emphasize customer satisfaction. The compensation of support personnel is in part dependent upon the retention rate of their respective accounts. The Company has an established career path for its agents, who over time gain responsibility for larger customers, as well as management responsibilities. The Company's customer support department currently receives approximately 800 support calls per day. The Company estimates that the average incoming call is answered by a support specialist in under 15 seconds, which the Company believes compares favorably to many competitors. The Company also utilizes four billing cycles per month, which helps ensure that customer service calls will be staggered throughout each month. If the Company is successful in entering the local service market, the Company believes that its level of customer service will provide it with a competitive advantage over existing local service providers. As of September 30, 1998, the Company employed 34 people in customer support. The Company anticipates that it will continue to hire additional customer support personnel as the size of its customer base increases. See "Risk Factors -- Dependence on Billing, Customer Service and Information Systems". NETWORK The Company pursues a capital-efficient network deployment strategy that involves owning switches while acquiring or leasing fiber optic transmission facilities on an incremental basis to satisfy customer demand. The Company's strategy has been to build a geographic concentration of revenue-producing customers through the resale of telecommunications services before building, acquiring or extending its own network to serve that concentration of customers. As network economics justify the deployment of switching or transport capacity, the Company expands its network and migrates customers to its network. The Company believes that this strategy allows the Company to penetrate new markets through its resale solution without incurring the risks associated with speculative deployment of network elements and to focus its capital expenditures in those geographic areas and markets where network expansion will result in higher long-term operating margins. CURRENT NETWORK SWITCHES. Currently, the Company operates an advanced telecommunications network that includes two Nortel switches. The switch located in Quincy, Massachusetts is a DMS 250/300 digital switch that combines on a single platform the DMS 250's interexchange switching capabilities and the DMS 300's international gateway capabilities. The switch located in Orlando, Florida is a Nortel DMS 250. The Company's switches are owned pursuant to capital lease arrangements. During September 1998, the Company carried approximately 27.0 million minutes, or approximately 48% of its total minutes, on its own network. The Company anticipates that this percentage will increase as it further expands its facilities-based infrastructure. The Company believes that increasing the traffic carried on its own network will increase long-term operating margins and give the Company greater control over its network operations. FIBER AND TRANSPORT. The Company recently entered into two 20-year indefeasible right-of-use ("IRU") agreements with two separate carriers pursuant to which it acquired 625 route miles of dark fiber (1,830 digital fiber miles). When the fiber is fully deployed and activated, it will form a 52 58 redundant fiber ring connecting major markets throughout New England and the New York metropolitan area, providing the Company with significant transmission capacity. The first IRU agreement is for 293 fiber route miles containing four dark Lucent TrueWave optical fibers. Markets connected by this segment include New York City, White Plains, Stamford, New Haven, New London, Providence and Boston. The second IRU agreement is for 332 fiber route miles containing two dark Lucent TrueWave optical fibers. Markets connected by this segment include Boston, Nashua, Springfield, Hartford, White Plains and New York City. The Company will install and control all electronics and optronics, including wave division multiplexing technologies. Where the Company has not acquired fiber, it leases long-haul network transport capacity from major facilities-based carriers and local access from the ILECs in their respective territories. The Company also uses competitive access provider ("CAP") or CLEC facilities where available and economically justified. To ensure seamless off-net termination and origination, the Company also utilizes interconnection agreements with major carriers. See "Risk Factors -- Reliance on Leased Transport Facilities and IRUs". INTERNATIONAL. The Company is interconnected with a number of U.S. and foreign wholesale international carriers through the Quincy, Massachusetts DMS 250/300 switch. The purpose of connecting to a variety of carriers is to provide state-of-the-art least-cost routing and network reliability. These interconnected international carriers are also a source of wholesale international traffic and revenue. To further support its international interconnections the Company has entered into leases for international submarine cable facilities in TAT-12/13 RIOJA in the Atlantic Ocean and TPC-5 in the Pacific Ocean. In addition, in December 1997 the Company purchased indefeasible rights of use capacity in the Americas I cable system. These arrangements support existing and planned interconnections with telephone operating companies in foreign countries. OTHER FEATURES. The Company is also interconnected with two Signaling Transfer Points in Waterbury, Connecticut and New Haven, Connecticut to provide SS7 common-channel signaling throughout its network. The SS7 signaling system reduces connect time delays, thereby enhancing overall network efficiencies. Additionally, SS7 will permit the anticipated expansion of AIN capabilities throughout the Company's network. The Company's uniform and advanced switching platform will enable it to (i) deploy features and functions quickly throughout its entire network, (ii) expand switch capacity in a cost-effective manner, (iii) lower maintenance costs through reduced training and spare parts requirements and (iv) achieve direct connectivity to cellular and personal communication system applications in the future. SECURITY AND RELIABILITY. The Company has a Network Operations Center in Quincy, Massachusetts, which monitors the Company's entire network from a central location, increasing the security, reliability and efficiency of the Company's operations. Centralized electronic monitoring and control of the Company's network allows the Company to avoid duplication of this function in each region. This consolidated operations center also helps reduce the Company's per-customer monitoring and customer service costs. In addition, the Company's network employs an "authorized access" architecture. Unlike many telecommunications companies, which allow universal access to their network, the Company utilizes an automatic number identification ("ANI") security screening architecture that ensures only the ANIs of those users who have subscribed to the Company's services and have satisfied the Company's credit and provisioning criteria are allowed access to the network. The Company believes that this architecture provides the Company a competitive advantage through its ability to better control bad debt and fraud in a manner that is invisible and nonintrusive to the customer. Additionally, this architecture allows the Company to better manage network capacity, as unauthorized and unplanned users cannot access the network. See "Risk Factors -- Dependence Upon Network Infrastructure; Risk of System Failure; Security Risks". 53 59 ANTICIPATED NETWORK EXPANSION As part of its growth strategy, the Company plans to undertake a significant network expansion through the deployment of additional switching and transport infrastructure to support its goal of continuing migration of its customers' traffic to its own network. Expansion of the Company's facilities-based infrastructure with international gateway, long distance and local switches will increase the proportion of communications traffic that is originated or terminated on its network, which the Company believes will result in higher long-term operating margins and greater control over its network operations. The Company structures its network expansion decisions in a manner designed to (i) reduce up-front capital expenditures required to enter new markets, (ii) avoid the risk of "stranded" investment in under-utilized fiber networks and (iii) enter markets and generate revenue and positive cash flow more rapidly than if the Company first constructed its own facilities. The Company intends to further expand its network in geographic areas where customer concentrations and traffic patterns make expansion economically justifiable. See "Risk Factors -- Substantial Future Capital Requirements; Need for Additional Financing; Substantial Leverage". The Company also plans to expand its business by offering a full range of local services in the geographic regions where the Company already has an established customer base. The Company intends to offer local services by (i) entering into interconnection agreements with ILECs; (ii) deploying its facilities-based infrastructure in conjunction with ILEC unbundled network elements ("UNE"); (iii) in those areas where the Company has not yet deployed local facilities infrastructure, or in those areas where the Company has not yet achieved significant market penetration, reselling the ILECs' local services pursuant to state commission-mandated wholesale discounts; and (iv) entering into agreements with various ILECs and IXCs for termination and origination of traffic for the Company's on-net local customers. The Company believes this network deployment strategy, along with its ability to leverage its existing customer base and demonstrated sales and provisioning expertise, will help to produce rapid penetration into local markets. Additionally, the Company believes that the bundling of local service with its long distance or data services will enhance customer retention and further enhance operating margins. Four phases of the Company's network expansion are anticipated to take place by the end of 1999. These phases are as follows: IXC PLATFORM. The Company intends to deploy and have operational the following switching platforms by mid-1999: (i) in Los Angeles, a DMS 250/300 digital switch, which combines on a single platform the DMS 250's interexchange switching capabilities and the DMS 300's international gateway capabilities; (ii) in Chicago, a DMS 250 interexchange switch; (iii) in New York City, a Lucent 5ESS equipped with interexchange capabilities; and (iv) in Atlanta, a Lucent 5ESS switch, which combines the interexchange switching platform with a local switching platform. Based upon current traffic patterns and volumes the Company believes that the deployment of this interexchange switching capacity will enable the Company to increase the on-net traffic generated by its current customer base. LOCAL NORTHEAST PLATFORM. The Company intends to deploy local switching infrastructure in the Northeastern United States, which will allow the Company to take advantage of its customer concentration in this region. It is the Company's current intention to deploy a Lucent 5ESS switch in both Boston and New York, along with numerous circuit and fast packet access nodes located in central offices and targeted buildings throughout its Northeastern region. LOCAL SOUTHEAST PLATFORM. The Company intends to deploy local switching infrastructure in the Southeastern United States, which will allow the Company to take advantage of its customer concentration in this region. While the Company is still evaluating various network configurations, it is the Company's current intention by mid-1999 to install a Lucent 5ESS switch in both Orlando and Atlanta, along with numerous circuit and fast packet access nodes located in central offices and targeted buildings throughout its Southeastern region. 54 60 SERVICE BUILDER. Concurrently with the build-out of its IXC and local network infrastructure, it is the Company's intention to deploy Service Builder, Nortel's next generation AIN platform as an extension of the SS7 technology embedded in the Company's network protocol. Specific value-added features currently supported by Service Builder include: (i) "500 number" technology; (ii) "follow me" services; (iii) local number portability (mandated by the Telecommunications Act); (iv) mass customization of number translation services; and (v) deployment of virtual private networks. The Company expects to begin offering some of these services by the first quarter of 1999. INTERNATIONAL PLATFORM The Company's switch in Quincy, Massachusetts has international gateway capabilities. To increase its opportunities in the Pacific Rim, the Company also plans to deploy a Nortel international gateway switch in its Los Angeles switching facility by year end 1998. SPRINT AGREEMENT In those geographic areas in which the Company has not deployed network elements, it contracts for and resells long distance domestic and International services from Sprint. See "Risk Factors -- Dependence Upon Suppliers and Other Service Providers". MANAGEMENT INFORMATION SYSTEMS, PROVISIONING, BILLING AND COLLECTIONS OVERVIEW The Company is committed to the continued development and successful implementation of an integrated provisioning, billing, collection and customer service system that provides accurate and timely information to both the Company and its customers. The Company's billing system is designed to provide access to a broad range of information on individual customers, including their call volume, patterns of usage and billing history. In connection with its anticipated growth, the Company has incurred and expects to incur significant costs to upgrade its information technology systems. The new system being developed by the Company is built on an open scalable client/server Oracle platform and is expected to better integrate the Company's operations, both geographically and among departments. There can be no assurance that the Company will realize the intended benefits from this new system or that the Company will not incur significant unanticipated costs in deploying this system. See "Risk Factors -- Dependence on Billing, Customer Service and Information Systems". PROVISIONING The Company believes that a significant ongoing challenge for ICPs will be to continuously improve provisioning systems, which includes the complex process of transitioning customers to their proprietary networks. Accordingly, the Company will continue to identify and focus on implementing the best provisioning practices in each of its markets to provide for rapid, seamless transition of customers from the ILEC to the Company. To support the provisioning of its services, the information platform being developed by the Company is designed to deliver information and automated ordering and provisioning capability directly to the end user as well as to the Company's internal staff. The Company believes that these practices and its comprehensive information technology platform, as developed, will provide the Company with a long-term competitive advantage and allow it to more rapidly implement switched local services in its markets and to shorten the time between the receipt of a customer order and the generation of revenue. The Company's Provisioning Department consists of four discrete areas: General Provisioning, Dedicated Access Services, Toll-Free Services and Reseller and Agent Provisioning and Support. The Director of Provisioning has over six years of telecommunications provisioning experience with 55 61 the Company. Additional members of the Provisioning Department management team include (i) the Dedicated Access Services Manager with over seven years of telecommunications provisioning experience with the Company; (ii) the Toll-Free Services Manager with four years of telecommunications provisioning experience with the Company; and (iii) two Assistant Managers of Provisioning, each with over four years of telecommunications provisioning experience with the Company. BILLING The Company maintains within its internal OSS all customer information, operational data, accounts receivable information, rating rules and tables, and tax tables necessary for billing its customers. The Company collects and processes on a daily basis all usage information from its own network and from the networks of third-party providers. The actual process of applying rating and taxing information to the millions of individual message units generated each month, and of generating invoice print files, is out-sourced to a third party utilizing both a redundant high-speed IBM MVS mainframe and the proven PL/1 language. Printing of invoices is outsourced to a high-speed print shop, and the mailing of all invoices is currently handled directly by the Company. To optimize both cash flow and internal work flow metrics, the Company currently utilizes four billing cycles per month. Additional billing cycles will be added as dictated by customer growth. To ensure the quality of the billing process, the Company utilizes strict quality control checks including boundary and statistical variation testing, sample pricing matrices and direct sampling. EMPLOYEES The Company's departments have a proven structure including a "growth from within" philosophy providing opportunities first, to the extent possible, to existing employees. The Company believes that this philosophy has increased employee retention and resulted in the Company's operations being managed by individuals with significant telecommunications experience with the Company. In addition, the Company believes that the long tenure, extensive experience and proven teamwork of its Sales, Customer Service, Provisioning, Billing and Collections management teams is a competitive advantage when compared to emerging ICPs lacking the extensive cooperative management experience enjoyed by the Company. As of September 30, 1998, the Company employed 337 people, consisting of 201 in sales and marketing, 34 in customer service, 24 in provisioning, five in production, three in billing, 13 in finance, 17 in networks, 10 in information technology/MIS, 10 in collections and 20 in other departments. The Company has also recently hired a Director of Human Resources to help manage the Company's growing employee base. In connection with its growth strategy, the Company currently anticipates hiring a significant number of additional personnel in sales and other areas of the Company's operations by year end 1999. As a result of the intense competition for qualified information technology personnel, the Company also uses third-party information technology consultants. The Company's employees are not unionized, and the Company believes its relations with its employees are good. The Company's success will continue to depend in part on its ability to attract and retain highly qualified employees. See "Risk Factors -- Management of Rapid Growth" and "-- Dependence on Key Personnel". PROPERTIES The Company's corporate headquarters are located in a 39,500-square foot facility in Quincy, Massachusetts. The Quincy facility also serves as a sales office and includes the Company's customer service operations, certain network facilities and its Network Operations Center. The Quincy facility is leased from an affiliate of the Company. See "Certain Transactions". The Company currently leases 12 additional facilities for current or planned sales offices. The Company also leases real estate to house its telemarketing center in Largo, Florida and interexchange switching facilities in Los Angeles, Chicago and Orlando. The Company has also recently entered into a lease 56 62 to house its first local switch in the Northeastern region of the United States and is in the process of obtaining other leases to house other local switches. The aggregate amount paid by the Company under its leases in 1997 was approximately $733,000. Although the Company's facilities are adequate at this time, the Company believes that it will be required to lease additional facilities, including additional sales offices and switching facilities, as a result of its anticipated growth. LEGAL MATTERS From time to time the Company is party to routine litigation and proceedings in the ordinary course of its business. The Company is not aware of any current or pending litigation to which the Company is or may be a party that the Company believes could have a material adverse effect on the Company's results of operations or financial condition. INDUSTRY OVERVIEW HISTORY AND INDUSTRY DEVELOPMENT Prior to 1984, AT&T dominated both the local exchange and long distance marketplaces by owning the operating entities that provided both local exchange and long distance services to most of the U.S. population. Although long distance competition began to emerge in the late 1970s, the critical event triggering the growth of long distance competition was the breakup of AT&T and the separation of its local and long distance businesses as mandated by the Modified Final Judgment relating to the breakup of AT&T (the "MFJ"). To foster competition in the long distance market, the MFJ prohibited AT&T's divested local exchange businesses, the RBOCs, from acting as single-source providers of telecommunications services. Although the MFJ established the preconditions for competition in the market for long distance services in 1984, the market for local exchange services has until recently been virtually closed to competition and has largely been dominated by regulated monopolies. Efforts to open the local exchange market began in the late 1980s on a state-by-state basis when CLECs began offering dedicated private line transmission and access services. These types of services together currently account for approximately 12% of total local exchange revenue. CLECs were restricted, often by state laws, from providing other, more frequently used services such as basic and switched services, which today account for approximately 88% of local exchange revenue. The Telecommunications Act, which was enacted in February 1996, is considered to be the most comprehensive reform of the nation's telecommunications laws and affects the development of competition for local telecommunications services. Specifically, certain provisions of the Telecommunications Act provide for (i) the removal of legal barriers to entry to the local telecommunications services market; (ii) the interconnection of ILEC networks with competitors' networks; (iii) the establishment of procedures and requirements to be followed by the RBOCs, including the requirement that RBOCs offer local services for resale as a precondition to entering into the long distance and telecommunications equipment manufacturing markets; and (iv) the relaxation of the regulation of certain telecommunications services provided by LECs and others. The Company believes the Telecommunications Act will promote significant growth in the local telecommunications market as new market entrants provide expanded service offerings. The Telecommunications Act further increases the opportunities available to CLECs by requiring the RBOCs and other ILECs to offer various network elements such as switching, transport and loops (i.e., the facilities connecting a customer's premises to a LEC central office) on an unbundled and non-discriminatory basis. RBOCs also are required to offer their retail services at wholesale rates for resale by other companies. By offering such services, RBOCs also meet certain of the requirements contained in the Telecommunications Act in order to gain FCC approval to provide in-region long distance services. Although certain provisions of the Telecommunications Act restricting the RBOCs' ability to provide in-region long distance services have been held unconstitutional by a 57 63 Federal district court, the Company believes that significant parts of such decision may be reversed and vacated on appeal, but no assurance can be made as to the outcome. The continuing deregulation of the telecommunications industry and technological change have resulted in an increasingly information-intensive business environment. Regulatory, technological, marketing and competitive trends have expanded substantially the Company's opportunities in the converging voice and data communications services markets. For example, technological advances, including rapid growth of the Internet, the increased use of packet switching technology for voice communications and the growth of multimedia applications, are expected to result in substantial growth in the high-speed data services market. This new market opportunity will permit competitive providers who can manage the operational and marketing implementation to offer a full range of telecommunications services, including local and long distance calling, toll-free calling, custom calling features, data services, Internet access and cellular services. The Company believes that customers will prefer a single source for all of their voice and data telecommunications requirements, including products, billing and service. Telecommunications companies with an established base of long distance customers will have the opportunity to sell additional services to such customers. The Company believes that a one-stop provider of integrated communications services will have the opportunity to penetrate its existing markets, expand its customer base, capture a larger portion of its customers' total expenditures on communication services and reduce customer turnover. Furthermore, companies that develop their own networks will have the opportunity to migrate customers from off-net to on-net, thereby increasing long-term operating margins and giving such companies greater control over their network operations. See "Risk Factors -- Competition", "-- The Telecommunications Act and Other Regulation" and "-- Impact of Technological Change". The Company also believes that small and medium-sized businesses have historically been underserved with respect to customer service and support. Because, the Company believes, RBOCs and the largest national carriers primarily concentrate their sales and marketing efforts on residential and large business customers, there is a significant market opportunity with respect to small and medium-sized businesses. Geographically, the Company believes that the Northeastern and Southeastern regions of the United States are attractive markets due to a number of factors, including (i) the population density in the Northeast; (ii) a large number of rapidly growing metropolitan clusters in the Southeast, such as Atlanta, Miami/Fort Lauderdale and Orlando; and (iii) the relatively small number of significant competitors to the ILECs. TELECOMMUNICATIONS SERVICES MARKET Overview of U.S. Market. The U.S. market for telecommunications services can be divided into three basic sectors: long distance services, local exchange services and Internet access services. In its July 1998 report "Trends in Telephone Service", the Industry Analysis Division of the Federal Communications Commission's Common Carrier Bureau estimated that, in the United States, long distance services generated revenue of approximately $99.7 billion in 1996 and local exchange services accounted for revenue of approximately $86.9 billion. Revenue for both local exchange and long distance services include amounts charged by long distance carriers and subsequently paid to ILECs (or, where applicable, CLECs) for long distance access. Long Distance Services. A long distance telephone call can be envisioned as consisting of three segments. Starting with the originating customer, the call travels along a local exchange network to a long distance carrier's point of presence ("POP"). At the POP, the call is combined with other calls and sent along a long distance network to a POP on the long distance carrier's network near where the call will terminate. The call is then sent from this POP along a local network to the terminating customer. Long distance carriers provide only the connection between the two local networks, and, unless the long distance carrier is a local service provider, pay access charges to LECs for originating and terminating calls. 58 64 The following diagram is a simplified illustration of a typical long distance network call carried by the Company: [Diagram] Local Exchange Services. A local call is one that does not require the services of a long distance carrier. In general, the local exchange carrier connects end user customers within a LATA and also provides the local portion of most long distance calls. The following diagram is a simplified illustration of a typical local network call: [Diagram] Internet Service. Internet services are generally provided in at least two distinct segments. A local network connection is required from the ISP customer to the ISP's local facilities. For large, communication-intensive users and for content providers, the connections are typically unswitched, dedicated connections provided by ILECs, CLECs or ICPs, either as independent service providers or, in some cases, by a company that is both a CLEC and an ISP. For residential and small and medium-sized business users, these connections are generally public switched telephone network ("PSTN") connections obtained on a dial-up access basis as a local exchange telephone call. Once a local connection is made to the ISP's local facilities, information can be transmitted and obtained over a packet-switched IP data network, which may consist of segments provided by many interconnected networks operated by a number of ISPs. The collection of interconnected networks makes up the Internet. A key feature of Internet architecture and packet-switching is that a single dedicated channel between communication points is never established, which distinguishes Internet-based services from the PSTN. COMPETITION OVERVIEW The Company operates in a highly competitive industry and believes that it does not have significant market share in any market in which it operates. The Company expects that competition 59 65 will continue to intensify in the future due to regulatory changes, including the continued implementation of the Telecommunications Act, and the increase in the size, resources and number of market participants. In each of its markets, the Company will face competition for local service from larger, better capitalized ILECs and CLECs. Additionally, the long distance market is already significantly more competitive than the local exchange market because the ILECs, prior to enactment of the Telecommunications Act, generally had a monopoly position within the local exchange market. While new business opportunities will be made available to the Company through the Telecommunications Act and other Federal and state regulatory initiatives, regulators are likely to provide the ILECs with an increased degree of flexibility with regard to pricing of their services as competition increases. Competition for the Company's products and services is based on price, quality, reputation, name recognition, network reliability, service features, billing services, perceived quality and responsiveness to customers' needs. While the Company believes that it currently has certain advantages relating to price, quality, customer service, and responsiveness to customer needs, there is no assurance that the Company will be able to maintain these advantages or obtain additional advantages. A continuing trend toward business combinations and alliances in the telecommunications industry may create significant new competitors to the Company. Many of the Company's existing and potential competitors have financial, technical and other resources significantly greater than those of the Company. In addition, in December 1997 the FCC issued rules to implement the provisions of the World Trade Organization Agreement on Basic Telecommunications, which was drafted to liberalize restrictions on foreign ownership of domestic telecommunications companies and to allow foreign telecommunications companies to enter domestic markets. The new FCC rules went into effect in February 1998 and are expected to make it substantially easier for many non-U.S. telecommunications companies to enter the U.S. market, thus further increasing the number of competitors. The new rules will also give non-U.S. individuals and corporations greater ability to invest in U.S. telecommunications companies, thus increasing the financial and technical resources potentially available to the Company and its existing and potential competitors. See "Risk Factors -- Competition", "Risk Factors -- The Telecommunications Act and Other Regulation" and "Government Regulation". LONG DISTANCE MARKET The long distance telecommunications industry is highly competitive and affected by the introduction of new services by, and the market activities of, major industry participants. The Company competes against various national and regional long distance carriers, including both facilities-based providers and switchless resellers offering essentially the same services as the Company. In addition, significant competition is expected to be provided by ILECs including, when authorized, RBOCs. The Company's success will depend upon its ability to provide high-quality services at prices generally competitive with, or lower than, those charged by its competitors. In addition, the long distance industry is characterized by a high level of customer attrition or "churn". Such attrition is attributable to a variety of factors, including initiatives of competitors as they engage in advertising campaigns, marketing programs and cash payments and other incentives. End users are often not obligated to purchase any minimum usage amount and can discontinue service without penalty at any time. While the Company believes its customer turnover rate is lower than that of many of its competitors, the Company's revenue has been, and is expected to continue to be, affected by churn. AT&T, MCI, Sprint and other carriers have implemented new price plans aimed at residential customers with significantly simplified rate structures, which may have the impact of lowering overall long distance prices. There can also be no assurance that long distance carriers will not make similar offerings available to the small to medium-sized businesses that the Company primarily serves. While the Company believes small and medium-sized business customers are not aggressively targeted by large long distance providers such as AT&T, MCI and Sprint, there can be no assurance the Company's customers and potential customers will not be targeted by these or other 60 66 providers in the future. Additional pricing pressure may come from IP transport, which is a developing use of packet-switched technology that can transmit voice communications at a cost that may be below that of traditional circuit-switched long distance service. While IP transport is not yet available in all areas, requires the dialing of additional digits, and generally produces sound quality inferior to traditional long distance service, it could eventually be perceived as a substitute for traditional long distance service and put pricing pressure on long distance rates. Any reduction in long distance prices may have a material adverse effect on the Company's results of operations. One of the Company's principal competitors, Sprint, is also a major supplier of services to the Company. The Company both links its switching equipment with transmission facilities and services purchased or leased from Sprint, and resells services obtained from Sprint. See "Business -- Network -- Sprint Agreement". There can be no assurance that Sprint will continue to offer services to the Company at competitive rates or on attractive terms, if at all, and any failure to do so could have a material adverse effect on the Company. See "Risk Factors -- Dependence Upon Suppliers and Other Service Providers". LOCAL EXCHANGE MARKET Under the Telecommunications Act and related Federal and state regulatory initiatives, barriers to local exchange competition are being removed. In local telecommunication markets, the Company's primary competitor will be the ILEC serving each geographic area. ILECs are established providers of dedicated and local telephone services to all or virtually all telephone subscribers within their respective service areas. ILECs also have long-standing relationships with regulatory authorities at the federal and state levels. While recent FCC administrative decisions and initiatives provide increased business opportunities to voice, data and Internet-service providers, they also provide the ILECs with increased pricing flexibility for their private line, special access and switched access services. In addition, with respect to competitive access services, the FCC recently proposed a rule that would provide for increased ILEC pricing flexibility and deregulation for such access services either automatically or after certain competitive levels are reached. If the ILECs are allowed additional flexibility by regulators to offer discounts to large customers through contract tariffs, decide to engage in aggressive volume and term discount pricing practices for their customers, or seek to charge competitors excessive fees for interconnection to their networks, the revenue of competitors to the ILECs could be materially adversely affected. If future regulatory decisions afford the ILECs increased access services, pricing flexibility or other regulatory relief, such decisions could also have a material adverse effect on competitors to the ILECs. The Company also will face competition or prospective competition in local markets from other carriers, many of which have significantly greater financial resources than the Company. For example, AT&T, MCI and Sprint have each begun to offer local telecommunications services in major U.S. markets using their own facilities or by resale of the ILECs' or other providers' services. In addition to these long distance service providers, entities that currently offer or are potentially capable of offering local switched services include companies that have previously operated as competitive access providers, cable television companies, electric utilities, microwave carriers, wireless telephone system operators and large customers who build private networks. These entities, upon entering into appropriate interconnection agreements or resale agreements with ILECs, including RBOCs, could offer single-source local and long distance services, similar to those offered or proposed to be offered by the Company. In addition, a continuing trend towards business combinations and alliances in the telecommunications industry may create significant new competitors to the Company. The proposed acquisition of GTE Corp. by Bell Atlantic Corp., the proposed merger of SBC and Ameritech, the merger of WorldCom and MCI, AT&T's proposed acquisition of Telecommunications Inc. and its acquisition of Teleport Communications Group, Inc., Teleglobe Inc.'s proposed acquisition of Excel Communications, and SBC's proposed acquisition of SNET are examples of some of the alliances that are being formed. Many of these combined entities will have resources far greater than those of the Company. 61 67 These combined entities may provide a bundled package of telecommunications products, including local and long distance telephony, that is in direct competition with the products offered or proposed to be offered by the Company, and may be capable of offering these products sooner and at more competitive rates than the Company. WIRELESS MARKET The Company will also face competition from fixed wireless services, including MMDS, LMDS, 24 GHz and 38 GHz wireless communications systems, FCC Part 15 unlicensed wireless radio devices, and other services that use existing point-to-point wireless channels on other frequencies. In addition, the FCC has allocated a number of spectrum blocks for use by wireless devices that do not require site or network licensing. A number of vendors have developed such devices that may provide competition to the Company, in particular for certain low data-rate transmission services. With respect to mobile wireless telephone system operators, the FCC has authorized cellular, PCS, and other CMRS providers to offer wireless services to fixed locations, rather than just to mobile customers, in whatever capacity such CMRS providers choose. Previously, cellular providers could provide service to fixed locations only on an ancillary or incidental basis. The authority to provide fixed as well as mobile services will enable CMRS providers to offer wireless local loop service and other services to fixed locations (e.g., office and apartment buildings) in direct competition with the Company and existing providers of traditional wireless telephone service. OTHER Section 271 of the Telecommunications Act prohibits an RBOC from providing long distance service that originates (or in certain cases terminates) in one of its in-region states, with several limited exceptions, until the RBOC has satisfied certain statutory conditions in that state and has received the approval of the FCC. The FCC has denied the following applications for such approval: SBC's Texas application in June 1998; SBC's Oklahoma application in June 1997; Ameritech's Michigan application in August 1997; and BellSouth Corporation's applications for South Carolina in December 1997 and Louisiana in February 1998 and October 1998. The Company anticipates that a number of RBOCs will file additional applications for in-region long distance authority in 1998. Bell Atlantic recently received conditional approval from the New York Public Service Commission of its Section 271 application for New York State. Thus, it is expected that Bell Atlantic will file its Section 271 application with the FCC in the near future. The FCC has 90 days from the date an application for in-region long distance authority is filed to decide whether to grant or deny the application. Once the RBOCs are allowed to offer widespread in-region long distance services, both they and the largest IXCs will be in a position to offer single-source local and long distance service. On December 31, 1997, a United States District Court judge in Texas held unconstitutional certain sections of the Telecommunications Act, including Section 271. Section 271 includes a "competitive checklist" that RBOCs must satisfy prior to obtaining authority to provide in-region, interLATA long-distance service. This decision would permit the three RBOCs involved in the suit immediately to begin offering widespread in-region long distance services. The decision, however, was stayed on February 11, 1998 by the District Court pending the outcome of an appeal on the merits to the U.S. Court of Appeals for the Fifth Circuit. On September 4, 1998, the Fifth Circuit reversed the District Court's ruling. Among other things, the Fifth Circuit found sec.sec.271-275 of the Telecommunications Act to be non-punitive in character and, therefore, not a bill of attainder as that term has been defined by the Superior Court. In addition, new FCC rules went into effect in February 1998 that will make it substantially easier for many non-U.S. telecommunications companies to enter the U.S. market, thus potentially further increasing the number of competitors. 62 68 The market for data communications and Internet access services is also extremely competitive. There are no substantial barriers to entry, and the Company expects that competition will intensify in the future. The Company's success selling these services will depend heavily upon its ability to provide high quality Internet connections at competitive prices. See "Risk Factors -- Competition". 63 69 GOVERNMENT REGULATION The following summary of regulatory developments and legislation does not purport to describe all present and proposed federal, state and local regulations and legislation affecting the telecommunications industry. Other existing federal, state and local legislation and regulations are currently the subject of judicial proceedings, legislative hearings, and administrative proposals that could change, in varying degrees, the manner in which the telecommunications industry operates. Neither the outcome of these proceedings, nor their impact upon the telecommunications industry or the Company, can be predicted at this time. This section also summarizes regulatory and tariff issues pertaining to the operation of the Company. OVERVIEW The Company's services are subject to regulation by federal, state and local government agencies. 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 domestic (interstate) or international communications. State regulatory commissions retain jurisdiction over carriers' facilities and services to the extent they are used to originate or terminate intrastate communications. Municipalities and other local government agencies may require carriers to obtain licenses or franchises regulating use of public rights-of-way necessary to install and operate their networks. The networks are also subject to numerous local regulations such as building codes, franchises, and rights of way licensing requirements. Many of the regulations issued by these regulatory bodies may change, the results of which the Company is unable to predict. See "Risk Factors -- The Telecommunications Act and Other Regulation". THE FEDERAL TELECOMMUNICATIONS ACT OF 1996 STATUTORY REQUIREMENTS. On February 1, 1996, the U.S. Congress enacted comprehensive telecommunications legislation, which the President signed into law on February 8, 1996. The Company believes that this legislation is likely to enhance competition in the local telecommunications marketplace because it (i) gives the FCC authority to preempt state and local entry barriers, (ii) requires ILECs to provide interconnection to their facilities, (iii) facilitates end-users' choice to switch service providers from ILECs to CLECs and (iv) proscribes the imposition of discriminatory or anticompetitive requirements by state or local governments for use of public rights of way. The Telecommunications Act requires all LECs (including ILECs and CLECs) (i) not to prohibit or unduly restrict resale of their services; (ii) to provide local number portability; (iii) to provide dialing parity and nondiscriminatory access to telephone numbers, operator services, directory assistance and directory listings; (iv) to afford access to poles, ducts, conduits and rights-of-way; and (v) to establish reciprocal compensation arrangements for the transport and termination of local telecommunications traffic. It also requires ILECs to negotiate local interconnection agreements in good faith and to provide interconnection (a) for the transmission and routing of telephone exchange service and exchange access, (b) at any technically feasible point within the ILEC's network, (c) that is at least equal in quality to that provided by the ILEC to itself, its affiliates or any other party to which the ILEC provides interconnection, and (d) at rates, terms and conditions that are just, reasonable and nondiscriminatory. ILECs also are required under the Telecommunications Act to provide nondiscriminatory access to network elements on an unbundled basis at any technically feasible point, to offer their local retail telephone services for resale at wholesale rates, and to facilitate collocation of equipment necessary for competitors to interconnect with or access unbundled network elements ("UNEs"). In addition, the Telecommunications Act requires RBOCs to comply with certain safeguards and offer interconnection that satisfies a prescribed 14-point competitive checklist before the RBOCs are permitted to provide in-region interLATA (i.e., interexchange long distance) services. These safeguards are designed to ensure that the RBOCs' competitors have access to local exchange and 64 70 exchange access services on nondiscriminatory terms and that subscribers of regulated non-competitive RBOC services do not subsidize their provision of competitive services. The safeguards also are intended to promote competition by preventing RBOCs from using their market power in local exchange services to obtain an anti-competitive advantage in the provision of other services. Three RBOCs, Ameritech Corp., SBC Communications Inc. (formerly Southwestern Bell Corp.) and BellSouth Corp., have filed applications with the FCC for authority to provide in-region interLATA service in selected states. The FCC has denied all such RBOC applications for in-region long distance authority filed to date. The denials of certain of these RBOC applications by the FCC are the subjects of judicial appeals and petitions for rehearing at the FCC. Other RBOCs have begun the process of applying to provide in-region interLATA service by filing with state commissions notice of their intent to file at the FCC. In addition, several RBOCs have challenged the constitutionality of certain provisions of the Telecommunications Act that bar the RBOCs from providing in-region interexchange and other services by filing a lawsuit in the U.S. District Court for the Northern District of Texas (captioned SBC Communications, Inc. v. FCC, Civil Action No. 7:97-CV-163-X (Kendall, J.)). Judge Kendall issued an order in that case that invalidated Sections 271-273 of the Telecommunications Act as they pertain to SBC, US West and Bell Atlantic, after finding that these provisions violated the constitutional prohibition against "bills of attainder". Judge Kendall's decision was appealed to the U.S. Court of Appeals for the Fifth Circuit; on September 4, 1998, the Fifth Circuit reversed the District Court's ruling. The Telecommunications Act also granted important regulatory relief to industry segments that compete with CLECs. ILECs were given substantial new pricing flexibility. RBOCs have the ability to provide out-of-region long-distance services and, if they obtain authorization and under prescribed circumstances, may provide additional in-region long-distance services. RBOCs also were granted new rights to provide certain cable TV services. IXCs were permitted to construct their own local facilities and/or resell local services. State laws no longer may require cable television service providers ("CATVs") to obtain a franchise before offering telecommunications services nor permit CATVs' franchise fees to be based on their telecommunications revenue. In addition, under the Telecommunications Act all utility holding companies are permitted to diversify into telecommunications services through separate subsidiaries. See "Risk Factors -- Competition". FCC RULES IMPLEMENTING THE LOCAL COMPETITION PROVISIONS OF THE TELECOMMUNICATIONS ACT. On August 8, 1996, the FCC released a First Report and Order, a Second Report and Order and a Memorandum Opinion and Order in its CC Docket 96-98 (combined, the "Interconnection Orders") that established a framework of minimum, national rules enabling state Public Service Commissions ("PSCs") and the FCC to begin implementing many of the local competition provisions of the Telecommunications Act. In its Interconnection Orders, the FCC prescribed certain minimum points of interconnection necessary to permit competing carriers to choose the most efficient points at which to interconnect with the ILECs' networks. The FCC also adopted a minimum list of unbundled network elements that ILECs must make available to competitors upon request and a methodology for states to use in establishing rates for interconnection and the purchase of unbundled network elements. The FCC also adopted a methodology for states to use when applying the Telecommunications Act's "avoided cost standard" for setting wholesale prices with respect to retail services. The following summarizes the key issues addressed in the Interconnection Orders: - INTERCONNECTION. ILECs 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 ILEC to itself or its affiliates and must be provided on rates, terms and conditions that are just, reasonable and nondiscriminatory. 65 71 - ACCESS TO UNBUNDLED ELEMENTS. ILECs are required to provide requesting telecommunications carriers 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, ILECs must unbundle and provide access to network interface devices, local loops, local and tandem switches (including all software features provided by such switches), interoffice transmission facilities, signaling and call-related database facilities, operations support systems, and information and operator and directory assistance facilities. Further, ILECs may not impose restrictions, limitations or requirements upon the use of any unbundled network elements by other carriers. - METHODS OF OBTAINING INTERCONNECTION AND ACCESS TO UNBUNDLED ELEMENTS. ILECs are required to provide physical collocation of equipment necessary for interconnection or access to unbundled network elements at the ILEC's premises, except that the ILEC may provide virtual collocation if it demonstrates to the PSC that physical collocation is not practical for technical reasons or because of space limitations. - TRANSPORT AND TERMINATION CHARGES. The FCC rules require that LEC charges for transport and termination of local traffic delivered to them by competing LECs must be cost-based and should be based on the LECs' Total Element Long-Run Incremental Cost ("TELRIC") of providing that service. However, as discussed below, the FCC's pricing and costing rules have been vacated by the U.S. Court of Appeals for the Eighth Circuit. - PRICING METHODOLOGIES. New entrants were required to pay for interconnection and unbundled elements at rates based on the ILEC's TELRIC of providing a particular network element plus a reasonable share of forward-looking joint and common costs, and may include a reasonable profit. However, as discussed below, these rules have been vacated by the Eighth Circuit. - RESALE. ILECs were required to offer for resale any telecommunications service that they provide at retail to subscribers who are not telecommunications carriers. PSCs were required to identify which marketing, billing, collection and other costs will be avoided or that are avoidable by ILECs 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. However, as discussed below, the specific federal pricing requirements have been vacated by the Eighth Circuit. - ACCESS TO RIGHTS-OF-WAY. The FCC established procedures and guidelines 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. - UNIVERSAL SERVICE REFORM. All telecommunications carriers, including the Company, are required to contribute funding for universal service support, on an equitable and nondiscriminatory basis, in an amount sufficient to preserve and advance universal service pursuant to a specific or predictable universal service funding mechanism. On May 8, 1997, the FCC released an order implementing these requirements by reforming its existing access charge and universal service rules. See "-- Universal Service Reform" below. Most provisions of the Interconnection Orders were appealed. Numerous appeals were consolidated for consideration by the Eighth Circuit Court of Appeals (captioned Iowa Utilities Board v. FCC). On July 18, 1997, the Court of Appeals released its decision regarding issues raised in the consolidated appeals. The Interconnection Orders were upheld in part and reversed in part. A non-exclusive list of decisions rendered include: - The FCC exceeded its jurisdiction in establishing rules governing the prices that ILECs may charge competitors for interconnection, unbundled access and resale. The Court ruled that the authority to establish prices for local communications facilities and services is reserved to 66 72 the states and, thus, vacated the FCC's pricing rules (except as they apply to CMRS providers). - The FCC's "pick and choose" rule, which allows competitors to select individual terms of previously approved interconnection agreements for their own use, conflicts with the purposes of the Telecommunications Act, and also was vacated. - The FCC lacks authority to hear formal complaints that involve the review and/or enforcement of certain terms of local interconnection agreements approved by state commissions. - The FCC lacks authority to require interconnection agreements that were negotiated before the enactment of the Telecommunications Act to be submitted for state commission approval. - The FCC may not adopt a blanket requirement that state interconnection rules must be consistent with the FCC's regulations. - The FCC correctly concluded that ILEC operations support systems, operator services and vertical switching features qualify as network elements that are subject to the unbundling requirements of the Telecommunications Act. - The FCC's definition of "technically feasible" was upheld for purposes of deciding where ILECs must permit interconnection by competitors, but the FCC's use of this term to determine the elements that must be unbundled was rejected. - The FCC erred in deciding that ILECs could be required by competitors to provide interconnection and unbundled network elements at levels of quality that exceed those levels at which ILECs provide such services to themselves. - The FCC cannot require ILECs to recombine network elements for competitors, but competitors may recombine such network elements themselves as necessary to provide telecommunications services. - Claims that the unbundling rules constitute an unconstitutional taking were not decided because they were either raised by parties that lacked standing or were not ripe for review. - The FCC rules and policies regarding the ILECs' duty to provide for physical collocation of equipment were upheld. - The FCC rules requiring ILECs to allow the resale of promotional prices lasting more than 90 days were upheld. The Interconnection Orders, and resulting local interconnection rules, were vacated in part consistent with these decisions. The U.S. Supreme Court granted certiorari to review most aspects of the Eighth Circuit decision regarding the Interconnection Orders, and heard oral agreements in October 1998. The Company cannot predict the outcome of this litigation or the requests for reconsideration that remain pending at the FCC. Notably, the FCC recently made the use of forward looking, economic costs for the pricing of local interconnection, transport and termination and unbundled network elements a temporary condition of its approval of the merger of Bell Atlantic and NYNEX. However, after the FCC indicated in its denial of Ameritech's application for in-region long distance authority that an RBOC's use of such forward looking, economic costs is relevant to the issue of whether it has satisfied the conditions necessary for approval of such an application, the Eighth Circuit issued a mandamus order instructing the FCC not to enforce such a requirement. SECTION 706 FORBEARANCE. Section 706 of the Telecommunications Act gives the FCC the right to forebear from regulating a market if the FCC concludes that such forbearance is necessary to encourage the rapid deployment of advanced telecommunications capability. Section 706 has not been used to date, but in January 1998 Bell Atlantic filed a petition under Section 706 seeking to have the FCC deregulate entirely the provision of packet-switched telecommunications services. 67 73 Similar petitions were later filed by the Alliance for Public Technology and US West Inc. (currently Media One Group Inc.), and other ILECs are expected to file similar petitions in the near future. On August 7, 1998, the FCC released an Order denying requests by the Regional Bell Operating Companies (RBOCs) that it use Section 706 of the Telecommunications Act to forbear from regulating advanced telecommunications services. Instead, the FCC determined that advanced services are telecommunications services and that ILECs providing advanced services are still subject to the unbundling and resale obligations of Section 251(c) and the in-region interLATA restrictions of Section 271. On the same day, the FCC released a Notice of Proposed Rulemaking ("NPRM") proposing that ILECs be permitted to offer advanced services through separate affiliates. Subject to certain restrictions on transfers from the ILEC to the affiliate, structural separation rules and nondiscrimination safeguards, these separate affiliates would not be subject to the obligations imposed on ILECs under Section 251(c), but would remain subject to the in-region interLATA restrictions imposed on RBOCs and RBOC affiliates by Section 271. In the Order, the FCC did not specifically authorize ILECs to provide advanced services through a separate affiliate immediately. ILECs may, of course, immediately provide advanced services, but until the separate affiliate is properly established pursuant to rules to be promulgated following comment on the NPRM, such provision of advanced services will be subject to Section 251. The outcome of this proceeding could have a material adverse effect on the Company. In order to assist competing carriers to gain access to ILEC facilities necessary to provide advanced services, the FCC also proposes to strengthen collocation and loop unbundling requirements. Finally, the FCC issued a Notice of Inquiry (NOI) to explore the availability of advanced, high speed telecommunications services. OTHER FEDERAL REGULATION. In general, the FCC has a policy of encouraging the entry of new competitors in the telecommunications industry and preventing anti-competitive practices. Therefore, the FCC has established different levels of regulation for dominant carriers and nondominant carriers. For purposes of domestic common carrier telecommunications regulation, large ILECs such as GTE and the RBOCs are currently considered dominant carriers, while CLECs are considered nondominant carriers. - TARIFFS. As a nondominant carrier, the Company may install and operate facilities for the transmission of domestic interstate communications without prior FCC authorization. Services of nondominant carriers have been subject to relatively limited regulation by the FCC, primarily consisting of the filing of tariffs and periodic reports. However, nondominant carriers like the Company must offer interstate services on a nondiscriminatory basis, at just and reasonable rates, and remain subject to FCC complaint procedures. With the exception of informational tariffs for operator-assisted services and tariffs for interexchange casual calling services, the FCC has ruled that IXCs must cancel their tariffs for domestic, interstate interexchange services. Tariffs remain required for international services. The effectiveness of those orders currently is subject to a stay issued by the U.S. Court of Appeals for the District of Columbia Circuit. On June 19, 1997, the FCC issued an order granting petitions filed by Hyperion Telecommunications Inc. and Time Warner Inc. to provide CLECs the option to cease filing tariffs for interstate interexchange access services and has proposed to make the withdrawal of CLEC access service tariffs mandatory. Pursuant to these FCC requirements, the Company has filed and maintains tariffs for its interstate services with the FCC. All of the interstate access and retail "basic" services (as defined by the FCC) provided by the Company are described therein. "Enhanced" services (as defined by the FCC) need not be tariffed. The Company believes that its proposed enhanced voice and Internet services are "enhanced" services that need not be tariffed. However, the FCC is reexamining the "enhanced" definition as it relates to IP transport and the Company cannot predict whether the FCC will change the classification of such services. 68 74 - INTERNATIONAL SERVICES. Nondominant carriers such as the Company also are required to obtain FCC authorization pursuant to Section 214 of the Communications Act and file tariffs before providing international communications services. The Company has obtained authority from the FCC to provide voice and data communications services between the United States and all foreign authorized points. - ILEC PRICE CAP REGULATION REFORM. In 1991, the FCC replaced traditional rate of return regulation for large ILECs with price cap regulation. Under price caps, ILECs can raise prices for certain services by only a small percentage each year. In addition, there are constraints on the pricing of ILEC services that are competitive with those of CLECs. On September 14, 1995, the FCC proposed a three-stage plan that would substantially reduce ILEC price cap regulation as local markets become increasingly competitive and ultimately would result in granting ILECs nondominant status. Adoption of the FCC's proposal to reduce significantly its regulation of ILEC pricing would significantly enhance the ability of ILECs to compete against the Company and could have a material adverse effect on the Company. The FCC released an order on December 24, 1996 that adopted certain of these proposals, including the elimination of the lower service band index limits on price reductions within the access service category. The FCC's December 1996 order also eased the requirements necessary for the introduction of new services by ILECs. On May 7, 1997, the FCC took further action in its CC Docket No. 94-1 updating and reforming its price cap plan for the ILECs. Among other things, the changes require price cap LECs to reduce their price cap indices by 6.5 percent annually, less an adjustment for inflation. The FCC also eliminated rules that require ILECs earning more than certain specified rates of return to "share" portions of the excess with their access customers during the next year in the form of lower access rates. These actions could have a significant impact on the interstate access prices charged by the ILECs with whom the Company expects to compete. - ACCESS CHARGES. Over the past few years, the FCC has granted ILECs significant flexibility in pricing their interstate special and switched access services. Under this pricing scheme, ILECs may establish pricing zones based on access traffic density and charge different prices for each zone. The Company anticipates that this pricing flexibility will result in ILECs lowering their prices in high traffic density areas, the probable area of competition with the Company. The Company also anticipates that the FCC will grant ILECs increasing pricing flexibility as the number of interconnections and competitors increases. On May 7, 1997, the FCC took action in its CC Docket No. 96-262 to reform the current interstate access charge system. The FCC adopted an order that makes various reforms to the existing rate structure for interstate access that are designed to move access charges, over time, to more economically efficient rate levels and structures. The following is a nonexclusive list of actions announced by the FCC: - SUBSCRIBER LINE CHARGE ("SLC"). The maximum permitted amount that an ILEC may charge for SLCs on certain lines was increased. Specifically, the ceiling was increased significantly for second and additional residential lines, and for multi-line business customers. SLC ceiling increases began in July 1997 and will be phased in over a two-year period. - PRESUBSCRIBED INTEREXCHANGE CARRIER CHARGE ("PICC"). The FCC created a new PICC access charge rate element. The PICC is a flat-rate, per-line charge that is recovered by LECs from IXCs. The charge is designed to recover common line revenue not recovered through SLCs. Effective January 1, 1998, the maximum permitted interstate PICC charge is $0.53 per month for primary residential lines and $1.50 per month for second and additional residential lines. The initial maximum interstate PICC for multi-line businesses are $2.75. The ceilings will be permitted to increase over time. - CARRIER COMMON LINE CHARGE ("CCL"). As the ceilings on the SLCs and PICCs increase, the per-minute CCL charge will be eliminated. Until then, the CCL will be 69 75 assessed on originating minutes of use. Thus, ILECs will charge lower rates for terminating than originating access. In addition, Long-term Support ("LTS") payments for universal service will be eliminated from the CCL charge. - LOCAL SWITCHING. Effective January 1, 1998, ILECs subject to price-cap regulation were required to move non-traffic-sensitive ("NTS") costs of local switching associated with line ports to common line rate elements and recover them through the common line charge discussed above. Local switching costs attributable to dedicated trunk ports must be moved to the trunking basket and recovered through flat-rate monthly charges. - TRANSPORT. The "unitary" rate structure option for tandem-switched transport will be eliminated effective July 1, 1998. For price cap LECs, additional rate structure changes became effective on January 1, 1998, which altered the recovery of certain NTS costs of tandem- switching and multiplexing and the minutes-of-use assumption employed to determine tandem-switched transport prices. Also effective January 1, 1998, certain costs currently recovered through the Transport Interconnection Charge ("TIC") were reassigned to specified facilities charges. The reassignment of tandem costs currently recovered through the TIC to the tandem switching charge will be phased in evenly over a three-year period. Residual TIC charges will be covered in part through the PICC, and price cap reductions will be targeted at the per-minute residual TIC until it is eliminated. In other actions, the FCC clarified that ILECs may not assess interstate access charges on the purchasers of unbundled network elements or information services providers (including ISPs). Further regulatory actions affecting ISPs are being considered in a FCC notice of inquiry released on December 24, 1996. The FCC also decided not to adopt any regulations governing the provision of terminating access by CLECs. ILECs also were ordered to adjust their access charge rate levels to reflect contributions to and receipts from the new universal service funding mechanisms. The FCC also announced that it will, in a subsequent Report and Order, provide detailed rules for implementing a market-based approach to further access charge reform. That process will give ILECs progressively greater flexibility in setting rates as competition develops, gradually replacing regulation with competition as the primary means of setting prices. The FCC also adopted a "prescriptive safeguard" to bring access rates to competitive levels in the absence of competition. For all services then still subject to price caps and not deregulated in response to competition, the FCC required ILECs subject to price caps to file Total Service Long Run Incremental Cost ("TSLRIC") cost studies no later than February 8, 2001. This series of decisions is likely to have a significant impact on the operations, expenses, pricing and revenue of the Company and costs vis-a-vis larger, more efficient carriers such as AT&T, MCI and Sprint. Various parties have sought reconsideration or appeal of the FCC's access charge rulings and all or part of the order ultimately could be set aside or revised. The Company cannot predict the outcome of these proceedings. UNIVERSAL SERVICE REFORM. On May 8, 1997, the FCC released an order in its CC Docket No. 96-45, which reforms the current system of interstate universal service support and implements the universal service provisions of the Telecommunications Act. The FCC established a set of policies and rules that ensure that low-income consumers and consumers that live in rural, insular and high-cost areas receive a defined set of local telecommunications services at affordable rates. This is accomplished in part through expansion of direct consumer subsidy programs and in part by ensuring that rural, small and high-cost LECs continue to receive universal service subsidy support. The FCC also created new programs to subsidize connection of eligible schools, libraries and rural health care providers to telecommunications networks. These programs will be funded by assessment of eligible revenue of nearly all providers of interstate telecommunications carriers, including the Company. 70 76 The Company, like other telecommunications carriers that provide interstate telecommunications services, will be required to contribute a portion of its end-user telecommunications revenue to fund universal service programs. These contributions became due beginning in 1998 for all providers of interstate telecommunications services. Such contributions are assessed based on intrastate, interstate and international end user telecommunications revenue. Contribution factors vary quarterly, and carriers, including the Company, are billed each month. Contribution factors for the first three quarters of 1998 have been determined by the FCC as follows: first quarter, second quarter and third quarter factors are 3.19%, 3.14% and 3.14%, respectively, for the high cost and low income funds (interstate and international end user telecommunications revenue) and 0.72%, 0.76% and 0.75%, respectively, for the schools, libraries and rural health funds (intrastate, interstate and international end user communications revenue). In addition, many state regulatory agencies have instituted proceedings to revise state universal support mechanisms to make them consistent with the requirements of the Telecommunications Act. As a result, the Company will be subject to state, as well as federal, universal service fund contribution requirements, which will vary from state to state. Several parties have appealed the FCC's May 8th order, and these appeals have been consolidated in the U.S. Court of Appeals for the Fifth Circuit. In addition, a number of telecommunications companies have filed a petition for a stay with the FCC, which is currently pending. Pursuant to the Universal Service Order, all carriers were required to submit a Universal Service Fund worksheet in September 1997. The Company has filed its Universal Service Fund worksheet. The amounts remitted to the Universal Service Fund may be billed to the Company's customers. If the Company does not bill these amounts to its customers, its profit margins may be less than if it had elected to do so. However, if the Company elects to bill these amounts to its customers, customers may reduce their use of the Company's services, or elect to use the services provided by the Company's competitors, which may have a material adverse effect upon the Company's business, financial condition, or results of operation. The Company is eligible to qualify as a recipient of universal service support if it elects to provide facilities-based service to areas designated for universal service support and if it complies with federal and state regulatory requirements to be an eligible telecommunications carrier. The FCC's decisions in CC Docket No. 96-45 could have a significant impact on future operations of the Company. Significant portions of the FCC's order have been appealed and are under review by the U.S. Court of Appeals for the Fifth Circuit. The Company cannot predict the outcome of these proceedings. CURRENT COMPANY CERTIFICATIONS. The Company has received Section 214 authorization from the FCC allowing it to engage in business as a resale and facilities-based international carrier. STATE REGULATION Most states require a certification or other authorization to offer local exchange and long distance intrastate services. These certifications generally require a showing that the carrier has adequate financial, managerial and technical resources to offer the proposed services in a manner consistent with the public interest. In addition to tariff requirements, most states require that common carriers charge just and reasonable rates and not discriminate among similarly situated customers. Some states also require the filing of periodic reports, the payment of various regulatory fees and surcharges, and compliance with service standards and consumer protection rules. States generally retain the right to sanction a carrier or to revoke certification if a carrier violates relevant laws and/or regulations. If any state regulatory agency were to conclude that the Company is or was providing intrastate services without the appropriate authority, the agency could initiate enforcement actions, which could include the imposition of fines, a requirement to disgorge revenues, or the refusal to grant the regulatory authority necessary for the future provision of intrastate telecommunications services. The Company holds authority to provide intrastate interLATA and, where authorized, intraLATA toll service in 49 states. The authority in some states may be limited to resale of long distance service. The Company is in the process of obtaining intrastate toll authority in Alaska. The Company has authority to provide competitive local exchange service in 71 77 Massachusetts, New Hampshire and Rhode Island. The Company has applications pending to provide resold and facilities-based competitive local exchange services in several other Northeastern and Southeastern states. There is no industry consensus on what constitutes a "facilities-based" carrier and the FCC and state regulatory agency definitions vary accordingly. There can be no assurance that the Company will receive the authorizations it seeks currently or in the future. The FCC imposes on entities authorized to provide international telecommunications service prior approval requirements for "transfers of control", including pro forma transfers. The Company is also subject to requirements in certain states to obtain prior approval for, or notify the state commission of, any transfers of control, sales of assets, corporate reorganizations, issuances of stock or debt instruments and related transactions. The Company did not obtain prior approval for its July 1998 corporate reorganization to create a holding company structure whereby Network Plus Corp. became the holding company of Network Plus, Inc. The Company is in the process of filing the necessary papers at the FCC and relevant state commissions seeking nunc pro tunc (retroactive) approval of the transaction on the grounds that the transaction serves certain important business needs of the Company and enhances the Company's ability to market and provide services more efficiently. Although the Company believes that its applications will be approved in due course, there can be no assurance that the FCC or state commissions will grant the Company's requests for retroactive approval and/or will not impose fines or license conditions, commence revocation proceedings or otherwise exercise their authority to address violations of applicable statutes and regulations. The Company believes that most, if not all, states in which it proposes to operate as a local telecommunications provider will require certification or other authorization to offer local intrastate services. Many of the states in which the Company intends to operate are in the process of addressing issues relating to the regulation of CLECs. In some states, existing state statutes, regulations or regulatory policy may preclude some or all forms of local service competition. However, Section 253 of the Telecommunications Act prohibits states and localities from adopting or imposing any legal requirement that may prohibit, or have the effect of prohibiting, the ability of any entity to provide any interstate or intrastate telecommunications service. The FCC has the authority to preempt any such state or local requirements to the extent necessary to enforce the Telecommunications Act's open market entry requirements. States and localities may, however, continue to regulate the provision of intrastate telecommunications services and require carriers to obtain certificates or licenses before providing service if such requirements do not constitute prohibited barriers to market entry. Some states in which the Company operates are considering legislation that could impede efforts by new entrants in the local services market to compete effectively with ILECs. For example, some state public utility commissions ("PUCs") are currently considering actions to preserve universal service and promote the public interest. The actions may impose conditions on the certificate issued to an operating company that would require it to offer service on a geographically widespread basis through (i) the construction of facilities to serve all residents and business customers in such areas, (ii) the acquisition from other carriers of network facilities required to provide such service, or (iii) the resale of other carriers' services. The Company believes that state PUCs have limited authority to impose such requirements under the Telecommunications Act. The imposition of such conditions by state PUCs, however, could increase the cost to operating companies of providing local exchange services, or could otherwise affect the operating companies' flexibility to offer services. Another state action that impedes efforts by new entrants to compete in the local exchange services market is the enactment of state laws that prohibit competition in certain areas of a state. For example, Section 65-4-201(d) of the Tennessee Code prohibits local exchange telecommunications competition in areas of Tennessee served by carriers with fewer than 100,000 access lines within the state. Other states have or may enact similar provisions; however, to date the FCC has considered Texas and Wyoming statutory provisions that are virtually identical to the 72 78 Tennessee statute, and has preempted both statutes as violative of sec.253(a) of the Telecommunications Act. A petition for preemption of the Tennessee statute has been filed at the FCC. The Company believes that, as the degree of intrastate competition increases, the states will offer the ILECs increasing pricing flexibility. This flexibility may present the ILECs with an opportunity to subsidize services that compete with the Company's services with revenue generated from non-competitive services, thereby allowing ILECs to offer competitive services at prices below the cost of providing the service. The Company cannot predict the extent to which this may occur or its impact on the Company's business. LOCAL INTERCONNECTION. The Telecommunications Act imposes a duty upon all ILECs to negotiate in good faith with potential interconnectors to provide interconnection to the ILEC networks, exchange local traffic, make unbundled network elements available and permit resale of most local services. In the event that negotiations do not succeed, the Company has a right to seek state PUC arbitration of any unresolved issues. Arbitration decisions involving interconnection arrangements in several states have been challenged in lawsuits filed in U.S. District Court by the affected ILECs. The Company may experience difficulty in obtaining timely ILEC implementation of local interconnection agreements, and there can be no assurance the Company will offer local services in these areas in accordance with its projected schedule, if at all. See "Risk Factors -- Lack of Interconnection and Peering Agreements". LOCAL GOVERNMENT AUTHORIZATIONS. If the Company constructs local networks, it will be required to obtain street use and construction permits and licenses and/or franchises to install and expand its fiber optic networks using municipal rights-of-way. In some municipalities the Company may be required to pay license or franchise fees based on a percentage of gross revenue or on a per linear foot basis, as well as post performance bonds or letters of credit. There can be no assurance that the Company will not be required to post bonds in the future. In many markets, the ILECs do not pay such franchise fees or pay fees that are substantially less than those that will be required to be paid by the Company. To the extent that competitors do not pay the same level of fees as the Company, the Company could be at a competitive disadvantage. However, the Telecommunications Act provides that any compensation extracted by states and localities for use of public rights-of-way must be "fair and reasonable", applied on a "competitively neutral and nondiscriminatory basis" and be "publicly disclosed" by such government entity. See "Risk Factors -- The Telecommunications Act and Other Regulation". 73 79 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table provides certain information regarding the executive officers and directors of the Company, including their ages as of August 15, 1998.
NAME AGE POSITIONS - ---- --- --------- Robert T. Hale............................. 60 Chairman of the Board of Directors Robert T. Hale, Jr......................... 32 Chief Executive Officer, President and Director James J. Crowley........................... 34 Executive Vice President, Chief Operating Officer, Secretary and Director David Martin............................... 59 Director Joseph C. McNay............................ 64 Director Michael F. Oyster.......................... 42 Executive Vice President of Networks and Product Development Joseph Haines.............................. 36 Vice President of Local Operations Steven L. Shapiro.......................... 40 Vice President of Finance, Chief Financial Officer and Treasurer Steven J. Stanfill......................... 45 Vice President of Network Services Kevin B. McConnaughey...................... 40 Vice President and General Manager of International Services
- --------------- ROBERT T. HALE is a co-founder of the Company and has served as Chairman of the Board since its inception in 1990. Mr. Hale is a founding member of the Telecommunications Resellers Association and has served as chairman of its Carrier Committee since 1993 and served as chairman of its board from May 1995 to May 1997. Mr. Hale was president of Hampshire Imports, the original importer of Laura Ashley Womenswear to the U.S. and a manufacturer of exclusive women's apparel, from 1968 to 1992. ROBERT T. HALE, JR., is a co-founder of the Company and has served as Chief Executive Officer, President and Director since its inception in 1990. He was employed by U.S. Telecenters, a sales agent for NYNEX Corporation, from 1989 to 1990, and as a sales representative at MCI from 1988 to 1989. JAMES J. CROWLEY has served as Executive Vice President since 1994 and became Chief Operating Officer and a Director in 1998. He was an attorney at Hale and Dorr LLP, a Boston law firm, from 1992 to 1994. DAVID MARTIN has served as a Director of the Company since September 1998. Mr. Martin was employed by Texas Instruments Inc. from 1960 until June 1998, most recently as Executive Vice President. Mr. Martin is a member of the Board of Directors of Mathsoft Inc. JOSEPH C. MCNAY has served as a Director of the Company since September 1998. Mr. McNay serves as Chairman and Chief Investment Officer of Essex Investment Management Company, LLC, a private investment management company founded by Mr. McNay in 1976. Previously he served as Executive Vice President and Director of Endowment Management & Research Corp. Mr. McNay serves as Trustee of University Hospital, Boston, Trustee of Simmons College, Trustee of the Dana Farber Cancer Institute, and Chairman and Trustee of Children's Hospital, Boston. MICHAEL F. OYSTER was named Executive Vice President of Networks and Product Development in July 1998. Mr. Oyster served as Regional Vice President and General Manager, and in other capacities, at Teleport Communications Group from August 1997 to July 1998. Mr. Oyster served in various capacities at AT&T from 1977 to 1997. 74 80 JOSEPH HAINES was named Vice President of Local Operations in July 1998. From 1992 to 1998, Mr. Haines held various positions with Teleport Communications Group, most recently as its Regional Vice President of Operations. STEVEN L. SHAPIRO has served as Vice President of Finance, Chief Financial Officer and Treasurer since July 1997. He served as Vice President and Controller of Grossman's Inc., a publicly held retailer of building materials, from 1993 to 1997, and as its Assistant Controller from 1986 to 1993. Mr. Shapiro served as a certified public accountant with Arthur Andersen & Co. from 1979 to 1986. STEVEN J. STANFILL has served as Vice President of Network Services since 1994. He served as Vice President of Network Operations at Ascom Communications, a telecommunication services provider, from 1989 to 1994. From 1983 to 1989, Mr. Stanfill served in various management capacities at National Applied Computer Technologies, a telecommunications switching equipment manufacturer. KEVIN B. MCCONNAUGHEY has served as Vice President and General Manager of International Services since March 1997. From 1995 to 1997, he was Associate Vice President of Business Development for Teleglobe International. From 1990 to 1995, Mr. McConnaughey was employed by Sprint International, where he held a variety of product management, international carrier relations and marketing positions. Each director serves until his or her successor is duly elected and qualified. Officers serve at the discretion of the Board of Directors. Robert T. Hale, Jr. is the son of Robert T. Hale. There are no other family relationships among the Company's executive officers and directors. No executive officer of the Company is a party to an employment agreement with the Company. COMPENSATION OF DIRECTORS In July 1998, the Company adopted the 1998 Director Stock Option Plan (the "Director Plan"). Under the terms of the Director Plan, options to purchase 5,000 shares of Common Stock will be granted to each new non-employee director upon his or her initial election to the Board of Directors. Annual options to purchase 2,500 shares of Common Stock will also be granted to each non-employee director on the date of each annual meeting of stockholders, or on August 1 of each year if no annual meeting is held by such date. Options granted under the Director Plan will vest in four equal annual installments beginning on the first anniversary of the date of grant. The exercisability of these options will be accelerated upon the occurrence of an Acquisition Event (as defined in the Director Plan). The exercise price of options granted under the Director Plan is equal to the fair market value of the Common Stock on the date of grant. A total of 100,000 shares of Common Stock may be issued upon the exercise of stock options granted under the Director Plan. In addition, Directors are reimbursed for out-of-pocket expenses incurred as a result of their service as Directors. Pursuant to the Director Plan, on September 3, 1998 Messrs. Martin and McNay each received an option to purchase 5,000 shares of Common Stock at an exercise price of $15.00 per share. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth certain information concerning the cash and non-cash compensation during fiscal year 1997 earned by or awarded to the Chief Executive Officer, the four other most highly compensated executive officers of the Company whose combined salary and bonus exceeded $100,000 during the fiscal year ended December 31, 1997, and the Chief Financial Officer of the Company (the "Named Executive Officers"). 75 81 ANNUAL COMPENSATION
ANNUAL COMPENSATION --------------------- NAME AND TITLE YEAR SALARY BONUS(1) - -------------- ---- -------- -------- Robert T. Hale, Jr.......................................... 1997 $355,431(2) $2,770 Chief Executive Officer and President Robert T. Hale.............................................. 1997 220,692(3) 2,725 Chairman of the Board of Directors James J. Crowley............................................ 1997 160,000 4,353 Executive Vice President and Chief Operating Officer Steven J. Stanfill.......................................... 1997 121,615 2,888 Vice President of Network Services Kevin B. McConnaughey(4).................................... 1997 100,961 -- Vice President and General Manager of International Services Steven L. Shapiro (5)....................................... 1997 70,096 -- Vice President of Finance, Chief Financial Officer and Treasurer
- --------------- (1) Includes the cash value of travel awarded as bonuses. (2) Includes sales commissions of $49,662. Robert T. Hale, Jr.'s annual base salary (excluding sales commissions) was reduced to $285,000 effective August 17, 1998. (3) Robert T. Hale's annual base salary was reduced to $195,000 effective December 23, 1997. (4) Commenced employment with the Company on March 17, 1997. (5) Commenced employment with the Company on July 1, 1997. EMPLOYEE BENEFIT PLANS 1998 STOCK INCENTIVE PLAN The Company's 1998 Stock Incentive Plan (the "1998 Incentive Plan") was adopted by the Company in July 1998. The 1998 Incentive Plan provides for the grant of stock-based awards to employees, officers and directors of, and consultants or advisors to, the Company. Under the 1998 Incentive Plan, the Company may grant options that are intended to qualify as incentive stock options ("incentive stock options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), options not intended to qualify as incentive stock options ("nonqualified options"), restricted stock and other stock-based awards. Incentive stock options may be granted only to employees of the Company. A total of 1,400,000 shares of common stock may be issued upon the exercise of options or other awards granted under the 1998 Incentive Plan. The number of shares with respect to which awards may be granted to any employee under the 1998 Incentive Plan may not exceed 700,000 during any calendar year. The exercisability of options or other awards granted under the 1998 Incentive Plan may in certain circumstances be accelerated in connection with an Acquisition Event (as defined in the 1998 Incentive Plan). Options and other awards may be granted under the 1998 Incentive Plan at exercise prices that are equal to, less than or greater than the fair market value of the Company's common stock, and the Board generally retains the right to reprice outstanding options. The 1998 Incentive Plan expires in June 2008, unless sooner terminated by the Board. As of July 15, 1998, the Company had granted options to purchase an aggregate of 741,140 shares of Common Stock under the 1998 Incentive Plan, including an option to purchase 120,000 shares to Mr. Crowley, an option to purchase 23,334 shares to Mr. Stanfill, an option to purchase 14,620 shares to Mr. McConnaughey, an option to purchase 10,045 shares to Mr. Shapiro, an option to purchase 40,000 shares to Mr. Oyster and an option to purchase 40,000 shares to Mr. Haines. The remainder of the options were granted to approximately 190 employees of, and one consultant to, the Company. These options generally 76 82 become exercisable in four equal annual installments beginning on the first anniversary of the date of grant, subject in certain cases to accelerated vesting in connection with an Acquisition Event. 401(k) PLAN Effective January 1, 1995, the Company adopted the Employee 401(k) and Profit Sharing Plan (the "401(k) Plan") covering the Company's eligible employees. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the lesser of 15% of eligible compensation or the statutorily prescribed annual limit ($10,000 in 1998) and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, additional contributions to the 401(k) Plan by the Company on behalf of all participants. The Company contributed $175,000 to the 401(k) Plan in 1995. No additional contributions have been made by the Company. The 401(k) Plan is intended to qualify under Section 401 of the Code, so that contributions by employees or by the Company to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn, and contributions by the Company, if any, are deductible by the Company when made. CERTAIN TRANSACTIONS The Company's office space in Quincy, Massachusetts is leased from a trust, the beneficiaries of which are the stockholders of the Company. The Company makes monthly rental payments to the trust of $35,900. In each of the years ending December 31, 1997, 1996 and 1995, the amount paid to the trust was $431,000. The Company is currently in the process of negotiating an increase in the rental payments under this lease and expects that, following such increase, the lease will be on terms no less favorable to the Company than could be obtained in an arms' length transaction. The Company is also contingently liable as a guarantor on a bank loan made to the trust. The outstanding balance on the loan at December 31, 1997 and 1996 was approximately $1.5 million. See "Description of Certain Indebtedness". On September 2, 1998, the Company paid a dividend in the aggregate amount of $5.0 million. As a result, $2.5 million was distributed to each of Robert T. Hale and Robert T. Hale, Jr. Robert T. Hale, Jr., reinvested $1.9 million in the Company (representing approximately the distribution to him, net of his estimated tax liability resulting from such dividend) in the form of a long-term loan to the Company. Interest on such loan will accrue at Fleet's prime rate. Principal and interest on such loan will be payable 10 days after the redemption of the Series A Preferred Stock. In December 1997, the Company's stockholders issued the Company loans totaling $1.8 million. Interest on the loans accrued at the bank's prime rate (8.5% at December 31, 1997) and was payable monthly. There was no required period for principal repayment. The loans, including accrued interest of $12,017, were repaid in May 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company had a service arrangement with a marketing company, the controlling stockholders of which include the Company's stockholders. The marketing company provided services relative to establishing, training and expanding the Company's sales organization. For the years ending December 31, 1997, 1996 and 1995, the amounts paid to the marketing company were $55,000, $132,000 and $197,000, respectively. This service arrangement was terminated in May 1997. 77 83 STOCK OWNERSHIP The following table sets forth as of September 15, 1998 the number of shares of Common Stock and the percentage of the outstanding shares of such class that are beneficially owned by (i) each person that is the beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii) each of the directors and Named Executive Officers of the Company and (iii) all of the current directors and executive officers of the Company as a group.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1) -------------------------- NUMBER OF PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS - ------------------------------------ --------- ---------- 5% STOCKHOLDERS Robert T. Hale.............................................. 5,000,000 50% c/o Network Plus, Inc. 234 Copeland Street Quincy, Massachusetts 02169 Robert T. Hale, Jr.......................................... 5,000,000 50% c/o Network Plus, Inc. 234 Copeland Street Quincy, Massachusetts 02169 OTHER DIRECTORS James J. Crowley............................................ 0 -- David Martin................................................ 0 -- Joseph C. McNay............................................. 0 -- OTHER NAMED EXECUTIVE OFFICERS Steven L. Shapiro........................................... 0 -- Kevin B. McConnaughey....................................... 0 -- Steven J. Stanfill.......................................... 0 -- All directors and executive officers as a group (10 persons).................................................. 10,000,000 100%
- --------------- (1) Each stockholder possesses sole voting and investment power with respect to the shares listed. Excludes options that vest subsequent to November 14, 1998. 78 84 DESCRIPTION OF CAPITAL STOCK The Company's Certificate of Incorporation (the "Charter") authorizes (i) 20,000,000 shares of Common Stock, $.01 par value, and (ii) 1,000,000 shares of Preferred Stock, $.01 par value, of which 50,000 shares have been designated 13.5% Series A Cumulative Preferred Stock due 2009 and 50,000 shares have been designated 13.5% Series A1 Cumulative Preferred Stock due 2009. Set forth below and under "Description of the Series A Preferred Stock" is a description of the capital stock of the Company. COMMON STOCK As of July 15, 1998, there were 10,000,000 shares of Common Stock issued and outstanding and held of record by two stockholders. The holders of Common Stock are entitled to receive dividends when and as dividends are declared by the Board of Directors of the Company out of funds legally available therefor, provided that if any shares of Preferred Stock are at the time outstanding, the payment of dividends on the Common Stock or other distributions may be subject to the declaration and payment of full cumulative dividends on outstanding shares of Preferred Stock. Holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Upon any liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, any assets remaining after the satisfaction in full of the prior rights of creditors and the aggregate liquidation preference of any Preferred Stock (including the Series A Preferred Stock) then outstanding will be distributed to the holders of Common Stock ratably in proportion to the number of shares held by them. The Common Stock is not publicly traded. See "Risk Factors -- Control by Existing Stockholders; Potential Conflict of Interest; Deadlock; Antitakeover Provisions". PREFERRED STOCK Under the Charter, the Board of Directors has the authority to issue up to 1,000,000 shares of Preferred Stock from time to time in one or more series with such preferences, terms and rights as the Board of Directors may determine without further action by the stockholders of the Company. Accordingly, the Board of Directors has the power to establish the provisions, if any, relating to dividends, voting rights, redemption rates, sinking funds, liquidation preferences and conversion rights for any series of Preferred Stock issued in the future. For a description of the Series A Preferred Stock, see "Description of the Series A Preferred Stock". No other shares of preferred stock have been issued or are outstanding. One of the effects of undesignated Preferred Stock may be to enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of the Company's management. The issuance of shares of the Preferred Stock pursuant to the Board of Directors' authority described above may adversely affect the rights of the holders of Common Stock. For example, Preferred Stock issued by the Company may rank prior to the Common Stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of Common Stock. Accordingly, the issuance of shares of Preferred Stock may discourage bids for the Common Stock or may otherwise adversely affect the market price of the Common Stock. LIMITATION OF LIABILITY OF DIRECTORS The Company's Charter eliminates the personal liability of the Company's directors to the Company or its stockholders for monetary damages for breach of a director's fiduciary duty to the full extent permitted by the Delaware General Corporation Law (the "DGCL"). 79 85 INDEMNIFICATION OF DIRECTORS AND OFFICERS The Charter provides that the directors and officers of the Company shall be indemnified by the Company to the fullest extent authorized by Delaware law, as it now exists or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with service for or on behalf of the Company. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the Charter, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In addition, the Charter of the Company provides that the directors of the Company will not be personally liable for monetary damages to the Company for breaches of their fiduciary duty as directors if they act in good faith and in a manner they reasonably believe to be in, or not opposed to, the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. The Company has purchased a general liability insurance policy that covers certain liabilities of directors and officers of the Company arising out of claims based on acts and omissions in their capacity as directors and officers. CERTAIN CHARTER AND BY-LAW PROVISIONS In the event the Company's Common Stock becomes or may become widely held, the Board of Directors or the stockholders may adopt certain charter or by-law provisions that have the effect of discouraging, delaying or making more difficult a change in control of the Company or preventing the removal of incumbent directors even if a majority of the Company's stockholders were to deem such an attempt to be in the best interests of the Company. Such provisions may include a classified board of directors, limitations in the manner in which directors are elected and limitations on matters that may be presented at meetings by stockholders. DESCRIPTION OF CERTAIN INDEBTEDNESS NEW REVOLVING CREDIT FACILITY The description below presents the material terms of the New Revolving Credit Facility. Definitive documentation setting forth the full terms and conditions of the New Revolving Credit Facility is available upon request from the Company. See "Risk Factors -- Substantial Future Capital Requirements; Need for Additional Financing; Substantial Leverage". On October 7, 1998, the Company and NPI entered into a loan agreement with Goldman Sachs Credit Partners L.P. and Fleet for the New Revolving Credit Facility. The New Revolving Credit Facility is a $60 million facility, concurrent with the closing of which the Company terminated the Former Bank Credit Facility. The New Revolving Credit Facility has a term of 18 months and is secured by the assets of the Company. Under the New Revolving Credit Facility, up to $60 million is available, of which $30 million is available based upon a percentage of accounts receivable. Interest is payable at one percent above the prime rate. The New Revolving Credit Facility requires the Company, among other things, to meet minimum levels of revenues and EBITDA, and not to exceed certain customer turnover levels and debt to revenue ratios. STOCKHOLDER LOAN On September 2, 1998, Robert T. Hale, Jr., the Company's President and Chief Executive Officer, loaned $1.9 million to the Company. This amount represents a reinvestment in the Company of a $2.5 million dividend distribution to Robert T. Hale, Jr., net of the estimated tax liability related to such distribution. Interest on such loan accrues at Fleet's prime rate. Principal and interest on such 80 86 loan will be payable 10 days after redemption of the Series A Preferred Stock. See "Certain Transactions". FORMER BANK CREDIT FACILITY The Former Bank Credit Facility with Fleet provided NPI the ability to borrow amounts up to $23 million. This facility was terminated in connection with the closing of the New Revolving Credit Facility. DESCRIPTION OF THE SERIES A PREFERRED STOCK The following is a summary of the material terms of the Certificate of Designation and the Series A Preferred Stock. A copy of the Certificate of Designation and the form of Series A Preferred Stock is available upon request to the Company at the address set forth under "Available Information". The following summary of certain provisions of the Certificate of Designation does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Certificate of Designation. The definitions of certain capitalized terms used but not defined in the following summary are set forth under "-- Certain Definitions". Other capitalized terms used but not defined herein and not otherwise defined under "-- Certain Definitions" are defined in the Certificate of Designation. GENERAL At the consummation of the Initial Offering, the Company issued 40,000 shares of its 13.5% Series A Cumulative Preferred Stock Due 2009, $0.01 par value per share. RANKING The Series A Preferred Stock will, with respect to dividend rights and rights on liquidation, winding-up and dissolution, rank (i) senior to all classes of common stock and to each other class of Capital Stock of the Company or series of Preferred Stock of the Company outstanding on the Issue Date and each other class or series established hereafter by the Board of Directors the terms of which do not expressly provide that it ranks senior to, or on a parity with, the Series A Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to, together with all classes of common stock of the Company, as "Junior Stock"); (ii) on a parity with each class of Capital Stock of the Company or series of Preferred Stock of the Company established hereafter by the Board of Directors, the terms of which expressly provide that such class or series will rank on a parity with the Series A Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution (collectively referred to as "Parity Stock"); and (iii) junior to each class of Capital Stock of the Company or series of Preferred Stock of the Company established hereafter by the Board of Directors, the terms of which expressly provide that such class or series will rank senior to the Series A Preferred Stock as to dividend rights and rights upon liquidation, winding-up and dissolution of the Company (collectively referred to as "Senior Stock"). While any shares of Series A Preferred Stock are outstanding, the Company may not authorize, create or increase the authorized amount of any class or series of stock that ranks senior to or on parity with the Series A Preferred Stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up without the consent of the holders of a majority of the outstanding shares of Series A Preferred Stock. However, without the consent of any holder of Series A Preferred Stock, the Company may create additional classes of stock, increase the authorized number of shares of preferred stock or issue series of a stock that ranks junior to the Series A Preferred Stock with respect, in each case, to the payment of dividends and amounts upon liquidation, dissolution and winding up. See "-- Voting Rights". 81 87 All claims of the holders of the Series A Preferred Stock, including without limitation, claims with respect to dividend payments, redemption payments, mandatory repurchase payments or rights upon liquidation, winding-up or dissolution, shall rank junior to the claims of any holders of any debt of the Company and its Subsidiary and all other creditors of the Company and its Subsidiary. Substantially all the operations of the Company is conducted through its Subsidiary and in future will be conducted through one or more of its subsidiaries. Accordingly, the Company is and will be a holding company with no assets other than the capital stock of such subsidiaries. Claims of creditors of such subsidiaries, including trade creditors, secured creditors and creditors holding indebtedness and guarantees issued by such subsidiaries, and claims of preferred stockholders (if any) of such subsidiaries generally will have priority with respect to the assets and earnings of such subsidiaries over the claims of the Company. Although the Certificate of Designation limits the incurrence of Debt of the Company and certain of its subsidiaries, such limitation is subject to a number of significant qualifications. Moreover, the Certificate of Designation does not impose any limitation on the incurrence of liabilities that are not considered Debt under the Certificate of Designation. See "-- Certain Covenants -- Limitation on Debt". DIVIDENDS The holders of shares of Series A Preferred Stock will be entitled to receive, when, as and if dividends are declared by the Board of Directors out of funds of the Company legally available therefor, cumulative preferential dividends from the Issue Date at a rate per share of 13.5% per annum of the Specified Amount per share of Series A Preferred Stock, payable quarterly in arrears on each of March 1, June 1, September 1 and December 1 (each a "Dividend Payment Date") or, if any such date is not a Business Day, on the next succeeding Business Day, to the holders of record as of the next preceding February 15, May 15, August 15 and November 15, respectively. Subject to the next succeeding sentence, dividends will be payable in cash. If any dividend (other than any Special Dividends) payable on any Dividend Payment Date on or before September 1, 2003 is not declared or paid in full in cash on such Dividend Payment Date, the amount payable as dividends on such Dividend Payment Date (other than any Special Dividends) that is not paid in cash on such Dividend Payment Date will be added automatically to the Specified Amount of the Series A Preferred Stock on such Dividend Payment Date (such dividends being herein called the "Accumulated Dividends"). The first dividend payment of Series A Preferred Stock will be payable on December 1, 1998. Dividends payable on the Series A Preferred Stock will be computed on a basis of the 360-day year consisting of twelve 30-day months and will be deemed to accrue on a daily basis. For a discussion of certain Federal income tax considerations relevant to the payment of dividends on the Series A Preferred Stock, see "Certain United States Federal Income Tax Consequences". Dividends on the Series A Preferred Stock will accrue whether or not the Company has earnings or profits, whether or not there are funds legally available for the payment of such dividends and whether or not dividends are declared. Dividends will accumulate to the extent they are not paid on the Dividend Payment Date for the period to which they relate. The Certificate of Designation will provide that the Company will take all actions required or permitted under the Delaware General Corporation Law (the "DGCL") to permit the payment of dividends on the Series A Preferred Stock. No dividend whatsoever shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Series A Preferred Stock with respect to any dividend period unless all dividends for all preceding dividend periods have been added to the Specified Amount (if on or before September 1, 2003), declared and paid, or declared and a sufficient sum set apart for the payment of such dividend, upon all outstanding shares of Series A Preferred Stock. Except as provided in the next sentence, no dividend will be declared or paid on any Parity Stock unless full cumulative dividends have been paid (or deemed paid) on the Series A Preferred Stock for all prior dividend periods. If accumulated dividends on the Series A Preferred Stock for all prior dividend periods have not been paid (or deemed paid) in full then any dividend declared on the 82 88 Series A Preferred Stock for any dividend period and on any Parity Stock will be declared ratably in proportion to accrued and unpaid dividends on the Series A Preferred Stock and such Parity Stock. The Company will not (i) declare, pay or set apart funds for the payment of any dividend or other distribution with respect to any Junior Stock or (ii) redeem, purchase or otherwise acquire for consideration any Junior Stock through a sinking fund or otherwise, unless (A) all accrued and unpaid dividends with respect to the Series A Preferred Stock and any Parity Stock at the time such dividends are payable have been paid (or deemed paid) or funds have been set apart for payment of such dividends and (B) sufficient funds have been paid or set apart for the payment of the dividend for the current dividend period with respect to the Series A Preferred Stock and any Parity Stock. OPTIONAL REDEMPTION Except as set forth below, the Series A Preferred Stock will not be redeemable at the option of the Company prior to September 1, 2003. Thereafter, the Series A Preferred Stock will be redeemable, at the Company's option (subject to the legal availability of funds therefor), in whole or in part, at any time or from time to time, upon not less than 30 nor more than 60 days' prior notice mailed by first-class mail to each Holder's registered address, at the following redemption prices (expressed in percentages of the Specified Amount thereof), plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends (including Special Dividends and an amount in cash equal to a prorated dividend for any partial dividend period) (subject to the rights of holders of record on the relevant record date to receive dividends due on the relevant Dividend Payment Date), if redeemed during the 12-month period commencing on September 1 of the years set forth below:
REDEMPTION PERIOD PRICE - ------ ---------- 2003....................................................... 106.500% 2004....................................................... 104.333% 2005....................................................... 102.167% 2006 and thereafter........................................ 100.000%
In the case of any partial redemption, selection of the Series A Preferred Stock for redemption will be made on a pro rata basis. MANDATORY REDEMPTION As soon as practicable following the closing of a Senior Notes Offering the net proceeds of which (excluding underwriting or other placement fees and proceeds placed in escrow at the closing thereof pursuant to the terms of such offering) received by the Company exceed $100 million, the Company will be required to redeem (subject to the legal availability of funds therefor) all outstanding shares of Series A Preferred Stock at a price in cash equal to 108% of the Specified Amount thereof, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends (including Special Dividends and an amount in cash equal to a prorated dividend for any partial dividend period), if any, to the date of redemption (subject to the rights of holders of record on the relevant record date to receive dividends on the relevant Dividend Payment Date). In addition, if at any time and from time to time prior to September 1, 2001, the Company consummates one or more Public Equity Offerings, the Company will be required to apply the first $25 million of net proceeds (excluding underwriting or other placement fees and calculated on a cumulative basis beginning with the first such Public Equity Offering) from such Public Equity Offering or Offerings and one-half of each additional dollar of net proceeds (excluding underwriting or other placement fees and calculated on a cumulative basis beginning with the first such Public Equity Offering) in excess of $25 million to redeem the Series A Preferred Stock, at the following redemption prices (expressed in percentages of the Specified Amount thereof), plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends (including Special 83 89 Dividends and an amount in cash equal to a prorated dividend for any partial dividend period), if any, to the date of redemption (subject to the rights of holders of record on the relevant record date to receive dividends due on the relevant Dividend Payment Date), if redeemed during the period ending on the dates set forth below:
REDEMPTION PERIOD PRICE - ------ ---------- June 1, 1999............................................... 102.000% September 1, 1999.......................................... 104.000% September 1, 2000.......................................... 106.000% September 1, 2001.......................................... 108.000%
In the case of any partial redemption, selection of the Series A Preferred Stock for redemption will be made on a pro rata basis. The Company will not be required to make sinking fund payments with respect to the Series A Preferred Stock. The Certificate of Designation will provide that the Company will take all actions required or permitted under Delaware law to permit such redemption. LIQUIDATION PREFERENCE Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, each holder of Series A Preferred Stock will be entitled to be paid, out of the assets of the Company available for distribution to stockholders, an amount equal to the Specified Amount per share of Series A Preferred Stock held by such holder, plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends thereon to the date fixed for liquidation, dissolution or winding-up before any distribution is made on any Junior Stock, including the Common Stock. If, upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the amounts payable with respect to the Series A Preferred Stock and all other Parity Stock are not paid in full, the holders of the Series A Preferred Stock and the Parity Stock will share equally and ratably in any distribution of assets of the Company in proportion to the full liquidation preference and accumulated and unpaid dividends to which each is entitled. After payment of the full amount of the liquidation preference and accumulated and unpaid dividends to which they are entitled, the holders of shares of Series A Preferred Stock will not be entitled to any further participation in any distribution of assets of the Company. However, neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all the property or assets of the Company nor the consolidation or merger of the Company with one or more entities shall be deemed to be a liquidation, dissolution or winding-up of the Company. The liquidation preference of the Series A Preferred Stock will be $1,000 per share. The Certificate of Designation will not contain any provision requiring funds to be set aside to protect the liquidation preference of the Series A Preferred Stock, although such liquidation preference will be substantially in excess of the par value of such shares of Series A Preferred Stock. VOTING RIGHTS The holders of Series A Preferred Stock, except as otherwise required under Delaware law or as provided in the Certificate of Designation, shall not be entitled or permitted to vote on any matter required or permitted to be voted upon by the stockholders of the Company. The Certificate of Designation will provide that if (i) after September 1, 2003, dividends on the Series A Preferred Stock are in arrears and unpaid for six or more dividend periods (whether or not consecutive); (ii) the Company fails to redeem the Series A Preferred Stock on September 1, 2009, or fails to otherwise discharge any redemption obligation with respect to the Series A Preferred Stock; (iii) the Company fails to make an Offer to Purchase if such offer is required by the 84 90 provisions of the covenant described under "-- Certain Covenants -- Change of Control", (iv) a breach or violation of any of the other provisions described under the caption "-- Certain Covenants" occurs and the breach or violation continues for a period of 60 days or more after the Company receives notice thereof specifying the default from the holders of at least 25% of the shares of Series A Preferred Stock then outstanding; or (v) the Company fails to pay at final maturity (giving effect to any applicable grace period) the principal amount of any Debt of the Company or any Significant Subsidiary or the final maturity of any such Debt is accelerated because of a default and the total amount of such Debt unpaid or accelerated exceeds $10 million and such nonpayment continues, or such acceleration is not rescinded or waived, within 10 days, then the holders of the outstanding shares of Series A Preferred Stock, voting together as a single class, will be entitled to elect to serve on the Board of Directors the lesser of (x) two additional members to the Board of Directors or (y) that number of directors constituting 25% of the members of the Board of Directors, and the number of members of the Board of Directors will be immediately and automatically increased by such number. Such voting rights of the Series A Preferred Stock will continue until such time as, in the case of a dividend default, all dividends in arrears on the Series A Preferred Stock are paid in full in cash (or, if prior to September 1, 2003, in shares of Series A Preferred Stock) and, in all other cases, any failure, breach or default giving rise to such voting rights is remedied or waived by the holders of a majority of the shares of Series A Preferred Stock then outstanding, at which time the term of any directors elected pursuant to the provisions of this paragraph (subject to the right of holders of any other preferred stock to elect such directors) shall terminate. Each such event described in clauses (i) through (v) above is referred to herein as a "Voting Rights Triggering Event". The Certificate of Designation also will provide that the Company will not authorize any class of Senior Stock without the affirmative vote or consent of holders of a majority of the shares of Series A Preferred Stock then outstanding, voting or consenting, as the case may be, as one class. In addition, the Certificate of Designation will provide that the Company may not authorize the issuance of any additional shares of Series A Preferred Stock without the affirmative vote or consent of the holders of a majority of the then outstanding shares of Series A Preferred Stock, voting or consenting, as the case may be, as one class. The Certificate of Designation will also provide that, except as set forth above, (a) the creation, authorization or issuance of any shares of Junior Stock or Parity Stock, including the designation of a series thereof within the existing class of Series A Preferred Stock, or (b) the increase or decrease in the amount of authorized Capital Stock of any class, including any preferred stock, shall not require the consent of the holders of Series A Preferred Stock and shall not be deemed to affect adversely the rights, preferences, privileges or voting rights of shares of Series A Preferred Stock. REGISTRATION COVENANT Under the Registration Agreement, the Company is required to use its reasonable best efforts to cause a registration statement under the Securities Act relating to a shelf registration of the Preferred Shares for resale by the Selling Stockholders (the "Resale Registration") to become effective and to remain effective for a period of up to two years. The Company will provide to the Selling Stockholders copies of this Prospectus, which is a part of the registration statement filed in connection with the Resale Registration, notify such Holders when the Resale Registration for the Preferred Shares has become effective and take certain other actions as are required to permit unrestricted resales of the Preferred Shares. Use of the Resale Registration registration statement by Selling Stockholders will be subject to certain Company "black-out" rights and customary information delivery requirements. A Selling Stockholder of Preferred Shares that sells such Preferred Shares pursuant to the Resale Registration generally is required to be named as a selling securityholder in the Prospectus and to deliver a Prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Registration Agreement that are applicable to such Selling Stockholder (including certain indemnification obligations). 85 91 In the event that (i) the Resale Registration has not become effective within 120 days following the filing thereof or (ii) the Resale Registration is filed and declared effective but shall thereafter cease to be effective (except as specifically permitted therein) without being succeeded immediately by an additional registration statement filed and declared effective (any such event referred to in clauses (i) and (ii), a "Registration Default"), then dividends will accumulate (in addition to the stated dividend on the Series A Preferred Stock) at the rate of 0.5% per annum on the Specified Amount, for the period from the occurrence of the Registration Default until such time as no Registration Default is in effect. Such additional dividends (the "Special Dividends") will be payable in cash on each regular dividend payment date. For each 90-day period that the Registration Default continues, the per annum rate of such Special Dividends will increase by an additional 0.25%, provided that such rate shall in no event exceed 1.0% per annum in the aggregate. Special Dividends, if any, will be computed on the basis of a 365 or 366 day year, as the case may be, and the number of days actually elapsed. The summary herein of the material provisions of the Registration Agreement is qualified by reference to the full provisions of the Registration Agreement, a copy of which is available upon request to the Company. COVENANTS The Certificate of Designation contains, among others, the following covenants: LIMITATION ON DEBT (a) The Company may not, and may not permit any Restricted Subsidiary of the Company to, Incur any Debt unless the ratio of (i) the aggregate consolidated principal amount of Debt of the Company and its Restricted Subsidiaries outstanding as of the most recent available quarterly or annual balance sheet, after giving pro forma effect to the Incurrence of such Debt and any other Debt Incurred since such balance sheet date and the receipt and application of the proceeds thereof to (ii) Consolidated Cash Flow Available for Fixed Charges for the four full fiscal quarters next preceding the Incurrence of such Debt for which consolidated financial statements are available, determined on a pro forma basis as if any such Debt had been Incurred at the beginning of such four fiscal quarters, would be less than 7.0 to 1 for such four-quarter periods ending on or prior to September 1, 2000, and 5.0 to 1 for such periods ending thereafter. (b) Notwithstanding the foregoing paragraph (a), the Company and any Restricted Subsidiary (except as specified below) may incur any or all of the following: (i) Debt outstanding on the Issue Date; (ii) Debt under any Bank Credit Agreement; (iii) Purchase Money Debt Incurred to finance the construction, acquisition, development, design, installation, integration, transportation or improvement of Telecommunications Assets which, together with any other outstanding Debt Incurred pursuant to this clause (iii) and any Debt Incurred pursuant to clause (vi) of this paragraph (b) in respect of Debt Incurred pursuant to this clause (iii), has an aggregate principal amount at the time of Incurrence, not in excess of $100 million at any time outstanding; (iv) Senior Notes the offering of which, together with any other outstanding Debt Incurred pursuant to this clause (iv), resulted in net proceeds (excluding underwriting or other placement fees and proceeds placed in escrow at the closing thereof pursuant to the terms of such offering) to the Company, not in excess of $100 million; (v) Debt owed by the Company to any Restricted Subsidiary of the Company or Debt owed by a Restricted Subsidiary of the Company to the Company or a Restricted Subsidiary of the Company; provided, however, that upon either (x) the transfer or other disposition by such Restricted Subsidiary or the Company of any Debt so permitted to a Person other than the 86 92 Company or another Restricted Subsidiary of the Company or (y) the issuance (other than directors' qualifying shares), sale, lease, transfer or other disposition of shares of Capital Stock (including by consolidation or merger) of such Restricted Subsidiary to a Person other than the Company or another such Restricted Subsidiary, the provisions of this clause (v) shall no longer be applicable to such Debt and such Debt shall be deemed to have been Incurred at the time of such transfer or other disposition; (vi) Debt Incurred to renew, extend, refinance or refund (each, a "refinancing") (A) Debt outstanding on the Issue Date, (B) Debt Incurred pursuant to paragraph (a) of this covenant or (C) Debt Incurred pursuant to clause (iii) of this paragraph (b), in each case in an aggregate principal amount not to exceed the aggregate principal amount of and accrued interest on the Debt so refinanced plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Debt so refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing by means of a tender offer or privately negotiated repurchase, plus the amount of expenses of the Company incurred in connection with such refinancing; provided, however, that the refinancing Debt by its terms, or by the terms of any agreement or instrument pursuant to which such Debt is issued, (x) does not provide for payments of principal of such Debt at the stated maturity thereof or by way of a sinking fund applicable thereto or by way of any mandatory redemption, defeasance, retirement or repurchase thereof by the Company (including any redemption, retirement or repurchase which is contingent upon events or circumstances, but excluding any retirement required by virtue of acceleration of such Debt upon any event of default thereunder), in each case prior to the time the same are required by the terms of the Debt being refinanced and (y) does not permit redemption or other retirement (including pursuant to an offer to purchase made by the Company) of such debt at the option of the holder thereof prior to the final stated maturity of the Debt being refinanced, other than a redemption or other retirement at the option of the holder of such Debt (including pursuant to an offer to purchase made by the Company) which is conditioned upon a change substantially similar to those described under "-- Change of Control" or which is pursuant to provisions substantially similar to those in the covenant described under "-- Limitation on Asset Dispositions"; (vii) Debt consisting of Permitted Interest Rate or Currency Protection Agreements; (viii) Debt consisting of performance and other similar bonds and reimbursement obligations Incurred in the ordinary course of business securing the performance of contractual, franchise or license obligations of the Company or a Restricted Subsidiary, or in respect of a letter of credit obtained to secure such performance; (ix) Debt of the Company to Robert T. Hale, Jr. in an original principal amount at the time of issuance not to exceed $2 million; provided, however, that no payment of principal on such Debt may be made prior to the redemption of the Series A Preferred Stock and the payment in full of all accumulated dividends on the Series A Preferred Stock; and (x) Debt of the Company or any Restricted Subsidiary not otherwise permitted to be Incurred pursuant to clauses (i) through (viii) above, which, together with any other outstanding Debt Incurred pursuant to this clause (x), has an aggregate principal amount or, in the case of Debt issued at a discount, an accreted amount (determined in accordance with generally accepted accounting principles) at the time of Incurrence, not in excess of $10 million at any time outstanding. Notwithstanding any other provision of this "Limitation on Debt" covenant, the maximum amount of Debt that the Company or a Restricted Subsidiary may Incur pursuant to this "Limitation on Debt" covenant shall not be deemed to be exceeded, with respect to any outstanding Debt, due solely to the result of fluctuations in exchange rates of currencies. 87 93 For purposes of determining compliance with this "Limitation on Debt" covenant, in the event that an item of Debt meets the criteria of more than one of the types of Debt the Company is permitted to incur pursuant to the foregoing clauses (i) through (x), the Company shall have the right, in its sole discretion, to classify such item of Debt and shall only be required to include the amount and type of such Debt under the clause permitting the Debt as so classified. For purposes of determining any particular amount of Debt under such covenant, Guarantees or Liens with respect to letters of credit supporting Debt otherwise included in the determination of a particular amount shall not be included. LIMITATION ON RESTRICTED PAYMENTS The Company (i) may not, directly or indirectly, declare or pay any dividend, or make any distribution, in respect of any Junior Stock or to the holders thereof (in their capacity as such), excluding any dividends or distributions payable solely in shares of Junior Stock (other than Disqualified Stock) or in options, warrants or other rights to acquire Junior Stock (other than Disqualified Stock); (ii) may not, and may not permit any Restricted Subsidiary to, purchase, redeem, or otherwise retire or acquire for value (a) any Junior Stock of the Company or any Related Person of the Company or (b) any options, warrants or rights to purchase or acquire shares of Junior Stock of the Company or any Related Person of the Company or any securities convertible or exchangeable into shares of Capital Stock of the Company or any Related Person of the Company; and (iii) may not make, or permit any Restricted Subsidiary to make, any Investment in, or payment on a Guarantee of any obligation of, any Person, other than the Company or a Restricted Subsidiary of the Company, except for Permitted Investments (each of clauses (i) through (iii) being a "Restricted Payment") if: (1) any accrued and payable dividends (including dividends for the then current dividend period) with respect to the Series A Preferred Stock or any Parity Stock have not been paid (or deemed paid) in full and funds for such payment have not been set apart shall have occurred and is continuing; or (2) upon giving effect to such Restricted Payment, the Company could not Incur at least $1.00 of additional Debt pursuant to the covenant described in paragraph (a) of "-- Limitation on Debt" above; or (3) upon giving effect to such Restricted Payment, the aggregate amount of all Restricted Payments from the Issue Date exceeds the sum of: (a) (x) Consolidated Cash Flow Available for Fixed Charges since the end of the last full fiscal quarter prior to the Issue Date through the last day of the last full fiscal quarter ending immediately preceding the date of such Restricted Payment (the "Calculation Period") minus (y) 1.5 times Consolidated Interest Expense for the Calculation Period; plus (b) the aggregate Net Cash Proceeds received by the Company from the issuance or sale of its Junior Stock (other than Disqualified Stock) subsequent to the Issue Date (other than an issuance or sale to a Subsidiary of the Company and other than an issuance or sale to an employee stock ownership plan or a trust established by the Company or any of its Subsidiaries for the benefit of their employees); plus (c) the amount by which Debt of the Company is reduced on the Company's balance sheet upon the conversion or exchange (other than by a Subsidiary of the Company) subsequent to the Issue Date of any Debt of the Company convertible or exchangeable for Junior Stock (other than Disqualified Stock) of the Company (less the amount of any cash, or the fair value of any property, distributed by the Company upon such conversion or exchange); plus (d) $5 million. Notwithstanding the foregoing, (i) the Company may pay any dividend on Capital Stock of any class within 60 days after the declaration thereof if, on the date when the dividend was declared, the Company could have paid such dividend in accordance with the foregoing provisions; (ii) the Company may repurchase any shares of its Common Stock or options to acquire its Common Stock from Persons who are currently or were formerly directors, officers or employees of the Company or any Restricted Subsidiary, provided that the aggregate amount of all such repurchases made pursuant to this clause (ii) shall not exceed (a) $1 million in any calendar year and (b) $5 million in the aggregate; (iii) the Company and its Restricted Subsidiaries may refinance any Debt otherwise permitted by clause (vi) of paragraph (b) under "-- Limitation on Debt" above; (iv) the Company 88 94 and its Restricted Subsidiaries may retire or repurchase any Junior Stock of the Company or any Capital Stock of any Restricted Subsidiary of the Company in exchange for, or out of the proceeds of the substantially concurrent sale (other than to a Restricted Subsidiary of the Company) of, Junior Stock (other than Disqualified Stock) of the Company; and (v) the Company may pay the dividend of $5 million declared on July 15, 1998. If the Company makes a Restricted Payment which, at the time of the making of such Restricted Payment, would in the good faith determination of the Company be permitted under the Certificate of Designation, such Restricted Payment shall be deemed to have been made in compliance with the Certificate of Designation notwithstanding any subsequent adjustments made in good faith to the Company financial statements affecting Consolidated Cash Flow Available for Fixed Charges or Consolidated Interest Expense for any period. LIMITATION ON ASSET DISPOSITIONS The Company may not, and may not permit any Restricted Subsidiary to, make any Asset Disposition in one or more related transactions occurring within any 12-month period unless: (i) the Company or the Restricted Subsidiary, as the case may be, receives consideration for such disposition at least equal to the fair market value for the assets sold or disposed of as determined by management of the Company in good faith, which determination shall be conclusive; (ii) at least 75% of the consideration for such disposition consists of (1) cash or readily marketable cash equivalents or the assumption of Debt of the Company or of the Restricted Subsidiary and release from all liability on the Debt assumed; (2) Telecommunications Assets; or (3) shares of publicly-traded Voting Stock of any Person engaged in the Telecommunications Business in the United States; and (iii) all Net Available Proceeds, less any amounts invested within 365 days of such disposition in new Telecommunications Assets, are applied within 365 days of such disposition (1) first, to the permanent repayment or reduction of Debt (other than Disqualified Stock) of the Company or Debt (other than Disqualified Stock) of a Restricted Subsidiary of the Company, to the extent permitted under the terms thereof and (2) second, to the extent of remaining Net Available Proceeds, to make an Offer to Purchase outstanding shares of Series A Preferred Stock at 100% of the Specified Amount thereof plus, without duplication, an amount in cash equal to all accumulated and unpaid dividends (including Special Dividends and an amount in cash equal to a prorated dividend for any partial dividend period), if any, to the date of purchase (subject to the rights of holders of record on the relevant record date to receive dividends due on the relevant dividend payment date), and, to the extent required by the terms thereof, any other Parity Stock of the Company at a price no greater than 100% of the liquidation preference thereof plus accumulated dividends to the date of purchase. To the extent any Net Available Proceeds remain after such uses, the Company and its Restricted Subsidiaries may use such amounts for any purposes not prohibited by the Certificate of Designation. Notwithstanding the foregoing, these provisions shall not apply to any Asset Disposition which constitutes a transfer, conveyance, sale, lease or other disposition of all or substantially all the Company's properties or assets as described under "-- Mergers, Consolidations and Certain Sales of Assets". TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS The Company may not, and may not permit any Restricted Subsidiary of the Company to, enter into any transaction (or series of related transactions) with an Affiliate or Related Person of the Company (other than the Company or a Restricted Subsidiary of the Company), including any Investment, either directly or indirectly, unless such transaction is on terms no less favorable to the Company or such Restricted Subsidiary than those that could be obtained in a comparable arm's-length transaction with an entity that is not an Affiliate or Related Person and is in the best interests of such Company or such Restricted Subsidiary. For any transaction that involves in excess of $1 million but less than or equal to $5 million, the Chief Executive Officer of the Company or a majority of the disinterested members of the Board of Directors of the Company shall determine that the transaction satisfies the above criteria. For any transaction that involves in excess of $5 million but less than or equal to $10 million, a majority of the disinterested members of the Board of 89 95 Directors of the Company shall determine that the transaction satisfies the above criteria. For any transaction that involves in excess of $10 million, the Company shall also obtain an opinion from a nationally recognized investment banking or accounting firm or another nationally recognized expert with experience in appraising the terms and conditions, taken as a whole, of the type of transaction (or series of related transactions) for which the opinion is required stating that such transaction (or series of related transactions) is on terms and conditions, taken as a whole, no less favorable to the Company or such Restricted Subsidiary than those that could be obtained in a comparable arm's- length transaction with an entity that is not an Affiliate or Related Person of the Company, which opinion shall be available for inspection by holders of Series A Preferred Stock at the Company's offices. This covenant shall not apply to Investments by an Affiliate or a Related Person of the Company in the Capital Stock (other than Disqualified Stock) of the Company or any Restricted Subsidiary of the Company. CHANGE OF CONTROL The Certificate of Designation will provide that, within 30 days of the occurrence of a Change of Control, the Company shall make an Offer to Purchase all outstanding shares of Series A Preferred Stock at a purchase price equal to 101% of the liquidation preference thereof plus accumulated and unpaid dividends, if any, to the date of purchase (subject to the rights of holders of record on the relevant record date to receive dividends due on the relevant dividend payment date). A "Change of Control" will be deemed to have occurred at such time as either (a) any Person or any Persons acting together (other than Permitted Holders or an underwriter engaged in a firm commitment underwriting on behalf of the Company) that would constitute a "group" (a "Group") for purposes of Section 13(d) of the Exchange Act, or any successor provision thereto, shall beneficially own (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision thereto) more than 50% of the aggregate voting power of all classes of Voting Stock of the Company or (b) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination by the Board of Directors for election by the Company's stockholders was approved by a vote of at least a majority of the members of the Board of Directors then in office who either were members of the Board of Directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office. Except as described above with respect to a Change of Control, the Certificate of Designation does not contain provisions that permit the Holders of the Series A Preferred Stock to require that the Company repurchase or redeem the Series A Preferred Stock in the event of a takeover, recapitalization or similar restructuring. The Company does not currently have adequate financial resources to effect a repurchase of the Series A Preferred Stock upon a Change of Control and there can be no assurance that the Company will have such resources in the future. The inability of the Company to repurchase the Series A Preferred Stock upon acceptance of the Offer to Purchase made following a Change of Control would constitute a Voting Rights Triggering Event. In addition, there may be restrictions contained in instruments evidencing Debt incurred by the Company or its Restricted Subsidiaries permitted under the Certificate of Designation which restrict or prohibit the ability of the Company to effect any repurchase required under the Certificate of Designation in connection with a Change of Control. In the event that the Company makes an Offer to Purchase the Series A Preferred Stock, the Company intends to comply with any applicable securities laws and regulations, including any applicable requirements of Section 14(e) of, and Rule 13e-4 and Rule 14e-1 under, the Exchange Act. 90 96 PROVISION OF FINANCIAL INFORMATION The Company has agreed that, for so long as any Series A Preferred Stock remains outstanding, it will furnish to the holders of the Series A Preferred Stock and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. In addition, prior to the effectiveness of the registration statement of which this Prospectus forms a part, the Company will furnish to the holders of the Series A Preferred Stock the quarterly and annual financial statements and related notes and an accompanying Management's Discussion and Analysis of Financial Condition and Results of Operations in the format that would be required to be included in the Company's periodic reports filed with the Commission if the Company were required to file such reports with the Commission. The Company will furnish such information to the holders of the Series A Preferred Stock within 15 days after the date on which the Company would have been required to file the same with the Commission. Following the effectiveness of the Resale Registration (or earlier if the Company becomes obligated to file reports with the Commission), the Company will furnish to the holders of the Series A Preferred Stock within 15 days after it files them with the Commission copies of the annual and quarterly reports and the information, documents, and other reports that the Company is required to file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC Reports"). In the event the Company shall cease to be required to file SEC Reports pursuant to the Exchange Act, the Company will nevertheless continue to file such reports with the Commission (unless the Commission will not accept such a filing) and furnish such reports to the holders of Series A Preferred Stock. The Company will make copies of the SEC Reports available to investors who request them in writing. MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS The Company may not, in a single transaction or a series of related transactions, (i) consolidate with or merge into any other Person or permit any other Person to consolidate with or merge into the Company (other than the consolidation or merger of a Restricted Subsidiary organized under the laws of a State of the United States into the Company), or (ii) directly or indirectly, transfer, sell, lease or otherwise dispose of all or substantially all its assets (determined on a consolidated basis for the Company and its Restricted Subsidiaries taken as a whole), unless: (1) in a transaction in which the Company does not survive or in which the Company sells, leases or otherwise disposes of all or substantially all its assets to any other Person, the successor entity to the Company is organized under the laws of the United States of America or any State thereof or the District of Columbia and the Series A Preferred Stock shall be converted into or exchanged for and shall become shares of such successor entity, having in respect of such successor entity the same powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereon, that the Series A Preferred Stock had immediately prior to such transaction; (2) immediately after giving pro forma effect to such transaction as if such transaction had occurred at the beginning of the last full fiscal quarter immediately prior to the consummation of such transaction with the appropriate adjustments with respect to the transaction being included in such pro forma calculation and treating any Debt which becomes an obligation of the Company or a Subsidiary as a result of such transaction as having been Incurred by the Company or such Subsidiary at the time of the transaction, no Voting Rights Triggering Event, and no event that after the giving of notice or lapse of time or both would become a Voting Rights Triggering Event, shall have occurred and be continuing; (3) immediately after giving effect to such transaction, the Consolidated Net Worth of the Company (or the successor entity to the Company) is equal to or greater than that of the Company immediately prior to the transaction; (4) immediately after giving effect to such transaction, the Company (or the successor entity to the Company) would be able to incur an additional $1.00 of Debt under paragraph (a) of the Covenant described under "-- Limitation on Debt" above; and (5) the Company has caused to be delivered to the holders of the Series A Preferred Stock an Opinion of Counsel to the effect that the holders of the Series A Preferred Stock will not recognize gain or loss for Federal income tax purposes as a result of such transaction. 91 97 In the event of any transaction (other than a lease) described in and complying with the immediately preceding paragraph in which the Company is not the surviving person and the surviving person complies with clause (1) of the preceding paragraph, such surviving person shall succeed to, and be substituted for, and may exercise every right and power of, the Company, and the Company will be discharged from its obligations under the Series A Preferred Stock and the Certificate of Designation; provided that solely for the purpose of calculating amounts described in clause (3) under the covenant described under "Covenant -- Limitations on Restricted Payments", any such surviving person shall only be deemed to have succeeded to and be substituted for the Company with respect to the period subsequent to the effective time of such transaction, and the Company (before giving effect to such transaction) shall be deemed to be the "Company" for such purposes for all prior periods. The meaning of the phrase "all or substantially all" as used above varies according to the facts and circumstances of the subject transaction, has no clearly established meaning under relevant law and is subject to judicial interpretation. Accordingly, in certain circumstances, there may be a degree of uncertainty in ascertaining whether a particular transaction would involve a disposition of "all or substantially all" the assets of the Company, and therefore it may be unclear whether the foregoing provisions are applicable. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the Certificate of Designation. Reference is made to the Certificate of Designation for the full definition of all such terms, as well as any other terms used herein for which no definition is provided. "Acquired Debt" means, with respect to any specified Person, (i) Debt of any other Person existing at the time such Person merges with or into or consolidates with or becomes a Restricted Subsidiary of such specified Person and (ii) Debt secured by a Lien encumbering any asset acquired by such specified Person, which Debt, in each case, was not Incurred in anticipation of, and was outstanding prior to, such merger, consolidation or acquisition. "Affiliate" of any Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Asset Disposition" by any Person means any transfer, conveyance, sale, lease or other disposition by such Person or any of its Restricted Subsidiaries (including a consolidation or merger or other sale of any such Restricted Subsidiary with, into or to another Person in a transaction in which such Restricted Subsidiary ceases to be a Restricted Subsidiary of the specified Person, but excluding a disposition by a Restricted Subsidiary of such Person to such Person or a Wholly Owned Restricted Subsidiary of such Person or by such Person to a Wholly Owned Restricted Subsidiary of such Person) of (i) shares of Capital Stock or other ownership interests of a Restricted Subsidiary of such Person (other than pursuant to a transaction in compliance with the covenant described under "-- Mergers, Consolidations and Certain Sales of Assets" above), (ii) substantially all the assets of such Person or any of its Restricted Subsidiaries representing a division or line of business (other than as part of a Permitted Investment) or (iii) other assets or rights of such Person or any of its Restricted Subsidiaries other than (A) in the ordinary course of business, (B) that constitute a Permitted Investment or a Restricted Payment which is permitted under the covenant "-- Limitation on Restricted Payments" above or (C) pursuant to or in connection with Receivables Sales under, or Debt in connection with Permitted Receivables Facilities permitted to be Incurred pursuant to the covenant described under "-- Limitation on Debt"; provided that a transaction described in clauses (i), (ii) and (iii) shall constitute an Asset 92 98 Disposition only if the aggregate consideration for such transfer, conveyance, sale, lease or other disposition is equal to $1 million or more in any 12-month period. "Attributable Value" means, as to any particular lease under which any Person is at the time liable other than a Capital Lease Obligation, and at any date as of which the amount thereof is to be determined, the total net amount of rent required to be paid by such Person under such lease during the initial term thereof as determined in accordance with generally accepted accounting principles, discounted from the last date of such initial term to the date of determination at a rate per annum equal to the discount rate which would be applicable to a Capital Lease Obligation with like term in accordance with generally accepted accounting principles. The net amount of rent required to be paid under any such lease for any such period shall be the aggregate amount of rent payable by the lessee with respect to such period after excluding amounts required to be paid on account of insurance, taxes, assessments, utility, operating and labor costs and similar charges. In the case of any lease which is terminable by the lessee upon the payment of a penalty, such net amount shall also include the lesser of the amount of such penalty (in which case no rent shall be considered as required to be paid under such lease subsequent to the first date upon which it may be so terminated) or the rent which would otherwise be required to be paid if such lease is not so terminated. "Attributable Value" means, as to a Capital Lease Obligation, the principal amount thereof. "Bank Credit Agreement" means any one or more (i) credit agreements (which may include or consist of revolving credits) between the Company and/or any Restricted Subsidiary of the Company and one or more banks or other financial institutions providing financing for the business of the Company and its Restricted Subsidiaries and (ii) Permitted Receivables Facilities, which credit agreements and Permitted Receivables Facilities provide for borrowings by the Company and its Restricted Subsidiaries in an aggregate principal amount outstanding at any one time not to exceed $100 million, and any renewal, extension, refinancing or refunding thereof in an amount which, together with any principal amount remaining outstanding or available under all credit agreements and Permitted Receivables Facilities of the Company and its Restricted Subsidiaries, plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of any credit agreement or Permitted Receivables Facility so refinanced plus the amount of expenses incurred in connection with such refinancing, does not exceed the aggregate principal amount outstanding or available under all such credit agreements and Permitted Receivables Facilities of the Company and its Restricted Subsidiaries immediately prior to such renewal, extension, refinancing or refunding. "Capital Lease Obligation" of any Person means the obligation to pay rent or other payment amounts under a lease of (or other Debt arrangements conveying the right to use) real or personal property of such Person which is required to be classified and accounted for as a capital lease or a liability on the face of a balance sheet of such Person in accordance with generally accepted accounting principles (a "Capital Lease"). The stated maturity of such obligation shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. The principal amount of such obligation shall be the capitalized amount thereof that would appear on the face of a balance sheet of such Person in accordance with generally accepted accounting principles. "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of corporate stock or other equity participations, including partnership interests, whether general or limited, of such Person. "Common Stock" of any Person means Capital Stock of such Person that is not Disqualified Stock. "Consolidated Cash Flow Available for Fixed Charges" for any period means the Consolidated Net Income of the Company and its Restricted Subsidiaries for such period increased by the sum of (i) Consolidated Interest Expense of the Company and its Restricted Subsidiaries for such period, 93 99 plus (ii) Consolidated Income Tax Expense of the Company and its Restricted Subsidiaries for such period, plus (iii) the consolidated depreciation and amortization expense included in the income statement of the Company and its Restricted Subsidiaries for such period plus (iv) any non-cash expense related to the issuance to employees of the Company or any Restricted Subsidiary of the Company of options to purchase Capital Stock of the Company or such Restricted Subsidiary, plus (v) any charge related to any premium or penalty paid in connection with redeeming or retiring any Debt prior to its stated maturity; provided, however, that there shall be excluded therefrom the Consolidated Cash Flow Available for Fixed Charges (if positive) of any Restricted Subsidiary of the Company (calculated separately for such Restricted Subsidiary in the same manner as provided above for the Company) that is subject to a restriction which prevents the payment of dividends or the making of distributions to the Company or another Restricted Subsidiary of the Company to the extent of such restriction. "Consolidated Income Tax Expense" for any period means the consolidated provision for income taxes of the Company and its Restricted Subsidiaries for such period calculated on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated Interest Expense" means for any period the consolidated interest expense included in a consolidated income statement (excluding interest income) of the Company and its Restricted Subsidiaries for such period calculated on a consolidated basis in accordance with generally accepted accounting principles, including without limitation or duplication (or, to the extent not so included, with the addition of), (i) the amortization of Debt discounts; (ii) any payments or fees with respect to letters of credit, bankers' acceptances or similar facilities; (iii) fees with respect to interest rate swap or similar agreements or foreign currency hedge, exchange or similar agreements; (iv) dividends on Preferred Stock of the Company and its Restricted Subsidiaries held by Persons other than the Company or a Wholly Owned Restricted Subsidiary (other than dividends paid in shares of Preferred Stock that is not Disqualified Stock) declared and paid or payable; (v) accrued Disqualified Stock dividends of the Company and its Restricted Subsidiaries, whether or not declared or paid; (vi) interest on Debt guaranteed by the Company and its Restricted Subsidiaries; and (vii) the portion of any Capital Lease Obligation paid during such period that is allocable to interest expense. "Consolidated Net Income" for any period means the consolidated net income (or loss) of the Company and its Restricted Subsidiaries for such period determined on a consolidated basis in accordance with generally accepted accounting principles; provided that there shall be excluded therefrom (a) the net income (or loss) of any Person acquired by the Company or a Restricted Subsidiary of the Company in a pooling-of-interests transaction for any period prior to the date of such transaction, (b) the net income (or loss) of any Person that is not a Restricted Subsidiary of the Company except to the extent of the amount of dividends or other distributions actually paid to the Company or a Restricted Subsidiary of the Company by such Person during such period, (c) gains or losses on Asset Dispositions by the Company or its Restricted Subsidiaries, (d) all extraordinary gains and extraordinary losses, (e) the cumulative effect of changes in accounting principles, (f) non-cash gains or losses resulting from fluctuations in currency exchange rates, (g) any non-cash gain or loss realized on the termination of any employee pension benefit plan and (h) the tax effect of any of the items described in clauses (a) through (g) above; provided, further, that for purposes of any determination pursuant to the covenant described under "Covenants -- Limitation on Restricted Payments," there shall further be excluded therefrom the net income (but not net loss) of any Restricted Subsidiary of the Company that is subject to a restriction which prevents the payment of dividends or the making of distributions to the Company or another Restricted Subsidiary of the Company to the extent of such restriction. "Consolidated Net Worth" of any Person means the consolidated stockholders' equity of such Person, determined on a consolidated basis in accordance with generally accepted accounting principles, less amounts attributable to Disqualified Stock of such Person. 94 100 "Debt" means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (i) every obligation of such Person for money borrowed, (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including any such obligations Incurred in connection with the acquisition of property, assets or businesses, (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person, (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (including securities repurchase agreements but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business which are not overdue or which are being contested in good faith), (v) every Capital Lease Obligation of such Person and all Attributable Value in respect of a Sale and Leaseback Transaction of such Person, (vi) all Receivables Sales of such Person, together with any obligation of such Person to pay any discount, interest, fees, indemnities, penalties, recourse, expenses or other amounts in connection therewith, (vii) all obligations to redeem Disqualified Stock issued by such Person, (viii) every obligation under Interest Rate or Currency Protection Agreements of such Person and (ix) every obligation of the type referred to in clauses (i) through (viii) of another Person and all dividends of another Person the payment of which, in either case, such Person has Guaranteed. The "amount" or "principal amount" of Debt at any time of determination as used herein represented by (a) any Debt issued at a price that is less than the principal amount at maturity thereof, shall be the amount of the liability in respect thereof determined in accordance with generally accepted accounting principles, (b) any Receivables Sale, shall be the amount of the unrecovered capital or principal investment of the purchaser (other than the Company or a Wholly Owned Restricted Subsidiary of the Company) thereof, excluding amounts representative of yield or interest earned on such investment, (c) any Disqualified Stock, shall be the maximum fixed redemption or repurchase price in respect thereof, (d) any Capital Lease Obligation, shall be determined in accordance with the definition thereof, or (e) any Permitted Interest Rate or Currency Protection Agreement, shall be zero. In no event shall Debt include any liability for taxes. "Disqualified Stock" of any Person means any Capital Stock of such Person which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of such Person, any Restricted Subsidiary of such Person or the holder thereof, in whole or in part, on or prior to the final Stated Maturity of the Series A Preferred Stock; provided, however, that any Preferred Stock which would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require the Company to repurchase or redeem such Preferred Stock upon the occurrence of a Change of Control occurring prior to September 1, 2009 shall not constitute Disqualified Stock if the change of control provisions applicable to such Preferred Stock are no more favorable to the holders of such Preferred Stock than the provisions applicable to the Series A Preferred Stock contained in the covenant described under "Covenants -- Change of Control" and such Preferred Stock specifically provides that the Company will not repurchase or redeem any such stock pursuant to such provisions prior to the Company's repurchase of such number of shares of Series A Preferred Stock as are required to be repurchased pursuant to the covenant described under "Covenants -- Change of Control". "Eligible Institution" means a commercial banking institution that has combined capital and surplus of not less than $500 million or its equivalent in foreign currency, whose debt is rated "A-3" or higher, "A-" or higher or "A-" or higher according to Moody's Investors Service, Inc., Standard & Poor's Ratings Group or Duff & Phelps Credit Rating Co. (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)), respectively, at the time as of which any investment or rollover therein is made. 95 101 "Exchange Act" means the Securities Exchange Act of 1934, as amended (or any successor act) and the rules and regulations thereunder. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which obligations or guarantee the full faith and credit of the United States is pledged and which have a remaining weighted average life to maturity of not more than one year from the date of Investment therein. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person guaranteeing, or having the economic effect of guaranteeing, any Debt of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including, without limitation, any obligation of such Person, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Debt, (ii) to purchase property, securities or services for the purpose of assuring the holder of such Debt of the payment of such Debt, or (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Debt (and "Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings correlative to the foregoing); provided, however, that the Guarantee by any Person shall not include endorsements by such Person for collection or deposit, in either case, in the ordinary course of business. "Hale Family" means collectively Robert T. Hale, Robert T. Hale, Jr. and members of their immediate families; any of their respective spouses, estates, lineal descendants, heirs, executors, personal representatives, administrators, trusts for any of their benefit and charitable foundations to which shares of the Company's Capital Stock beneficially owned by any of the foregoing have been transferred; and any corporation or partnership, all of the Capital Stock of which is owned by one or more of the foregoing Persons. "Incur" means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), assume, Guarantee or otherwise become liable in respect of such Debt or other obligation including by acquisition of Subsidiaries or the recording, as required pursuant to generally accepted accounting principles or otherwise, of any such Debt or other obligation on the balance sheet of such Person (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings correlative to the foregoing); provided, however, that a change in generally accepted accounting principles that results in an obligation of such Person that exists at such time becoming Debt shall not be deemed an Incurrence of such Debt and that neither the accrual of interest nor the accretion of original issue discount shall be deemed an Incurrence of Debt; provided further, however, that the Company may elect to treat all or any portion of revolving credit debt of the Company or a Subsidiary as being Incurred from and after any date beginning the date the revolving credit commitment is extended to the Company or a Subsidiary, by memorializing such determination in the corporate records of the Company, and any borrowings or reborrowings by the Company or a Subsidiary under such commitment up to the amount of such commitment designated by the Company as Incurred shall not be deemed to be new Incurrences of Debt by the Company or such Subsidiary. "Interest Rate or Currency Protection Agreement" of any Person means any forward contract, futures contract, swap, option or other financial agreement or arrangement (including, without limitation, caps, floors, collars and similar agreements) relating to, or the value of which is dependent upon, interest rates or currency exchange rates or indices. "Investment" by any Person means any direct or indirect loan, advance or other extension of credit or capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise) to, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person, including any payment on a Guarantee of any obligation of such other Person, but excluding any loan, advance or extension of credit to an employee of the Company or any of its 96 102 Restricted Subsidiaries in the ordinary course of business, accounts receivables and other commercially reasonable extensions of trade credit. "Issue Date" means the first date on which any shares of Series A Preferred Stock are issued pursuant to the Certificate of Designation. "Lien" means, with respect to any property or assets, any mortgage or deed of trust, pledge, hypothecation, assignment, Receivables Sale, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such property or assets (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing). "Marketable Securities" means: (i) Government Securities; (ii) any time deposit account, money market deposit and certificate of deposit maturing not more than 270 days after the date of acquisition issued by, or time deposit of, an Eligible Institution; (iii) commercial paper maturing not more than 270 days after the date of acquisition issued by a corporation (other than an Affiliate of the Company) with a rating, at the time as of which any investment therein is made, of "P-1" or higher according to Moody's Investors Service, Inc., "A-1" or higher according to Standard & Poor's Ratings Group or "A-1" or higher according to Duff & Phelps Credit Rating Co. (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); (iv) any banker's acceptances or money market deposit accounts issued or offered by an Eligible Institution; (v) repurchase obligations with a term of not more than 7 days for Government Securities entered into with an Eligible Institution; and (vi) any fund investing primarily in investments of the types described in clauses (i) through (v) above. "Net Available Proceeds" from any Asset Disposition by any Person means cash or readily marketable cash equivalents received (including by way of sale or discounting of a note, installment receivable or other receivable, but excluding any other consideration received in the form of assumption by the acquiror of Debt or other obligations relating to such properties or assets) therefrom by such Person, net of (i) all legal, title and recording tax expenses, commissions and other fees and expenses (including appraisals, commissions, investment banking fees, and accounting, legal, broker and finder's fees) Incurred and all Federal, state, provincial, foreign and local taxes (including taxes payable upon payment or other distribution of funds from a foreign subsidiary to the Company or another subsidiary of the Company) required to be accrued as a liability as a consequence of such Asset Disposition, (ii) all payments made by such Person or its Restricted Subsidiaries on any Debt which is secured by such assets in accordance with the terms of any Lien upon or with respect to such assets or which must by the terms of such Lien, or in order to obtain a necessary consent to such Asset Disposition or by applicable law, be repaid out of the proceeds from such Asset Disposition, (iii) all distributions and other payments made to minority interest holders in Restricted Subsidiaries of such Person or joint ventures as a result of such Asset Disposition, (iv) appropriate amounts to be provided by such Person or any Restricted Subsidiary thereof, as the case may be, as a reserve in accordance with generally accepted accounting principles against any liabilities associated with such assets and retained by such Person or any Restricted Subsidiary thereof, as the case may be, after such Asset Disposition, including, without limitation, liabilities under any indemnification obligations and severance and other employee termination costs associated with such Asset Disposition, in each case as determined by management of the Company, in its reasonable good faith judgment; provided, however, that any reduction in such reserve within 12 months following the consummation of such Asset Disposition will be treated for all purposes of the Certificate of Designation as a new Asset Disposition at the time of such reduction with Net Available Proceeds equal to the amount of such reduction, and (v) any consideration for an Asset Disposition (which would otherwise constitute Net Available Proceeds) that is required to be held in escrow pending determination of whether a purchase price adjustment 97 103 will be made, but amounts under this clause (v) shall become Net Available Proceeds at such time and to the extent such amounts are released to such Person. "Net Cash Proceeds" means the proceeds of any issuance or sale of Capital Stock in the form of cash or cash equivalents, including payments in respect of deferred payment obligations (to the extent corresponding to the principal, but not interest, component thereof) when received in the form of cash or cash equivalents (except to the extent such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) and proceeds from the conversion of other property received when converted to cash or cash equivalents, net of attorney's fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Offer to Purchase" means a written offer (the "Offer") sent by the Company by first-class mail, postage prepaid, to each holder at his address appearing in the Stock Register on the date of the Offer offering to purchase up to the number of shares of Series A Preferred Stock having the aggregate liquidation preference specified in such Offer at the purchase price specified in such Offer (as determined pursuant to the Certificate of Designation). Unless otherwise required by applicable law, the Offer shall specify an expiration date (the "Expiration Date") of the Offer to Purchase which shall be, subject to any contrary requirements of applicable law, not less than 30 days or more than 60 days after the date of such Offer and a settlement date (the "Purchase Date") for purchase of shares of Series A Preferred Stock within five Business Days after the Expiration Date. The Offer shall contain information concerning the business of the Company and its Subsidiaries which the Company in good faith believes will enable such holders to make an informed decision with respect to the Offer to Purchase (which at a minimum will include (i) the most recent annual and quarterly financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the documents required to be filed with the Commission, (ii) a description of material developments in the Company's business subsequent to the date of the latest of such financial statements referred to in clause (i) (including a description of the events requiring the Company to make the Offer to Purchase), (iii) if applicable, appropriate pro forma financial information concerning the Offer to Purchase and the events requiring the Company to make the Offer to Purchase and (iv) any other information required by applicable law to be included therein). The Offer shall contain all instructions and materials necessary to enable such holders to tender shares of Series A Preferred Stock pursuant to the Offer to Purchase. The Offer shall also state: a. the paragraph of the Certificate of Designation pursuant to which the Offer to Purchase is being made; b. the Expiration Date and the Purchase Date; c. the aggregate number of shares of Series A Preferred Stock offered to be purchased by the Company pursuant to the Offer to Purchase (including, if less than 100%, the manner by which such has been determined pursuant to the Certificate of Designation provision requiring the Offer to Purchase) (the "Purchase Amount"); d. the purchase price to be paid by the Company for the Specified Amount of shares of Series A Preferred Stock accepted for payment (as specified pursuant to the Certificate of Designation) (the "Purchase Price"); e. that the holder may tender all or any portion of the shares of Series A Preferred Stock registered in the name of such holder; f. the place or places where shares of Series A Preferred Stock are to be surrendered for tender pursuant to the Offer to Purchase; 98 104 g. that dividends on any shares of Series A Preferred Stock not tendered or tendered but not purchased by the Company pursuant to the Offer to Purchase will continue to accumulate; h. that on the Purchase Date the Purchase Price will become due and payable upon each share of Series A Preferred Stock being accepted for payment pursuant to the Offer to Purchase and that dividends thereon shall cease to accumulate on and after the Purchase Date; i. that each holder electing to tender a share of Series A Preferred Stock pursuant to the Offer to Purchase will be required to surrender such share of Series A Preferred Stock at the place or places specified in the Offer prior to the close of business on the Expiration Date (such share of Series A Preferred Stock being, if the Company so requires, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company duly executed by, the holder thereof or his attorney duly authorized in writing); j. that holders will be entitled to withdraw all or any portion of shares of Series A Preferred Stock tendered if the Company receives, not later than the close of business on the Expiration Date, a telegram, telex, facsimile transmission or letter setting forth the name of the holder, the number of shares of Series A Preferred Stock the holder tendered, the certificate number of the shares the holder tendered and a statement that such holder is withdrawing all or a portion of his tender; k. that (a) if shares of Series A Preferred Stock in an aggregate number less than or equal to the Purchase Amount are duly tendered and not withdrawn pursuant to the Offer to Purchase, the Company shall purchase all such shares of Series A Preferred Stock and (b) if shares of Series A Preferred Stock in an aggregate number in excess of the Purchase Amount are tendered and not withdrawn pursuant to the Offer to Purchase, the Company shall purchase shares of Series A Preferred Stock equal to the Purchase Amount on a pro rata basis (with such adjustments as may be deemed appropriate so that only whole shares shall be purchased); and l. that in the case of any holder whose shares of Series A Preferred Stock are purchased only in part, the Company shall return all such unpurchased shares or execute and deliver to the holder of such shares without service charge, new shares as requested by such holder, in an aggregate liquidation preference equal to and in exchange for the unpurchased portion of the shares so tendered. Any Offer to Purchase shall be governed by and effected in accordance with the Offer for such Offer to Purchase. "Permitted Holders" means the Hale Family. "Permitted Interest Rate or Currency Protection Agreement" of any Person means any Interest Rate or Currency Protection Agreement entered into with one or more financial institutions in the ordinary course of business that is designed to protect such Person against fluctuations in interest rates or currency exchange rates with respect to Debt Incurred and which shall have a notional amount no greater than the payments due with respect to the Debt being hedged thereby and not for purposes of speculation. "Permitted Investment" means (i) any Investment in the Company or any Restricted Subsidiary, (ii) any Investment in any Person as a result of which such Person becomes a Wholly Owned Restricted Subsidiary, (iii) any Investment in Marketable Securities, (iv) Investments in Permitted Interest Rate or Currency Protection Agreements, (v) Investments made as a result of the receipt of noncash consideration from an Asset Disposition that was made pursuant to and in compliance with the covenant described under "Covenants -- Limitation on Asset Dispositions" above, (vi) loans or advances to employees of the Company or any Restricted Subsidiary that in the aggregate at any one time do not exceed $1 million, (vii) Strategic Investments in an amount not to exceed $5 million at any one time outstanding and (viii) an amount equal to the sum of (a) $5 million and (b) the 99 105 aggregate Net Cash Proceeds received by the Company from the sale of its Capital Stock (other than Disqualified Stock) subsequent to the Issue Date (other than an issuance or sale to a Subsidiary of the Company and other than an issuance or sale to an employee stock ownership plan or a trust established by the Company or any of its Subsidiaries for the benefit of their employees) to the extent such Net Cash Proceeds have not been used pursuant to clause (3)(b) of the first paragraph or clause (iv) of the second paragraph of the covenant described under "-- Limitation on Restricted Payments" above. "Permitted Receivables Facility" means a transaction pursuant to which any Restricted Subsidiary transfers (pursuant to a sale, contribution to capital or a combination thereof) to a Special Purpose Subsidiary Receivables and certain related rights, and such Special Purpose Subsidiary securitizes such Receivables and related rights pursuant to a loan agreement, receivables purchase agreement, pooling and servicing agreement or similar contract with one or more commercial paper conduits, banks, financial institutions or similar entities. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof or any other entity. "Preferred Stock" of any Person means Capital Stock of such Person of any class or classes (however designated) that ranks prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person. "Public Equity Offering" means an underwritten primary public offering of Common Stock of the Company pursuant to an effective registration statement under the Securities Act (other than a registration statement on Form S-8 or any successor form). "Purchase Money Debt" means (i) Acquired Debt Incurred in connection with the acquisition of Telecommunications Assets and (ii) Debt of the Company or of any Restricted Subsidiary of the Company (including, without limitation, Debt represented by Capital Lease Obligations, mortgage financings and purchase money obligations) Incurred for the purpose of financing all or any part of the cost of construction, acquisition, development, design, installation, integration, transportation or improvement by the Company or any Restricted Subsidiary of the Company of any Telecommunications Assets of the Company or any Restricted Subsidiary of the Company, and including any related notes, Guarantees, collateral documents, instruments and agreements executed in connection therewith, as the same may be amended, supplemented, modified or restated from time to time. "Receivables" means receivables, chattel paper, instruments, documents or intangibles evidencing or relating to the right to payment of money in respect of the sale of goods or services. "Receivables Sale" of any Person means any sale of Receivables of such Person (pursuant to a purchase facility or otherwise), other than in connection with a disposition of the business operations of such Person relating thereto or a disposition of defaulted Receivables for purpose of collection and not as a financing arrangement. "Related Person" of any Person means any other Person directly or indirectly owning (a) 10% or more of the outstanding Common Stock of such Person (or, in the case of a Person that is not a corporation, 10% or more of the equity interest in such Person) or (b) 10% or more of the combined voting power of the Voting Stock of such Person. "Restricted Subsidiary" of the Company means any Subsidiary, whether existing on or after the Issue Date, unless such Subsidiary is an Unrestricted Subsidiary. "Sale and Leaseback Transaction" of any Person means an arrangement with any lender or investor or to which such lender or investor is a party providing for the leasing by such Person of any property or asset of such Person which has been or is being sold or transferred by such Person more than 365 days after the later of the acquisition thereof or the completion of construction or 100 106 commencement of operation thereof to such lender or investor or to any person to whom funds have been or are to be advanced by such lender or investor on the security of such property or asset. The stated maturity of such arrangement shall be the date of the last payment of rent or any other amount due under such arrangement prior to the first date on which such arrangement may be terminated by the lessee without payment of a penalty. "Senior Notes" means Debt of the Company having a maturity of at least six years. "Senior Notes Offering" means an offering (whether private or registered under the Securities Act) of Senior Notes. "Significant Subsidiary" means a Restricted Subsidiary that is a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the Securities Act and the Exchange Act. "Special Purpose Subsidiary" means a corporation, limited liability company, partnership or business trust, all of the capital stock or other equity interests therein are owned, directly or indirectly, by the Company or any Wholly Owned Restricted Subsidiary, that has been established for the purpose of, and whose activities are limited to, the consummation of Receivables Sales and activities incidental thereto. "Specified Amount" means, on any date with respect to any share of Series A Preferred Stock, the sum of (i) the Liquidation Preference with respect to such share and (ii) the Accumulated Dividends with respect to such share that are added automatically to the Specified Amount of such share. "Strategic Investment" means (a) Investments that the Board of Directors has determined in good faith will enable the Company or any of its Wholly Owned Restricted Subsidiaries to obtain additional business that it might not be able to obtain without making such Investment and (b) Investments in entities, the principal function of which is to perform research and development with respect to products and services that may be useful in the Telecommunications Business; provided that the Company or one of its Wholly Owned Restricted Subsidiaries is entitled or otherwise reasonably expected to obtain rights to such products or services as a result of such Investment. "Subsidiary" of any Person means (i) a corporation more than 50% of the combined voting power of the outstanding Voting Stock of which is owned, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof or (ii) any other Person (other than a corporation) in which such Person, or one or more other Subsidiaries of such Person or such Person and one or more other Subsidiaries thereof, directly or indirectly, has at least a majority ownership and power to direct the policies, management and affairs thereof. "Telecommunications Assets" means all assets, rights (contractual or otherwise) and properties, whether tangible or intangible, used or intended for use in connection with a Telecommunications Business. "Telecommunications Business" means the business of (i) transmitting, or providing services relating to the transmission of, voice, video or data through owned or leased transmission facilities, (ii) creating, developing or marketing communications related network equipment, software and other devices for use in a Telecommunication Business or (iii) evaluating, participating or pursuing any other activity or opportunity that is primarily related to those identified in (i) or (ii) above and shall, in any event, include all businesses in which the Company or any of its Subsidiaries are engaged on the Issue Date; provided that the determination of what constitutes a Telecommunications Business shall be made in good faith by the Board of Directors of the Company, which determination shall be conclusive. "Unrestricted Subsidiary" means (1) any Subsidiary of the Company designated as such by the Board of Directors of the Company as set forth below where (a) neither the Company nor any of 101 107 its other Subsidiaries (other than another Unrestricted Subsidiary) (i) provides credit support for, or Guarantee of, any Debt of such Subsidiary or any Subsidiary of such Subsidiary (including any undertaking, agreement or instrument evidencing such Debt) or (ii) is directly or indirectly liable for any Debt of such Subsidiary or any Subsidiary of such Subsidiary, and (b) no default with respect to any Debt of such Subsidiary or any Subsidiary of such Subsidiary (including any right which the holders thereof may have to take enforcement action against such Subsidiary) would permit (upon notice, lapse of time or both) any holder of any other Debt of the Company and its Restricted Subsidiaries to declare a default on such other Debt or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity and (2) any Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company may designate any Subsidiary to be an Unrestricted Subsidiary unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property of, any other Subsidiary of the Company which is not a Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted Subsidiary; provided that either (x) the Subsidiary to be so designated has total assets of $1,000 or less or (y) immediately after giving effect to such designation, the Company could incur at least $1.00 of additional Debt pursuant to paragraph (a) under "Covenants -- Limitation on Debt" above; and provided further, that the Company could make a Restricted Payment in an amount equal to the greater of the fair market value and the book value of such Subsidiary pursuant to the covenant described under "Covenants -- Limitation on Restricted Payments" and such amount is thereafter treated as a Restricted Payment for the purpose of calculating the aggregate amount available for Restricted Payments thereunder. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary, provided that, immediately after giving effect to such designation, the Company could incur at least $1.00 of additional Debt pursuant to paragraph (a) under "Covenants -- Limitation on Debt" above. "Voting Stock" of any Person means Capital Stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. "Wholly Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person 99% or more of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person or by such Person and one or more Wholly Owned Restricted Subsidiaries of such Person. DESCRIPTION OF THE WARRANTS The Series A Preferred Stock was initially issued as a part of a Unit offering. Each Unit included 7.75 Initial Warrants and 15 Contingent Warrants. The Warrants were issued pursuant to a Warrant Agreement dated as of September 3, 1998 (the "Warrant Agreement"), between the Company and American Stock Transfer & Trust Company, as warrant agent (the "Warrant Agent"). The following summary of the material provisions of the Warrant Agreement is qualified by reference to all of the provisions of the Warrant Agreement, including the definitions therein of certain terms. GENERAL Each Warrant, when exercised, will entitle the holder thereof to purchase one share of common stock from the Company at a price (the "Exercise Price") of $0.01 per share. The Exercise Price and the number of shares of common stock issuable upon exercise of a Warrant are both subject to adjustment in certain cases. See "-- Adjustments" below. The Initial Warrants will initially entitle the holders thereof to acquire, in the aggregate, 310,000 shares of common stock. The Contingent Warrants will initially entitle the holders thereof to acquire, in the aggregate, 600,000 shares of common stock. 102 108 The Warrants may be exercised at any time on or after the Exercisability Date; provided, however, that the Contingent Warrants shall not be exercisable until the later of the Exercisability Date and the release of such Contingent Warrants from escrow, as described below. "Exercisability Date" means the earlier to occur of (i) the second anniversary of the Issue Date, and (ii) any Exercise Event. "Exercise Event" means the date of the earliest of: (a) a Change of Control (as defined under "Description of the Series A Preferred Stock -- Certain Covenants -- Change of Control"); (b)(1) 180 days after an Initial Public Offering or (2) upon the closing of an Initial Public Offering by the Company but only in respect of Warrants required to be exercised in order to permit the holder thereof to sell shares in such Initial Public Offering as permitted under "-- Registration Rights;" (c) a consolidation, merger or purchase of assets involving the Company or any of its Subsidiaries that results in the common stock becoming subject to registration under the Exchange Act; or (d) voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; provided, however, that holders of Warrants will be able to exercise their Warrants only if a registration statement relating to the Warrant Shares is effective or the exercise of such Warrants is exempt from the registration requirements of the Securities Act, and such securities are qualified for sale or exempt from qualification under the applicable securities laws of the states or other jurisdictions in which such holders reside. The Contingent Warrants are held in escrow pursuant to the terms of an escrow agreement (the "Contingent Warrant Escrow Agreement"), between the Company and American Stock Transfer & Trust Company, as escrow agent (the "Contingent Warrant Escrow Agent"). On September 1 of each year prior to the Expiration Date, commencing September 1, 1999, (each September 1, a "Contingent Warrant Release Date"), pursuant to the Contingent Warrant Escrow Agreement, the Contingent Warrant Escrow Agent will release the Applicable Percentage of the Contingent Warrants and any other Contingent Warrant Escrow Property on a pro rata basis (for purposes of which any shares of Series A Preferred Stock redeemed or repurchased prior to such date by the Company shall be deemed to be issued and outstanding and held by the Company) to the holders of the issued and outstanding shares of Series A Preferred Stock on the immediately preceding August 15 (each August 15, a "Contingent Warrant Release Record Date"). All Contingent Warrants not released to such holders shall be returned to the Company for cancelation. Unless earlier exercised, the Warrants will expire on September 1, 2009 (the "Expiration Date"); provided, however, that the Company shall act in good faith to permit the prompt exercise of Contingent Warrants, if any, released from escrow on the Expiration Date. The Company will give notice of expiration not less than 90 nor more than 120 days prior to the Expiration Date to the registered holders of the then outstanding Warrants. If the Company fails to give such notice, the Warrants will nevertheless expire and become void on the Expiration Date. AS OF THE DATE OF EFFECTIVENESS OF THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART, THE INITIAL WARRANTS WILL TRADE SEPARATELY FROM THE SERIES A PREFERRED STOCK. CONTINGENT WARRANTS WILL NOT TRADE SEPARATELY FROM THE SERIES A PREFERRED STOCK UNTIL THE DATE ON WHICH THEY ARE RELEASED FROM ESCROW. At the Company's option, fractional shares of common stock may not be issued upon exercise of the Warrants. If any fraction of a share of common stock would, except for the foregoing provision, be issuable upon the exercise of any such Warrant (or specified portion thereof), the Company will pay an amount in cash equal to the Current Market Value per share of common stock, as determined on the day immediately preceding the date the Warrant is presented for exercise, multiplied by such fraction, computed to the nearest whole cent. Certificates for Warrants will be issued in fully registered form only. See "Form, Denomination, Book-Entry Procedures and Transfer". No service charge will be made for registration of transfer or exchange upon surrender of any Warrant Certificate at the office of the Warrant Agent maintained for that purpose. The Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Warrant Certificates. 103 109 In the event a bankruptcy, reorganization or similar proceeding is commenced by or against the Company, a bankruptcy court may hold that unexercised Warrants are executory contracts which may be subject to rejection by the Company with approval of the bankruptcy court. As a result, even if sufficient funds are available, holders of the Warrants may not be entitled to receive any consideration or may receive an amount less than they would be entitled to if they had exercised their Warrants prior to the commencement of any such bankruptcy, reorganization or similar proceeding. CERTAIN TERMS EXERCISE In order to exercise all or any of the Warrants, the holder thereof is required to surrender to the Warrant Agent the related Warrant Certificate and pay in full the Exercise Price for each share of Common Stock or other securities issuable upon exercise of such Warrants. The Exercise Price may be paid (i) in cash or by certified or official bank check or by wire transfer to an account designated by the Company for such purpose or (ii) at any time following registration of the Common Stock under the Exchange Act, without the payment of cash, by reducing the number of shares of Common Stock that would be obtainable upon the exercise of a Warrant and payment of the Exercise Price in cash so as to yield a number of shares of common stock upon the exercise of such Warrant equal to the product of (a) the number of shares of common stock for which such Warrant is exercisable as of the date of exercise (if the Exercise Price were being paid in cash) and (b) the Cashless Exercise Ratio (the "Cashless Exercise"). The "Cashless Exercise Ratio" shall equal a fraction, the numerator of which is the excess of the Current Market Value per share of common stock on the Exercise Date over the Exercise Price per share as of the Exercise Date and the denominator of which is the Current Market Price per share of the common stock on the Exercise Date. Upon surrender of a Warrant Certificate representing more than one Warrant in connection with the holder's option to elect a Cashless Exercise, the number of shares of common stock deliverable upon a Cashless Exercise shall be equal to the number of shares of common stock issuable upon the exercise of Warrants that the holder specifies are to be exercised pursuant to a Cashless Exercise multiplied by the Cashless Exercise Ratio. All provisions of the Warrant Agreement shall be applicable with respect to a surrender of a Warrant Certificate pursuant to a Cashless Exercise for less than the full number of Warrants represented thereby. Upon the exercise of Warrants in accordance with the Warrant Agreement, the Warrant Agent will cause the Company to transfer promptly to or upon the written order of the holder of such Warrant Certificate appropriate evidence of ownership of any shares of common stock or other securities or property to which it is entitled, registered or otherwise to the person or persons entitled to receive the same and an amount in cash, in lieu of any fractional shares, if any. All shares of common stock or other securities issuable by the Company upon the exercise of the Warrants will be validly issued, fully paid and nonassessable. NO RIGHTS AS STOCKHOLDERS The holders of unexercised Warrants are not entitled, by virtue of being such holders, to receive dividends, to vote, to consent, to exercise any preemptive rights or to receive notice as stockholders of the Company in respect of any stockholders' meeting for the election of directors of the Company or any other purpose, or to exercise any other rights whatsoever as stockholders of the Company. MERGERS, CONSOLIDATIONS, ETC. In the event that the Company consolidates with, merges with or into, or sells all or substantially all its assets to, another Person, each Warrant thereafter will entitle the holder thereof to receive upon exercise thereof, per share of Common Stock for which such Warrant is exercisable, the number of shares of common stock or other securities or property which the holder of a share of common stock is entitled to receive upon completion of such consolidation, merger or sale of 104 110 assets. However, if (i) the Company consolidates with, merges with or into, or sells all or substantially all its assets to, another Person and, in connection therewith, the consideration payable to the holders of common stock in exchange for their shares is payable solely in cash or (ii) there is a dissolution, liquidation or winding-up of the Company, then the holders of the Warrants will be entitled to receive distributions on an equal basis with the holders of common stock or other securities issuable upon exercise of the Warrants, as if the Warrants had been exercised immediately prior to such event, less the Exercise Price. Upon receipt of such payment, if any, the Warrants will expire and the rights of the holders thereof will cease. In the case of any such merger, consolidation or sale of assets, the surviving or acquiring person and, in the event of any dissolution, liquidation or winding-up of the Company, the Company, must deposit promptly with the Warrant Agent the funds (or other consideration), if any, required to pay the holders of the Warrants. After such funds and the surrendered Warrant Certificates are received, the Warrant Agent is required to deliver a check in such amount as is appropriate (or, in the case of consideration other than cash, such other consideration as is appropriate) to such Persons as it may be directed in writing by the holders surrendering such Warrants. ADJUSTMENTS The number of shares of common stock issuable upon the exercise of the Warrants and the Exercise Price will be subject to adjustment in certain events including (i) the payment by the Company of dividends (or other distributions) on the common stock of the Company payable in shares of common stock or other shares of the Company's capital stock, (ii) subdivisions, combinations and certain reclassifications to the common stock, (iii) the distribution to all holders of the common stock of any of the Company's assets, debt securities or any options, warrants or rights to purchase securities (excluding those options, warrants and rights referred to in clause (iv) and cash dividends and other cash distributions from current or retained earnings or, in respect of any period during which the Company was a subchapter S corporation for U.S. federal income tax purposes, the payment of dividends in respect of common stockholders' federal and state income tax liability and related tax reporting preparation expenses), (iv) the issuance of rights, options or warrants entitling the holders thereof to subscribe for shares of common stock, or of securities convertible into or exchangeable or exercisable for shares of common stock, for a consideration per share that is less than the Current Market Value per share of the common stock at the time of issuance of such rights, options or warrants or convertible or exchangeable securities, (v) the issuance of shares of common stock for a consideration per share which is less than the Current Market Value per share of the common stock (other than issuances of common stock in respect of rights, options or warrants or convertible or exchangeable securities the issuance of which either did not require or otherwise result in an adjustment to the Warrants pursuant to clause (iv)), and (vi) the purchase of shares of common stock pursuant to a tender or exchange offer made by the Company or any subsidiary thereof at a price greater than the Current Market Value of the common stock at the time such tender or exchange offer expires. No adjustment to the number of shares of common stock issuable upon the exercise of the Warrants and the Exercise Price will be required in certain events including (i) the issuance of common stock or warrants to purchase common stock in connection with any debt or equity financing from or with one or more unaffiliated third parties approved by the Board of Directors (including upon the exercise of any warrants issued in connection with such financings), (ii) the issuance of shares of common stock (including upon exercise of options) pursuant to the terms of and in order to give effect to the Stock Incentive Plan, the Director Plan or issued to directors, advisors, employees or consultants of the Company pursuant to a stock option plan, employee stock purchase plan, restricted stock plan or other agreement approved by the Board of Directors, (iii) the issuance of shares of common stock in connection with acquisitions of assets or securities of another Person (other than issuances to affiliates of the Company), and (iv) the issuance of shares of common stock upon exercise of the Initial Warrants and the Contingent Warrants. 105 111 In the event of a distribution to holders of common stock which results in an adjustment to the number of shares of Common Stock or other consideration for which a Warrant may be exercised, the holders of the Warrants may, in certain circumstances, be deemed to have received a distribution subject to United States Federal income tax as a dividend. See "Federal Income Tax Considerations". No adjustment in the Exercise Price will be required unless such adjustment would require an increase or decrease of at least one percent in the Exercise Price; provided, however, that any adjustment which is not made as a result of this paragraph will be carried forward and taken into account in any subsequent adjustment. AMENDMENT From time to time, the Company and the Warrant Agent, without the consent of the holders of the Warrants, may amend or supplement the Warrant Agreement for certain purposes, including curing defects or inconsistencies or making any change that does not adversely affect the rights of any holder. Any amendment or supplement to the Warrant Agreement that has an adverse effect on the interests of the holders of the Warrants shall require the written consent of the holders of a majority of the then outstanding Warrants. The consent of each holder of the Warrants affected shall be required for any amendment pursuant to which the Exercise Price would be increased or the number of shares of Common Stock issuable upon exercise of Warrants would be decreased (other than pursuant to adjustments provided in the Warrant Agreement). REGISTRATION RIGHTS Whenever the Company proposes to effect a Public Offering, the Company must, not later than the date of the initial filing of a registration statement pertaining thereto, provide written notice thereof to the holders of the Warrants and the Warrant Shares. Each such holder will have the right, within 20 days after receipt of such notice, to request (which request will indicate the intended method of distribution) that the Company include such holder's Warrant Shares for sale pursuant to such registration statement. The Company will include in any Public Offering all the Warrant Shares for which it receives notice pursuant to the preceding paragraph, unless the managing underwriter for such Public Offering (the "Managing Underwriter") determines that, in its opinion, the number of Warrant Shares that the holders of Warrants and Warrant Shares (the "Requesting Holders") have requested to be sold in such Public Offering, plus the total number of shares of such common stock that the Company and any other selling stockholders entitled to sell shares in such Public Offering propose to sell in such Public Offering, exceed the maximum number of shares that may be distributed without materially adversely affecting the price, timing or distribution of the shares to be sold by the Company. In such event, the Company will be required to include in such Public Offering only that number of shares which the Managing Underwriter believes may be sold without causing such adverse effect in the following order: (i) all the shares that the Company proposes to sell in such Public Offering, (ii) all the shares that are proposed to be sold by any holder of common stock who is exercising a demand registration right existing on the Issue Date, if such public offering is being made pursuant to such demand and (iii) shares of the Requesting Holders and all other shares that are proposed to be sold by any holder of common stock on a pro rata basis (based on the number of shares proposed to be sold by each Requesting Holder) in an aggregate number which is equal to the difference between the maximum number of shares that may be distributed in such Public Offering as determined by the Managing Underwriter and the number of shares to be sold in such Public Offering pursuant to clauses (i) and (ii) above. The Company will have the right to postpone or withdraw any registration statement prior to the effective date without obligation to any Requesting Holder. 106 112 In the event that the shares of the Requesting Holders are excluded from a Public Offering as a result of the preceding sentence, holders of more than 50% of the Warrant Shares (whether outstanding or subject to issuance upon exercise of outstanding Warrants) that have not been sold pursuant to a registration statement may request, at any time at least 180 days after the closing of such Public Offering, the Company to register, on one occasion only, all their Warrant Shares (and those of any other holder of Warrant Shares that have not been sold pursuant to a registration statement) in connection with a Public Offering. The demand registration will be subject to certain Company "black-out" rights and customary information delivery requirements. The Warrant Agreement will include customary covenants with respect to the registration rights of the holders on the part of the Company and will provide that the Company will indemnify the holders included in any registration statement and any underwriter with respect thereto against certain liabilities. The Warrant Agreement will require that holders of Warrants and Warrant Shares agree that they will not, other than as part of such offering or with the consent of the Managing Underwriter, transfer Warrants or Warrant Shares during the 180 days following the closing of the first Public Offering of the common stock. CERTAIN DEFINITIONS The Warrant Agreement contains, among others, the following definitions: "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Applicable Percentage" means, for each date set forth below, the percentage set forth below:
CONTINGENT WARRANT APPLICABLE RELEASE DATE PERCENTAGE - ------------------ ---------- September 1, 1999 9.09% September 1, 2000 10.00% September 1, 2001 11.11% September 1, 2002 12.50% September 1, 2003 14.28% September 1, 2004 16.67% September 1, 2005 20.00% September 1, 2006 25.00% September 1, 2007 33.33% September 1, 2008 50.00% September 1, 2009 100.00%
"Current Market Value" per share of common stock or any other security at any date means (i) if the security is not registered under the Exchange Act, (a) the value of the security, determined in good faith by the Board of Directors of the Company and certified in a board resolution, based on the most recently completed arm's-length transaction between the Company and a Person other than an Affiliate of the Company, the closing of which shall have occurred on such date or within the six-month period preceding such date, or (b) if no such transaction shall have occurred on such date or within such six-month period, the value of the security as determined by a nationally recognized investment banking firm or (ii) if the security is registered under the Exchange Act, the average of the daily closing bid prices (or the equivalent in an over-the-counter market) for each 107 113 Business Day during the period commencing 15 Business Days before such date and ending on the date one day prior to such date, or if the security has been registered under the Exchange Act for less than 15 consecutive Business Days before such date, then the average of the daily closing bid prices (or such equivalent) for all of the Business Days before such date for which daily closing bid prices are available; provided, however, that if the closing bid price is not determinable for at least ten Business Days in such period, the "Current Market Value" of the security shall be determined as if the security were not registered under the Exchange Act. "Initial Public Offering" means the first time a registration statement filed under the Securities Act respecting an offering, whether primary or secondary, of common stock (or securities convertible into, or exchangeable or exercisable for, common stock or rights to acquire common stock or such securities, other than the Warrants) which is underwritten on a firmly committed or best efforts basis, is declared effective and the securities so registered are issued and sold. "Issue Date" means the date on which the Initial Warrants are initially issued. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Public Offering" means an underwritten primary public offering of Common Stock of the Company pursuant to an effective registration statement under the Securities Act (other than a registration statement on Form S-8 or any successor form). "Warrant Certificates" mean the registered certificates (including the Global Warrants (as defined)) issued by the Company under the Warrant Agreement representing the Warrants. "Warrant Shares" means the shares of common stock (or any other securities) for which Warrants are exercisable or which have been issued upon exercise of Warrants. FEDERAL INCOME TAX CONSIDERATIONS The following general discussion summarizes U.S. Federal income tax consequences of the purchase, ownership and disposition of the Series A Preferred Stock and reflects the opinion of the Company's legal counsel, Hale and Dorr LLP ("legal counsel"), regarding the U.S. Federal income tax consequences that are material to a U.S. Holder (as defined below) of Series A Preferred Stock, which are identified below, except where the disclosure below expressly states that legal counsel is unable to render an opinion. The tax consequences set forth below apply only to persons that hold shares of Series A Preferred Stock as capital assets within the meaning of Section 1221 of the Code, and that purchase the Preferred Shares for cash at original issue. The tax consequences set forth below may differ for a particular holder subject to special treatment under certain U.S. Federal income tax laws, such as dealers in securities or foreign currency, banks, trusts, insurance companies, tax-exempt organizations, persons who are not U.S. Holders (as defined below), persons that hold Series A Preferred Stock as part of a straddle, hedge, synthetic security, constructive sale or conversion transaction, persons that have a functional currency other than the U.S. dollar and investors in pass-through entities. The opinions set forth below are based on legal counsel's interpretation of the Code, the final, temporary and proposed Treasury regulations promulgated thereunder, administrative pronouncements and judicial decisions, all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect. The Company has not requested, and will not request, a ruling from the U.S. Internal Revenue Service (the "IRS") with respect to any of the U.S. Federal income tax consequences described below, and as a result, there can be no assurance that the IRS will not disagree with or challenge any of the conclusions set forth herein. 108 114 LOSS OF S CORPORATION STATUS The status of the Company as an "S Corporation" under Subchapter S of the Code terminated as a result of the issuance of the Units in the Initial Offering. As a result, the Company became taxable under the Code on its taxable income at the entity level as a regular "C corporation", generally at the rate of 35%. Additionally, its income, losses and other tax items no longer "flow through" to its shareholders, who instead are taxed on the Company's distributions, which are treated as ordinary dividend income to the extent they do not exceed the Company's current and accumulated earnings and profits, with any excess generally taxable as capital gain. The Company also became subject to entity-level taxation in many states that is less favorable than the state tax treatment afforded S corporations. U.S. HOLDERS The tax consequences set forth below apply only to persons who or which are U.S. Holders that acquired Preferred Shares for cash upon their original issuance. For these purposes, "U.S. Holder" means - an individual who is a citizen or resident of the United States, - a corporation or other entity taxable as a corporation created or organized under the laws of the United States or any political subdivision thereof or therein, - an estate the income of which is subject to U.S. Federal income tax regardless of its source, - a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and (b) one or more United States trustees have the authority to control all substantial decisions of the trust or - any person or entity whose worldwide income or gain is otherwise subject to U.S. federal income tax on a net income basis. Classification of Series A Preferred Stock The characterization of an instrument as debt or equity is a factual determination the outcome of which cannot be predicted with certainty. It is the opinion of legal counsel that, although the issue is not free from doubt, it is more likely than not that the Series A Preferred Stock constitutes equity rather than debt for U.S. Federal income tax purposes. The tax consequences set forth below are determined in reliance upon, and are subject to, the correctness of this opinion. Series A Preferred Stock Dividends Distributions on the Series A Preferred Stock will constitute dividends to the extent they are paid from current or accumulated earnings and profits of the Company (as determined under U.S. federal income tax principles). Since the Contingent Warrants are not separable from the Series A Preferred Stock until the later of the Contingent Warrant Release Date and the Separation Date, the Company intends to treat the Contingent Warrants as a distribution with respect to the Series A Preferred Stock on each applicable Contingent Warrant Release Date. Thus, the fair market value of the Contingent Warrants, if any, distributed on each applicable Contingent Warrant Release Date will be a taxable distribution to holders of the Series A Preferred Stock. Such amount will also be the initial tax basis of the Contingent Warrants for U.S. federal income tax purposes. In addition to the amount of cash and Contingent Warrants received, a U.S. Holder may be treated as having received an annual distribution, taxable as a dividend to the extent of current or accumulated earnings and profits of the Company, in an amount equal to the annual accrual of the difference between the issue price of such Series A Preferred Stock and the redemption price (as discussed below) of such stock (the "Redemption Premium"). Such accrual will be determined 109 115 under a constant yield method that will result in increasing amounts of accruals of income over the accrual period. The accrual will not be required, however, if the difference between the issue price of the Series A Preferred Stock and the redemption price of such stock does not exceed a de minimis amount, as determined under principles similar to the principles of Section 1273(a)(3) of the Code. For purposes of determining the Redemption Premium, the Company intends to treat the redemption price as the amount that will be paid upon retirement of the Series A Preferred Stock on September 1, 2009. Legal counsel is unable to render an opinion regarding which possible redemption price must be used in determining the amount of the Redemption Premium, due to the absence of applicable guidance in federal income tax laws and interpretations thereof. Legal counsel has advised the Company that it is reasonable and appropriate to adopt the treatment described in the preceding sentence. The IRS may assert, however, that the Redemption Premium should be determined by using one of the higher redemption prices that apply (1) in the event of an optional redemption by the Company after September 1, 2003 (an "Optional Redemption") or (2) in the event of a mandatory redemption by the Company following a Permitted Senior Notes Offering or a Public Equity Offering (a "Mandatory Redemption"). Legal counsel believes, but as noted above is unable to opine, that using a redemption price applicable to an Optional Redemption to calculate the Redemption Premium is not required because, as of the issue date, redemption pursuant to the Optional Redemption is not more likely than not to occur, as described in Treasury Regulation Section 1.305-5(b)(3). Legal counsel believes, but as noted above is unable to opine, that using a redemption price applicable to a Mandatory Redemption to calculate the Redemption Premium is not required because, under Section 305(c)(1) of the Code and Treasury Regulation Section 1.305-5(b)(2) the Company should not be treated as required to redeem the Series A Preferred Stock "at a specified time," since (1) as of the issue date it is not possible to ascertain the time at which a Mandatory Redemption might occur, if at all, and (2) it is possible that, as of the issue date, the likelihood of a Mandatory Redemption might be regarded as remote. However, despite the language of the Code and Regulation section cited above, the preamble to these regulations contemplates that a redemption triggered by an initial public offering may be treated as non-remote, and the IRS may be successful in making such a contention. The risk to U.S. Holders if such a contention were made by the IRS and sustained by a court is that in this event, the redemption price could be deemed to be as high as 108% of the liquidation preference of the Series A Preferred Stock; the amount of the Redemption Premium, and therefore the amounts of the income accruals described above, would be correspondingly greater than the accruals, if any, determined by the Company; and the income accruals would be required to be taken into account entirely in a period or periods prior to the date on which the Mandatory Redemption is deemed to occur for this purpose. The Company's determination of the amount(s) of any required accruals of Redemption Premium is binding on all U.S. Holders of the Series A Preferred Stock (who may obtain this information from the Company) other than a U.S. Holder that explicitly discloses that its determination of the amounts, if any, of such accruals differs from that of the Company. Such disclosure must be made on a statement attached to the U.S. Holder's timely filed federal income tax return for the taxable year that includes the date the U.S. Holder acquired the Series A Preferred Stock. Each U.S. Holder should consult its own tax advisor concerning the appropriate accruals of Redemption Premium and related disclosure requirements. Any dividends on the Series A Preferred Stock that are not paid in cash will accrue and compound, and will therefore be payable upon the optional or mandatory redemption of the Series A Preferred Stock. The tax treatment of such accruing and compounding dividends ("Accumulated Dividends") is not free from doubt. Under current law, it appears that Accumulated Dividends would not be treated as having been received by holders of the Series A Preferred Stock until such Accumulated Dividends were actually paid in cash (and would then be taxable distributions for U.S. 110 116 federal income tax purposes treated as dividends.) The legislative history to the 1990 amendments to Section 305(c) of the Code, however, grants the IRS authority to issue regulations (possibly with retroactive effect) that would treat such Accumulated Dividends as part of the redemption price of the stock. Due to this legislative history and the absence of any such regulations or other authorities, legal counsel is unable to render an opinion regarding whether Accumulated Dividends must be treated as part of the redemption price of the stock. If the IRS were to contend that Accumulated Dividends must be included in the redemption price of the Series A Preferred Stock and such contention were upheld by a court, the risk to a holder is that such holder would be required to take such Accumulated Dividends into account in determining the amount that constitutes the redemption premium price, as described above. The effect of such treatment would be to treat such holder as having received such Accumulated Dividends as constructive distributions at the time they accrue, rather than at the time they are paid in cash. Until regulations requiring such treatment with respect to Accumulated Dividends are issued, however, the Company intends to take the position that Accumulated Dividends on Series A Preferred Stock need not be treated as received by a holder until such time as such Accumulated Dividends are actually paid to such holder in cash, and will report to the IRS on that basis. To the extent that the amount of (1) any actual distribution (including those of Accumulated Dividends) or (2) any constructive distribution resulting from the accrual of Redemption Premium on the Series A Preferred Stock (including distributions of Contingent Warrants) exceeds the Company's current and accumulated earnings and profits allocable to such distributions (as determined for federal income tax purposes), such distribution will be treated as a return of capital, thus reducing the U.S. Holder's adjusted tax basis in such Series A Preferred Stock. Any such excess distribution that is greater than the U.S. Holder's adjusted tax basis in the Series A Preferred Stock will be taxed as capital gain and will be long-term capital gain if the U.S. Holder's holding period for such Series A Preferred Stock exceeds one year. Dividends Received Deduction Under Section 243 of the Code, corporate U.S. Holders generally will be able to deduct 70% of the amount of any distribution qualifying as a dividend. There are, however, many exceptions and restrictions relating to the availability of such dividends received deduction. Section 246A of the Code reduces the dividends received deduction allowed to a corporate U.S. Holder that has incurred indebtedness "directly attributable" to its investment in portfolio stock. Section 246(c) of the Code requires that, in order to be eligible for the dividends received deduction, a corporate U.S. Holder must, among other things, hold the shares of the Series A Preferred Stock for tax purposes for a minimum of 46 days (91 days in the case of certain preferred stock dividends attributable to a period or periods aggregating in excess of 366 days) during the 90-day period beginning on the date which is 45 days before the date on which such share becomes ex-dividend with respect to such dividend (during the 180-day period beginning on the date which is 90 days before such ex-dividend date in the case of certain preferred stock dividends attributable to a period or periods aggregating in excess of 366 days). A U.S. Holder's holding period for these purposes is suspended during any period in which it has certain options or contractual obligations with respect to substantially identical stock or holds one or more other positions with respect to substantially similar or related property that diminishes the risk of loss from holding the Series A Preferred Stock. No deduction is allowed if the corporate U.S. Holder is under an obligation to make related payments with respect to positions in substantially similar or related property. To the extent the dividends received deduction is allowed, a corporate U.S. Holder's liability, if any, for alternative minimum tax may be increased. 111 117 Under Section 1059 of the Code, a corporate U.S. Holder is required to reduce its tax basis (but not below zero) in the Series A Preferred Stock by the nontaxed portion of any "extraordinary dividend" if such stock has not been held for tax purposes for more than two years before the earliest of the date such dividend is declared, announced, or agreed to. Generally, the nontaxed portion of an extraordinary dividend is the amount excluded from income by operation of the dividends received deduction provisions of Section 243 of the Code. An extraordinary dividend on the Series A Preferred Stock generally would be a dividend that (i) equals or exceeds 5% of the corporate U.S. Holder's adjusted tax basis in the Series A Preferred Stock, treating all dividends having ex-dividend dates within an 85-day period as one dividend or (ii) exceeds 20% of the corporate U.S. Holder's adjusted tax basis in the Series A Preferred Stock, treating all dividends having ex-dividend dates within a 365-day period as one dividend. In determining whether a dividend paid on the Series A Preferred Stock is an extraordinary dividend, a corporate U.S. Holder may elect to substitute the fair market value of the stock for such U.S. Holder's adjusted tax basis for purposes of applying these tests, provided such fair market value is established to the satisfaction of the Secretary of the Treasury as of the day before the ex-dividend date. An extraordinary dividend also includes any amount treated as a dividend in the case of a redemption that is non-pro rata as to all stockholders or in partial liquidation of the Company or which would not have been treated as a dividend if any options had not been taken into account under Section 318(a)(4) of the Code or Section 304(a) of the Code had not applied, regardless of the stockholder's holding period and regardless of the size of the dividend. If any part of the nontaxed portion of an extraordinary dividend is not applied to reduce the U.S. Holder's tax basis as a result of the limitation on reducing such basis below zero, such part will be treated as capital gain and will be recognized in the taxable year in which the extraordinary dividend is received. Special rules exist with respect to extraordinary dividends for "qualified preferred dividends." A qualified preferred dividend is any fixed dividend payable with respect to any share of stock which (i) provides for fixed preferred dividends payable not less frequently than annually and (ii) is not in arrears as to dividends at the time the U.S. Holder acquired such stock. A qualified preferred dividend does not include any dividend payable with respect to any share of stock if the actual rate of return of such stock exceeds 15%. Section 1059 does not apply to qualified preferred dividends if the corporate U.S. Holder holds the stock with respect to which the dividends are paid for more than five years. If the U.S. Holder disposes of such stock before it has been held for more than five years, the amount subject to extraordinary dividend treatment with respect to qualified preferred dividends is limited to the excess of the actual rate of return over the stated rate of return. Actual or stated rates of return are the actual or stated dividends expressed as a percentage of the lesser of (1) the U.S. Holder's adjusted tax basis in such stock or (2) the liquidation preference of such stock. Disposition of Preferred Stock A U.S. Holder's adjusted tax basis in the Series A Preferred Stock will, in general, be the U. S. Holder's initial tax basis of such Series A Preferred Stock increased by the Redemption Premium, if any, previously included in income by the U.S. Holder. A corporate U.S. Holder's tax basis may be further adjusted by the extraordinary dividend provisions discussed above. Upon the sale or other disposition of Series A Preferred Stock (other than by redemption), a U.S. Holder will generally recognize capital gain or loss equal to the difference between the amount realized upon the disposition and the adjusted tax basis of the Series A Preferred Stock. Such gain or loss will be capital gain or loss and will be long-term capital gain or loss if at the time of sale, exchange, or other disposition the Series A Preferred Stock has been held for more than one year. The deductibility of capital losses is subject to limitations. 112 118 The treatment of a particular redemption of Series A Preferred Stock by the Company as (1) a dividend or (2) an exchange depends upon whether the redemption meets one of the alternative requirements for exchange treatment that are enumerated in Section 302(b) of the Code. Specifically, in the opinion of legal counsel, a redemption will be treated as an exchange under Section 302(b), and therefore not as a dividend, if after giving effect to the constructive ownership rules of Section 302(c) and Section 318 of the Code, the redemption: (1) represents a "complete termination" of the redeeming U.S. Holder's stock interest in the Company; or (2) is treated as "substantially disproportionate" with respect to the redeeming U.S. Holder by virtue of meeting a specific ownership reduction requirement set forth in Section 302(b) of the Code; or (3) is treated as "not essentially equivalent to a dividend" under standards set forth in a number of court decisions and IRS revenue rulings. Whether a particular redemption satisfies one of these three alternative requirements depends upon the amount of the redeeming U.S. Holder's ownership of shares of stock, the extent of the reduction in such ownership of shares resulting from that redemption and any other redemptions that are effected at the same time or as part of the same plan, and, in some cases, other factors particular to the redeeming U.S. Holder. Consequently, this determination can be made only at the time of, and with respect to, each particular redemption. Whether either of the first two requirements is satisfied at that time generally should be clearly determinable at that time based upon whether the shareholder's actual and constructive ownership before and after the redemption meets, or does not meet, ownership standards expressly set forth in federal income tax law, as referred to above. If neither such alternative requirement is satisfied, there may be uncertainty regarding whether a particular redemption is "not essentially equivalent to a dividend," as more particularly described below in the last paragraph under this heading, "Disposition of Preferred Stock." If a redemption is treated as a sale or exchange because it satisfies one of these three alternative requirements, a U.S. Holder will generally recognize capital gain or loss as described above, except to the extent that the redemption price includes dividends which have been declared but not paid prior to the redemption, which will be treated as dividends as described above. If a redemption of shares of the Series A Preferred Stock does not satisfy any of these three alternative requirements, it will be treated as a dividend with respect to a particular U.S. Holder to the extent of the Company's current or accumulated earnings and profits. In this event, such U.S. Holder (i) will not recognize any loss on the redemption, and (ii) will recognize dividend income (rather than capital gain) in an amount equal to its proportionate share of the Company's current or accumulated earnings and profits. Under the constructive ownership rules of Section 318 of the Code, a U.S. Holder of a Warrant will be treated as owning the Common Stock which would be received pursuant to the exercise of such Warrant. Accordingly, a redemption of Series A Preferred Stock could not, standing alone, satisfy the "complete termination" test if the U.S. Holder owns Warrants before and after the redemption, but could satisfy such test if the U.S. Holder does not own Warrants or any other stock interest (including through constructive ownership) after the redemption. A redemption will be "not essentially equivalent to a dividend" as to a particular U.S. Holder if it results in a "meaningful reduction" in such U.S. Holder's interest in the Company (after application of the constructive ownership rules of Section 318 of the Code). The determination whether a "meaningful reduction" occurs will be required only if a particular redemption fails to satisfy either of the other two tests. In many cases, the application of this meaningful reduction test will produce an uncertain result because the relevant principles established in judicial decisions and IRS rulings have been applied only in specific factual situations, and there is no authority that specifies how they should apply in different factual situations not specifically addressed in a case or ruling. 113 119 Information Reporting and Backup Withholding A noncorporate U.S. Holder of Series A Preferred Stock may be subject to backup withholding at a 31% rate with respect to "reportable payments", which include dividends (including any accrual of Redemption Premium) paid on Series A Preferred Stock or the proceeds of a sale or exchange of the Series A Preferred Stock. The payor of any reportable payments will be required to deduct and withhold 31% of such payments if: - the payee fails to furnish a correct Taxpayer Identification Number (a "TIN") to the payor in the prescribed manner; - the IRS notifies the payor that the TIN furnished by the payee is incorrect; - the payee has failed properly to report the receipt of certain reportable payments and the IRS has notified the payor that backup withholding is required; or - the payee fails to certify under penalties of perjury that such payee is not subject to backup withholding. If any one of these events occurs with respect to a U.S. Holder of Series A Preferred Stock, the payer of any reportable payment will be required to withhold 31% of any such reportable payments with respect thereto. Any amount withheld from a payment to a U.S. Holder under the backup withholding rules will be allowed as a refund or credit against such holder's U.S. federal income tax liability, so long as the required information is provided to the IRS. The payer of any reportable payment generally will report to a U.S. Holder of Series A Preferred Stock and to the IRS the amounts of any reportable payments made in respect to the Series A Preferred Stock for each calendar year and the amount of tax withheld, if any, with respect to such payments. NON-U.S. HOLDERS The opinions above are applicable only to U.S. Holders. The Series A Preferred Stock may not be an appropriate investment for persons other than U.S. Holders ("Non-U.S. Holders"), since dividends on the Series A Preferred Stock (whether paid in cash or in-kind) generally will be subject to the withholding of U.S. Federal income tax at a 30% rate (or lower applicable treaty rate, subject to applicable requirements, including the requirement to provide specified documentation of foreign status). Tax consequences for Non-U.S. Holders, if any, may differ if their investment in Series A Preferred Stock is treated as effectively connected with their conduct of a trade or business within the United States. The tax consequences to Non-U.S. Holders may be complex and in some cases, adverse, and are not described herein except to the limited extent set forth in this paragraph. Persons who are Non-U.S. Holders should consult their own tax advisors prior to acquiring Series A Preferred Stock. THE EFFECTS OF THE TAX RULES DESCRIBED ABOVE ON A PARTICULAR U.S. HOLDER MAY DIFFER DEPENDING UPON THAT HOLDER'S FACTUAL CIRCUMSTANCES AT THE TIME OF ANY DISTRIBUTION, REDEMPTION OR OTHER TRANSACTION. FOR EXAMPLE, THE TREATMENT OF A PARTICULAR REDEMPTION OF SERIES A PREFERRED STOCK AS AN EXCHANGE OR A DIVIDEND WILL DEPEND UPON THE PARTICULAR U.S. HOLDER'S STOCK OWNERSHIP BEFORE AND AFTER THE REDEMPTION, TAKING INTO ACCOUNT STOCK OWNED AND DEEMED TO BE OWNED BY THAT U.S. HOLDER UNDER THE APPLICABLE CONSTRUCTIVE OWNERSHIP RULES OF THE CODE. FOR THIS REASON, PROSPECTIVE PURCHASERS OF SERIES A PREFERRED STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION TO THEIR PARTICULAR SITUATIONS OF THE U.S. FEDERAL INCOME TAX LAWS SET FORTH ABOVE. PROSPECTIVE PURCHASERS OF SERIES A PREFERRED STOCK ARE ALSO URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION TO THEM OF THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION. 114 120 PLAN OF DISTRIBUTION The Company will not receive any proceeds from any sale of Preferred Shares by any Selling Stockholder. Preferred Shares may be sold from time to time by Selling Stockholders pursuant hereto in brokers' transactions, in transactions with market makers, in block placements, or otherwise, at market prices prevailing at the time of the sale or at prices otherwise negotiated. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such Preferred Shares. Any broker-dealer that participates in a distribution of such Preferred Shares and other participating broker-dealers and the Selling Stockholders may be deemed to be "underwriters" within the meaning of the Securities Act, and any profit of any such resale of Preferred Shares and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. If required, the Company will amend this Prospectus to update the selling stockholder information required by Item 507 of Regulation S-K. The Preferred Shares may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale, or at negotiated prices. Such sales may be effected in transactions (which may involve block transactions) (i) on any national securities exchange or quotation service on which the Preferred Shares may be listed or quoted at the same time of the sale, (ii) in the over-the-counter market, (iii) in transactions otherwise than on such exchanges or services or in the over-the-counter market, or (iv) through the writing of options. In connection with sales of the Preferred Shares or otherwise, the Selling Stockholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the Preferred Shares in the course of hedging in positions they assume. The Selling Stockholders may also sell Preferred Shares short and deliver Preferred Shares to close out short positions, or loan or pledge Preferred Shares to broker-dealers that in turn may sell such Preferred Shares. The Company does not intend to apply for listing of the Preferred Shares on any securities exchange. Accordingly, no assurance can be given as to the development of liquidity or any trading market for the Preferred Shares. There can be no assurance that any Selling Stockholder will sell any or all of the Preferred Shares registered pursuant to the registration statement of which this Prospectus forms a part (the "Registration Statement"). In addition, any Preferred Shares covered by the Registration Statement of which this Prospectus forms a part that qualify for sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under Rule 144 or Rule 144A rather than pursuant to this Prospectus. The Selling Stockholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation Regulation M which may limit the timing of purchases and sales of any of the Preferred Shares by the Selling Stockholders and any other such person. Furthermore, Regulation M of the Exchange Act may restrict the ability of any person engaged in the distribution of the Preferred Shares to engage in market-making activities with respect to the particular Preferred Shares being distributed for a period of up to five business days prior to the commencement of such distribution. All of the foregoing may affect the marketability of the Preferred Shares and the ability of any person or entity to engage in market-making activities with respect to the Preferred Shares. To comply with the securities laws of certain jurisdictions, if applicable, the Preferred Shares will be offered or sold in such jurisdictions only through registered or licensed brokers or dealers. In 115 121 addition, in certain jurisdictions the Preferred Shares may not be offered or sold unless they have been registered or qualified for sale in such jurisdictions or an exemption from registration or qualification is available and is complied with. The Company intends to maintain the effectiveness of the Registration Statement for two (2) years (or, if earlier, until the date that all Preferred Shares covered hereby are sold by the Selling Stockholders pursuant hereto). Notwithstanding the foregoing, if counsel to the Company determines in good faith that it is reasonable to conclude that compliance with the Company's disclosure obligations in connection with the Registration Statement may require the disclosure of information that the Board of Directors has identified as material and that the Board of Directors has determined that the Company has a bona fide business purpose for preserving as confidential, then the Company shall not be required to maintain the effectiveness of the Registration Statement or amend or supplement the Registration Statement for a period (an "Information Delay Period") expiring three (3) business days after the earliest to occur of (i) the date on which such material information is disclosed to the public or ceases to be material or the Company is able to so comply with its disclosure obligations and Commission requirements or (ii) 45 days after the Company notifies the Selling Stockholders of such good faith determination. There may be no more than four (4) Information Delay Periods prior to the Expiration Date and no more than two (2) Information Delay Periods during any contiguous 135 day period. The Company is required to provide notice of any such Information Delay Period. Upon receiving such notice and until the expiration of the Information Delay Period, the Selling Stockholders must immediately discontinue disposition of Preferred Shares pursuant hereto and immediately discontinue distribution hereof. The Company has agreed to pay all expenses incident to the registration of the Preferred Shares for resale by the Selling Stockholders other than the expenses of counsel for the Selling Stockholders and commissions or concessions of any brokers or dealers, and will indemnify the Selling Stockholders against certain liabilities, including liabilities under the Securities Act. 116 122 SELLING STOCKHOLDERS The following table provides certain information with respect to the Preferred Shares held of record by each Selling Stockholder. No Selling Stockholder holds shares of Common Stock of the Company. The Preferred Shares may be offered from time to time by any of the Selling Stockholders. Because the Selling Stockholders may sell all or any part of their shares pursuant to this Prospectus, no estimate can be given as to the number of shares that will be held by each Selling Stockholder upon termination of this offering. See "Plan of Distribution".
Number of Preferred Shares Owned Prior to this Offering Name and Number of Preferred Shares That May Be Sold in this Offering - ---- ---------------------------------------------------------------- Putnam Investments Funds: VT High Yield Fund........................................ 4,083 High Yield Managed Trust.................................. 1,623 Putnam High Yield Fixed Income Trust...................... 362 Abbott Laboratories Annuity Retirement Plan............... 227 High Yield Fixed Income Fund.............................. 21 Ameritech Fund............................................ 527 Putnam High Yield Total Return............................ 383 Putnam High Yield Trust II................................ 3,877 Central States-High Yield................................. 1,168 Putnam Managed High Yield Trust........................... 382 Putnam High Yield Advantage............................... 10,337 Putnam High Yield Trust................................... 13,191 Goldman, Sachs & Co......................................... 5,169
Goldman, Sachs & Co. acted as an Initial Purchaser in the Initial Offering, for which it received customary fees, and it may receive additional fees after the date of this Prospectus in connection with investment banking services it may provide to the Company. Goldman Sachs Credit Partners L.P., an affiliate of Goldman, Sachs & Co., is a lender under the New Revolving Credit Facility. See "Description of Certain Indebtedness -- New Revolving Credit Facility." VALIDITY OF THE SECURITIES The validity of the Preferred Shares will be passed upon for the Company by Hale and Dorr LLP, Boston, Massachusetts. INDEPENDENT ACCOUNTANTS The financial statements of the Company as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997 included in this Prospectus have been audited by PricewaterhouseCoopers LLP, independent accountants, as stated in their report appearing herein. 117 123 GLOSSARY 1+ OUTBOUND SERVICE -- Standard, self-dialed long distance telephone service. "500 NUMBER" TECHNOLOGY -- A non-geographic area code system that allows for "follow me" services. ACCESS CHARGES -- The fees paid by long distance carriers to LECs for originating and terminating long distance calls on their local networks. ADVANCED INTELLIGENT NETWORK (AIN) -- A network architecture with three basic elements: (1) Signal Control Points (SCPs) -- computers that hold databases in which customer-specific information is stored for use by the network to route calls; (2) Signal Switching Points (SSPs) -- digital telephone switches that can communicate with SCPs and ask them for customer-specific instructions as to how a call should be completed; and (3) Signal Transfer Points (STPs) -- packet switches that shuttle messages between SSPs and SCPs. AMERICAS 1 -- A submarine telecommunications cable system linking the United States and several Caribbean and South American countries. AUTOMATIC NUMBER IDENTIFICATION (ANI) -- The delivery of the calling party's number by a LEC for billing or routing purposes and the subsequent delivery of such number of end users. BANDWIDTH -- The number of bits of information that can move through a communications medium in a given amount of time; the capacity of a telecommunications circuit or network to carry voice, data and video information. BUNDLED SERVICES -- Services for which a carrier must pay one all-inclusive charge for switching, transmission, LEC access, and other charges. CALL DETAIL RECORD (CDR) -- A paper or electronic record of the time, duration, and points of origination and termination of a telephone call, made and kept primarily for billing purposes. CATVS (COMMUNITY ANTENNA TELEVISION OR CABLE TELEVISION) -- Cable television service providers. CENTREX -- A trademarked name for an ILEC service that offers direct dialing within a given phone system, direct dialing of incoming calls and automatic identification of outbound calls. This service simulates, through equipment located centrally, the features of a dedicated switching system located within an office building (a so-called Private Branch Exchange or PBX). CO-CARRIER STATUS -- A relationship between CLECs that affords equal access to and rights on each other's networks, and that provides access and services on an equal basis. COLLOCATION -- The physical or virtual connection of a telecommunications carrier's equipment with a given LEC's system to facilitate the interconnection of their respective switching/routing equipment. COMMERCIAL MOBILE RADIO SERVICE (CMRS) -- The FCC's term for certain wireless telecommunication services, provided on a commercial basis, including cellular telephone service and personnel communications services. COMMUNICATIONS ACT -- The Communications Act of 1934, 47 U.S.C. sec. 151 et seq., as amended. COMPETITIVE ACCESS PROVIDER (CAP) -- A company that provides its customers with an alternative to the local exchange company for local transport of private line and special access services, and interstate transport of switched access telecommunications services. COMPETITIVE LOCAL EXCHANGE CARRIER (CLEC) -- A company that provides its customers an alternative to the local telephone carrier for local transport of private line, special access and switched local access telecommunications services. G-1 124 CONTRACT TARIFFS -- Contractually prescribed rates for telecommunications services, generally set forth on a per minute basis by place of termination of call, and filed with a state or federal regulatory agency. DEDICATED ACCESS LINES -- Telecommunications lines dedicated or reserved for use exclusively by particular customers along predetermined routes (in contrast to telecommunications lines within a LEC's public, switched network). DIALING PARITY -- The ability to reach a given termination point by dialing the same telephone number, or same number of digits, through any provider of telecommunication services. DSO, DS1, DS3 AND E1 SPEEDS -- Standard telecommunications industry signal formats which are distinguishable by bit rate (the number of binary digits (0 and 1) transmitted per second). FACILITIES-BASED PROVIDER -- A telecommunications company that carries all or a portion of its traffic over its own network infrastructure, including switching facilities and/or transport facilities; distinguished from a company that carriers traffic solely over leased infrastructure elements. There is no industry consensus on what constitutes a facilities-based carrier and the FCC and state regulatory agency definitions vary accordingly. FCC -- United States Federal Communications Commission. FGD (FEATURE GROUP D) -- A trunk-side LATA access affording call supervision to an interexchange carrier (IXC), a uniform access code, optional calling-party identification, recording of access-charge billing details, and presubscription to a customer-specified IXC. FGD also provides automatic number identification (ANI) for billing purposes. FILE TRANSFER PROTOCOL (FTP) -- A service that supports file transfer between local and remote computers. "FOLLOW ME" NUMBERS -- "Smart" telephone numbers that, through number translation and computer switching, can be used to reach a person among various possible locations (e.g., home, office, etc.). FRAME RELAY SERVICE -- A high-speed data packet switching service used to transmit data between computers. HUNT SEQUENCING -- A series of telephone lines organized in such a way that if the first line is busy the next line is hunted and so on until a free line is found. INCUMBENT LOCAL EXCHANGE CARRIERS (ILEC) -- Companies providing local telephone services that were historically the sole local provider in their respective regions, including RBOCs. INDEFEASIBLE RIGHT OF USE ("IRU") -- An unconditional right to use a facility, such as a fiber optic filament or right of way; this right is created by contract and confers upon the holder certain indicia of ownership, while leaving legal title in the hands of the grantor. INTELLIGENT NETWORK -- See "AIN", above. INTEGRATED COMMUNICATIONS PROVIDER (ICP) -- A telecommunications carrier that provides packaged or integrated services from among a broad range of categories, including local exchange, long distance, enhanced data, cable TV, and other communications services. INTEGRATED SERVICES DIGITAL NETWORK (ISDN) -- A transmission method that provides circuit-switched access to a public network at high speeds for voice, data and video transmission. INTERCONNECTION AGREEMENT -- A contract between an ILEC and CLEC for the interconnection of the two networks and CLEC access to the ILEC's unbundled network elements and resale of the ILEC's services. Such an agreement sets out the financial and operational aspects of such interconnection and access. G-2 125 INTERCONNECTION ORDERS -- Rulings by the FCC announced in August 1996 that implemented the local competition provisions of the Telecommunications Act and that require ILECs to provide interconnection to any CLEC, seeking such interconnection. INTEREXCHANGE CARRIER (IXC) -- A telecommunications company that provides telecommunications services between local exchanges on an interstate or intrastate basis. INTER-LATA SERVICE -- Telecommunications services originating in one LATA and terminating in another. INTERNATIONAL GATEWAY SWITCH -- A switch that routes international telecommunications traffic. INTERNET PROTOCOL (IP) -- Network protocols that allow computers with different architectures and operating system software to communicate with other computers on the Internet. INTERNET SERVICE PROVIDER (ISP) -- A vendor who provides access for customers to the Internet and the World Wide Web. INTRA-LATA SERVICE -- Telecommunications services originating and terminating in the same LATA. LOCAL ACCESS AND TRANSPORT AREA (LATA) -- A geographic area established by the MFJ within which a former Bell System local exchange carrier offers switched telecommunications services, including long distance services. The MFJ established approximately 200 LATAs in the United States. The term is primarily of historical significance since the enactment of the Telecommunications Act. LOCAL EXCHANGE -- A geographic area determined by the appropriate state regulatory authority in which calls generally are transmitted without toll charges to the customer. LOCAL EXCHANGE CARRIER (LEC) -- A telecommunications company that provides telecommunications services in a geographic area in which calls generally are transmitted without toll charges. LECs include both RBOCs and CLECs. LOCAL MULTIPORT DISTRIBUTION SERVICE (LMDS) -- Digital wireless service licensed by the FCC in the 28-30 GHz frequency band. LOCAL NUMBER PORTABILITY (LNP) -- The ability of an end user to retain a given telephone number upon changing local telephone service providers. LOOPS -- Circuits that connect end users to telecommunications switching equipment. MODIFIED FINAL JUDGMENT (MFJ) -- The consent decree resulting from United States v. AT&T that effected the breakup of AT&T and the separation of its local and long distance businesses. MULTICHANNEL MULTIPOINT DISTRIBUTION SERVICE (MMDS) -- A one-way domestic public radio service rendered on microwave frequencies from a fixed station transmitting to multiple receiving facilities located at fixed points. MULTIPLEXING -- An electronic or optical process that combines a number of lower speed transmission lines into one high-speed line in order to maximize capacity. NETWORK -- A web of telecommunications equipment, including switches and lines, over which telecommunications traffic can be transmitted. NETWORK OPERATIONS CENTER -- The central office from which the Company manages its network. NODE -- A point on a network at which a router and user access equipment are located. NPI -- Network Plus, Inc., a wholly owned operating subsidiary of Network Plus Corp. ON-NET TRAFFIC -- Customer traffic that is switched by one or more of the Company's switches; such traffic may be transported on third-party facilities. G-3 126 OFF-NET TRAFFIC -- Customer traffic that is neither switched nor transported on the Company's network; such traffic is carried entirely on third-party facilities. OPERATIONAL SUPPORT SYSTEM (OSS) -- The Company's methods, procedures and software that directly support the daily operations of its telecommunications infrastructure. PEERING -- The commercial practice under which ISPs exchange each other's traffic without the payment of settlement charges. Peering occurs at both public and private exchange points. PERCENTAGE ALLOCATION ROUTING -- An 800 Service that allows a customer to route pre-selected percentages of calls from each originating routing group (typically an area code) to two or more answering locations. Allocation percentages may be further dictated based on the day of the week, time of day, etc. PERSONAL COMMUNICATIONS SERVICE (PCS) -- A type of wireless telephone system licensed by the FCC that uses light, inexpensive handheld sets and communicates via low-powered antennas. POINT OF PRESENCE (POP) -- The location at which a long distance carrier has installed transmission equipment in a service area that serves as, or relays calls to, a network switching center of that long distance carrier. PRIVATE LINE -- A private, dedicated telecommunications line connecting different point-to-point locations (excluding long distance carrier POPs). PROVISIONING -- The act of supplying telecommunications services to a user, including all associated transmission, fiber and equipment. PUBLIC SWITCHED TELEPHONE NETWORK (PSTN) -- That portion of a local exchange company's network available to all users generally on a shared basis (i.e., not dedicated to a particular user). Traffic along the PSTN is generally switched at the LECs central offices. PUBLIC UTILITY COMMISSION (PUC) -- A state regulatory commission, existing in most states, that regulates public utilities, including telecommunications companies providing intrastate services. REGIONAL BELL OPERATING COMPANIES (RBOCS) -- The regional local telephone holding companies established by the MFJ that effected the breakup of AT&T, and which generally had a monopoly on local telephone service in their respective areas prior to the enactment of the Telecommunications Act. ROUTING -- The process by which sophisticated computer switching equipment directs a call from its point of origination to its point of termination. Intelligent routing capabilities include time-of-day, day-of-week, and day-of-year routing, which direct calls to varying termination points based on specified computer instructions; and least cost routing, which chooses the most cost-efficient route available. SIGNALLING SYSTEM SEVEN (SS7) -- An advanced signaling protocol that helps optimize a network's efficiency through intelligent out-of-band routing decisions. SIGNALLING TRANSFER POINT -- The signalling facility through which SS7 messages must pass as they are transmitted to their points of termination. SWITCH -- A sophisticated computer that (a) routes telecommunications transmissions by selecting the paths or circuits to be used for the transmission of information and (b) establishes a connection. Switches allow telecommunications service providers to connect calls to their destinations while providing advanced features and recording connection information for future billing. SWITCHED ACCESS SERVICE -- The origination or termination of long distance traffic between a customer's premises and a long distance carrier's POP via shared local trunks using a local switch. SWITCHED TRAFFIC -- Telecommunications traffic along a switched network. G-4 127 TAT 12/13 RIOJA -- A transatlantic submarine telecommunications cable linking the United States and Europe. TELECOMMUNICATIONS ACT -- The federal Telecommunications Act of 1996, 47 U.S.C. sec. 230 et seq. TERMINATION POINT -- The destination point of a telephone call. TPC-5 -- A transpacific submarine telecommunications cable system linking the United States and East Asia. TRUNK LINE SERVICE -- A service that combines multiple channels with unrestricted access in such a manner that user demands for channels are automatically "queued" and then allocated to the first available channels. UNBUNDLED ACCESS -- Access to unbundled elements of a telecommunications services provider's network including network facilities, equipment, features, functions and capabilities, at any technically feasible point within such network. UNBUNDLED NETWORK ELEMENTS (UNE) -- The various portions of an ILECs network that a CLEC can lease for purposes of building a facilities-based competitive network, including copper lines, fiber, central office collocation space, interoffice transport, operational support systems, local switching and rights of way. VIRTUAL PRIVATE NETWORK (VPN) -- A service that establishes a software-derived network offering the appearance, functionality and usefulness of a dedicated private network. WIRELESS COMMUNICATIONS SERVICE -- A generic term for telecommunications services transmitted by radio signal, as opposed to those sent over fiber optic or copper lines. G-5 128 NETWORK PLUS CORP. FINANCIAL STATEMENTS INDEX TO FINANCIAL STATEMENTS
PAGE ---- 1997 FINANCIAL STATEMENTS OF NETWORK PLUS, INC. Report of Independent Accountants......................... F-2 Balance Sheets as of December 31, 1997 and 1996........... F-3 Statements of Operations and Retained Earnings for the Years Ended December 31, 1997, 1996 and 1995........... F-4 Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.................................... F-5 Notes to Financial Statements............................. F-6 UNAUDITED SEPTEMBER 30, 1998 INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF NETWORK PLUS CORP. Balance Sheets as of September 30, 1998 and December 31, 1997................................................... F-17 Statements of Operations for the Three Months and Nine Months Ended September 30, 1998 and 1997............... F-18 Statement of Stockholders' Equity (Deficit) for the Nine Months Ended September 30, 1998........................ F-19 Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997............................ F-20 Notes to Unaudited Interim Financial Statements........... F-21
On July 15, 1998, Network Plus Corp. (the "Company") was incorporated in the state of Delaware. The stockholders of Network Plus, Inc. contributed 100% of their shares to the Company in return for 10,000,000 shares of the Company's common stock. Accordingly, Network Plus, Inc. became a wholly-owned subsidiary of the Company. The principal operations of the Company have been to issue stock options, preferred stock and warrants. Through September 30, 1998, Network Plus, Inc. remains the only operating entity of the Company. For periods prior to the formation of the Company, the financial statements reflect the financial statements of Network Plus, Inc., as it was the sole operating entity. F-1 129 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Network Plus Corp.: In our opinion, the accompanying balance sheets and the related statements of operations and retained earnings and of cash flows present fairly, in all material respects, the financial position of Network Plus, Inc., a wholly owned subsidiary of Network Plus Corp., at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts June 24, 1998, except for the information in Notes 12 and 15, for which the dates are July 15, 1998 and September 3, 1998, respectively F-2 130 NETWORK PLUS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, ------------------ 1997 1996 ------- ------- ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 1,502 $ 2,241 Accounts receivable, net of allowance for doubtful accounts of $926 and $850, respectively................ 16,927 14,974 Marketable securities..................................... 65 62 Investments............................................... 9,500 2,093 Prepaid expenses.......................................... 415 308 Other current assets...................................... 112 93 ------- ------- Total current assets.............................. 28,521 19,771 PROPERTY AND EQUIPMENT, NET................................. 6,957 3,075 OTHER ASSETS................................................ 103 69 ------- ------- TOTAL ASSETS...................................... $35,581 $22,915 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable.......................................... $17,445 $14,023 Accrued liabilities....................................... 2,245 1,934 Revolving line of credit.................................. 4,510 2,000 Notes payable to stockholders............................. 1,755 -- Current portion of debt and capital lease obligations..... 5,694 193 ------- ------- Total current liabilities......................... 31,649 18,150 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS................ 3,623 664 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Common stock, $.01 par value, 20,000,000 shares authorized, 10,000,000 shares issued and outstanding... 100 100 Additional paid-in capital................................ 183 183 Retained earnings......................................... 26 3,818 ------- ------- Total stockholders' equity........................ 309 4,101 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $35,581 $22,915 ======= =======
The accompanying notes are an integral part of the financial statements. F-3 131 NETWORK PLUS, INC. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Revenue............................................ $ 98,209 $ 75,135 $ 49,024 Operating expenses Costs of services................................ 78,106 57,208 35,065 Selling, general and administrative expenses..... 25,704 19,230 17,697 Depreciation and amortization.................... 994 533 276 ---------- ---------- ---------- 104,804 76,971 53,038 ---------- ---------- ---------- Operating loss..................................... (6,595) (1,836) (4,014) Other income (expense) Interest and dividend income..................... 86 95 202 Interest expense................................. (557) (313) (40) Other income, net................................ 3,917 3,529 7,859 ---------- ---------- ---------- 3,446 3,311 8,021 ---------- ---------- ---------- Income (loss) before state income taxes............ (3,149) 1,475 4,007 Provision for state income taxes................... 42 60 312 ---------- ---------- ---------- Net income (loss).................................. $ (3,191) $ 1,415 $ 3,695 ========== ========== ========== Retained earnings, beginning....................... 3,818 3,639 1,834 Distributions to stockholders...................... (601) (1,237) (1,890) ---------- ---------- ---------- Retained earnings, ending.......................... $ 26 $ 3,818 $ 3,639 ========== ========== ========== Net income (loss) per share -- basic and diluted... $ (0.32) $ 0.14 $ 0.37 ========== ========== ========== Weighted average shares outstanding -- basic and diluted.......................................... 10,000,000 10,000,000 10,000,000 ========== ========== ========== Pro forma data (unaudited): Historical income (loss) before income taxes....... $ (3,149) $ 1,475 $ 4,007 Pro forma provision (credit) for income taxes...... (1,094) 607 1,601 ---------- ---------- ---------- Pro forma net income (loss)........................ $ (2,055) $ 868 $ 2,406 ========== ========== ========== Pro forma net income (loss) per share -- basic and diluted.......................................... $ (0.21) $ 0.09 $ 0.24 ========== ========== ==========
The accompanying notes are an integral part of the financial statements. F-4 132 NETWORK PLUS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- Cash flows from operating activities: Net income (loss)......................................... $(3,191) $ 1,415 $ 3,695 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization.......................... 994 533 276 Provision for losses on accounts receivable............ 4,104 1,102 887 Amortization of AT&T credits........................... -- (1,810) (2,436) Valuation of Tel-Save common stock warrants received as consideration........................................ (3,837) (2,093) -- Gain on sale of Tel-Save common stock.................. -- (1,367) -- (Increase) decrease in assets: Accounts receivable.................................. (6,059) (1,584) (7,967) Prepaid expenses..................................... (107) (218) (60) Other current assets................................. (19) 11 198 Other long-term assets............................... (34) (13) 484 (Decrease) increase in liabilities: Accounts payable..................................... 8,022 4,146 6,727 Accrued liabilities.................................. 311 (438) 659 ------- ------- ------- Net cash provided by (used for) operating activities...................................... 184 (316) 2,463 Cash flows from investing activities: Proceeds from sale of fixed assets..................... 9 -- -- Proceeds from sale of fixed assets to affiliate........ -- 34 535 Capital expenditures................................... (3,363) (2,135) (860) Exercise of Tel-Save common stock warrants received as consideration........................................ (3,570) (2,800) -- Proceeds from sale of Tel-Save common stock............ -- 4,167 -- Purchase of marketable securities...................... (3) (3) -- Proceeds from sale of marketable securities............ -- 90 141 ------- ------- ------- Net cash used for investing activities............ (6,927) (647) (184) Cash flows from financing activities: Net proceeds from line of credit....................... 2,510 2,000 -- Proceeds from note payable............................. -- 1,000 -- Proceeds from notes payable to stockholders............ 1,755 -- -- Proceeds from sale and leaseback of fixed assets....... 3,450 -- -- Payments on debt and capital lease obligations......... (1,110) (167) (13) Distributions to stockholders.......................... (601) (1,237) (1,890) ------- ------- ------- Net cash provided by (used for) financing activities...................................... 6,004 1,596 (1,903) ------- ------- ------- Net increase (decrease) in cash............................. (739) 633 376 Cash at beginning of year................................... 2,241 1,608 1,232 ------- ------- ------- Cash at end of year......................................... $ 1,502 $ 2,241 $ 1,608 ======= ======= ======= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest............................................. $ 498 $ 298 $ 40 ======= ======= ======= Income taxes......................................... $ 15 $ 243 $ 167 ======= ======= =======
The accompanying notes are an integral part of the financial statements. F-5 133 NETWORK PLUS, INC. NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS ACTIVITY Network Plus, Inc. (the "Company"), a wholly-owned subsidiary of Network Plus Corp. (see Note 12), is a switch-based carrier and switchless reseller of long distance telecommunications services, principally to small and medium-sized businesses in the Northeastern and Southeastern regions of the United States. Revenues are derived from the sale of domestic and international telephone services, calling cards, debit cards and paging services. All revenues are billed and collected in U.S. dollars. The Company operates two telephony switches, located in Quincy, Massachusetts and Orlando, Florida, and contracts with Sprint Communications Company, LP ("Sprint") to provide switching and dedicated voice and data services for a portion of the Company's telecommunications traffic. CASH EQUIVALENTS All highly liquid cash investments with maturities of three months or less at date of purchase are considered to be cash equivalents. REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE Telecommunication revenues and accounts receivable are recognized when calls are completed or when services are provided. Accounts receivable include both billed and unbilled amounts, and are reduced by an estimate for uncollectible amounts. Unbilled amounts result from the Company's monthly billing cycles and reflect telecommunications services provided in the 30 days prior to the reporting date. These amounts are billed within 30 days subsequent to the reporting date and are expected to be collected under standard terms offered to customers. Unbilled amounts were $7,594 and $6,310 at December 31, 1997 and 1996, respectively. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. Upon retirement or other disposition of property and equipment, the cost and related depreciation are removed from the accounts and the resulting gain or loss is reflected in earnings. Long-lived assets and identifiable intangibles held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or intangibles may exceed the undiscounted future net cash flow expected to be generated by such assets. If it is determined that impairment has occurred, the asset is written down to fair value as determined by market value or discounted cash flow. CAPITAL LEASES Capital leases, those leases which transfer substantially all benefits and risks of ownership, are accounted for as acquisitions of assets and incurrences of obligations. Capital lease amortization is included in depreciation and amortization expense, with the amortization period equal to the estimated useful life of the assets. Interest on the related obligation is recognized over the lease term at a constant periodic rate. F-6 134 NETWORK PLUS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. COSTS OF SERVICES Costs of services includes costs of origination, transport and termination of on-net and off-net traffic, exclusive of depreciation and amortization. INCOME TAXES Effective March 1, 1992, the Company elected by the consent of its stockholders to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Company does not pay corporate Federal income taxes on its taxable income. Instead, the stockholders are liable for individual income taxes on their share of the Company's taxable income. The Company continues to pay state income taxes in those states that do not fully recognize the Subchapter S provision and states that assess certain franchise taxes. The issuance of the preferred stock (see Note 15) terminated Network Plus Corp.'s election to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Accordingly, these financial statements present, on a pro forma basis, Federal and state income taxes assuming the Company had been a C Corporation for all periods presented. CONCENTRATION OF RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. In addition, risk exists in cash deposited in banks that may, at times, be in excess of FDIC insurance limits. Cash balances are managed daily to reduce revolving credit borrowings. The trade accounts receivable risk is limited due to the breadth of entities comprising the Company's customer base and their dispersion across different industries and geographical regions. The Company evaluates the creditworthiness of customers, as appropriate, and maintains an adequate allowance for potential uncollectible accounts. EARNINGS (LOSS) PER SHARE The Company computes and reports earnings per share in accordance with the provisions of SFAS No. 128, "Earnings Per Share". The computations of basic and diluted earnings (loss) per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities. Potentially dilutive securities include convertible preferred stock, stock options and warrants. There were no potentially dilutive securities outstanding during 1997, 1996 or 1995. Unaudited pro forma net loss per share reflecting the Company's conversion from an S Corporation to a C Corporation is presented using an estimated effective income tax rate of approximately 36% to 40%. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which is effective for fiscal years beginning after December 15, 1997, including interim periods. SFAS 130 F-7 135 NETWORK PLUS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) requires the presentation of comprehensive income and its components. Comprehensive income presents a measure of all changes in equity that result from recognized transactions and other economic events during the period other than transactions with stockholders. The Company will adopt SFAS 130 in the first quarter of 1998 and does not expect comprehensive income to differ from reported net income. In July 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years beginning after December 15, 1997. Interim reporting disclosures are not required in the first year of adoption. SFAS 131 specifies revised guidelines for determining an entity's operating segments and the type and level of operating information to be disclosed. SFAS 131 changes current practice under SFAS 14 by establishing a new framework on which to base segment reporting. The management approach described in SFAS 131 expands the required disclosures for each segment. The Company will adopt SFAS 131 in its year ending December 31, 1998, and has yet to determine the impact of such adoption on the reporting of its results of operations as currently presented. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The Company does not believe that this pronouncement will have a material impact on its business or results of operations. RECLASSIFICATIONS Certain amounts in the financial statements for prior years have been reclassified to conform with the current year presentation. Such reclassifications had no effect on previously reported results of operations. 2. RELATED PARTY TRANSACTIONS In December 1997, the Company's stockholders made loans to the Company totaling $1,755. Interest on the loans accrues at the prevailing prime rate (8.5% at December 31, 1997) and is payable monthly. There is no required period for principal repayment. The loans were repaid in May 1998 and, accordingly, have been classified as a current liability in the accompanying balance sheet. The Company had a service arrangement through May 1997 with a marketing company, the controlling stockholders of which include the Company's stockholders. The marketing company provided services relative to establishing, training and expanding the Company's sales organization. For the years ending December 31, 1997, 1996 and 1995, the amounts paid to the marketing company were $55, $132 and $197, respectively. Office space, located in Quincy, Massachusetts, is leased from a trust, the beneficiaries of which are the stockholders of the Company (see Note 11). The Company makes monthly rental payments of $36. In each of the years ending December 31, 1997, 1996, and 1995, the amount paid to the trust was $431. F-8 136 NETWORK PLUS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 3. MARKETABLE SECURITIES Marketable securities are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------- -------------------- COST FAIR VALUE COST FAIR VALUE ------ ---------- ------ ---------- U.S. obligations.................................. $ 3 $ 3 $ 3 $ 3 Other securities.................................. 62 62 59 59 ------ ------ ------ ------ $ 65 $ 65 $ 62 $ 62 ====== ====== ====== ======
4. INVESTMENTS AND TRANSFER OF CUSTOMERS Investments are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------- -------------------- COST FAIR VALUE COST FAIR VALUE ------ ---------- ------ ---------- Tel-Save warrants................................. $9,500 $9,500 $2,093 $2,093 ====== ====== ====== ======
In 1995, the Company provided long distance services to certain customers ("DNS Customers") pursuant to an AT&T Distributed Network Services Resale Contract (the "DNS Contract"). In June 1995, the Company transferred the DNS Contract to EqualNet Holdings Corp. for cash totaling approximately $8,422, and EqualNet Holdings Corp. became the provider of long distance services to the DNS Customers. Prior to the time of this transaction, there was no value recorded in the financial statements related to the DNS Customers. Concurrent with the transfer of the DNS Contract, the Company's obligations to AT&T pursuant to the DNS Contract were terminated and, accordingly, the $8,422 was recognized as miscellaneous income when received. In a separate transaction in 1995, the Company transferred (the "Transfer") certain customers to whom it provided long distance and toll free telecommunications services pursuant to certain AT&T resale contracts (the "AT&T contracts") to Tel-Save Holdings, Inc. ("Tel-Save"). Concurrent with the Transfer, the Company's obligations to AT&T under the AT&T contracts were terminated without obligation or liability on behalf of the Company. Prior to the time of this transaction, there was no value recorded in the financial statements related to these customers. In exchange for the Transfer, the Company received four separate warrants to purchase a total of 1,365,000 shares of Tel-Save common stock at an exercise price of $4.67 per share (after reflecting stock splits through December 31, 1997). Each warrant vested to the Company separately based on the retail revenue generated by Tel-Save with respect to the transferred customers, which had to exceed specified levels for three consecutive months. The warrants expired at various dates through 1997. In addition to the Warrant Agreements, the Company was subject to a Voting Rights Agreement whereby Tel-Save retained the right to hold and vote the stock until the point in time when the Company informed Tel-Save it wished to sell the stock. Upon receiving such notice from the Company, Tel-Save was obligated to either purchase the stock at the price offered by the Company or, alternatively, was to deliver the common stock certificates to the Company. In 1996, the vesting requirements were met to exercise the first three warrants. The vesting requirement for the first warrant was met at the end of the third quarter of 1996, entitling the Company to purchase 600,000 shares of Tel-Save common stock. The Company exercised this warrant and sold the related common stock, which had previously been registered, resulting in net proceeds and other income of $1,370 in the third quarter of 1996. F-9 137 NETWORK PLUS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The vesting requirements with respect to the second and third warrants were met in November 1996. The second warrant entitled the Company to purchase 300,000 shares of Tel-Save common stock prior to January 8, 1997. The third warrant entitled the Company to purchase 150,000 shares of Tel-save Common stock prior to June 10, 1997. The warrants were valued upon vesting at approximately $2,093 using the Black-Scholes valuation model. The significant assumptions in the valuation model were an interest rate of 5.1%, warrant lives reflecting the respective expiration periods, expected volatility of 50% and no dividend rate. At December 31, 1996, the warrants had not yet been exercised and based upon the belief that the common stock underlying the warrants would become marketable in 1997, the Company classified the warrants as investments (available-for-sale securities). The value of the warrants at December 31, 1996 approximated the fair value recorded by the Company at the date of vesting. Other income of $2,093 related to the second and third warrants was recognized in the fourth quarter of 1996. On January 6, 1997, the Company exercised the second and third warrants and paid Tel-Save the total exercise price of $2,100. In June 1997, the Company believed it met the vesting requirements with respect to the fourth warrant, entitling the Company to purchase 315,000 shares of Tel-Save common stock; the Company exercised this warrant on June 4, 1997 and paid Tel-Save the exercise price of $1,470. On November 7, 1997, Tel-Save filed a registration statement with the SEC, listing the Company as a selling shareholder with respect to 765,000 shares (the total shares purchased by the Company, after reflecting stock splits, under the second, third and fourth warrants). Following the registration of the common stock, the Company intended immediately to sell the shares of Tel-Save, as it had done previously with the first warrant. Accordingly, all activities necessary for the transfer of the certificates were completed and the Company issued a demand to Tel-Save for the common stock certificates or, alternatively, requested that Tel-Save purchase the shares. Throughout the remainder of the fourth quarter, Tel-Save refused to deliver the common stock certificates to the Company. Accordingly, as of December 31, 1997, the Company no longer considered the Tel-Save shares as available-for-sale securities and considered them to be non-marketable due the unsuccessful attempts to obtain and sell the shares. In order to take physical possession of the Tel-Save common stock certificates, the Company filed a lawsuit against Tel-Save in January 1998. On June 24, 1998, a settlement agreement was signed between the parties pursuant to which the Company received a total of $9,500 from Tel-Save. As part of the settlement, Tel-Save returned the $1,470 exercise price paid by the Company during 1997 in its attempt to exercise the fourth warrant, and cancelled that warrant. In addition, Tel-Save issued the remaining 450,000 shares to the Company and simultaneously repurchased such shares for a negotiated payment of $8,030. Following the June 1998 settlement, there are no continuing obligations between the parties. Accordingly, the Company's investment in Tel-Save at December 31, 1997 was valued at the final negotiated payment of $9,500 received pursuant to the settlement. This settlement resulted in other income of $3,840 recorded in the fourth quarter of 1997, equal to the total cash received, less cash paid by the Company, less the valuation previously recorded in 1996. F-10 138 NETWORK PLUS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 5. PROPERTY AND EQUIPMENT
DECEMBER 31, ESTIMATED ------------------ USEFUL LIFE 1997 1996 ------------- ------- ------- Switching equipment................................... 5 years $ 4,004 $ 1,513 Computer equipment.................................... 3-5 years 2,756 948 Office furniture and equipment........................ 7 years 1,272 1,157 Purchased software.................................... 3 years 694 275 Motor vehicles........................................ 5 years 174 175 Leasehold improvements................................ Term of lease 130 92 ------- ------- 9,030 4,160 Less accumulated depreciation and amortization........ (2,073) (1,085) ------- ------- $ 6,957 $ 3,075 ======= =======
In August 1997, upon review of the Company's experience and expectations for upgrades and replacement of equipment, including information gathered during the process of financing such equipment, the Company changed its estimate of the useful life of its switching equipment from 12 years to 5 years. The Company also reviewed publicly available industry data on telecommunications equipment, which confirmed that the estimate of useful lives of the Company's telecommunications equipment, which was entirely switching equipment at that time, reasonably approximated 5 years. The Company also assessed that there had been no significant decline in the market value of its switching equipment since purchased and that the market value exceeded the net book value of the equipment at the time of the change in estimate. This was confirmed by the Company's ability to enter into a sale and leaseback of the switches for the approximate book value, completed at the same time as the change in estimate. Depreciation expense in 1997 was approximately $136 more than what would have otherwise been reported had the change in estimate not been made. Annual depreciation expense related to these assets will be approximately $407 more through 2002 than what would have otherwise been reported had the change not been made. In November 1997, the Company entered into a sale and leaseback of its switching equipment. The equipment was sold at book value, which approximates market value, and, consequently, no gain or loss was recorded on the sale. The Company has the right to reacquire the equipment at the end of the lease's five-year term. 6. ACCRUED LIABILITIES Accrued liabilities consist of the following:
DECEMBER 31, ---------------- 1997 1996 ------ ------ Accrued interest......................................... $ 60 $ 14 Accrued salaries, wages, commissions and related taxes... 297 445 Customer deposits........................................ 361 125 Accrued income and franchise taxes....................... 766 879 Accrued taxes other than income and franchise............ 238 375 Other accrued liabilities................................ 523 96 ------ ------ $2,245 $1,934 ====== ======
F-11 139 NETWORK PLUS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 7. REVOLVING CREDIT AGREEMENT The Company has a revolving line of credit with Fleet National Bank ("Fleet") for borrowings up to $7,000, including letters of credit, which expires on May 31, 1998. Availability in excess of $5,000 is based upon a percentage of accounts receivable. Interest is payable monthly at the bank's prime rate or available LIBOR options. The revolving line of credit requires the Company to meet certain debt service, liquidity and tangible net worth covenants. At December 31, 1997, cash borrowings under the line of credit totalled $4,510 and letters of credit issued in the ordinary course of business totalled $120. At December 31, 1996, cash borrowings under the line totalled $2,000 and there were no outstanding letters of credit. The interest rate on such borrowings was 8.5% at December 31, 1997 and 8.25% at December 31, 1996. The maximum borrowings under the agreement in 1997 and 1996 were $5,000 and $3,000, respectively. On May 1, 1998, the Company entered into a new revolving credit agreement with Fleet, which allows for up to $23 million of borrowings, based upon a percentage of accounts receivable. The new agreement has a term of three years. Interest is payable monthly at Fleet's prime rate or available LIBOR options. The revolving credit agreement requires the Company to meet certain gross margin, operating income and tangible net worth covenants. All outstanding notes payable were paid in full with proceeds from the new facility. 8. DEBT AND CAPITAL LEASE OBLIGATIONS Debt and capital lease obligations consist of the following:
DECEMBER 31, ------------------ 1997 1996 ------- ------- Notes payable.......................................... $ 4,600 $ 855 Capital lease obligations.............................. 4,717 2 ------- ------- 9,317 857 Less current portion................................... (5,694) (193) ------- ------- $ 3,623 $ 664 ======= =======
The Company issued a promissory note, dated December 1, 1997, to Sprint for repayment of $4,600 previously classified as accounts payable. Monthly principal payments are required from February 1998 through the note's maturity on September 1, 1998. Interest accrues at a fixed rate of 9.75% per annum on the unpaid principal balance and is payable monthly. The promissory note and accrued interest were paid in full on May 1, 1998. In January 1996, the Company entered into a five-year term loan agreement in the amount of $1,000 at a fixed rate of 8.11% per year, collateralized by switching equipment. This loan was repaid in October 1997. At December 31, 1996, the unpaid principal on the loan was $846. The Company's capital leases contain various covenants which, among other things, require the Company to maintain specified ratios of total liabilities to net worth and to meet certain net income requirements. 9. LEASE COMMITMENTS The Company has entered into noncancellable operating leases for office space in several locations in the eastern United States. The leases have termination dates through 2003 and require the payment of various operating costs including condominium fees. Rental expense related to the F-12 140 NETWORK PLUS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) leases for the years ended December 31, 1997, 1996 and 1995 were $733, $688 and $501, respectively. Minimum lease payments for the next five years and thereafter are as follows:
YEAR ENDED DECEMBER 31, CAPITAL LEASES OPERATING LEASES - ----------------------------------------------------- -------------- ---------------- 1998................................................. $ 1,254 $ 684 1999................................................. 1,368 630 2000................................................. 1,230 346 2001................................................. 817 88 2002................................................. 750 90 Thereafter........................................... -- 75 ------- ------- Total minimum lease payments......................... $ 5,419 $ 1,913 ======= Less imputed interest................................ (702) ------- Present value of minimum lease payments.............. 4,717 Less current portion................................. (1,094) ------- Long-term capital lease obligations.................. $ 3,623 =======
Property and equipment under capital leases are as follows:
DECEMBER 31, -------------- 1997 1996 ------ ---- Switching equipment......................................... $3,837 $-- Computer equipment.......................................... 1,527 -- Office equipment............................................ -- 3 ------ --- 5,364 3 Less accumulated amortization............................... (515) (3) ------ --- $4,849 $-- ====== ===
10. UNEARNED CREDITS In 1993 and 1994, the Company, through special sales promotions offered through AT&T on three-year service contracts, received cash based on maintaining annual sales commitment levels over a specific dollar amount. The total amounts received from the AT&T promotions were initially amortized over the three-year length of each contract, which approximated the achievement of required sales commitment levels. During 1996, all contracts concluded or were terminated without continuing liability to the Company. Upon termination, any remaining unearned credits were recorded in income. Accordingly, all amounts were amortized prior to 1997. Amortization of these credits included in revenue in 1996 and 1995 was $1,810 and $2,436, respectively. 11. COMMITMENTS AND CONTINGENCIES The Company is contingently liable as a guarantor on a bank loan made to the trust from whom the Company leases office space in Quincy, Massachusetts (see Note 2). The outstanding balance of the loan at December 31, 1997 and 1996 is $1,486 and $1,546, respectively. F-13 141 NETWORK PLUS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 12. STOCKHOLDERS' EQUITY On July 15, 1998, the stockholders of the Company created Network Plus Corp. ("NP Corp."), which was incorporated in the State of Delaware. NP Corp. expects to elect to be taxed under the provisions of Subchapter S of the Internal Revenue Code. NP Corp. became the owner of 100% of the issued and outstanding common stock of the Company on July 15, 1998, the date on which the stockholders of the Company contributed their ownership interest in the Company totaling 100 shares of common stock in return for 10,000,000 shares of common stock, representing 100% of the ownership interest of NP Corp. These transactions were initiated by the stockholders of the Company to achieve a number of business objectives including an increase in the number of shares of common stock authorized for issuance and issued and outstanding. The Company has accounted for the effects of these transactions as a 100,000-for-1 stock split and retroactively restated the accompanying financial statements to reflect these transactions. COMMON STOCK The certificate of incorporation of NP Corp. authorizes the issuance of up to 20,000,000 shares of $.01 par value common stock. There are 10,000,000 shares of common stock issued and outstanding and held of record by two stockholders as of July 15, 1998. The holders of common stock are entitled to receive dividends when and as dividends are declared by the Board of Directors of NP Corp. out of funds legally available therefor, provided that if any shares of preferred stock are at the time outstanding, the payment of dividends on the common stock or other distributions may be subject to the declaration and payment of dividends on outstanding shares of preferred stock. Holders of common stock are entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Upon any liquidation, dissolution or winding up of the affairs of NP Corp., whether voluntary or involuntary, any assets remaining after the satisfaction in full of the prior rights of creditors and the aggregate liquidation preference of any preferred stock then outstanding will be distributed to the holders of common stock ratably in proportion to the number of shares held by them. The common stock is not publicly traded. PREFERRED STOCK Under the certificate of incorporation of NP Corp., the Board of Directors has the authority to issue up to 1,000,000 shares of $.01 par value preferred stock from time to time in one or more series with such preferences, terms and rights as the Board of Directors may determine without further action by the stockholders of NP Corp. Accordingly, the Board of Directors has the power to establish the provisions, if any, relating to dividends, voting rights, redemption rates, sinking funds, liquidation preferences and conversion rights for any series of preferred stock issued in the future. There are currently no shares of preferred stock outstanding. STOCK-BASED COMPENSATION PLANS On July 15, 1998, NP Corp. adopted the 1998 Stock Incentive Plan (the "1998 Incentive Plan"). The 1998 Incentive Plan provides for the grant of stock-based awards to employees, officers and directors of, and consultants or advisors to, NP Corp. Under the 1998 Incentive Plan, the Company may grant options that are intended to qualify as incentive stock options ("incentive stock options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), options not intended to qualify as incentive stock options ("non-statutory options"), restricted stock and other stock-based awards. Incentive stock options may be granted only to employees of NP Corp. or its subsidiaries. A total of 1,400,000 shares of common stock may be issued upon the exercise of options or other awards granted under the 1998 Incentive Plan. The number of shares F-14 142 NETWORK PLUS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) with respect to which awards may be granted to any employee under the 1998 Incentive Plan may not exceed 700,000 during any calendar year. The exercisability of options or other awards granted under the 1998 Incentive Plan may, in certain circumstances, be accelerated in connection with an Acquisition Event (as defined in the 1998 Incentive Plan). Options and other awards may be granted under the 1998 Incentive Plan at exercise prices that are equal to, less than or greater than the fair market value of NP Corp.'s common stock, and the Board generally retains the authority to reprice outstanding options. The 1998 Incentive Plan expires in July 2008, unless sooner terminated by the Board. On July 15, 1998, NP Corp. authorized the grant of a total of 741,140 options to purchase NP Corp. common stock at exercise prices at or above the fair market value of NP Corp.'s common stock, as determined by its Board of Directors. The options, when issued, will generally vest ratably over a period of four years. NP Corp. and the Company intend to adopt the accounting provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation". Accordingly, the Company's or NP Corp.'s results of operations are not expected to be materially affected by the options granted to date under this plan. On July 15, 1998, NP Corp. adopted the 1998 Director Stock Option Plan (the "Director Plan"). Under the terms of the Director Plan, 5,000 shares of common stock will be granted to each non-employee director upon his or her initial election to the Board of Directors. Annual options to purchase 2,500 shares of common stock will also be granted to each non-employee director on the date of each annual meeting of stockholders, or on August 1 of each year if no annual meeting is held by such date. Options granted under the Director Plan will vest in four equal annual installments beginning on the first anniversary of the date of grant. The exercisability of these options will be accelerated upon the occurrence of an Acquisition Event (as defined in the Director Plan). The exercise price of options granted under the Director Plan is equal to the fair market value of the common stock on the date of grant. A total of 100,000 shares of common stock may be issued upon the exercise of stock options granted under the Director Plan. No options have been granted under this plan. DIVIDEND On July 15, 1998, the Board of Directors of NP Corp. declared a dividend in the aggregate amount of $5,000. As a result, it is anticipated that $2,500 will be distributed to each of the stockholders of NP Corp. Following receipt of the dividend, one stockholder will loan the Company $1,875 (representing the distribution to that stockholder, net of the estimated tax liability resulting from such distribution). Interest will accrue at Fleet's prime rate, and interest and principal will be payable 10 days after redemption of the Series A Preferred Stock. 13. MAJOR SUPPLIER The Company has an agreement with Sprint to provide switching and dedicated voice and data services. At expiration or any time prior, the Company can seek to renew all material aspects of the agreement with Sprint. In the event that renewal does not occur, the Company may be able to negotiate equally beneficial terms with other major telecommunications companies. Should neither of these alternatives be possible, there could be material adverse implications for the Company's financial position and operations. Management's experience has been to renegotiate agreements annually to ensure receiving competitive pricing, and management believes the Company will be able to continue to renegotiate the agreements. The current agreement was renegotiated, effective February 1998, and will expire in February 2000. F-15 143 NETWORK PLUS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 14. EMPLOYEE BENEFIT PLAN The Company sponsors a 401(k) and profit sharing plan (the "Plan") which is open to all eligible employees under the Plan's provisions. The terms of the Plan allow the Company to determine its annual profit sharing contribution. There were no Company contributions to the Plan in 1997 or 1996. The Company's contribution to the Plan in 1995 was $175. 15. SUBSEQUENT EVENT On September 3, 1998, NP Corp. (see Note 12) issued 40,000 shares of 13.5% Series A Cumulative Preferred Stock Due 2009, warrants to purchase, for $.01 per share, 310,000 shares of NP Corp.'s common stock ("Initial Warrants") and rights to receive warrants to purchase 600,000 shares of NP Corp. common stock at an exercise price of $.01 per share ("Contingent Warrants"), resulting in proceeds to NP Corp. of $37,500, net of issuance costs of $2,500. The Contingent Warrants entitle the holders of the preferred stock to receive annually, beginning on September 1, 1999, warrants to purchase approximately 1.36 shares of the Company's common stock for each share of preferred stock. The Warrants vest on September 1, 2000 subject to acceleration upon the occurrence of certain events. A total value of $4,360 was ascribed to the Initial Warrants, net of issuance costs of $290, and was accounted for as a separate component of additional paid-in capital. The value ascribed to the Initial Warrants was recorded as a discount to the preferred stock, which will be accreted to the preferred stock balance over an assumed maturity period. The value ascribed to the Contingent Warrants was de minimis. Through September 3, 1998, NP Corp.'s activities consist principally of the issuance of its preferred stock and warrants. The issuance of the preferred stock terminated NP Corp.'s election to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Accordingly, NP Corp. will provide for and report Federal and state income taxes, if any. F-16 144 NETWORK PLUS CORP. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ ASSETS CURRENT ASSETS Cash and cash equivalents................................. $26,804 $ 1,502 Accounts receivable, net of allowance for doubtful accounts of $444 and $926, respectively................ 14,916 16,927 Marketable securities..................................... 67 65 Investments............................................... -- 9,500 Prepaid expenses.......................................... 1,163 415 Other current assets...................................... 172 112 ------- ------- Total current assets.............................. 43,122 28,521 PROPERTY AND EQUIPMENT, NET................................. 10,659 6,957 OTHER ASSETS................................................ 396 103 ------- ------- TOTAL ASSETS...................................... $54,177 $35,581 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable.......................................... $15,100 $17,445 Accrued liabilities....................................... 2,645 2,245 Revolving line of credit.................................. -- 4,510 Notes payable to stockholders............................. -- 1,755 Current portion of debt and capital lease obligations..... 4,025 5,694 ------- ------- Total current liabilities......................... 21,770 31,649 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS................ -- 3,623 LONG-TERM NOTE PAYABLE TO STOCKHOLDER....................... 1,875 -- COMMITMENTS AND CONTINGENCIES REDEEMABLE PREFERRED STOCK 13.5% Series A cumulative due 2009, $.01 par value, 50,000 shares authorized, 40,000 shares issued and outstanding (liquidation preference of $1,000 per share)........... 33,739 -- STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $.01 par value, 20,000,000 shares authorized, 10,000,000 shares issued and outstanding... 100 100 Additional paid-in capital................................ -- 183 Warrants.................................................. 4,359 -- Retained earnings (accumulated deficit)................... (7,666) 26 ------- ------- Total stockholders' equity (deficit).............. (3,207) 309 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)....................................... $54,177 $35,581 ======= =======
The accompanying notes are an integral part of the unaudited interim consolidated financial statements. F-17 145 NETWORK PLUS CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------------- -------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Revenue.......................... $ 27,283 $ 24,540 $ 79,588 $ 73,921 Operating expenses Costs of services.............. 20,406 19,753 59,234 58,193 Selling, general and administrative expenses..... 8,164 5,803 20,099 16,370 Depreciation and amortization................ 498 257 1,449 581 ----------- ----------- ----------- ----------- 8,662 6,060 21,548 16,951 ----------- ----------- ----------- ----------- Operating loss................... (1,785) (1,273) (1,194) (1,223) Other income (expense) Interest and dividend income... 50 17 62 77 Interest expense............... (203) (153) (781) (330) Other income, net.............. 32 35 69 72 ----------- ----------- ----------- ----------- (121) (101) (650) (181) ----------- ----------- ----------- ----------- Net loss before income taxes..... (1,906) (1,374) (1,844) (1,404) Provision for income taxes....... 296 17 430 42 ----------- ----------- ----------- ----------- Net loss......................... (2,202) (1,391) (2,274) (1,446) Preferred stock dividends and accretion of offering expenses and discount................... (598) -- (598) -- ----------- ----------- ----------- ----------- Net loss applicable to common stockholders................... $ (2,800) $ (1,391) $ (2,872) $ (1,446) =========== =========== =========== =========== Net loss per share applicable to common stockholders -- basic and diluted.............. $ (0.28) $ (0.14) $ (0.29) $ (0.14) =========== =========== =========== =========== Weighted average shares outstanding -- basic and diluted.............. 10,000,000 10,000,000 10,000,000 10,000,000 =========== =========== =========== =========== Pro forma data: Historical loss before income taxes.......................... $ (1,906) $ (1,374) $ (1,844) $ (1,404) Pro forma credit for income taxes.......................... (686) (495) (664) (505) ----------- ----------- ----------- ----------- Pro forma net loss............... (1,220) (879) (1,180) (899) Historical preferred stock dividends and accretion of offering expenses and discount....................... (598) -- (598) -- ----------- ----------- ----------- ----------- Pro forma net loss applicable to common stockholders............ $ (1,818) $ (879) $ (1,778) $ (899) =========== =========== =========== =========== Pro forma net loss per share applicable to common stockholders -- basic and diluted.............. $ (0.18) $ (0.09) $ (0.18) $ (0.09) =========== =========== =========== ===========
The accompanying notes are an integral part of the unaudited interim consolidated financial statements. F-18 146 NETWORK PLUS CORP. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
RETAINED TOTAL ADDITIONAL EARNINGS STOCKHOLDERS' COMMON PAID-IN (ACCUMULATED EQUITY STOCK CAPITAL WARRANTS DEFICIT) (DEFICIT) ------ ---------- -------- ------------ ------------- Balance at December 31, 1997......... $100 $183 $ -- $ 26 $ 309 Net Loss............................. (2,274) (2,274) Distributions to Stockholders........ (3) (3) Common Stock Dividends............... (5,000) (5,000) Issuance of 310,000 Warrants......... 4,359 4,359 Dividends on Preferred Stock......... (183) (267) (450) Accretion of Preferred Stock Offering Expenses and Discount.............. (148) (148) ---- ---- ------ ------- ------- Balance at September 30, 1998........ $100 $ -- $4,359 $(7,666) $(3,207) ==== ==== ====== ======= =======
The accompanying notes are an integral part of the unaudited interim consolidated financial statements. F-19 147 NETWORK PLUS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, -------------------- 1998 1997 -------- -------- Cash flows from operating activities: Net loss.................................................. $(2,274) $(1,446) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization............................. 1,449 581 Gain on disposal of fixed assets.......................... (8) -- Exercise of Tel-Save common stock warrants................ -- (3,570) Provision for losses on accounts receivable............... 1,264 1,039 (Increase) decrease in assets: Accounts receivable.................................... 747 (4,330) Prepaid expenses....................................... (748) (416) Other current assets................................... (60) 7 Other long-term assets............................... (293) (84) (Decrease) increase in liabilities: Accounts payable....................................... (2,344) 7,748 Accrued liabilities.................................... 400 (406) ------- ------- Net cash used for operating activities............... (1,867) (877) Cash flows from investing activities: Proceeds from disposal of fixed assets.................... 17 9 Capital expenditures...................................... (5,160) (3,035) Refund of exercise price of Tel-Save common stock warrants............................................... 1,470 -- Proceeds from sale of Tel-Save common stock............... 8,030 -- Purchase of marketable securities......................... (2) (1) ------- ------- Net cash used for investing activities............... (4,355) (3,027) Cash flows from financing activities: Net proceeds from (payments on) line of credit............ (4,510) 3,000 Net proceeds from preferred stock offering................ 37,500 -- Payments on debt and capital lease obligations............ (5,293) (1,698) Net proceeds from notes payable to stockholders........... 120 -- Proceeds from sale and leaseback of fixed assets.......... -- 1,522 Distributions to stockholders............................. (5,003) (299) ------- ------- Net cash provided by financing activities............ 22,814 2,525 ------- ------- Net increase (decrease) in cash............................. 25,302 (1,379) Cash at beginning of period................................. 1,502 2,241 ------- ------- Cash at end of period....................................... $26,804 $ 862 ======= =======
The accompanying notes are an integral part of the unaudited interim consolidated financial statements. F-20 148 NETWORK PLUS CORP. NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. BASIS OF PRESENTATION On July 15, 1998, Network Plus Corp. (the "Company") was incorporated in the state of Delaware. The stockholders of Network Plus, Inc. contributed 100% of their shares to the Company in return for 10,000,000 shares of the Company's common stock. Accordingly, Network Plus, Inc. became a wholly-owned subsidiary of the Company. The Company was created in order to facilitate a number of corporate objectives including obtaining financing and issuance of stock options. On July 15, 1998, the Company granted stock options for the future purchase of the Company's common stock. As of September 30, 1998, no options to purchase shares had vested and, consequently, none had been exercised. On September 3, 1998, the Company issued 40,000 shares of Series A Preferred Stock, warrants to purchase 310,000 shares of the Company's common stock at $.01 per share, and rights to receive warrants to purchase an additional 610,000 shares of the Company's common stock. As of September 30, 1998, the Company's consolidated financial statements reflect the financial position and results of operations of its wholly-owned subsidiary, Network Plus, Inc., and amounts ascribed to the stock options, preferred stock and warrant transactions described above and in Note 7. All intercompany transactions are eliminated in consolidation. The issuance of the preferred stock terminated Network Plus Corp.'s election to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Accordingly, Network Plus Corp. will provide for and report Federal and state income taxes, as necessary. The accompanying Unaudited Interim Consolidated Financial Statements of the Company have been prepared in conformity with generally accepted accounting principles and, in the opinion of management, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the year. These unaudited interim consolidated financial statements should be read in conjunction with the financial statements and related notes in the Network Plus, Inc. annual audited financial statements. The balance sheet as of December 31, 1997 has been derived from the audited financial statements as of that date. Certain amounts in the financial statements for the prior year have been reclassified to conform with the current year presentation. Such reclassifications had no effect on previously reported results of operations. Accounts receivable include unbilled amounts of $7,245 and $7,594 at September 30, 1998 and December 31, 1997. 2. RELATED PARTY TRANSACTIONS In September 1998, one of the Company's stockholders made a loan to the Company for $1,875. Interest on the loan accrues at the prime rate (8.25% at September 30, 1998). Principal and interest will be payable 10 days after redemption of the Series A Preferred Stock (see Note 8). Office space, located in Quincy, MA, is leased from a trust, the beneficiaries of which are stockholders of the Company. The Company makes monthly rental payments of $36 to the trust. In each of the nine-month periods ended September 30, 1998 and 1997, $324 was paid to the trust. F-21 149 NETWORK PLUS CORP. NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 3. PROPERTY AND EQUIPMENT
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ Telecommunications equipment................................ $ 8,877 $4,004 Computer equipment.......................................... 2,847 2,756 Office furniture and equipment.............................. 1,371 1,272 Purchased software.......................................... 653 694 Motor vehicles.............................................. 201 174 Leasehold improvements...................................... 220 130 ------- ------ 14,169 9,030 Less accumulated depreciation and amortization.............. (3,510) (2,073) ------- ------ $10,659 $6,957 ======= ======
In August 1997, upon review of the Company's experience and expectations for upgrades and replacement of equipment and publicly available industry data on useful lives applied by other telecommunications companies for similar equipment, the Company changed its estimate of the useful life of its switching equipment from 12 years to 5 years. Depreciation expense in the nine months ended September 30, 1997 was approximately $114 less than what would have otherwise been reported had the change been previously made. 4. ACCRUED LIABILITIES Accrued liabilities consist of the following:
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ Accrued interest............................................ $ 63 $ 60 Accrued salaries, wages, commissions and related taxes...... 911 297 Customer deposits........................................... 166 361 Deferred income taxes....................................... 480 -- Accrued income and franchise taxes.......................... 348 766 Accrued taxes other than income and franchise............... 34 238 Accrued agency commissions.................................. 391 340 Other accrued liabilities................................... 252 183 ------ ------ $2,645 $2,245 ====== ======
5. REVOLVING CREDIT AGREEMENTS The Company had a revolving line of credit with Fleet National Bank ("Fleet") for borrowings up to $23,000 (the "Former Bank Credit Facility"), including letters of credit, which was terminated on October 7, 1998 upon entering into the New Revolving Credit Facility, described below. At September 30, 1998, there were no borrowings under the Former Bank Credit Facility, and letters of credit issued in the ordinary course of business totaled $1,171. On October 7, 1998, the Company entered into a loan agreement with Goldman Sachs Credit Partners, L.P. and Fleet for a $60,000 revolving credit facility (the "New Revolving Credit Facility"), concurrent with the closing of which the Company terminated the Former Bank Credit Facility. The New Revolving Credit Facility has a term of 18 months. Under the New Revolving Credit Facility, F-22 150 NETWORK PLUS CORP. NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) $30,000 of the $60,000 is available based upon a percentage of accounts receivable. Interest is payable monthly at one percent above the prime rate. The New Revolving Credit Facility requires the Company, among other things, to meet minimum levels of revenues and earnings before interest, taxes, depreciation and amortization, and not to exceed certain customer turnover levels and debt to revenue ratios. 6. DEBT AND CAPITAL LEASE OBLIGATIONS Debt and capital lease obligations consist of the following:
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ Note payable................................................ $ -- $4,600 Capital lease obligations................................... 4,025 4,717 ------- ------ 4,025 9,317 Less current portion........................................ -- (5,694) ------- ------ $ 4,025 $3,623 ======= ======
The Company issued a promissory note, dated December 1, 1997, to Sprint for repayment of $4,600 previously classified as accounts payable. On May 1, 1998, the remaining balance of $3,700 due on the note was repaid. The Company received a waiver from a lender for a violation at September 30, 1998 of a financial covenant of its capital leases which requires no two consecutive quarters with net losses. The Company has classified the entire capital lease liability as current based on the expectation that the Company will repay the entire obligation in December 1998. The Company expects to refinance the obligation prior to year end 1998. 7. PREFERRED STOCK ISSUANCE On September 3, 1998, the Company issued 40,000 shares of 13.5% Series A Cumulative Preferred Stock Due 2009, warrants to purchase, for $0.01 per share, 310,000 shares of the Company's common stock ("Initial Warrants"), and rights to receive additional warrants to purchase 600,000 shares of the Company's common stock at an exercise price of $.01 per share ("Contingent Warrants"), resulting in proceeds to the Company of $37,500, net of issuance costs of $2,500. The Contingent Warrants entitle the holders of the preferred stock to receive annually, beginning on September 1, 1999, warrants to purchase approximately 1.36 shares of the Company's common stock for each share of preferred stock. The warrants vest on September 1, 2000 subject to acceleration upon the occurrence of certain events. A total value of $4,360 was ascribed to the Initial Warrants, net of issuance costs of $290, and was accounted for as a component of stockholders' equity. The value ascribed to the Initial Warrants was recorded as a discount to the preferred stock, which will be accreted to the preferred stock balance over the period from date of issuance through the initial date of mandatory redemption (September 1, 2003). The value ascribed to the Contingent Warrants was de minimis. Through September 3, 1998, the Company's activities consist principally of the issuance of its preferred stock and warrants. F-23 151 NETWORK PLUS CORP. NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 8. COMMON STOCK DIVIDEND On September 2, 1998, the Company issued a $5,000 dividend to its stockholders. One of the stockholders loaned the Company the stockholder's respective share of the dividend, net of estimated taxes, in the form of a $1,875 long-term loan (see Note 2). 9. MAJOR SUPPLIER The Company has an agreement with Sprint to provide switching and dedicated voice and data services. At expiration or any time prior, the Company can renew all material aspects of the agreement with Sprint. In the event that renewal does not occur, the Company believes it will be able to negotiate equally beneficial terms with other major telecommunications companies. Should neither of these alternatives be possible, there could be material adverse implications for the Company's financial position and operations. Management's experience has been to renegotiate agreements annually to ensure receiving competitive pricing, and management believes the Company will be able to continue to renegotiate the agreement. The current agreement was renegotiated, effective February 1998, and will expire in February 2000. 10. SIGNIFICANT CUSTOMER During the nine months ended September 30, 1998, the Company had one customer that accounted for approximately 12% of the Company's revenue. No other customer comprised greater than 10% of total revenue. 11. NET INCOME (LOSS) PER SHARE The computations of basic and diluted earnings per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities. Potentially dilutive securities include convertible preferred stock, stock options and warrants. Unaudited pro forma net loss per share reflecting the Company's conversion from an S Corporation to a C Corporation is presented using estimated effective income tax rates and excludes a $480 tax provision for deferred taxes payable recorded in the third quarter of 1998 resulting from the conversion. The following table sets forth the computation of basic and diluted income (loss) per share:
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, -------------------------- -------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net loss applicable to Network Plus Corp. common stock -- basic and diluted.............. $ (2,800) $ (1,391) $ (2,872) $ (1,446) =========== =========== =========== =========== Shares used in net loss per share -- basic and diluted..... 10,000,000 10,000,000 10,000,000 10,000,000 =========== =========== =========== =========== Net loss per share applicable to common stockholders -- basic and diluted.................... $ (0.28) $ (0.14) $ (0.29) $ (0.14) =========== =========== =========== ===========
Stock options to purchase 741,000 shares of common stock were not included in the 1998 computations of diluted net income (loss) per share because inclusion of such shares would have an anti-dilutive effect on net loss per share, as the exercise price was at or above fair market value. F-24 152 NETWORK PLUS CORP. NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Warrants for the purchase of 310,000 shares of common stock were not included in the 1998 computations of diluted net income (loss) per share because inclusion of such shares would have an anti-dilutive effect on net loss per share, as the Company reported net losses in the respective 1998 periods. 12. COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This Statement establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's net income or stockholders' equity. There were no adjustments required to calculate comprehensive income for either the nine months ended September 30, 1998 or 1997. 13. ACCOUNTING FOR STOCK-BASED COMPENSATION ISSUED TO EMPLOYEES AND DIRECTORS The Company accounts for its stock option plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and, in accordance with the recognition requirements set forth under this pronouncement, no compensation expense was recognized for the three months ended September 30, 1998. The Company elected to adopt Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation" for disclosure purposes only. For disclosure purposes, the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for stock options granted in 1998: no dividends or volatility, risk-free interest rate of 6.3% and expected life of ten years for all grants. The weighted-average fair value of the stock options granted in 1998 was $1.85. Under the above model, the total value of stock options granted in 1998 was $1,366, which would be amortized ratably on a pro forma basis over the four-year option vesting period. Had the company determined compensation cost for the stock-based compensation plans in accordance with SFAS No. 123, the Company's pro forma net loss and loss per share would have been:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 ------------------ ------------------ Pro forma net loss applicable to common stockholders................................. $(2,885) $(2,957) ======= ======= Pro forma net loss per share -- basic and diluted...................................... $ (0.29) $ (0.30) ======= =======
Stock option transactions are summarized as follows:
NUMBER EXERCISE PRICE OF SHARES RANGE --------- -------------- Shares under option, December 31, 1997.................... -- -- Options granted........................................... 741,140 $15.00-50.00 ------- Shares under option, September 30, 1998................... 741,140 $15.00-50.00
F-25 153 NETWORK PLUS CORP. NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following table summarizes information about the stock options outstanding at September 30, 1998.
OPTIONS OUTSTANDING ------------------------------------------------------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE RANGE OF NUMBER REMAINING CONTRACTUAL WEIGHTED-AVERAGE FAIR VALUE AT EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE GRANT DATE --------------- ----------- --------------------- ---------------- ---------------- $15.00............... 195,534 9.8 $15.00 $7.01 30.00............... 283,740 9.8 30.00 -- 50.00............... 261,866 9.8 50.00 -- ------- --- ------ ----- 741,140 9.8 $33.11 $1.85 ======= === ====== =====
At September 30, 1998 no options were exercisable and the Company had an aggregate of 758,860 shares available for future grant under its Stock Incentive Plan and Director Stock Option Plan. 14. NEW ACCOUNTING PRONOUNCEMENTS In 1997, Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information", was issued which establishes standards for segment reporting in a full set of general purpose financial statements. Management has not yet evaluated the effects of this change on the reporting of its results of operations. The Company will adopt SFAS 131 for its fiscal year ending December 31, 1998. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". The Company does not believe that this pronouncement will have a material impact on its business or results of operations. In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", was issued, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for the quarters in the Company's fiscal year 2000. Had the Company implemented SFAS 133 in the current period, financial position and results of operations would not have been affected. F-26 154 - ------------------------------------------------------- - ------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE AS OF WHICH THE INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ------------------ TABLE OF CONTENTS
PAGE ---- Notice to Investors.................... i Forward-Looking Statements............. ii Available Information.................. ii Summary................................ 1 Risk Factors........................... 9 Use of Proceeds........................ 21 Dividend Policy........................ 21 Capitalization......................... 22 Selected Financial Data................ 23 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 26 Business............................... 41 Government Regulation.................. 64 Management............................. 74 Annual Compensation.................... 76 Certain Transactions................... 77 Stock Ownership........................ 78 Description of Capital Stock........... 79 Description of Certain Indebtedness.... 80 Description of the Series A Preferred Stock................................ 81 Description of the Warrants............ 102 Federal Income Tax Considerations...... 108 Plan of Distribution................... 115 Selling Stockholders................... 117 Validity of the Securities............. 117 Independent Accountants................ 117 Glossary............................... G-1 Index to Financial Statements.......... F-1
- ------------------------------------------------------- - ------------------------------------------------------- - ------------------------------------------------------- - ------------------------------------------------------- [Network Plus Logo] 58,276 SHARES 13.5% SERIES A CUMULATIVE PREFERRED STOCK DUE 2009 ------------------ PROSPECTUS , 1998 ------------------ - ------------------------------------------------------- - ------------------------------------------------------- 155 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses, all of which will be borne by the Registrant, in connection with the sale and distribution of the securities being registered. All amounts shown are estimates except for the Securities and Exchange Commission filing fee. SEC registration fee........................................ $ 17,192 Accounting fees and expenses................................ 30,000 Legal fees and expenses..................................... 75,000 Printing and mailing expenses............................... 25,000 Miscellaneous............................................... 2,808 -------- Total............................................. $150,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party 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 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. A corporation may, in advance of the final action of any civil, criminal, administrative or investigative action, suit or proceeding, pay the expenses (including attorneys' fees) incurred by any officer, director, employee or agent in defending such action, provided that the director or officer undertakes to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation. A corporation may indemnify such person against 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 if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. A Delaware corporation may indemnify officers and directors in an action by or in the right of the corporation to procure a judgment in its favor under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses (including attorneys' fees) which he or she actually and reasonably incurred in connection therewith. The indemnification provided is not deemed to be exclusive of any other rights to which an officer or director may be entitled under any corporation's by-law, agreement, vote or otherwise. In accordance with Section 145 of the DGCL, Article Eighth of the Company's Certificate of Incorporation (the "Certificate") and the Company's By-laws (the "By-laws") provide that the Company shall indemnify each person who is or was a director, officer or employee of the Company (including the heirs, executors, administrators or estate of such person) or is or was serving at the request of the Company as director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, to the fullest extent permitted under subsections 145(a), (b), and (c) of the DGCL or any successor statute. The indemnification provided by the Certificate and the By-laws shall not be deemed exclusive of any other rights to which any of those seeking II-1 156 indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Expenses (including attorneys' fees) incurred in defending a civil, criminal, administrative or investigative action, suit or proceeding upon receipt of an undertaking by or on behalf of the indemnified person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Company. The Certificate further provides that a director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit. If the DGCL is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Company shall be eliminated or limited to the fullest extent permitted by the DGCL as so amended. The By-laws provide that the Company may purchase and maintain insurance on behalf of its directors, officers, employees and agents against any liabilities asserted against such persons arising out of such capacities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Set forth below in chronological order is certain information regarding securities issued by the Registrant since inception. 1. Upon its inception in July 1998, the Registrant issued 5,000,000 shares of Common Stock to each of Robert T. Hale and Robert T. Hale, Jr., in exchange for all of the issued and outstanding shares of Common Stock of Network Plus, Inc. 2. In September 1998, the Registrant issued 40,000 Units, each consisting of one share of 13.5% Series A Cumulative Preferred Stock due 2009 and 7.75 Initial Warrants and 15 Continent Warrants, each to purchase one share of Common Stock, for an aggregate purchase price of $40,000,000. The initial purchasers were Goldman, Sachs & Co., Lehman Brothers Inc, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, who received a purchase price discount of 3.25% for acting as underwriters in connection therewith. Since inception, the Registrant has granted stock options to employees and a consultant to purchase an aggregate of 741,140 shares of Common Stock with exercise prices ranging from $15.00 to $50.00 per share. The securities issued in the foregoing transactions were offered and sold in reliance upon exemptions set forth in Sections 3(b) and 4(2) of the Securities Act, or regulations promulgated thereunder, relating to sales by an issuer not involving a public offering. In the case of certain options to purchase shares of Common Stock, such offers and sales were made in reliance upon an exemption from registration under Rule 701 of the Securities Act. Except as noted above, no underwriters or placement agents were involved in the foregoing sales of securities. II-2 157 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NO. DESCRIPTION - ------- ----------- 3.1* -- Certificate of Incorporation of the Company. 3.2* -- Certificate of Designation of the Series A Preferred Stock. 3.3* -- By-laws of the Company. 4.1* -- Exchange and Registration Rights Agreement dated as of September 1, 1998 between the Company and the Purchasers. 4.2* -- Purchase Agreement dated as of September 1, 1998 between the Company and the Purchasers. 5 -- Opinion of Hale and Dorr LLP. 8 -- Opinion of Hale and Dorr LLP with respect to certain tax matters. 10.1* -- 1998 Stock Incentive Plan 10.2* -- 1998 Director Stock Option Plan 10.3+* -- Resale Solutions Switched Services Agreement dated as of June 21, 1998 between the Company and Sprint Communications Company L.P. 10.4+ -- Agreement for the Provision of Fiber Optic Facilities and Services dated as of July 17, 1998 between the Company and Northeast Optic Network, Inc. 10.5+* -- IRU Agreement dated as of July 17, 1998 between the Company and Qwest Communications Corporation. 10.6* -- Net Lease by and between Network Plus Realty Trust, Landlord, and Network Plus, Inc., Tenant, dated July 1, 1993. 10.7* -- Interconnection Agreement Under Sections 251 and 252 of the Telecommunications Act of 1996, dated September 4, 1998, by and between New England Telephone and Telegraph Company d/b/a Bell Atlantic -- Massachusetts and Network Plus Inc. 10.8+ -- Loan and Security Agreement dated October 7, 1998 by and between Network Plus, Inc. as Borrower, Goldman Sachs Credit Partners L.P. and Fleet National Bank as Lenders, Fleet National Bank as Agent and Goldman Sachs Credit Partners L.P. as Syndication and Arrangement Agent. 10.9+* -- Master Lease Agreement, dated as of August 8, 1997, between Chase Equipment Leasing, Inc. and Network Plus, Inc., as amended. 12* -- Ratio of Earnings to Fixed Charges. 21 -- Subsidiaries of the Registrant. 23.1 -- Consent of PricewaterhouseCoopers LLP. 23.2 -- Consent of Hale and Dorr LLP (included in their opinion filed as Exhibit 5). 24* -- Power of Attorney.
- --------------- * Previously filed. + Confidential treatment requested as to certain portions. (b) Financial Statement Schedules: Schedule II Valuation and Qualifying Accounts Report of Independent Accounts on Schedule II All other schedules have been omitted because they are not applicable or not required or the required information is included in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of registrants pursuant to the provisions described under Item 20 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer II-3 158 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 court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment 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. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. The undersigned registrant hereby further undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, 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 497(h) under the Securities 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 Securities Act of 1933, 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-4 159 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment No. 3 to its Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Quincy, State of Massachusetts, on December 23, 1998. NETWORK PLUS CORP. By: /s/ JAMES J. CROWLEY ------------------------------------ JAMES J. CROWLEY EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 3 to the Registration Statement on Form S-1 has been signed below by the following persons, in the capacities indicated, as of December 23, 1998.
NAME TITLE ---- ----- * Chairman of the Board - ------------------------------------------------ ROBERT T. HALE * President, Chief Executive - ------------------------------------------------ Officer and Director (Principal ROBERT T. HALE, JR. Executive Officer) /s/ JAMES J. CROWLEY Executive Vice President, Chief - ------------------------------------------------ Operating Officer and Director JAMES J. CROWLEY * Vice President of Finance, - ------------------------------------------------ Chief Financial Officer and STEVEN L. SHAPIRO Treasurer (Principal Financial and Accounting Officer) * Director - ------------------------------------------------ DAVID MARTIN * Director - ------------------------------------------------ JOSEPH C. MCNAY *By: /s/ JAMES J. CROWLEY ------------------------------------------ JAMES J. CROWLEY ATTORNEY-IN-FACT
II-5 160 SCHEDULE II NETWORK PLUS CORP. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGES TO DEDUCTIONS BALANCE BEGINNING COSTS AND FROM AT END DESCRIPTION OF PERIOD EXPENSES RESERVES(1) OF PERIOD - ----------- ---------- ---------- ----------- --------- Allowance for doubtful accounts: Nine Months Ended September 30, 1998 (unaudited)............................... $926 $1,264 $1,746 $444 ==== ====== ====== ==== Year Ended December 31, 1997................ $850 $4,104 $4,028 $926 ==== ====== ====== ==== Year Ended December 31, 1996................ $500 $1,102 $ 752 $850 ==== ====== ====== ==== Year Ended December 31, 1995................ $273 $ 887 $ 660 $500 ==== ====== ====== ====
- --------------- (1) Write-off of bad debts less recoveries. 161 REPORT OF INDEPENDENT ACCOUNTANTS ON SCHEDULE II To the Stockholders of Network Plus, Inc. We have audited in accordance with generally accepted auditing standards, the financial statements of Network Plus, Inc. included in this registration statement and have issued our report thereon dated June 24, 1998 except for the information in Notes 12 and 15, for which the dates are July 15, 1998 and September 3, 1998, respectively. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in Item 21(b) is the responsibility of the company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. PricewaterhouseCoopers LLP Boston, Massachusetts June 24, 1998 162 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ------- ----------- 3.1* -- Certificate of Incorporation of the Company. 3.2* -- Certificate of Designation of the Series A Preferred Stock. 3.3* -- By-laws of the Company. 4.1* -- Exchange and Registration Rights Agreement dated as of September 1, 1998 between the Company and the Purchasers. 4.2* -- Purchase Agreement dated as of September 1, 1998 between the Company and the Purchasers. 5 -- Opinion of Hale and Dorr LLP. 8 -- Opinion of Hale and Dorr LLP with respect to certain tax matters. 10.1* -- 1998 Stock Incentive Plan 10.2* -- 1998 Director Stock Option Plan 10.3+* -- Resale Solutions Switched Services Agreement dated as of June 21, 1998 between the Company and Sprint Communications Company L.P. 10.4+ -- Agreement for the Provision of Fiber Optic Facilities and Services dated as of July 17, 1998 between the Company and Northeast Optic Network, Inc. 10.5+* -- IRU Agreement dated as of July 17, 1998 between the Company and Qwest Communications Corporation. 10.6* -- Net Lease by and between Network Plus Realty Trust, Landlord, and Network Plus, Inc., Tenant, dated July 1, 1993. 10.7* -- Interconnection Agreement Under Sections 251 and 252 of the Telecommunications Act of 1996, dated September 4, 1998, by and between New England Telephone and Telegraph Company d/b/a Bell Atlantic -- Massachusetts and Network Plus Inc. 10.8+ -- Loan and Security Agreement dated October 7, 1998 by and between Network Plus, Inc. as Borrower, Goldman Sachs Credit Partners L.P. and Fleet National Bank as Lenders, Fleet National Bank as Agent and Goldman Sachs Credit Partners L.P. as Syndication and Arrangement Agent. 10.9+* -- Master Lease Agreement, dated as of August 8, 1997, between Chase Equipment Leasing, Inc. and Network Plus, Inc., as amended. 12* -- Ratio of Earnings to Fixed Charges. 21 -- Subsidiaries of the Registrant. 23.1 -- Consent of PricewaterhouseCoopers LLP. 23.2 -- Consent of Hale and Dorr LLP (included in their opinion filed as Exhibit 5). 24* -- Power of Attorney.
- --------------- * Previously filed. + Confidential treatment requested as to certain portions. EX-5 2 OPINION OF HALE AND DORR LLP 1 Exhibit 5 [HALE AND DORR LLP LETTERHEAD] December 23, 1998 Network Plus Corp. 234 Copeland Street Quincy, MA 02169 Gentlemen: This opinion is furnished to you in connection with a Registration Statement on Form S-1 (originally, Form S-4) (Registration No. 333-64663), together with Amendment Nos. 1, 2 and 3 thereto (the "Registration Statement"), filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended, for the registration of 58,276 shares of 13.5% Series A Cumulative Preferred Stock due 2009, $.01 par value per share (the "Shares"), of Network Plus Corp., a Delaware corporation (the "Company"). The Shares are to be registered pursuant to the Exchange and Registration Rights Agreement dated as of September 1, 1998 among the Company, Goldman, Sachs & Co., Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Exchange Agreement"). We have acted as counsel for the Company in connection with the issue and sale by the Company of the Shares. We have examined signed copies of the Registration Statement and all exhibits thereto, all as filed with the Commission. We have also examined and relied upon the original or copies of minutes of meetings of the stockholders and Board of Directors of the Company, stock record books of the Company, and copies of the Certificate of Incorporation, Certificate of Designation and the By-Laws of the Company. Based upon the foregoing, we are of the opinion that the Shares have been duly authorized and are validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion as part of the Registration Statement and to the use of our name therein and in the related Prospectus under the caption "Validity of the Securities." It is understood that this opinion is to be used only in connection with the offer and sale of the Shares while the Registration Statement is in effect. Very truly yours, /s/ Hale and Dorr LLP HALE AND DORR LLP EX-8 3 OPINION OF HALE AND DORR LLP 1 EXHIBIT 8 [LETTERHEAD OF HALE AND DORR LLP] December 23, 1998 Network Plus Corp. 234 Copeland Street Quincy, Massachusetts 02169 Re: Registration Statement on Form S-1 File No. 333-64663 Ladies and Gentlemen: We are counsel to Network Plus Corp., a Delaware corporation (the "Company"), and have acted as such in connection with the filing of a Registration Statement on Form S-1 (File No. 333-64663) (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), covering up to 58,276 shares of 13.5% Series A Cumulative Preferred Stock due 2009 (the "Shares"). We have examined the Registration Statement and the Company's Certificate of Incorporation and Certificate of Designation of the Series A Preferred Stock, which have been filed with the Securities and Exchange Commission as Exhibits to the Registration Statement. In addition, we have examined, and have relied as to matters of fact upon, the originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, agreements, documents and other instruments and such certificates or comparable documents of public officials and of officers and representatives of the Company, and have made such other and further investigations, as we have deemed relevant and necessary as a basis for the opinion hereinafter set forth. In such examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals and the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such latter documents. Based upon the foregoing, and subject to the qualifications and limitations stated herein, the discussion in the Registration Statement under the caption "Federal Income Tax Considerations" reflects our opinion with respect to the matters set forth therein, except where such discussion expressly states that we are unable to render an opinion. We are members of the Bar of the Commonwealth of Massachusetts and we do not express any opinion herein concerning any law other than the law of the Commonwealth of Massachusetts and the federal law of the United States. This opinion is rendered to you solely in connection with the above-described transaction and may not be relied upon for any other purpose without our prior written consent. We hereby consent to the use of this opinion as an Exhibit to the Registration Statement and to the reference to our firm under the caption "Validity of the Securities" in the Prospectus included therein. Very truly yours, /s/ HALE AND DORR LLP -------------------------------------- HALE AND DORR LLP EX-10.4 4 AGREEMENT FOR THE PROVISION OF FIBER OPTIC 1 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT 10.4 AGREEMENT FOR THE PROVISION OF FIBER OPTIC FACILITIES AND SERVICES BETWEEN NORTHEAST OPTIC NETWORK, INC. AND NETWORK PLUS, INC. Effective as of July 17, 1998 (the "Effective Date") Network Plus Inc., a Massachusetts corporation, having an office at 234 Copeland Street, Quincy, MA 02169 ("Network Plus"), and NorthEast Optic Network, Inc., a Delaware corporation, having an office at 391 Totten Pond Road, Suite 401, Waltham, MA 02154 ("NEON"), (collectively, the "Parties") agree as follows: BACKGROUND. NEON and its affiliates are the exclusive owners of The New England Optical Network (the "NEON Network"), a communication system located on property owned by electric utility companies and others. Network Plus seeks to use part of the NEON Network to operate its communication network. NEON is willing to grant Network Plus the indefeasible right to use ("IRU") certain of NEON's facilities and fiber optics filaments in exchange for certain payments and annual fees. 1. THE NETWORK PLUS FIBERS. Upon completion pursuant to Section 2.3, NEON shall be deemed to have conveyed to Network Plus an IRU for [*] AT&T True Wave dark optical fibers to be specifically identified between NEON's Boston Metropolitan Area POP and NEON's New York City, NY POP including any connectors thereto as depicted in Exhibit 1, attached hereto. NEON will dedicate these [*] fibers to Network Plus's use along the cable system (the "Network Plus Fibers" or the "Network Plus Fiber Network") and represents and warrants that no other party shall use such dedicated fibers at any time during the term of this Agreement. 2. TERM, TERMINATION, USE AND COMPLETION OF NETWORK PLUS FIBER NETWORK. 2.1 TERM. The initial term of the IRU conveyed for the Network Plus Fiber Network shall be twenty years from the date the Network Plus Fiber Network is completed pursuant to Section 2.3 (the "Initial Term"). Unless Network Plus gives NEON written notice at least [***********] days prior to the end of the Initial Term, the term shall be automatically extended until the earlier of (i) the end of the economic useful life of the Network Plus Fiber Network or (ii) as to specific affected portions of the Network Plus Fiber Network, the expiration of NEON's right to use certain rights of way and other facilities under its agreement with Northeast Utilities Service Company dated September 27, 1994 (the period of such extension being referred to herein as the "Renewal Period"); PROVIDED, however, that NEON's obligations pursuant to Sections 5.1, 5.2, 5.3, 5.4 (except for the last sentence thereof), 5.5, 11.1 and 11.2 shall terminate at the end of the Initial Term and shall not apply during any Renewal Period. [****************************************************************************** ******]. 2.2 USE. Network Plus may use the fibers covered by the IRU for (and only for) any lawful purpose. 2.3 COMPLETION. The Network Plus Fiber Network as a whole shall be complete, operational and available for use by Network Plus by April 1, 1999 (the "Completion Date"). Completion of the Network Plus Fiber Network shall be deemed to have occurred when the Network Plus Fibers are in conformance in all material respects with the technical specifications (the "Specifications") set forth in Exhibit 2.3, and all acceptance testing has been completed to Network Plus's reasonable satisfaction (the "Acceptance Date"). 2.4 COMPLETION SCHEDULE. If completion of the Network Plus Fiber Network does not take place by the Completion Date, a penalty of $[**] per day shall accrue up to a total aggregate penalty of $[**], and that penalty charge shall be due and payable by NEON 30 days following the Completion Date or on the Acceptance Date, whichever shall occur first. If completion of the Network Plus Fiber Network does not occur 2 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. within 30 days of the Completion Date, Network Plus shall have the right to terminate this Agreement immediately upon written notice to NEON. The parties agree that they will negotiate in good faith a mutually agreeable project plan (the "Project Plan") relating to the construction and implementation of the Network Plus Fiber Network. This Project Plan will include, without limitation, target dates for the construction of certain segments, financial penalties in the event that NEON fails to satisfy its obligations with respect to such target dates, and such other terms as the parties may negotiate. Except as expressly agreed by the Parties in writing, (i) such Project Plan, including all agreements and understandings between the Parties relating to the execution of such Project Plan, shall not affect the rights and obligations of the Parties as set forth in this IRU Agreement, including but not limited to the first two sentences of this Section 2.4 and (ii) such Project Plan shall not be deemed to be an amendment to the terms of this IRU Agreement. 2.5 TERMINATION. Notwithstanding any provision contained in this Agreement to the contrary, at any time after the Acceptance Date, Network Plus shall have the option, in its sole discretion and for any reason, to terminate this Agreement upon [***] days' prior written notice to NEON, without further liability other than to pay the monthly lease charges specified in Section 4.1 (as adjusted under Section 4.2 and 4.3, as applicable) for months in the Initial Term prior to the effective date of such termination. 2.6 RIGHT OF NOTICE. In the event that NEON contemplates entering into a transaction with a third party as a result of which fewer than [****] fibers would remain available on any route in the NEON Network, NEON shall notify Network Plus in writing at least [****] days prior to entering into a written agreement with respect to such transaction. NEON shall have no obligation to disclose the terms of such contemplated transaction, nor shall Network Plus be entitled to a right of first refusal or any other right (other than a right of notice) pursuant to this Section 2.6. 3. DELIVERABLES. 3.1 DOCUMENTATION. In accordance with the time frame set forth in Section 3.2, herein, NEON shall deliver to Network Plus complete documentation regarding the as-built condition of the Network Plus Fibers. This documentation (hereinafter referred to as the "Deliverables") shall consist of the following, which NEON represents and warrants will be true and correct in all material respects: (a) As-Built Drawings reflecting the specifications set forth in Exhibit 3.1, attached hereto and incorporated herein. (b) Technical specifications of the optical fiber cable, associated splices and other equipment used in installing and providing the Network Plus Fibers. (c) List of names and 7 x 24 telephone numbers for NEON personnel responsible for maintaining and repairing the Network Plus Fibers. 3.2 DELIVERY AND NUMBER OF COPIES. The Deliverables shall be supplied within 30 days after the Acceptance Date, provided, however, that the Deliverable described in Section 3.1(c) shall be supplied upon execution of the Agreement. NEON shall provide 2 copies of the Deliverables to Network Plus. 3.3 WORKING VERSIONS. Upon execution of this Agreement, NEON will supply to Network Plus working versions of the Deliverables specified in Sections 3.1(a) and (b), and shall supply updated versions of the Deliverables every [*********] days thereafter, or, if sooner, immediately upon any material change thereto. 4. PAYMENT TERMS. 4.1 LEASE RATE. The lease rate for the Network Plus Fibers will be $[**] per month for each month during the Initial Term. The first payment will be due 30 days after the Acceptance Date. Network Plus shall have the right to set off against such payments any and all amounts owed by NEON to Network Plus (or to a Network Plus supplier) under this Agreement, including without limitation reimbursement for all -2- 3 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. costs associated with matters undertaken by Network Plus pursuant to the terms of this Agreement that are to be at NEON's cost and expense. 4.2 RATE ADJUSTMENTS. NEON agrees that the monthly lease rate for the Network Plus Fibers will be the lowest price per fiber mile under the Term hereof and for the fiber strand count herein charged by NEON for dark fiber leases on the route on which the Network Plus Fibers are located. Should NEON contract to lease dark fiber to a third party at a lower price per fiber mile on the same Term for the same fiber count, then effective as of the commencement of such lease, the lease rate payable hereunder for the relevant Network Plus Fibers shall be lowered to the same price per fiber mile as in said third party contract. NEON and Network Plus shall promptly thereafter execute an appropriate amendment to this Agreement to document such new lease amount. 4.3 INFLATION. On January 1, 1999 and on January 1st of each year thereafter during the Initial Term, the lease rate referred to in Section 4.1 hereof shall be increased by [**] of the percentage increase in the Consumer Price Index for Urban Wage Earners, United States, Base 1982-84 = 100, issued by the Bureau of Labor Statistics of the United States Department of Labor ("CPI-W"), for the immediately preceding calendar year. If the government body issuing the CPI-W ceases to use the 1982-84 average of 100 as the basis for calculation, the CPI-W shall be adjusted to the figure that would have been arrived at had the manner of so calculating the CPI-W not been so changed. If the CPI-W (or a successor or a substitute index) ceases to be published, or ceases to be generally recognized as an index of inflation, the parties hereto shall select and substitute an index which is mutually acceptable, published by a governmental or other disinterested body with appropriate reconciliation of the base of the substituted index with the base of the CPI-W. 4.4 SALES TAX. In addition to the lease rate, as adjusted periodically by Sections 4.2 and 4.3, Network Plus shall be responsible for any and all sales taxes levied on the grant of the IRU for the Network Plus Fiber Network and the lease payments pursuant to Section 4.1. 5. MAINTENANCE AND REPAIR OF THE NETWORK PLUS FIBER NETWORK. 5.1 EMERGENCY MAINTENANCE. During the Initial term, NEON shall use its best efforts to respond to any failure, interruption or impairment in the operation of Network Plus Fibers within [**] hours after receiving a report from Network Plus of any such failure, interruption or impairment, and Network Plus reserves the right to have a representative present to assist in any maintenance or repair. NEON will use its best efforts to have all fibers restored within [**] hours of any failure, interruption or impairment. When trouble is encountered on the Network Plus Fibers, Network Plus, to assist NEON in its maintenance activities, will diagnose the trouble through OTDR testing, if possible, and ascertain and notify NEON of the location address to the nearest cross street. NEON shall use its best efforts to perform maintenance and repair to correct any failure, interruption or impairment in the operation of the Network Plus Fibers in accordance with the procedures set forth in Exhibit 5.1 attached hereto and incorporated herein. In the event NEON fails to perform any necessary Emergency Maintenance in accordance with the procedures set forth in Exhibit 5.1, Network Plus shall have the right, with notice to NEON, but not the obligation, to immediately undertake such Emergency Maintenance of the Network Plus Fibers, at NEON's sole cost and expense. NEON shall not be required to provide emergency maintenance services during any Renewal Term, except as mutually agreed by each of the parties in writing. 5.2 ROUTINE MAINTENANCE. NEON will schedule and perform specific periodic maintenance and repair checks and services during the Initial Term, as set forth in NEON's Routine Maintenance Standards, attached hereto as Exhibit 5.2, from time to time on the Network Plus Fibers, at NEON's reasonable discretion, upon 21 days' advance notice to Network Plus, or at Network Plus's reasonable request. Network Plus and NEON will schedule such Routine Maintenance at mutually agreeable times, and NEON shall reschedule any Routine Maintenance as reasonably requested by Network Plus in writing at least [**] days prior to the date of any scheduled Routine Maintenance. Network Plus may request reasonable Routine Maintenance by delivering to NEON, not more than twice per agreement year, for NEON's approval, a statement detailing the maintenance checks and services Network Plus desires to be performed on the Network Plus Fibers. In the event NEON fails to perform any Routine Maintenance in accordance with NEON's Routine Maintenance Standards, after written notice by Network Plus, Network Plus shall have the right, but not the obligation, to undertake such Routine -3- 4 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Maintenance of the Network Plus Fibers, at NEON's sole cost and expense, using contractors pre-approved by NEON. 5.3 OUTAGE CREDITS. Network Plus shall receive a credit ("Outage Credit") against the fiber lease rate owed NEON hereunder in the event that the Network Plus Fibers do not operate within the parameters of the Specifications. The Outage Credit shall be equal to [**]th of the monthly lease rate, as adjusted, multiplied by the number of fibers out of compliance for each hour or portion thereof of noncompliance, as measured from the time Network Plus notifies NEON of the problem until the time NEON, or Network Plus in the event of self help, has corrected the problem. 5.4 SELF-HELP. In the event NEON, or others acting in Neon's behalf, after written notice to Network Plus, at any time during the term of this Agreement discontinues maintenance and/or repair of the Network Plus Fibers, Network Plus, or others acting in Network Plus's behalf, shall have the right, but not the obligation, to thereafter provide for the maintenance and repair of the Network Plus Fibers, at NEON's sole cost and expense. Any such discontinuance shall be upon no less than 6 months' prior written notice to Network Plus. In the event of such discontinuance or during any Renewal Period, NEON shall obtain for Network Plus, or others acting in Network Plus's behalf, adequate access to the Rights-of-Way (as hereinafter defined) on or within which the Network Plus fibers are located, for the purpose of permitting Network Plus, or others acting in Network Plus's behalf, to undertake such maintenance and repair of the Network Plus Fibers; provided, however, that such access shall be provided by NEON at Network Plus's sole cost and expense during any Renewal Period. 5.5 REPLACEMENT. In the event all or any part of the Network Plus Fiber Network shall require replacement during the Initial Term of this Agreement, such replacement shall be made as soon as reasonably practical, at NEON's sole cost and expense. If replacement of the Network Plus Fibers is required in accordance with the preceding sentence, NEON shall give Network Plus written notice of such replacement as soon as reasonably practicable before the replacement optical fiber cable is ordered from the manufacturer. Network Plus shall have the option, in its sole discretion, to be exercised by written notice to NEON within 20 days of Network Plus's receipt of notice from NEON to: (a) accept the proposed replacement optical fiber cable per Specifications; or (b) increase the number of optical fiber strands to be installed in such new cable for Network Plus's use. 5.6 ESCALATION. Within [**********] days after execution of this Agreement, the parties shall agree in writing upon a mutually acceptable plan for escalating troubles, outages and similar matters. 5.7 DAMAGE BY NETWORK PLUS. In the event that the electronics, optronics or other technologies employed by Network Plus interfere or adversely affect the use of or damage any portion of the NEON Network, including the Network Plus Fibers, (i) NEON shall be entitled to those indemnification rights set forth in Section 13.3 hereof, and (ii) NEON shall have no maintenance obligation or outage credit liability pursuant to this Section 5 as a result of such outage or damage. 6. WARRANTIES. 6.1 CONFORMITY WITH SPECIFICATIONS. NEON represents and warrants that the Network Plus Fiber Network shall: (a) be in full compliance with and operate within the parameters of the Specifications, and (b) be fit to perform as an optical fiber cable system; provided, however, that such warranties shall in no way be deemed to be a limitation on or in derogation of NEON's obligations under Section 5, herein. Any maintenance or repairs to the NEON System required as a result of a breach of the foregoing warranties shall be performed at NEON's sole cost and expense. 6.2 NEON CORPORATE AUTHORITY. NEON represents and warrants to Network Plus that it has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by NEON have been duly and validly authorized by all necessary corporate action on the part of NEON. 6.3 NETWORK PLUS CORPORATE AUTHORITY. Network Plus represents and warrants to NEON that it has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by Network -4- 5 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Plus have been duly and validly authorized by all necessary corporate action on the part of Network Plus. 7. TAXES AND FEES. 7.1 GENERAL. NEON shall be responsible for and shall timely pay any and all taxes and franchise, license and permit fees based on its use and ownership of the Network Plus Network. 7.2 REAL ESTATE TAXES. [**] 7.3 TAXES RELATING TO NETWORK PLUS. [**] 8. RELOCATION. If, for any reason, NEON is required by any third party, including, but not limited to, a governmental entity, or if NEON desires, for any other reason, to relocate any of the facilities used or required in providing the Network Plus Fibers or to relocate any of the facilities used or required in providing the NEON System and the Network Plus Fibers, NEON shall give Network Plus at least 60 days' (or such lesser period of notice that NEON may have received from such third party) prior written notice of any such relocation and Network Plus shall be entitled to terminate this Agreement, in accordance with the provisions, excluding the notification period, of Section 2.4 herein, by giving at least [**] days' prior written notice to NEON. In the event this Agreement is not terminated, NEON shall relocate the Network Plus Fibers and, to the extent NEON is not reimbursed for the cost of such relocation by a third party, governmental entity or otherwise, NEON shall be responsible for all the costs associated with the relocation of the Network Plus Fibers. 9. CONDEMNATION. Upon its receipt of a formal notice of condemnation or taking, NEON shall notify Network Plus immediately of any condemnation proceeding filed against NEON containing the Network Plus Fiber Network or the Utilities' property in or upon which the Network Plus Fiber Network shall have been installed. NEON shall also notify Network Plus of any similar threatened condemnation proceeding. If a taking or condemnation requires relocation of NEON containing the Network Plus Fiber Network, NEON shall use its best efforts to obtain an alternative route over which the Network Plus Fiber Network may be relocated, at no cost to Network Plus. NEON shall be entitled to use any condemnation proceeds otherwise payable to Network Plus to defray the reasonable cost of such alternative route. Any excess proceeds received by NEON with respect to Network Plus's interests shall be paid by NEON to Network Plus. Subject to the foregoing, both parties shall be entitled, to the extent permitted under applicable law, to participate in any condemnation proceedings to seek to obtain compensation by either joint or separate awards for the economic value of their respective interests. NEON shall not sell the Network Plus Fiber Network property to an acquiring agency, authority or other party in lieu of condemnation without prior written notice to and consent of Network Plus. 10. OWNERSHIP OF THE NETWORK PLUS FIBER NETWORK. 10.1 GENERAL. Network Plus shall have an undivided right of use of the Network Plus Fibers. It is understood and agreed that NEON must and does maintain legal title to the Network Plus Fiber Network subject to the IRU hereunder. Notwithstanding the foregoing, it is understood and agreed as between the parties that the grant of the IRU hereunder shall be treated for accounting and federal and all applicable state and local tax purposes as the sale and purchase of the Network Plus Fiber Network, and that on or after the Acceptance Date, Network Plus shall be treated as the owner of the Network Plus Fiber Network for such purposes; PROVIDED, however, that the IRU granted hereunder and Network Plus's ownership status for tax, accounting and all other legal purposes, shall revert to NEON upon the termination or expiration of this Agreement. The parties agree to file their respective income tax returns, property -5- 6 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. tax returns, and other returns and reports for their respective Impositions on such basis and, except as otherwise required by law, not to take any positions inconsistent therewith. 10.2 REPRESENTATIONS TO THIRD PARTIES. Except as otherwise provided in this Agreement, Network Plus shall not represent to any third party that any party other than NEON is the legal owner of the Network Plus Fibers. NEON acknowledges that Network Plus has contracted for the purchase of an IRU in the Network Plus Fibers and agrees that it will not take any action which is inconsistent with Network Plus's said position. 11. REQUIRED RIGHTS. 11.1 MAINTENANCE OF REQUIRED RIGHTS. NEON represents and warrants that NEON has obtained or shall use its best efforts to obtain all Required Rights and other rights, licenses, permits and authorizations as required to construct the Network Plus Fiber Network and shall use its best efforts to maintain in place all Required Rights necessary to operate the Network Plus Fiber Network throughout the Initial Term hereof. Upon Network Plus's written request, NEON shall make available for inspection by Network Plus, at NEON's offices, copies of all information, documents, agreements, reports, permits, drawings and specifications that in NEON's reasonable determination are material to the grant of the IRU to Network Plus and available to NEON including, without limitation, the Required Rights to the extent that the terms of each such document or the legal restrictions applicable to such information or document permits disclosure and further as may be redacted to protect disclosure of confidential business and proprietary terms. NEON represents and warrants that any redacted portions of the Required Rights documents shall not materially affect the rights of Network Plus granted hereunder. "Required Rights" means any and all rights, licenses, authorizations, rights of way, and other agreements necessary for the use of poles, conduit, cable, wire or other physical plant facilities, as well as any other such rights, licenses, authorizations (including any necessary state, tribal or federal authorizations such as environmental permits), rights of way and other agreements necessary for the installation and use of the Network Plus Fiber Network. 11.2 EXPIRATION OF REQUIRED RIGHTS. In the event that, despite exercising its best efforts to do so, NEON is unable to maintain in place one or more Required Rights throughout the Initial Term, NEON shall use commercially reasonable efforts to provide to Network Plus a Functionally Equivalent Communications Path at NEON's sole cost to replace the portion of the Network Plus Fiber Network that is affected by the loss of such Required Rights. "Functionally Equivalent Communications Path" shall mean telecommunications capabilities that, when used in conjunction with Network Plus's electronics, optronics or technologies (as they exist at the time of such loss of such Required Right), provide the same communications bandwidth between the same locations. In the event that, despite exercising commercially reasonable efforts pursuant to this Section 11.2, NEON is unable to provide a Functionally Equivalent Communications Path, the Term of the IRU hereunder with respect to the affected portion of the Network Plus Fiber Network shall automatically expire upon such expiration or termination of the Required Right, and the lease rate pursuant to Section 4.1 hereof shall be reduced in proportion to the reduction in the total number of fiber miles in the Network Plus Fiber Network. 12. REGENERATORS. 12.1 SPECIFICATIONS OF SHELTER SPACE. NEON shall provide Network Plus with [***] square feet of caged shelter space for placement of its electronics equipment at NEON regenerator sites located along the route with 7/24 unescorted access during the Initial Term. During any Renewal Period, NEON shall offer to Network Plus such shelter space at a commercially reasonable rate. The Shelter Equipment Layout is as identified in Exhibit 12.1. Network Plus shall pay NEON for all incremental actual buildout costs associated with providing Network Plus with secure separate shelter space and access. 12.2 BACKUP POWER. NEON will provide Network Plus with a minimum of [**] hours of battery backup and generator power at each regenerator site. Failure to provide such power during the Initial Term shall be deemed an Outage for purposes of Section 5.3. During any Renewal Period, NEON shall offer to Network Plus such backup and generator power at a commercially reasonable rate. In addition, NEON shall permit Network Plus to install a generator plus at each facility and shall permit Network Plus to attach its own generator to such plug in the event Network Plus desires to do so. -6- 7 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 12.3 ACCESS TO NETWORK. NEON shall provide Network Plus with access to the Network Plus Fiber Network at all regeneration sites and point of presence ("POP") locations. In addition, NEON shall provide Network Plus access to the Network Plus Fiber Network at existing cable splice points, as reasonably requested from time to time by Network Plus. All connections shall be performed by NEON in accordance with NEON's applicable specifications and operating procedures as approved by Network Plus, which approval shall not be unreasonably withheld, and shall be at Network Plus's sole cost and expense, so long as such cost and expense have been approved in advance in writing by Network Plus. Network Plus shall have no limitations on the types of electronics, optronics or technologies employed to utilize the Network Plus Fiber Network fibers, subject to mutually agreeable safety procedures and so long as such electronics, optronics or technologies do not interfere with the use of or present a risk of damage to any portion of the NEON Network. 13. LIMITATION OF LIABILITY; INDEMNIFICATION. 13.1 CONSEQUENTIAL DAMAGES. Neither party shall be liable to the other party for any indirect, special, punitive, or consequential damages (including, but not limited to, any claim from any customer for loss of service) arising under this Agreement or from any breach or partial breach of the provisions of this Agreement or arising out of any act or omission of either party, its employees, servants, contractors and/or agents. Each party agrees to use its best efforts to include in any agreement with any third party relating to the use of NEON or the Network Plus Fiber Network a waiver by such third party of any claim for indirect, special, punitive or consequential damages (including, but not limited to, any claim from any client or customer for loss of services) arising out of or as a result of any act or omission by either party, its employees, servants, contractors and/or agents. 13.2 CLAIMS AGAINST THIRD PARTIES. Nothing contained herein shall operate as a limitation on the right of either party hereto to bring an action for damages, including consequential damages, against any third party based on any acts or omissions of such third party as such acts or omissions may affect the construction, operation or use of NEON or the Network Plus Fiber Network provided, however, that each party hereto shall assign such rights or claims, execute such documents and do whatever else may be reasonably necessary to enable the injured party to pursue any such action against such third party. 13.3 INDEMNIFICATION. Each party agrees to indemnify, defend, protect and save the other harmless from and against any claim, damage, loss, liability, cost, and expense (including reasonable attorney's fees) in connection with any personal injury, including death, loss or damage to any property, or facilities of any party (including NEON, Network Plus or any other party operating or using any part of NEON or the Network Plus Fiber Network) arising out of or resulting in any way from the negligent acts or negligent omissions to act of such party, its employees, servants, contractors, and/or agents (and/or, in the case of NEON, for the negligent acts or negligent omissions to act of any other entity to whom it grants or has granted an IRU or otherwise leases fiber or provides services using the fiber) in connection with the exercise of its rights and obligations under the terms of this Agreement or any breach by such party of any obligation contained in this Agreement. 14. INSURANCE. Each party shall, at its own expense, secure and maintain in force throughout the term of this Agreement, General Liability Insurance with competent qualified issuing insurance companies, including the following coverages: Product Liability, Hazard of Premises/Operations (including explosion, collapse and underground coverages); Independent Contractors; Products and Completed Operations; Blanket Contractual Liability (covering the liability assumed in this Agreement); Personal Injury (including death); and Broad Form Property Damage in policy or policies of insurance such that the total available limits to all insured will not be less than $[**] Combined Single Limit for each occurrence and $[**] aggregated for each annual period. Such insurance may be provided in policy or policies, primary and excess, including so-called umbrella or catastrophe forms. All policies required by this Section 14 shall require the insurance companies to notify the other party at least 30 days prior to the Effective Date of any cancellation or material modification of such policies, and shall specify that the policy shall apply without consideration for the other policies separately carried and shall state that each insured is provided coverage as though a separate policy had been issued to each, except the insurer's liability shall not be increased beyond the amount for which the insurer would have been liable had only one insured been covered and only one -7- 8 deductible shall apply regardless of the number of insured covered. Each Party shall also carry such insurance as will protect it from all claims under any worker's compensation laws in effect that may be applicable to it. 15. ASSIGNMENT. 15.1 BY NETWORK PLUS. Except as provided in this Section 15.1, Network Plus shall not assign or otherwise transfer this Agreement, in whole or in part, to any other party without the prior written consent of NEON, which consent shall not be unreasonably withheld or delayed; provided, however, that without such consent, Network Plus shall have the right to assign, sublet or otherwise transfer this Agreement, in whole or in part, to any parent, subsidiary or affiliate of Network Plus which shall control, be under the control of or be under common control with Network Plus, or any corporation which purchases all or substantially all of the assets of Network Plus. Any assignee or transferee shall continue to perform the Network Plus obligations to NEON under this Agreement. It will be reasonable for NEON to take into consideration the financial stability and ability to pay of any assignee. 15.2 BY NEON. Except as provided in this Section 15.2, NEON shall not assign or otherwise transfer this Agreement, in whole or in part, to any other party without the prior written consent of Network Plus, which consent shall not be unreasonably withheld or delayed. It is expressly understood that Network Plus shall not consent to any such assignment if Network Plus has reasonably determined that the proposed assignee lacks appropriate financial viability and technical capabilities suitable for providing maintenance and repair of the Network Plus Fibers and is incapable of performing NEON's obligations under this Agreement to Network Plus's satisfaction. Notwithstanding the foregoing provisions of this Section 15.2, NEON shall have the right, without Network Plus's consent, to assign or otherwise transfer this Agreement to any parent, subsidiary or affiliate of NEON which shall control, be under the control of or be under common control with NEON, or any corporation which purchases all or substantially all of the assets of NEON. Any assignee or transferee shall continue to perform the NEON obligations to Network Plus under the terms of this Agreement. 15.3 PERMITTED SUCCESSORS AND ASSIGNS. Subject to the provisions of this Section 15, this Agreement, and each of the parties' respective rights and obligations hereunder, shall be binding upon and shall inure to the benefit of the parties hereto and each of their respective permitted successors and assigns. 16. LIENS. 16.1 IMPOSED THROUGH NEON. If the Network Plus Fiber Network becomes subject to any mechanics', artisans' or materialmen's lien, or other encumbrance, chargeable to or through NEON which interferes with Network Plus's use of the Network Plus Fiber Network or which is not fully subordinated to Network Plus's rights under this Agreement, NEON shall promptly cause such lien or encumbrance to be discharged and released of record (by payment, posting of bond, court deposit or other means without cost to Network Plus); provided, however, that if any such lien or encumbrance is not so discharged and released within 30 days after written notice by Network Plus to NEON, then Network Plus may pay or secure the release or discharge thereof and NEON shall indemnify Network Plus against all costs and expenses (including reasonable attorney's fees) incurred in discharging and releasing such lien or encumbrance. 16.2 IMPOSED THROUGH NETWORK PLUS. If NEON becomes subject to any mechanics', artisans', or materialmen's lien, or other encumbrances, chargeable to or through Network Plus which interferes with NEON, Network Plus shall promptly cause such lien or encumbrance to be discharged and released of record (by payment, posting of bond, court deposit or other means) without cost to NEON; provided, however, that if any such lien or encumbrance is not so discharged and released within 30 days after written notice by NEON to Network Plus, then NEON may pay or secure the release or discharge thereof and Network Plus shall indemnify NEON against all costs and expenses (including reasonable attorney's fees) incurred in discharging and releasing such lien or encumbrance. 16.3 NONDISTURBANCE AGREEMENTS. NEON agrees and acknowledges that it has no right to use the Network Plus Fibers during the Term hereof, and that, from and after the effective date of the Agreement, NEON shall keep the Network Plus Fiber Network and Network Plus's IRU granted hereunder free from (a) any liens of any third party attributable to NEON, and (b) any rights or claims of any third party attributable to -8- 9 NEON. As provided in the previous sentence, NEON shall obtain from any entity in favor of which NEON in its discretion shall have granted after the date hereof a security interest or lien on all or part of the Network Plus Fiber Network a written nondisturbance and attornment agreement substantially to the effect that the holder of such security interest or lien acknowledges Network Plus's rights and interests in and to the Network Plus Fiber Network and the IRU hereunder and agrees that the same shall not be diminished, disturbed, impaired or interfered with in any adverse respect by the holder of such security interest or lien, except to the extent that such holder may succeed to the rights of NEON to require Network Plus to perform its obligations hereunder. 17. FORCE MAJEURE. The obligations of the parties under this Agreement are subject to, and neither party shall be in default under this Agreement due to, any failure or delay in performance that is caused by strike or other labor problems; accidents; acts of God; fire; flood; adverse weather conditions; material or facility shortages or unavailability not resulting from such party's failure to timely place orders therefor; lack of transportation; the imposition of any governmental codes, ordinances, laws, rules, regulations or restrictions; condemnation or the exercise of rights of eminent domain; war or civil disorder; or any other cause beyond the reasonable control of either party hereto; provided, however, that the incidence of strikes or other labor unrest shall not delay commencement of the running of time periods which must expire before Network Plus shall be entitled to itself take corrective action under the terms of this Agreement; and provided further, that delays in NEON securing the necessary rights-of-way for installation of NEON containing the Network Plus Fiber Network shall not be deemed to be a force majeure, such delays being otherwise provided for in this Agreement. 18. DEFAULT. 18.1 BY NETWORK PLUS. Network Plus shall not be in default under this Agreement, or in breach of any provision hereof unless and until NEON shall have given Network Plus written notice of such breach and Network Plus shall have failed to cure the same within 30 days after receipt of such notice; provided, however, that where such breach cannot reasonably be cured within such 30 day period, if Network Plus shall proceed promptly to cure the same and prosecute such curing with due diligence, the time of curing such breach shall be extended for such period of time as may be necessary to complete such curing up to a maximum of 60 additional days. Upon the failure by Network Plus to timely cure any such breach after notice thereof from NEON, NEON shall have the right, in its sole discretion, to take such action as it may determine to be necessary to cure the breach or to terminate this Agreement upon written notice to Network Plus. 18.2 BY NEON. NEON shall not be in default under this Agreement or in breach of any provision hereof unless and until Network Plus shall have given NEON written notice of such breach and NEON shall have failed to cure the same within 30 days after receipt of such notice; provided however, that where such breach cannot reasonably be cured within such 30 day period, if NEON shall proceed promptly to cure the same and prosecute such curing with due diligence, the time for curing such breach shall be extended for such period of time as may be necessary to complete such curing. Upon the failure by NEON to timely cure any such breach after notice thereof from Network Plus, Network Plus shall have the right in its sole discretion to take such action as it may determine to be necessary to cure the breach or to terminate this Agreement. 18.3 REMEDIES. No remedy provided for herein is intended to be exclusive, but each remedy shall be cumulative and in addition to and may be exercised concurrently with any other remedy available to NEON or Network Plus at law or in equity. 19. CONFIDENTIALITY. The Parties executed a Confidentiality Agreement on May 11, 1998, attached hereto as Exhibit 19. Both parties acknowledge and agree that the terms of that Confidentiality Agreement apply to and are binding as to this Agreement in all respects. 20. NOTICES. 20.1 ADDRESSES. Unless otherwise provided herein, all notices and communications concerning this Agreement shall be in writing and addressed as follows: If to NEON: -9- 10 NorthEast Optic Network, Inc. 391 Totten Pond Road, Suite 401 Waltham, MA 02154-2014 Attention: President Facsimile Number: (781) 890-8404 with a copy to Hale and Dorr LLP 60 State Street Boston, MA 02109 Attention: Alexander A. Bernhard Facsimile Number: (617) 526-5000 If to NETWORK PLUS: Network Plus, Inc. 234 Copeland Street Quincy, MA 02169 Attention: Vice President, Network Operations Facsimile Number: (617) 786-4013 or at such other address as may be designated in writing to the other party. 20.2 METHOD OF DELIVERY. Unless otherwise provided herein, notices shall be sent by certified U.S. mail, return receipt requested, or by commercial overnight delivery service or by facsimile, and shall be deemed delivered: if sent by U.S. Mail, 5 days after deposit; if sent by facsimile, upon verification of receipt; or, if sent by commercial overnight delivery service, 1 business day after deposit. 21. GOVERNING LAW. This Agreement shall be interpreted and construed in accordance with the internal laws of the Commonwealth of Massachusetts without giving effect to its principles of conflicts of laws. 22. DISPUTE RESOLUTION. 22.1 GENERAL. It is the intent of Network Plus and NEON that any disputes which may arise between them, or between the employees of each of them, be resolved as quickly as possible. Quick resolution may, in certain circumstances, involve immediate decisions made by the parties' representatives. When such resolution is not possible, and depending upon the nature of the dispute, the parties hereto agree to resolve such disputes in accordance with the provisions of this Section 22. 22.2 ARBITRATION. Any dispute arising out of or related to this Agreement, which cannot be resolved by negotiation between the Parties, shall be settled in Boston, Massachusetts by binding arbitration in accordance with the arbitration rules and procedures of the American Arbitration Association. The costs of arbitration, including the fees and expenses of the arbitrator, shall be shared equally by the parties unless the arbitration award provides otherwise. Each party shall bear the cost of preparing and presenting its case. The parties agree that this provision and the Arbitrator's authority to grant relief shall be subject to the United States Arbitration Act 9 U.S.C. 1-16 et seq. ("USAA"), the provisions of this Agreement, and the ABA-AAA Code of Ethics for Arbitrators in Commercial Disputes. The parties agree that the arbitrator shall have no power or authority to make awards or issue orders of any kind except as expressly permitted by this Section 22.2, and in no event shall the arbitrator have the authority to make any award that provides for punitive or exemplary damages. The arbitrator's decision shall follow the substantive laws of the Commonwealth of Massachusetts and the plain meaning of the relevant documents, and shall be final and binding. The arbitrator shall make written findings of fact and conclusions of law in support of the award. The award may be confirmed and enforced in any court of competent jurisdiction. All post-award proceedings shall be governed by the USAA. 22.3 PENDING RESOLUTION. NEON shall continue to provide the Network Plus Fiber Network pursuant to this Agreement during the proceedings described in this Section 22 and Network Plus shall continue to make payments in accordance with this Agreement. -10- 11 23. MISCELLANEOUS. 23.1 HEADINGS. The headings of the Sections of this Agreement are strictly for convenience and shall not in any way be construed as amplifying or limiting any of the terms, provisions or conditions of this Agreement. 23.2 PLURALS AND CONJUNCTIONS. In construction of this Agreement, words used in the singular shall include the plural and the plural the singular, and "or" is used in the inclusive sense, in all cases where such meanings would be appropriate. 23.3 SEVERABILITY. In the event any term of this Agreement shall be held invalid, illegal or unenforceable in whole or in part, neither the validity of the remaining part of such term nor the validity of the remaining terms of this Agreement shall in any way be affected thereby. 23.4 AMENDMENTS. This Agreement may be amended only by a written instrument executed by the party against whom enforcement of the modification is sought. 23.5 NO IMPUTED WAIVER. No failure to exercise and no delay in exercising, on the part of either party hereto, any right, power or privilege hereunder shall operate as a waiver hereof, except as expressly provided herein. 23.6 ENTIRE AGREEMENT. This Agreement, and any Exhibits attached hereto or to be attached hereto, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede any and all prior negotiations, understandings and agreements with respect hereto, whether oral or written. 23.7 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and same instrument. -11- 12 IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day and year first above written. NETWORK PLUS, INC. By: /s/ James J. Crowley ------------------------------ James J. Crowley Executive Vice President NORTHEAST OPTIC NETWORK, INC. By: /s/ Victor Colantonio ------------------------------ Victor Colantonio President -12- 13 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT 2.3 TECHNICAL SPECIFICATIONS [**] -13- 14 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT 3.1 SPECIFICATIONS [**] ACCEPTANCE TEST PLAN NEON will conduct the following tests as part of its Acceptance Test Plan: 1. Non-destructive Attenuation Tests (End-to-End) 2. Optical Time Reflectometer Tests (OTDR) for each fiber Fiber acceptance testing will be performed to ensure that the _____ fibers will operate within the parameters of the Specifications set forth in this Agreement. More specifically, fiber acceptance testing will include the following: 3. Continuity Uniformity Tests: All fibers shall be tested bi-directionally at 1310 nm or 1550 run, as applicable, with an OTDR, the subsequent traces shall be inspected for end-to end continuity and for uniform attenuation. These traces will be stored on diskette and will be compatible with laser precision PC-OTDR software. 4. Optical Length: The OTDR will be used to determine the end-to-end optical length of the cable. 5. Splice Loss: Splice loss will be measured bi-directionally with an OTDR using the Splice Loss average method. The average splice loss shall be the measurement for splice loss set forth in Exhibit B to this Agreement. 6. End-to-End Loss: Using a light source and a power meter, the bi-directional, connector-to-connector attenuation will be measured for each fiber at 1310 nm and 1550 nm, as applicable. The acceptance average attenuation per kilometer on a per span basis shall be the attenuation set forth in Exhibit B to this Agreement. 7. Connector Assemblies -14- 15 Where required, all connector assemblies must be SCUPC physical contact design, and must meet or exceed 50 dB return loss. Connectors must have a mean insertion [less than] 0.4 dB with maximum insertion loss [less than] 0.6 dB. Connector assemblies will be placed in secure locations or have lockable covers. The splice enclosure at the termination point shall be of sufficient size to hold a slack loop of at least ten feet in length in each direction. Where fibers are terminated, terminations shall be made in both directions. AS-BUILT DRAWING SPECIFICATIONS NEON shall deliver As-built drawings in either Autocad or DXF format in addition to five (5) "11 by 17" hard copies. At a minimum, NEON's As-built drawings will include: 1. A route diagram that illustrates the location of the: End Locations Splice Locations Repeater Locations 2. Manufacturer, type of cable, fiber count, and reel numbers. 3. A summary of distances between the locations listed above and offset of cable in relation to fixed objects. 4. The type of cable construction between locations (buried, aerial, conduit) and any typical, or details needed for the specified type of construction. 5. Any geographic information deemed necessary to further clarify the route. 6. Detailed route information that includes: Street, road and highway names Railroad and or highway crossings Bridge Crossings Manhole and pole identification Pole-to-pole-pole distances in feet Manhole-to-manhole distances in feet Distances along or between any other attachment points on the route New conduit, manhole, and pole installations Building riser and lateral conduit locations, if any -15- 16 EXHIBIT 5.1 EMERGENCY MAINTENANCE PROCEDURES 1. NOTIFICATION New England Fiber shall notify NEON of interruption to service (signal loss, service degradation, out of specification performance or other conditions) to the fiber optic cable transmission system. NEON will dispatch technicians, vehicles and equipment to initiate the repair of such conditions and the restoration of service. 2. NEON CONTACTS In the event of a service interruption contact NEON by calling the following numbers in the sequence listed below. If the first option is not successful proceed to the second and so on. a. Normal Hours 1-800-891-5080 b. Network Monitoring Service (NORTEL SURVEILLANCE) 1-800-275-8726 select options 1 and 8 c. After Hours Digital Pager 888-768-9828 888-768-9829 d. Michael A. Musen 888-886-3123 This listing is subject to change. 3. DISPATCH: NEON shall respond to the notification immediately upon taking the call. For required emergency restoration. Technicians and appropriate equipment will report to the location controlling signals designated by Customer. NEON will log in at the location and pick up needed restoration materials. Restoration Activities: Troubleshooting will continue until the problem is found. The restoration sequence will be: - Report of Damage - Estimate time to repair - Notification of Utilities if needed (i.e. down pole). - Verbal report of tasks to repair given to the representative of Customer and to New England Fiber. 4. REPAIR: a. Channel or End Equipment Problems: NEON technicians will isolate the signal problem by reviewing the following: 1. visible alarms on bay or terminal equipment 2. computer generated equipment logs 3. review of performance statistics for common and customer equipment 4. application of DS1 & DS3 test equipment, fiber optic signal level meter and OTDR as required Testing and diagnostics will be coordinated with New England Fiber technicians. NEON technicians will remain on the call until all alarm or signal problems have been corrected. b. Outside Plant Repairs Commencing immediately, NEON will restore service to the link by fusion splice methods, as a first priority, or with mechanical connectors as a second choice. NEON will use its fusion splicer and OTDR power meter and -16- 17 all other equipment required, excluding only the parts in the restoration kit. The link will be brought into service, tested and protected until the cable can be placed on a permanent pole attachment or in conduit. Restoration test reports will be furnished to Customer after testing. The testing report includes end to end attenuation and photos along with a text describing the outage suitable for insurance purposes. Upon the satisfactory completion and acceptance of the testing by Customer, the service will be declared restored. -17- 18 5. END OF OUTAGE NEON, INC. ______________________________________________________ OUTAGE REPORT CUSTOMER:____________________DATE:_________________ TIME REPORTED______________ LOCATION:______________________________________________________________________ STREET: _____________________________ POLE/MANOLE: ___________________________ CAUSE OF OUTAGE: ______________________________________________________________ ARRIVAL AT DESIGNATED LOCATION:__________________________________________ AM/PM FIRST REPORT TO CUSTOMER:________________________________________________ AM/PM ESTIMATED TIME TO REPAIR:______________________________________________________ UTILITIES NOTIFIED: ELECTRIC: __________________ CONTACT:____________________ TELEPHONE: _________________ CONTACT:____________________ CATV:_______________________ CONTACT:____________________ OTHER:______________________ CONTACT:____________________ ANTICIPATED ACTIVITIES PRIOR TO RESTORATION: TIME OF RESTORATION: AM/PM REPAIRS MADE CUSTOMER MATERIAL USED DESCRIPTION: QUANTITY: ____________________________ ________________________________ ____________________________ ________________________________ ____________________________ ________________________________ ____________________________ ________________________________ ____________________________ ________________________________ TESTS COMPLETED DATE: ______________________ TIME: ___________________ AM/PM TECHNICIAN IN CHARGE: SIGNED:____________________________________________________________NEON, INC. CUSTOMER: LOCATION: STREET: CAUSE OF OUTAGE: -18- 19 EXHIBIT 5.2 ROUTINE MAINTENANCE STANDARDS RIDEOUTS Ride-outs of the fiber plant will be done on the following schedule: Transmission Lines Annual end to end surveillance Splice Locations Quarterly inspections Distribution Lines Semi Annual inspection Should New England Fiber require more frequent ride-outs, they will be done at New England Fiber's cost unless technical performance data indicate cable deterioration or failure. These ride-outs will be documented and will contain notes concerning general condition of Right-of-Way and plant. Items such as excavation activities, construction work, broken lashing wire, tree trimming, and so on will be noted and dealt with immediately. Follow up verification of corrective actions taken will be documented. FIBER TESTS OTDR measurements will be performed at a minimum semi-annually on all inactive fiber and compared against original installation readings to insure integrity. Tests will be performed more frequently if tests and performance data warrant additional measurements. -19- 20 EXHIBIT 11.1 NEON SITE SPECIFICATIONS 1. NEON will provide the following to (Customer): a) At least 120 square feet of floor space at Regenerator location for electronics which shall be physically separated and secured according to (Customer)'s specifications, with a separate entrance for 24-hour (Customer) access. b) Additional square footage may be required at specified sites for (Customer) Electronics and administrative purposes. c) Access to the site for (Customer) technicians/representatives and vehicles, including full rights of ingress and egress into the building to the (Customer) Space. d) Fire suppression system, as approved by (Customer) and such approval shall not be unreasonably denied. e) Security measures should be commensurate with the area of the site and should include: Best Locks(TM) and a motion detection lighting system outside the site. f) NEON will provide unistrut mounted to the ceiling above the (Customer) Space per (Customer) engineering specifications. g) All required Fiber Distribution Panels (FDPs) and relay racks. h) AC overhead light fixtures, along with at least four (4) 110 or 120 volt AC duplex outlets, to be located within six (6) feet of (Customer) Electronics within the (Customer) Space. i) Adequate equipment egress to be provided for (Customer)'s use. j) Adequate parking for (Customer) vehicles. k) All doors will bear signs with the following information: Emergency telephone numbers (police and fire), and prohibition of the use of cellular devices within the building. l) Joslyn Electronics AC lightning arresters or equivalent for protection of AC power entrances at NEON Sites and (Customer) Space. POWER 1) NEON will provide (Customer) with all AC and DC power at the NEON Site required to operate (Customer)'s equipment, to include the following: a) An emergency backup generator is required. The generator must be permanently installed at the NEON Site. The generator system must be sized to carry the full AC electrical load of the site, including all air conditioning and DC rectifiers. The generator system must be designed and maintained so as to carry the full AC electrical load of the site continuously for seventy-two (72) hours and have auto-transfer switching the capacity. b) A redundant -48V nominal, 100 A DC electrical feed is required at sites. These feeds will terminate at a Battery Distribution Circuit Breaker Board (BDCBB). The DC power plant will be equipped with redundant rectifiers so that the loss of one rectifier will not impede the delivery of (Customer)'s required current ratings. The 100 A redundant feed requires two (2) separate circuits to the BDCBB. Each circuit should be protected by an over-current protection device rated at 100 A. Each feed should be designed with a maximum loop voltage drop of one volt (1 V) at the full 100 A. The BDCBB will be installed in a relay rack separate from other equipment. The BDCBB will be equipped with ten (10) 20 A circuit breakers, ten (10) 30 A circuit breakers and four (4) 50 A breakers. The breakers must be alarmable. c) There will be no point in the DC electrical system past the site main AC disconnect to the BDCBB where AC or DC current must flow through a single over-current protection device. This requires that there must be more than one AC source to the rectifiers and there must be more than one rectifier. If battery disconnects are used there must be more than one battery system. d) The NEON's battery plant will be engineered and maintained so as to provide eight (8) hours reserve time for (Customer) Electronics). This will require the NEON's DC power feeds to be able to provide the full DC current load at a voltage no smaller in magnitude than 43.44V -20- 21 continuously for eight (8) hours will no commercial or generator AC power. e) NEON will provide to (Customer) wire termination access to the office principal ground bar of the NEON Site. ENTRANCE 1) NEON will follow (Customer)'s specifications for diverse entrance when bringing the (Customer) Fibers into the NEON Site. 2) (Customer) will have the right to bring in additional cables pursuant to Exhibit H, and/or conduit to the (Customer) Space and NEON will work with (Customer) to facilitate construction and/or installation for such activities. NEON will not charge any additional charges for the additional cable. 3) (Customer) will have the right to upgrade the NEON Site in the future to a POP site. (Customer) will provide notice to NEON of its intent to upgrade and will provide information regarding any additional facility requirements. MAINTENANCE 1) NEON will monitor and maintain the NEON Sites on a twenty-four (24) hour a day, seven (7) days a week basis. 2) NEON will notify (Customer) immediately upon NEON becoming aware of any potential service affecting condition(s). 3) NEON will maintain the grounds and exterior/interior of the building so as to provide an appropriate environment for housing telecommunications equipment. The facility must be clean and free of debris, the grounds must be free of weeds and trash, but in any case the facility shall be kept in a condition that meets no less than industry standards. 4) NEON will maintain batteries within the DC power plant in accordance with manufacturers' recommendations. ENVIRONMENTAL CONDITIONING 1) NEON will maintain the environmental temperature inside the NEON Sites at seventy-three degrees (73(degree sign)), plus or minus five degrees (+/- 5(degree sign)). Humidity must not exceed 55%. Environmental conditions within the NEON Sites will be maintained at a level which is appropriate for the operation of telecommunications equipment, which in any case shall be no less than manufacturer's or industry standards. ALARMS NEON will provide to (Customer) visibility to NEON Site environmental and power alarms. These alarms are dry-contract, normally open. All alarms will be collected and brought into (Customer) Space. When (Customer) sees an alarm condition, (Customer) will notify NEON and if appropriate, request NEON to dispatch personnel immediately. The necessary alarms for a POP site and a regenerator site are as follows: 1) Building Door 2) Building Temperature 3) Commercial AC Power 4) Fire & Smoke -21- 22 NONDISCLOSURE AGREEMENT PURPOSE: This NONDISCLOSURE AGREEMENT ("Agreement") dated May 11, 1998, is made this day by and between FiveCom, Inc. and FiveCom affiliates ("FiveCom") with its principal place of business at 391 Totten Pond Road, Suite 401, Waltham, MA 02154 and Network Plus of Quincy, MA 02169, in order to protect the confidential and proprietary information ("Confidential Information") to be disclosed by the parties to each other in connection with a matter of mutual interest ("Goal") during a meeting on May 11, 1998, and subsequent communications related thereto. For good and valuation consideration, the sufficiency of which is hereby acknowledged, the parties agree to the following provisions of the Agreement: 1. To facilitate discussion, meetings and the conduct of business between the parties regarding the Goal, it may be necessary for either party to disclose to the other Confidential Information defined as technical, customer, personnel and/or business information in written, graphic, oral or other tangible or intangible forms including, but not limited to, business plans, specifications, know how, records, field data, computer programs, drawings, graphics, schematics, logo designs, maps, models, samples, reports, conversations, notes, documentation or other types of confidential information associated with each party's physical plant, engineering, design, development plans, customer lists, and the marketing and construction of telecommunication services, future business plans and any other information marked "CONFIDENTIAL" by either party. Such Confidential Information may contain proprietary or confidential material or material subject to applicable laws regarding secrecy of communications or trade secrets. 2. This Agreement applies only to Confidential Information that is disclosed between the parties within two years after Effective Date above. 3. All Confidential Information acquired by either party from the other shall be and shall remain the exclusive property of the source. 4. Each party shall: receive in confidence any Confidential Information; limit access to such Confidential Information except as necessary for each party to work toward the Goal described above; and not disclose such Confidential Information to others without the prior written approval of the source. 5. Each party shall use such Confidential Information solely for purposes of work, services or analysis related to the Goal described above and for other purposes only upon such terms as may be agreed between the parties in writing. 6. Each party shall return original Confidential Information promptly to the disclosing party and, at the disclosing party's request, destroy any copies of such Confidential Information providing to the disclosing party a list of all such material destroyed. 7. Each party shall protect the disclosed Confidential Information from disclosure, using at least the same degree of care to prevent the unauthorized use, disclosure or publication of the Confidential Information as it uses to protect its own Confidential Information and shall return all Confidential Information upon either parties' written request to the other to do so at any time. 8. The obligations with respect to Confidential Information shall extend for a period of five years following the date of initial disclosure of that Confidential Information and such obligations shall extend beyond completion of the term of this Agreement. 9. Neither disclosure of Confidential Information nor this Agreement shall be construed as a license to make, use or sell the Confidential Information or derived products. 10. These Obligations do not apply to Confidential Information which: a. As shown by reasonably documented proof, was in the other's possession prior to receipt from the disclosure; or -22- 23 b. As shown by reasonably documented proof, was received by one party in good faith from a third party not subject to a confidential obligation to the other party; or c. Now is or later becomes publicly known through no breach of confidential obligation by the receiving party; or d. Is disclosed pursuant to a requirement imposed by a governmental agency or is otherwise required to be disclosed by operation of law, except that prior to any disclosure pursuant to this subsection, the party receiving the request for the Information shall notify the source party and shall give that party an opportunity to participate in objecting to production of the Confidential Information; or e. Was developed by the receiving party without the developing person(s) having access to any of the Confidential Information received from the other party. 11. It is agreed that a violation of any of the provisions of this Agreement will cause irreparable harm and injury to the non-violating party and that party shall be entitled, in addition to any other rights and remedies it may have at law or in equity, to an injunction enjoining and restraining the violating party from doing or continuing to do any such act and any other violations or threatened violations of this Agreement. Absent a showing of willful violation of this Agreement, neither party shall be liable to the other, whether in contract or in tort or otherwise, for special, indirect, incidental or consequential damages. 12. Neither this Agreement nor provision of Confidential Information pursuant to it shall be construed as an agreement, commitment, promise or representation by either party to do business with the other or to do anything except as set out specifically in the Agreement. 13. This Agreement shall be construed in accordance with the laws of the Commonwealth of Massachusetts. 14. This Agreement sets forth the entire agreement between the parties with respect to nondisclosure of Confidential Information pertaining to the Goal and supersedes all prior agreements and understanding with respect to this subject. This Agreement may be amended only by written agreement executed by both parties. This Agreement shall not be assigned or transferred by either party without the prior written consent of the other party. This Agreement shall be binding on agents, successors and permitted assigns of the party. 15. Unless terminated earlier by written notice, this Agreement shall remain in full force for two (2) years. -23- 24 FIVECOM, INC. NETWORK PLUS By: /s/ Victor Colantonio By: /s/ James J. Crowley ------------------------------ ------------------------------ Victor Colantonio, President James J. Crowley Executive Vice President FIVECOM, LLC By its Manager FiveCom, Inc. By: /s/ Victor Colantonio ------------------------------ Victor Colantonio, President FIVECOM OF MAINE, LLC By its Manager FiveCom, Inc. By: /s/ Victor Colantonio ------------------------------ Victor Colantonio, President NECOM, LLC By its Manager FiveCom, Inc. By: /s/ Victor Colantonio ------------------------------ Victor Colantonio, President -24- EX-10.8 5 LOAN AND SECURITY AGREEMENT 1 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Exhibit 10.8 LOAN AND SECURITY AGREEMENT BY AND BETWEEN NETWORK PLUS CORP. AND NETWORK PLUS, INC. AS BORROWER, GOLDMAN SACHS CREDIT PARTNERS L.P. AND FLEET NATIONAL BANK AS LENDERS, AND FLEET NATIONAL BANK AS AGENT, AND GOLDMAN SACHS CREDIT PARTNERS L.P. AS SYNDICATION & ARRANGEMENT AGENT DATED AS OF OCTOBER 7, 1998 2 TABLE OF CONTENTS
Page 1. DEFINITIONS AND CONSTRUCTION 1.1 Definitions. 1.2 Accounting Terms. 1.3 Code. 1.4 Construction. 1.5 Schedules and Exhibits. 2. LOAN AND TERMS OF PAYMENT. 2.1 Revolving Tranche A Advances. 2.2 Revolving Tranche B Advances. 2.3 Borrowing Procedures and Settlements. 2.4 Payments. 2.5 Overadvances. 2.6 Interest: Rates, Payments, and Calculations. 2.7 Collection of Accounts. 2.8 Crediting Payments; Application of Collections. 2.9 Designated Account. 2.10 Maintenance of Loan Account; Statements of Obligations. 2.11 Fees. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 Conditions Precedent to the Initial Advance. 3.2 Conditions Precedent to all Advances. 3.3 Condition Subsequent. 3.4 Term. 3.5 Effect of Termination. 3.6 Early Termination by Borrower. 3.7 [Intentionally Omitted]. 4. CREATION OF SECURITY INTEREST. 4.1 Grant of Security Interest. 4.2 Negotiable Collateral. 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral. 4.4 Delivery of Additional Documentation Required. 4.5 Power of Attorney. 4.6 Right to Inspect. 5. REPRESENTATIONS AND WARRANTIES. 5.1 No Encumbrances. 5.2 Eligible Accounts.
3 5.3 Compliance with Laws, etc. 5.4 Equipment. 5.5 Location of Inventory and Equipment. 5.6 [Intentionally omitted]. 5.7 Location of Chief Executive Office; FEIN. 5.8 Due Organization and Qualification; Subsidiaries. 5.9 Due Authorization; No Conflict. 5.10 Litigation. 5.11 No Material Adverse Change. 5.12 Fraudulent Transfer. 5.13 Employee Benefits. 5.14 Environmental Condition. 5.15 Brokerage Fees. 5.16 Year 2000 Compliance. 5.17 Intellectual Property. 5.18 Leases. 5.19 Material Carriers. 6. AFFIRMATIVE COVENANTS. 6.1 Accounting System. 6.2 Collateral Reporting. 6.3 Financial Statements, Reports, Certificates. 6.4 Billing System Conversion. 6.5 [intentionally omitted]. 6.6 [intentionally omitted]. 6.7 Title to Equipment. 6.8 Maintenance of Equipment. 6.9 Taxes. 6.10 Insurance. 6.11 No Setoffs or Counterclaims. 6.12 Location of Inventory and Equipment. 6.13 Compliance with Laws. 6.14 [Intentionally Omitted. 6.15 Leases. 6.16 Brokerage Commissions. 6.17 Year 2000 Compliance. 6.18 Projections. 6.19 Corporate Existence, etc. 6.20 Disclosure Updates. 6.21 Carrier Agreements. 7. NEGATIVE COVENANTS. 7.1 Indebtedness. 7.2 Liens. 7.3 Restrictions on Fundamental Changes.
4 7.4 Disposal of Assets. 7.5 Change Name. 7.6 Guarantee. 7.7 Nature of Business. 7.8 Prepayments and Amendments. 7.9 Change of Control. 7.10 [intentionally omitted]. 7.11 Distributions. 7.12 Accounting Methods. 7.13 Investments. 7.14 Transactions with Affiliates. 7.15 Suspension. 7.16 Compensation. 7.17 Use of Proceeds. 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees. 7.19 [Intentionally Omitted]. 7.20 Financial Covenants. 7.21 Capital Expenditures. 7.22 Contracts with Carriers. 7.23 Holding Company. 8. EVENTS OF DEFAULT. 9. THE LENDER GROUP'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. 9.2 Remedies Cumulative. 10. TAXES AND EXPENSES. 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. 11.2 The Lender Group's Liability for Collateral. 11.3 Indemnification. 12. NOTICES. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. 14. DESTRUCTION OF BORROWER'S DOCUMENTS. 15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS. 15.1 Assignments and Participations. 15.2 Successors. 16. AMENDMENTS; WAIVERS.
5 16.1 Amendments and Waivers. 16.2 No Waivers; Cumulative Remedies. 17. AGENT; THE LENDER GROUP. 17.1 Appointment and Authorization of Agent. 17.2 Delegation of Duties. 17.3 Liability of Agent and S&A Agent. 17.4 Reliance by Agent and S&A Agent. 17.5 Notice of Default or Event of Default. 17.6 Credit Decision. 17.7 Costs and Expenses; Indemnification. 17.8 Agent and S&A Agent in Individual Capacity. 17.9 Successor Agent and S&A Agent. 17.10 Withholding Tax. 17.11 Collateral Matters. 17.12 Restrictions on Actions by Lenders; Sharing of Payments. 17.13 Agency for Perfection. 17.14 Payments by Agent to the Lenders. 17.15 Concerning the Collateral and Related Loan Documents. 17.16 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information. 17.17 Several Obligations; No Liability 17.18 Legal Representation of GSCP. 18. GENERAL PROVISIONS. 18.1 Effectiveness. 18.2 Section Headings. 18.3 Interpretation. 18.4 Severability of Provisions. 18.5 Amendments in Writing. 18.6 Counterparts; Telefacsimile Execution. 18.7 Revival and Reinstatement of Obligations. 18.8 Integration. 18.9 GSCP as S&A Agent.
6 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of October 7, 1998, between and among, on the one hand, the financial institutions listed on the signature pages hereof (such financial institutions, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders"), FLEET NATIONAL BANK, a national banking association, as agent for the Lenders ("Agent"), with a place of business located at One Federal Street, Boston, Massachusetts 02110, GOLDMAN SACHS CREDIT PARTNERS L.P., a Bermuda limited partnership, as syndication and arrangement agent for the Lenders ("S&A Agent"), with a place of business at 85 Broad Street, New York, New York 10004, and, on the other hand, NETWORK PLUS, INC., a Massachusetts corporation ("NPI"), with its chief executive office located at 234 Copeland Street. Quincy, Massachusetts 02169, and, NETWORK PLUS CORP., a Delaware corporation ("Holdings"), with its chief executive office located at 234 Copeland Street. Quincy, Massachusetts 02169. The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account, General Intangible, or Negotiable Collateral. "Accounts" means all currently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the sale or lease of General Intangibles relating to the provision of telecommunications services, or the rendition of services by Borrower, irrespective of whether earned by performance, and any and all credit insurance, guaranties, or security therefor. "Advances" means Tranche A Advances or Tranche B Advances, as the context requires. "Affiliate" means, as applied to any Person, any other Person who, directly or indirectly, controls, is controlled by, is under common control with such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to vote 5% or more of the Stock having ordinary voting power for the election of directors (or comparable managers) or the direct or indirect power to direct the management and policies of a Person. 7 "Agent" means FNB, solely in its capacity as agent for the Lenders, and shall include any successor agent. "Agent Account" has the meaning set forth in Section 2.7. "Agent's Liens" means the Agent's Tranche A Liens and the Agent's Tranche B Liens. "Agent-Related Persons" means Agent and any successor agent together with their respective Affiliates, and the officers, directors, employees, counsel, agents, and attorneys-in-fact of such Persons and their Affiliates. "Agents' Side Letter" means a letter agreement, dated as of even date herewith, between Agent and S&A Agent, in form and substance reasonably acceptable to Agent and S&A Agent. "Agent's Tranche A Liens" means the Liens on the Collateral granted by Borrower to Agent for the benefit of the Tranche A Lenders under this Agreement and the other Loan Documents. "Agent's Tranche B Liens" means the Liens on the Collateral granted by Borrower to Agent for the benefit of the Tranche B Lenders under this Agreement and the other Loan Documents. "Agreement" has the meaning set forth in the preamble hereto. "Assignee" has the meaning set forth in Section 15.1. "Assignment and Acceptance" means an Assignment and Acceptance in the form of Exhibit A-1 attached hereto. "Authorized Person" means any officer or other employee of Borrower. "Availability" means the sum of Tranche A Availability plus Tranche B Availability. "Average Unused Portion of the Maximum Tranche A Amount" means, as of any date of determination, (a) the Maximum Tranche A Amount, less (b) the average Daily Balance of Tranche A Advances that were outstanding during the immediately preceding month. "Average Unused Portion of Maximum Tranche B Amount" means, as of any date of determination, (a) the Maximum Tranche B Amount, less (b) the average Daily Balance of Tranche B Advances that were outstanding during the immediately preceding month. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C. Section 101 8 et seq.), as amended, and any successor statute. "Base Rate" means, as of any date of determination, the variable rate of interest, per annum, most recently publicly announced by The Chase Manhattan Bank, or any successor thereto, as its prime lending rate in effect at its principal office in New York City, irrespective of whether such announced rate is the best rate available from such financial institution, and such institution may make loans at rates of interest above, or below any such announced prime lending rate. "Bell Atlantic Interconnection Agreement" means that certain Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996, dated as of September 4, 1998, by and between New England Telephone and Telegraph Company d/b/a Bell Atlantic-Massachusetts and Network Plus, Inc. "Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA) within the past six years. "Billing System Conversion" means the development and implementation by Borrower of a billing system administered wholly or primarily by Borrower, and the conversion from Borrower's current billing system administered by a third Person to such billing system administered wholly or primarily by Borrower. "Borrower" means NPI and Holdings, individually and collectively, and jointly and severally. "Borrower's Books" means all of Borrower's books and records including: ledgers; records indicating, summarizing, or evidencing Borrower's properties or assets (including the Collateral) or liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs, or other computer prepared information. "Borrowing" means a borrowing hereunder consisting of Advances made on the same day by the Lenders, or Agent on behalf thereof, to Borrower. "Borrowing Base" has the meaning set forth in Section 2.1(a). "Borrowing Base Certificate" means a certificate in the form of Exhibit B-1. "Business Day" means any day that is not a Saturday, Sunday, or other day on which national banks are authorized or required to close. "Call Data Record" means a computer record evidencing a telephony or internet protocol transaction for which Borrower is entitled to receive payment from its Account Debtors. 9 "Capital Expenditures" means expenditures made or liabilities incurred for the acquisition of fixed assets or improvements, replacements, substitutions, or additions thereto that are required to be accounted for as capital expenditures under GAAP, including the total principal portion of Capitalized Lease Obligations. "Capital Lease" means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. "Capitalized Lease Obligation" means any Indebtedness represented by obligations under Capital Lease. "Carrier" means any provider of long distance telecommunications access with whom Borrower from time to time does business. "Carrier Agreement" means each contract or agreement in effect between Borrower and a Carrier. "Casualty Loss" means (i) the loss, damage, or destruction of any asset owned or used by Borrower or any of its Subsidiaries, or (ii) the condemnation, confiscation, or other taking, in whole or in part, of any such asset. "Change of Control" shall be deemed to have occurred at such time as: (a) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act), other than Permitted Holders, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 25% of the total voting power of all classes of Stock then outstanding of Holdings entitled to vote in the election of directors; (b) a majority of members of the board of directors of Holdings shall not be Continuing Directors; (c) the Permitted Holders shall cease to own and control, directly and of record, (1) prior to an initial public offering of the capital Stock of Holdings, more than 75% of the issued and outstanding capital Stock of Holdings, or (2) from and after an initial public offering of the capital Stock of Holdings, more than 50% of the issued and outstanding capital Stock of Holdings; or (d) Holdings shall cease to own and control, directly and of record, 100% of the issued and outstanding capital Stock of NPI. "Churn" means, as of any date of determination, the aggregate number on a consolidated basis, of Customers whose telecommunications service account with Borrower is deactivated during the immediately preceding one month period, divided by, the average of the aggregate number of Customers as of the first day of such one month period and the aggregate number of Customers as of the last day of such one month period. "Clearinghouse" means a call transaction billing-and- collection clearinghouse. "Closing Date" means the date of the making of the initial Advance. "Closing Date Business Plan" means the set of Projections of Borrower for the 3 year period following the Closing Date (on a year by year basis, and for the 1 year period 10 following the Closing Date, on a month by month basis), in form and substance (including as to scope and underlying assumptions) satisfactory to Agent and S&A Agent, each in its sole and absolute discretion. "Code" means the New York Uniform Commercial Code. "Collateral" means all of Borrower's right, title, and interest in and to each of the following: (a) the Accounts (b) Borrower's Books, (c) the Equipment, (d) the General Intangibles, (e) the Inventory, (f) the Investment Property, (g) the Negotiable Collateral, (h) any money, or other assets of Borrower that now or hereafter come into the possession, custody, or control of any member of the Lender Group, and (i) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Borrower's Books, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real Property, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. "Collateral Access Agreement" means a landlord waiver or consent, mortgagee waiver or consent, Equipment lessor or Equipment secured financier waiver or consent, bailee letter, or a similar acknowledgement agreement of any warehouseman, processor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in the Collateral consisting of goods, or of lessors or secured financiers of Equipment to Borrower, in each case, in form and substance satisfactory to Agent. "Collections" means all cash, checks, notes, instruments, and other items of payment (including, insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds). "Commitment" means Tranche A Commitment, Tranche B Commitment, or Total Commitment, as the context requires. 11 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. "Communications Act" means the Communications Act of 1934, as amended, 47 U.S.C. sec. 151 et seq. "Compliance Certificate" means a certificate substantially in the form of Exhibit C-1 and delivered by the chief accounting officer of Borrower to Agent. "Continuing Director" means, as of any date of determination, a member of the board of directors of Holdings who (a) was a member of the board of directors of Holdings on the Closing Date, or (b) was nominated to be a member of the board of directors of Holdings by a majority of the Continuing Directors then in office to fill a vacancy left by the death, expiration of term, permanent disability, or resignation of a Continuing Director. "Customer" means, as of any date of determination, each Person reflected as a direct retail end-user of Borrower's telecommunication services on Borrower's Books. "Customer List Escrow Agent" means Data Securities International, Inc. "Customer List Escrow Agreement" means that certain Customer List Escrow Agreement among Borrower, Agent, and Customer List Escrow Agent. "Daily Balance" means the amount of an Obligation owed at the end of a given day. "Debt to Annualized Quarterly Revenue Ratio" means, as of any date of determination (which shall be the last day of each month), the ratio of (i) Indebtedness of Borrower to the Lender Group hereunder as of such date, to (ii) 4 times Borrower's revenue for the immediately preceding 3 months as to which Borrower has delivered its monthly financial statements to Agent pursuant to Section 6.3 hereof. "Default" means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default. "Designated Account" means account number [**] of Borrower maintained with Borrower's Designated Account Bank, or such other deposit account of Borrower (located within the United States) that has been designated, in writing and from time to time, by Borrower to Agent. "Designated Account Bank" means FNB, whose office is located at One Federal Street, Boston, Massachusetts 02110, and whose ABA number is 011000138. "Dilution" means, in each case based upon the experience of the immediately prior 90 days, the result of dividing the Dollar amount of (a) bad debt write-downs, discounts, advertising, promotions, credits, or other dilutive items with respect to the Accounts (collectively, the "Dilutive Items"), by (b) Borrower's Collections (excluding extraordinary items) plus the Dollar amount of clause (a). The foregoing notwithstanding the Dilutive Items shall not include non-recurring items disclosed to Agent, which, in Agent's reasonable 12 judgment, are not indicative of a trend. "Dilution Reserve" means, as of any date of determination, an amount sufficient to reduce the advance rate against Eligible Accounts by one percentage point for each percentage point by which Dilution is in excess of 5%. "Direct Account" means an Account that is billed directly by Borrower (including Accounts with respect to which the bills are prepared for Borrower by another Person) and not submitted by Borrower for billing and collection by any other Person (including such other Persons as LECs or Clearinghouses). "Disbursement Letter" means an instructional letter executed and delivered by Borrower to Agent regarding the extensions of credit to be made on the Closing Date, the form and substance of which shall be satisfactory to Agent. "Dollars" or "$" means United States dollars. "EBITDA" means, with respect to any fiscal period, the sum of Borrower's net earnings (or loss) before net interest expense, taxes, amortization, and depreciation for such period as determined in accordance with GAAP. "Eligible Accounts" means those Direct Accounts created by Borrower in the ordinary course of business, that arise out of NPI's sale of goods, sale of General Intangibles relating to the providing of telecommunication services, or rendition of services, that comply with each and all of the representations and warranties respecting Accounts made by Borrower to Agent in the Loan Documents, and that are and at all times continue to be acceptable to Agent in all respects; provided, however, that standards of eligibility may be fixed and revised from time to time by Agent in Agent's reasonable credit judgment. Eligible Accounts shall not include the following: (a) Accounts that the Account Debtor has failed to pay within 60 days of invoice date, or Accounts that are not invoiced by NPI on its normal credit cycle; (b) Accounts with respect to which the Account Debtor is an Affiliate or agent of Borrower; (c) Accounts that are not payable in Dollars; (d) Accounts with respect to which the Account Debtor: (i) does not maintain a significant business office in the United States, or (ii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof unless (y) the Account is supported by an irrevocable letter of credit satisfactory to Agent (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Agent and is directly drawable by Agent, or (z) the Account is covered by credit insurance in form and amount, and by an insurer, satisfactory to Agent; 13 (e) Accounts with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which NPI has complied, to the satisfaction of Agent, with the Assignment of Claims Act, 31 U.S.C. Section 3727), or (ii) any State of the United States (exclusive, however, of Accounts owed by any State that does not have a statutory counterpart to the Assignment of Claims Act); (f) Accounts with respect to which the Account Debtor is a creditor of Borrower (to whom Borrower's obligations exceed $2,500), has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to the Account, to the extent of such setoff, dispute, or claim; (g) Accounts with respect to an Account Debtor whose total obligations to NPI exceed (i) as to those Account Debtors listed on Schedule E-1, 20% of all Eligible Accounts, or (ii) as to any other Account Debtor, 10% of all Eligible Accounts, in each case, to the extent of the obligations owing by such Account Debtor in excess of such percentage; (h) Accounts with respect to which the Account Debtor is or reasonably could be expected to become subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; (i) Accounts the collection of which Agent, in its reasonable credit judgment, believes to be doubtful by reason of the Account Debtor's financial condition or otherwise; (j) Accounts with respect to which the telecommunications services giving rise to such Account have not been provided to and utilized by the Account Debtor, or any services giving rise to such Account have not been performed, consumed, or utilized by the Account Debtor, or the Account does not otherwise represent a final sale; (k) Accounts with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other state that requires a creditor to file a Business Activity Report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless NPI has qualified to do business in New Jersey, Minnesota, Indiana, West Virginia, or such other states, or has filed a Notice of Business Activities Report with the applicable division of taxation, the department of revenue, or with such other state offices, as appropriate, for the then-current year, or is exempt from such filing requirement; (l) Accounts that are not Direct Accounts; (m) Accounts that have not yet been billed to the Account Debtor (provided that such Accounts may qualify as Eligible Unbilled Accounts if they otherwise meet the criteria applicable thereto); and 14 (n) Accounts that represent progress payments or other advance billings that are due prior to the completion of performance by Borrower of the subject contract for goods or services. "Eligible Transferee" means: (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $250,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of any such country, and having total assets in excess of $250,000,000; provided that such bank is acting through a branch or agency located in the United States; (c) a finance company, insurance company or other financial institution or fund that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and having (together with its Affiliates) total assets in excess of $250,000,000; (d) any Affiliate (other than individuals) of a pre-existing Lender; (e) so long as no Event of Default has occurred and is continuing, any other Person approved by S&A Agent, Agent, and Borrower; or (f) during the continuation of an Event of Default, any other Person approved by S&A Agent and Agent, provided, that neither Agent, S&A Agent, nor the Lender proposing to make the transfer to such Person knows or reasonably should know that the primary line of business of such other Person directly competes with the business of Borrower. "Eligible Unbilled Account" means, as of any date of determination, a Direct Account of NPI that (a) resulted from a transaction that occurred prior to the date of determination and with respect to which NPI has an existing call transaction record in a format that is capable of being billed by NPI to its customer in accordance with NPI's usual billing methods for Direct Accounts but that has not yet been billed and invoiced to such customer, (b) does not relate to a Call Data Record received by Borrower more than 60 days prior to the date of determination, and (c) in all other respects would qualify as an Eligible Account but for the fact that it has not yet been billed and invoiced to NPI's customer. Eligible Unbilled Accounts shall be net of contra accounts. If an Account that, immediately prior to being billed and invoiced, was an Eligible Unbilled Account, then is billed and invoiced, it thereupon shall cease to be an Eligible Unbilled Account, and it shall become an Eligible Account if it then meets the criteria applicable thereto. "Equipment" means all of Borrower's present and hereafter acquired machinery, machine tools, motors, equipment, furniture, furnishings, fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including, (a) any assets acquired by Borrower with the proceeds of an Advance, (b) any interest of Borrower in any of the foregoing, and (c) all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, 29 U.S.C. Sections 1000 et seq., amendments thereto, successor statutes, and regulations or guidance promulgated thereunder. 15 "ERISA Affiliate" means (a) any corporation subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any party subject to ERISA that is a party to an arrangement with Borrower and whose employees are aggregated with the employees of Borrower under IRC Section 414(o). "Event of Default" has the meaning set forth in Section 8. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and any successor statute thereto. "Existing Lender" means FNB. "Family Member" means, with respect to any individual, any other individual having a relationship by blood (to the second degree of consanguinity), marriage, or adoption to such individual. "Family Trusts" means, with respect to any individual, trusts or other estate planning vehicles established for the benefit of Family Members of such individual and in respect of which such individual serves as trustee or in a similar capacity. "FCC" means the Federal Communications Commission or any governmental body or agency succeeding to the functions thereof. "FCC Rules" means Title 47 of the Code of Federal Regulations, as amended at any time and from time to time, and FCC decisions issued pursuant to the adoption of such regulations. "Fee Letter" means that certain fee letter, dated as of even date herewith, between Borrower and S&A Agent, in form and substance reasonably satisfactory to S&A Agent. "FEIN" means Federal Employer Identification Number. "FNB" means Fleet National Bank, a national banking association. "Funding Date" means the date on which a Borrowing occurs. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangibles" means all of Borrower's present and future general 16 intangibles and other personal property (including contract rights, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, literature, reports, catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), other than goods, Accounts, and Negotiable Collateral. "Governing Documents" means, with respect to any person, the certificate or articles of incorporation, by-laws, or other organizational or governing documents of such Person. "Governmental Authority" shall mean any federal, state, local, or other governmental or administrative body, instrumentality, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body. "GSCP" means Goldman Sachs Credit Partners L.P., a Bermuda limited partnership. "Hale Subordination Agreement" means a subordination agreement, in form and substance satisfactory to each Lender, executed by Robert T. Hale, Jr. and NPI to Agent for the benefit of the Lenders. "Hales" means, individually and collectively, Robert T. Hale, Sr. and Robert T. Hale, Jr. "Hazardous Materials" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "Holdings" has the meaning set forth in the preamble to this Agreement. "Indebtedness" means: (a) all obligations of Borrower for borrowed money, (b) all obligations of Borrower evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of Borrower in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all Capitalized 17 Lease Obligations (it being understood that Borrower's obligations under operating leases shall not be deemed Indebtedness), (d) all obligations or liabilities of others secured by a Lien on any property or asset of Borrower, irrespective of whether such obligation or liability is assumed, and (e) any obligation of Borrower guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with recourse to Borrower) any indebtedness, lease, dividend, letter of credit, or other obligation of any other Person, to the extent such obligation of such other Person would be "Indebtedness" pursuant to clauses (a) - (d) of this definition if such obligation were an obligation of Borrower. "Indemnified Liabilities" has the meaning set forth in Section 11.3. "Indemnified Person" has the meaning set forth in Section 11.3. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Intangible Assets" means, with respect to any Person, that portion of the book value of all of such Person's assets that would be treated as intangibles under GAAP. "Intercompany Subordination Agreement" means a subordination agreement, in form and substance satisfactory to each Lender, executed by Holdings and NPI to Agent for the benefit of the Lenders. "Interest Rate or Currency Protection Agreement" of any Person means any forward contract, futures contract, swap, option, or other financial arrangement (including caps, floors, collars, and similar arrangements) relating to, or the value of which is dependent upon, interest rates or currency exchange rates or indices. "Inventory" means all present and future inventory in which Borrower has any interest, including goods held for sale or lease or to be furnished under a contract of service and all of Borrower's present and future raw materials, work in process, finished goods, and packing and shipping materials, wherever located. "Investments" means, with respect to any Person, all investments by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide accounts receivable arising from the sale of goods or services in the ordinary course of business consistent with past practice), purchases or other acquisitions for consideration of Indebtedness, Stock, or other securities, and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP "Investment Property" means "investment property" as that term is defined in 18 Section 9-115 of the Code. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "LEC" means a local exchange carrier or telephone company that provides "basic" (as defined by the FCC) telecommunications services to its customers and from whom Borrower may receive payments with respect to Accounts. "Legal Requirements" means all applicable international, foreign, federal, state, and local laws, judgments, decrees, orders, statutes, ordinances, rules, regulations, or Permits. "Lender" and "Lenders" have the respective meanings set forth in the preamble to this Agreement, and shall include any other Person made a party to this Agreement in accordance with the provisions of Section 15.1 hereof. "Lender Group" means, individually and collectively, each of the individual Lenders, Agent, and S&A Agent. "Lender Group Expenses" means all: costs or expenses (including taxes, and insurance premiums) required to be paid by Borrower under any of the Loan Documents that are paid or incurred by the Lender Group; reasonable fees or charges paid or incurred by the Lender Group in connection with the Lender Group's transactions with Borrower, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC (or equivalent) searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Collateral appraisals); costs and expenses incurred by Agent in the disbursement of funds to Borrower (by wire transfer or otherwise); charges paid or incurred by Agent resulting from the dishonor of checks; reasonable costs and expenses paid or incurred by the Lender Group to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated; reasonable costs and expenses paid or incurred by Agent in examining Borrower's Books; reasonable costs and expenses of third party claims or any other suit paid or incurred by the Lender Group in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or the Lender Group's relationship with Borrower (or any of its Subsidiaries party to one or more Loan Documents); and the Lender Group's reasonable attorneys fees and expenses incurred in advising, structuring, drafting, reviewing, administering, amending, terminating, enforcing (including attorneys fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning Borrower or any guarantor of the Obligations), defending, or concerning the Loan Documents, irrespective of whether suit is brought. "Lender-Related Person" means, with respect to any Lender, such Lender, together with such Lender's Affiliates, and the officers, directors, employees, counsel, agents, 19 and attorneys-in-fact of such Lender and such Lender's Affiliates. "Lien" means any interest in property securing an obligation owed to, or a claim by, any Person other than the owner of the property, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, adverse claim or charge, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes. "Loan Account" has the meaning set forth in Section 2.10. "Loan Documents" means this Agreement, the Disbursement Letter, the Fee Letter, the Lockbox Agreements, the Suretyship Agreement, the Stock Pledge Agreement, the Intercompany Subordination Agreement, any note or notes executed by Borrower and payable to the Lender Group, and any other agreement entered into, now or in the future, in connection with this Agreement. "Lockbox Account" shall mean account number [**] maintained at FNB, as Agent. "Lockbox Agreements" shall have the meaning ascribed thereto in Section 2.7. "Lockbox Bank" means FNB. "Lockboxes" shall have the meaning ascribed thereto in Section 2.7. "Material Adverse Change" means (a) a material adverse change in the business, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrower, (b) the material impairment of Borrower's ability to perform its obligations under the Loan Documents to which it is a party or of the Lender Group to enforce the Obligations or realize upon the Collateral, (c) a material adverse effect on the priority of Agent's Liens with respect to the Collateral, the value of the Collateral, or the amount that the Lender Group would be likely to receive (after giving consideration to delays in payment and costs of enforcement) in the liquidation of such Collateral. "Material Carriers" means, as of any date of determination, all Carriers for whom Borrower's volume of telecommunications traffic (measured in minutes) through such Carrier for the immediately preceding month exceeds 10% of the aggregate amount of Borrower's volume of telecommunications traffic (measured in minutes) through Carriers for such period; provided, however, that for purposes of this definition, telecommunications traffic shall not include any tariffed LEC accessed origination or termination minutes. "Maturity Date" has the meaning set forth in Section 3.4. 20 "Maximum Amount" means the sum of the Maximum Tranche A Amount and the Maximum Tranche B Amount. "Maximum Tranche A Amount" means $30,000,000. "Maximum Tranche B Amount" means $30,000,000. "Multiemployer Plan" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to contribute, within the past six years. "Negotiable Collateral" means all of a Person's present and future letters of credit, notes, drafts, instruments, Investment Property, documents, personal property leases (wherein such Person is the lessor), chattel paper, and Books relating to any of the foregoing. "NPI" has the meaning set forth in the preamble to this Agreement. "Obligations" means all loans, Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), premiums, liabilities (including all amounts charged to Borrower's Loan Account pursuant hereto), obligations, fees, charges, costs, or Lender Group Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties owing by Borrower to the Lender Group of any kind and description pursuant to or evidenced by this Agreement or the other Loan Documents (irrespective of whether for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due and all Lender Group Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. "Overadvance" has the meaning set forth in Section 2.5. "Participant" has the meaning set forth in Section 15.1(e). "Pay-Off Letter" means a letter, in form and substance reasonably satisfactory to Agent, from Existing Lender respecting the amount necessary to repay in full all of the obligations of Borrower owing to Existing Lender and obtain a termination or release of all of the Liens existing in favor of Existing Lender in and to the properties or assets of Borrower. "PBGC" means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto. "Permits" of a Person shall mean all rights, franchises, permits, authorities, licenses, certificates of approval or authorizations, including licenses and other authorizations issuable by a Governmental Authority, which pursuant to applicable Legal Requirements are necessary to permit such Person lawfully to conduct and operate its business as currently 21 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. conducted and to own and use its assets. "Permitted Disposition" means (a) the sale, exchange, license, lease or other disposition of telephony services and equipment ancillary thereto, in the ordinary course of Borrower's business, (b) the sale, exchange, or other disposition of Borrower's Equipment that is substantially worn, damaged, or obsolete in the ordinary course of Borrower's business, (c) so long as no Event of Default has occurred and is continuing or would result therefrom, the sale of any asset pursuant to a Permitted Sale and Leaseback Transaction, or (d) so long as no Event of Default has occurred and is continuing or would result therefrom, other dispositions of Borrower's Equipment with an aggregate value not to exceed $[**] in any 12 month period. "Permitted Holders" means the Hales, their respective Family Members, and their respective Family Trusts. "Permitted Indebtedness" means Indebtedness of Borrower permitted pursuant to Section 7.1. "Permitted Interest Rate or Currency Protection Agreement" of any Person means any Interest Rate or Currency Protection Agreement entered into with one or more financial institutions in the ordinary course of business that is designed to protect such Person against fluctuations in interest rates or currency exchange rates with respect to Indebtedness of such Person and which shall have a notional amount not greater than the payments due with respect to the Indebtedness hedged thereby and not for purposes of speculation. "Permitted Investments" means (a) direct obligations of the United States of America, or any agency thereof if backed by the full faith and credit of the United States of America, or obligations fully guaranteed by the United States of America, or any agency thereof if backed by the full faith and credit of the United States of America, in each case denominated in Dollars and maturing within 1 year from the date of creation thereof, (b) commercial paper, denominated in Dollars, issued by a corporation (other than Obligors or any Affiliate of any Obligor) organized under the laws of any State of the United States of America or the District of Columbia maturing within 1 year from the date of creation thereof rated in the highest grade by a nationally recognized credit rating agency, (c) time deposits denominated in Dollars and maturing within 1 year from the date of creation thereof with, including certificates of deposit issued by, any office located in the United States of America of any bank or trust company which is organized under the laws of the United States of America or any state thereof and has capital, surplus, and undivided profits aggregating at least $500,000,000, (d) shares of any money market mutual fund holding only obligations denominated in Dollars rated at least AAA or the equivalent thereof by Standard & Poor's Corporation or at least Aaa or the equivalent thereof by Moody's Investors Service, Inc., or (e) loans, advances, capital contributions, or transfers of property (i) from Holdings to NPI, (ii) from NPI to Holdings, or (iii) so long as no Event of Default has occurred and is continuing or would result therefrom, in an aggregate amount not to exceed $[**] at any one time; provided that such investment shall not be a Permitted Investment unless the security 22 interests of Agent on behalf of the Lender Group therein are perfected. "Permitted Liens" means (a) Liens held by Agent for the Benefit of the Lender Group, (b) Liens for unpaid taxes that either (i) are not yet due and payable or (ii) are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) (i) the interests of lessors under operating leases, and (ii) the interests of lessors under Capital Leases to the extent that such Capital Leases are permitted under Section 7.1(e), (e) Purchase Money Liens securing Purchase Money Indebtedness permitted under Section 7.1(e), provided, that the Lien only attaches to the asset purchased or acquired and the proceeds thereof and only secures the purchase price of the asset, (f) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of business of Borrower and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet due and payable, or (ii) are the subject of Permitted Protests, (g) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (h) Liens or deposits to secure performance of bids, tenders, or leases (to the extent permitted under this Agreement), incurred in the ordinary course of business of Borrower and not in connection with the borrowing of money, (i) Liens arising by reason of security for surety or appeal bonds in the ordinary course of business of Borrower, (j) Liens of or resulting from any judgment or award that reasonably could not be expected to result in a Material Adverse Change and as to which the time for the appeal or petition for rehearing of which has not yet expired, or in respect of which Borrower is in good faith prosecuting an appeal or proceeding for a review and in respect of which a stay of execution pending such appeal or proceeding for review has been secured, (k) with respect to any Real Property, easements, rights of way, zoning and similar covenants and restrictions, and similar encumbrances that customarily exist on properties of Persons engaged in similar activities and similarly situated and that in any event do not materially interfere with or impair the use or operation of the Collateral by Borrower or the value of the Liens of Agent on behalf of the Lender Group thereon or therein, or materially interfere with the ordinary conduct of the business of Borrower; and (l) Liens on cash collateral provided by Borrower to secure its reimbursement obligations relative to outstanding letters of credit permitted under Section 7.1(h) in an amount not to exceed 102% of such reimbursement obligations. "Permitted Preferred Stock" means and refers to: (a) the Series A Cumulative Preferred Stock, and (b) any other Preferred Stock issued by Holdings that is not Prohibited Preferred Stock. "Permitted Protest" means the right of Borrower to protest any Lien (other than any such Lien that secures the Obligations), tax (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the books of Borrower in such amount as is required under GAAP, (b) any such protest is instituted and diligently prosecuted by Borrower in good faith, and (c) Agent is reasonably satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Liens of Agent on behalf of the Lender Group in and to the Collateral. 23 "Permitted Sales and Leaseback Transaction" means a Sale and Leaseback Transaction by NPI that (a) is consummated at a time when no Default or Event of Default has occurred and is continuing or would result therefrom, (b) is in respect of telecommunications and related Equipment that (i) is first acquired by NPI after the Closing Date, or (ii) is first acquired by NPI on or before the Closing Date and is fully described on Schedule P-2, and in each case, is sold by NPI to a non-Affiliate of NPI under such Sale and Leaseback Transaction upon fair and reasonable terms, (c) is fully consummated within 12 months following the date of initial acquisition of such Equipment, and (d) involves the incurrence of Indebtedness that is permitted under the terms of Section 7.1 hereof. "Permitted Subordinated Debt" means Indebtedness having a maturity of at least 6 years, that is subordinated to Borrower's Obligations on terms and conditions reasonably satisfactory to the Required Lenders, and does not provide for mandatory cash payments of principal or interest prior to 12 months after the Maturity Date (other than interest payable from an interest reserve account established with respect to such Indebtedness). "Person" means and includes natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Plan" means any employee benefit plan, program, or arrangement maintained or contributed to by Borrower or with respect to which it may incur liability. "Preferred Stock" means, with respect to any Person, any class or series of equity securities of such Person that is entitled, upon any distribution of assets of such Person, whether by dividend or by liquidation, to a preference over another class or series of equity securities of such Person. "Prohibited Preferred Stock" means any Preferred Stock that by its terms is mandatorily redeemable or subject to any other payment obligation (including any obligation to pay dividends, other than dividends of Preferred Stock of the same class and series payable in kind or dividends of common Stock) on or before the date that is 12 months following the Maturity Date or, on or before the date that is 12 months following the Maturity Date, is redeemable at the option of the holder thereof for cash (or assets or securities other than distributions in kind of Preferred Stock of the same class and series or of common Stock). "Projections" means Borrower's forecasted (a) balance sheets, (b) profit and loss statements, (c) cash flow statements, and (d) capitalization statements, all prepared on a consistent basis with Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "Pro Rata Share" means: (a) with respect to a Lender's obligation to make Tranche A Advances and receive payments of interest and principal with respect thereto, the percentage obtained by dividing (i) such Lender's Tranche A Commitment, as set forth on Schedule C-1, by (ii) the Tranche A Commitments of all Lenders, as set forth on Schedule 24 C-1; (b) with respect to a Lender's obligation to make Tranche B Advances and receive payments of interest and principal with respect thereto, the percentage obtained by dividing (i) such Lender's Tranche B Commitment, as set forth on Schedule C-1, by (ii) the Tranche B Commitments of all Lenders, as set forth on Schedule C-1; and (c) with respect to all other matters (including the indemnification obligations arising under Section 17.7), the percentage obtained by dividing (i) such Lender's Total Commitments, as set forth on Schedule C-1, by (ii) the aggregate Total Commitments of all Lenders, as set forth on Schedule C-1; provided, however, that, in each case, in the event all Commitments have been terminated, Pro Rata Share shall be determined according to the Commitments in effect immediately prior to such termination and otherwise as set forth above. "Purchase Money Indebtedness" means and includes (a) Indebtedness (other than the Obligations) for the payment of all or any part of the purchase price of any fixed assets, (b) Indebtedness (other than the Obligations), including Capitalized Lease Obligations, incurred at the time of or within 10 days prior to or after the acquisition of any fixed assets for the purpose of financing all or any party of the purchase price thereof, and (c) any renewals, extensions, or refinancings thereof, but not any increases in the principal amounts thereof. "Purchase Money Lien" means, with respect to any fixed asset, a Lien upon such fixed asset that secures Purchase Money Indebtedness relative to such fixed asset. "Qualifying Preferred Stock Offering" means the offering by Holdings of its Series A Cumulative Preferred Stock . "Real Property" means any estates or interests in real property now owned or hereafter acquired by Borrower. "Reimbursable Agent Expenses" shall have the meaning ascribed thereto in Section 2.4(b)(i). "Reimbursable Lender Expenses" shall have the meaning ascribed thereto in Section 2.4(b)(i). "Reportable Event" means any of the events described in Section 4043(c) of ERISA or the regulations thereunder other than a Reportable Event as to which the provision of 30 days notice to the PBGC is waived under applicable regulations. "Required Lenders" means, at any time, Lenders whose Pro Rata Shares aggregate 66.67% of the Total Commitments, or if all Commitments have been terminated irrevocably, 66.67% of the Obligations then outstanding; provided, however, (a) at any time that there are two or fewer Lenders, and (b) that until such time as GSCP and its Affiliates shall have less than $40,000,000 of Commitments, the foregoing percentages shall each be 100%. "Retiree Health Plan" means an "employee welfare benefit plan" within the 25 meaning of Section 3(1) of ERISA that provides benefits to individuals after termination of their employment, other than as required by Section 601 of ERISA. "Revolving Facility Usage" means, as of any date of determination, the sum of (a) the aggregate amount of Tranche A Advances outstanding plus (b) the aggregate amount of Tranche B Advances outstanding. "S&A Agent" means GSCP, solely in its capacity as syndication and arrangement agent for the Lenders, and shall include any successor syndication and arrangement agent. "S&A Agent-Related Persons" means S&A Agent and any successor syndication and arrangement agent together with their respective Affiliates, and the officers, directors, employees, counsel, agents, and attorneys-in-fact of such Persons and their Affiliates. "Sales and Leaseback Transaction" means an arrangement with any third Person providing for the purchase of an asset owned by NPI and the concurrent leasing of such asset to NPI by such third Person. "Series A Cumulative Preferred Stock" means those certain 40,000 shares of Holdings' 13-1/2% Stock Due 2009, $0.01 par value per share. "Settlement Date" has the meaning set forth in Section 2.3(c)(ii). "Solvent" means, with respect to any Person on a particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "Stock" means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a corporation or equivalent entity, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated 26 by the SEC under the Exchange Act). "Stock Pledge Agreement" means a stock pledge agreement, in form and substance satisfactory to each Lender, executed and delivered by Holdings to Agent for the benefit of the Lender Group with respect to the pledge of the capital Stock of NPI. "Subsidiary" of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Stock having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. "Suretyship Agreement" means a suretyship agreement, in form and substance satisfactory to each Lender, executed and delivered by each Borrower to Agent for the benefit of the Lender . "System" means a telecommunications network or system (including optical fiber networks, telephone switching equipment, and systems ancillary thereto) constructed, acquired, installed, or operated by Borrower for the provision of telecommunications services (including the transmission of voice, video, or data), internet services, or electronic telephone directory services. "Total Commitment" means, at any time with respect to a Lender, the principal amount set forth beside such Lender's name under the heading "Total Commitment" on Schedule C-1 attached hereto or on the signature page of an Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 15.1, as such Total Commitment may be adjusted from time to time in accordance with Section 15.1, and "Total Commitments" means. collectively, the aggregate amount of Total Commitments of all of the Lenders. "Tranche A Advances" has the meaning set forth in Section 2.1. "Tranche A Availability" means the amount that Borrower is entitled to borrow as Tranche A Advances under Section 2.1, such amount being the difference derived when (a) the aggregate principal amount of Tranche A Advances then outstanding (including any amounts that the Lender Group may have paid for the account of Borrower pursuant to any of the Loan Documents and that are reimbursed by Borrower by being charged to the Loan Account as Tranche A Advances) is subtracted from (b) the lesser of (i) the Maximum Tranche A Amount, or (ii) the Borrowing Base. "Tranche A Commitment" means, at any time with respect to a Lender, the principal amount set forth beside such Lender's name under the heading "Tranche A Commitment" on Schedule C-1 attached hereto or on the signature page of an Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 15.1, as such Tranche A Commitment may be adjusted from time to time in accordance with the provisions of Section 15.1, and "Tranche A 27 Commitments" means, collectively, the aggregate amount of Tranche A Commitments of all of the Lenders. "Tranche A Lenders" means the Lenders with Tranche A Commitments. "Tranche A Obligations" means all Obligations in respect of the Tranche A Advances. "Tranche B Advances" has the meaning set forth in Section 2.2 "Tranche B Availability" means the amount that Borrower is entitled to borrow as Tranche B Advances under Section 2.2, such amount being the difference derived when (a) the aggregate principal amount of Tranche B Advances then outstanding (including any amounts that the Lender Group may have paid for the account of Borrower pursuant to any of the Loan Documents and that are reimbursed by Borrower by being charged to the Loan Account as Tranche B Advances) is subtracted from (b) the Maximum Tranche B Amount. "Tranche B Commitment" means, at any time with respect to a Lender, the principal amount set forth beside such Lender's name under the heading "Tranche B Commitment" on Schedule C-1 attached hereto or on the signature page of an Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 15.1, as such Tranche B Commitment may be adjusted from time to time in accordance with the provisions of Section 15.1, and "Tranche B Commitments" means, collectively, the aggregate amount of Tranche B Commitments of all of the Lenders. "Tranche B Lenders" means the Lenders with Tranche B Commitments. "Tranche B Obligations" means all Obligations other than Tranche A Obligations. "Voidable Transfer" has the meaning set forth in Section 15.8. "WorldCom Subordination Agreement" means a subordination agreement, in form and substance satisfactory to each Lender, executed by WorldCom Network Services, Inc. dba WilTel, Inc. to Agent for the benefit of the Lenders. "Year 2000 Compliant" means, with regard to any Person, that all software in goods produced or sold by, or utilized by and material to the business operations or financial condition of, such Person are able to interpret and manipulate data on and involving all calendar dates correctly and without causing any abnormal ending scenario, including dates in and after the year 2000. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in 28 accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrower" or "Holdings" is used in respect of a financial covenant or a related definition, it shall be understood to mean Holdings and its Subsidiaries on a consolidated basis, unless the context clearly requires otherwise. 1.3 Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.4 Construction. Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. An Event of Default shall "continue" or be "continuing" until such Event of Default has been waived in writing by Agent. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in the Loan Documents to this Agreement or any of the Loan Documents shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable. 1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. LOAN AND TERMS OF PAYMENT. 2.1 Revolving Tranche A Advances. (a) Subject to the terms and conditions of this Agreement, and during the term of this Agreement, each Tranche A Lender severally agrees to make advances ("Tranche A Advances") to Borrower in an amount at any one time outstanding not to exceed such Lender's Pro Rata Share of an amount equal to the lesser of (i) the Maximum Tranche A Amount, or (ii) the Borrowing Base. For purposes of this Agreement, "Borrowing Base", as of any date of determination, shall mean the result of: (w) the lesser of (1) the sum of (A) 85% of Eligible Accounts, plus (B) the lesser of (I) 85% of Eligible Unbilled Accounts and (II) $18,000,000; minus (C) the amount, if any, of the Dilution Reserve, and (2) an amount equal to NPI's Collections with respect to Accounts for the immediately preceding 60 day period, minus (x) the aggregate amount of reserves, if any, established by Agent or the Required Lenders pursuant to Section 2.1(b) or Section 10, minus (y) the aggregate amount of commissions payable with respect to Accounts to Persons other than employees of Borrower, minus (z) the aggregate amount of deposits received with respect to Accounts from Account Debtors. 29 (b) Anything to the contrary in this Section 2.1 notwithstanding, Agent or the Required Lenders shall have the right to establish reserves in such amounts, and with respect to such matters, as Agent in its reasonable credit judgment (from the perspective of a secured lender) or the Required Lenders in their reasonable credit judgment (from the perspective of a secured lender), as the case may be, shall deem necessary or appropriate, against the Borrowing Base, including with respect to (i) sums chargeable against the Loan Account as Advances under any section of this Agreement or any other Loan Document, (ii) amounts owing by Borrower to any Person to the extent secured by a Lien (other than Permitted Liens) on, or trust over, any assets of Borrower, and (iii) such other matters, events, conditions, or contingencies as to which Agent in its reasonable credit judgment (from the perspective of a secured lender) or the Required Lenders in their reasonable credit judgment (from the perspective of a secured lender), as the case may be, determines reserves should be established from time to time hereunder. (c) The Lenders shall have no obligation to make further Tranche A Advances hereunder to the extent such further Advances would cause (i) the outstanding aggregate amount of Tranche A Advances to exceed the lesser of the Borrowing Base and the Maximum Tranche A Amount, or (ii) the outstanding Obligations to exceed the Maximum Amount. (d) Amounts borrowed pursuant to this Section 2.1 may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. 2.2 Revolving Tranche B Advances. (a) Subject to the terms and conditions of this Agreement and during the term of this Agreement, each Tranche B Lender severally agrees to make advances ("Tranche B Advances") to Borrower in an amount at any one time outstanding not to exceed such Lender's Pro Rata Share of an amount equal to the Maximum Tranche B Amount. (b) The Lenders shall have no obligation to make further Tranche B Advances hereunder (i) to the extent they would cause (y) the outstanding aggregate amount of Tranche B Advances to exceed the Maximum Tranche B Amount, or (z) the outstanding Obligations to exceed the Maximum Amount, or (ii) to the extent Tranche A Availability exceeds zero (-0-); it being the express understanding of Borrower, Agent, the Tranche A Lenders, and the Tranche B Lenders, that (A) at any time that there exists any borrowing availability under Tranche A, all further Advances first shall be drawn under Tranche A until such borrowing availability has been exhausted, and (B) if at any time there are Tranche B Advances outstanding at a time when borrowing availability exists under Tranche A, such Tranche B Advances automatically shall be deemed repaid and additional Tranche A Advances created to the extent of such borrowing availability under Tranche A. (c) Amounts borrowed pursuant to this Section 2.2 may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term 30 of this Agreement. 2.3 Borrowing Procedures and Settlements. (a) Procedure for Borrowing. Each Borrowing shall be made upon Borrower's irrevocable request therefor delivered to Agent (which notice must be received by Agent no later than 10:00 a.m. (New York time) on the Business Day that is the requested Funding Date) specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day. Upon receipt of each such notice, Agent shall promptly notify each Lender having a Commitment to make the requested type of Advance and, subject to the terms and conditions hereof, each Lender shall promptly remit its Pro Rata Share of the requested Advance to Agent. If and to the extent that Agent receives funds from such Lenders on a timely basis, it shall remit such funds to Borrower by not later than 4:00 p.m. (New York time) on the Funding Date; it being the express understanding of the parties that Agent may, but shall not be obligated to, advance funds to Borrower on behalf of the Lenders having a Commitment to make a requested type of Advance and that the only parties having Commitments to make Advances are Lenders as opposed to Agent (in its capacity as agent). (b) Disbursement of Funds. Agent, subject to the terms and conditions herein, may, on behalf of the Lenders, disburse funds to Borrower for Loans requested. If any Lender fails to pay the amount necessary to adjust such Lender's actual Pro Rata Share pursuant to Section 2.3(c), Agent shall promptly notify Borrower, and Borrower shall immediately repay such amount to Agent (without duplication of amounts received by Agent from such Lender pursuant to Section 2.3(d)) without set-off, counterclaim, or deduction of any kind together with interest thereon, for each day from and including the date such amount was to have been made available to Agent by such Lender to but excluding the date of payment to Agent, at the interest rate then applicable under this Agreement with respect to such Advance. Any repayment required pursuant to this Section 2.3(b) shall be without premium or penalty. Nothing in this Section 2.3(b) or elsewhere in this Agreement or the other Loan Documents, including the provisions of Section 2.3(c), shall be deemed to require Agent to advance funds on behalf of any Lender or to relieve any Lender from its obligation to fulfill its commitments hereunder or to prejudice any rights that Agent or Borrower may have against any Lender as a result of any default by such Lender hereunder. 31 (c) Settlements. (i) The Revolving Facility Usage may fluctuate from day to day through Agent's disbursement of funds to, and receipt of funds from, Borrower. In order to minimize the frequency of transfers of funds between Agent and each Lender, at Agent's sole option, Advances and payments may be settled among Agent and Lenders according to the procedures described in this Section 2.3(c). These procedures notwithstanding, each Lender's obligation to fund its portion of any Advances made by Agent to Borrower will commence on the date such Advances are made by Agent. Such payments will be made by such Lender without set-off, counterclaim or reduction of any kind. Nothing in this Section or elsewhere in this Agreement or the other Loan Documents, shall be deemed to require Agent to advance funds on behalf of any Lender or to relieve any Lender from its obligation to fulfill its commitments hereunder or to prejudice any rights that Agent or Borrower may have against any Lender as a result of any default by such Lender hereunder. (ii) On the 2nd Business Day of each week, or more frequently (including daily), if Agent so elects (each such day being a "Settlement Date"), Agent will advise each Lender by telephone or telecopy of the amount of each such Lender's Pro Rata Share of the Revolving Facility Usage as of the close of business of the 2nd Business Day immediately preceding the Settlement Date. In the event that payments are necessary to adjust such Lender's actual Pro Rata Share of the Revolving Facility Usage as of any Settlement Date to equal the amount of such Lender's required Pro Rata Share of the Revolving Facility Usage, the party from which such payment is due will pay the other, in same day funds, by wire transfer to the other's account not later than 1:00 p.m. (New York time) on the Business Day immediately following the Settlement Date. (d) Availability of Lender's Pro Rata Share. (i) Unless Agent shall have received notice from a Lender prior to a Funding Date that such Lender will not make available its Pro Rata Share of an Advance requested by Borrower, Agent may assume that such Lender will make such amount available to Agent on the Business Day following the next Settlement Date. If a Lender does not in fact make its Pro Rata Share available to the Agent on such date, then such Lender agrees to pay to Agent forthwith on demand such amount (without duplication of amounts received from Borrower pursuant to Section 2.5(b)) without set-off, counterclaim or deduction of any kind, together with interest thereon, for each day from and including the date such amount was to have been made available to Borrower to but excluding the date of payment to Agent, at the then prevailing federal funds rate as most recently announced from time to time by the Federal Reserve Board. Until any such amount (with interest thereon as aforesaid) is paid to Agent, Agent shall not be obligated to remit to such defaulting Lender any payment made by Borrower to Agent with respect to any Loan or any fees or other payments with respect thereto nor shall Agent be obligated to remit to such defaulting Lender its Pro Rata Share of Collections and other proceeds in respect of Collateral. (ii) Nothing contained in this Section 2.3(d) will be deemed 32 to relieve a Lender of its obligation to fulfill its commitments or to prejudice any rights Agent or Borrower may have against such Lender as a result of any such default by such Lender under this Agreement. (e) Return of Payments (i) If Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by Agent from Borrower and such related payment is not received by Agent, then Agent will be entitled to recover such amount from such Lender without set-off, counterclaim or deduction of any kind together with interest thereon, for each day from and including the date such amount is made available by Agent to such Lender to but excluding the date of repayment to Agent, at the then prevailing federal funds rate as most recently announced from time to time by the Federal Reserve Board, and such payment to such Lender shall be deemed to not have been made. (ii) If Agent determines at any time that any amount received by Agent under this Agreement must be returned to Borrower or paid to any other person pursuant to any requirement at law, court order or otherwise, then, notwithstanding any other term or condition of this Agreement, Agent will not be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to Agent on demand any portion of such amount that Agent has distributed to such Lender, together with interest at such rate, if any, as Agent is required to pay to Borrower or such other Person, without set-off, counterclaim or deduction of any kind. (f) Lenders' Failure to Perform. It is understood that (i) no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Advances hereunder, nor shall any Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its obligation to make any Advances hereunder, and (ii) no failure by any Lender to perform its obligation to make any Advances hereunder shall excuse any other Lender from its obligation to make any Advances hereunder. (g) Replacement of Defaulting Lender. (i) If any Lender fails to perform its obligation to make any Advance hereunder (a "Defaulting Lender"), and as a result of such failure to perform (A) Borrower does not receive the total amount of an Advance requested by Borrower, or (B) Borrower is required to repay Agent for amounts received by Borrower and not paid by such Defaulting Lender, then Borrower may, upon at least 5 Business Days' prior irrevocable notice to each of such Lender, Agent, and S&A Agent, permanently replace such Defaulting Lender with one or more Eligible Transferees (collectively, the "Replacement Lenders"). The notice from Borrower to replace a Lender shall specify an effective date for such replacement, which date shall not be later than the tenth Business Day after the date such notice is given. Prior to such effective date, such Defaulting Lender and each Replacement Lender shall execute an Assignment and Acceptance Agreement. The replacement of such Lender shall 33 be made in accordance with the terms of Section 15.1. (ii) Prior to such effective date, such Defaulting Lender and each Replacement Lender shall execute an Assignment and Acceptance Agreement. Until such time as the Replacement Lenders shall have acquired all of the Obligations, the Commitments, and the other rights and obligations of such Defaulting Lender hereunder and under the other Loan Documents, such Defaulting Lender shall remain obligated to make such Defaulting Lender's Pro Rata Share of Tranche A Advances and Tranche B Advances. (iii) Nothing contained in this Section 2.3(g) shall (A) increase any Lender's Tranche A Commitment or Tranche B Commitment, or (B) be deemed to prejudice any rights Agent or Borrower may have against such Defaulting Lender as a result of such Defaulting Lender's failure to perform under this Agreement. 2.4 Payments. (a) Payments by Borrower. (i) All payments to be made by Borrower shall be made without set-off, recoupment, deduction, or counterclaim, except as otherwise required by law. Except as otherwise expressly provided herein, all payments by Borrower shall be made to Agent for the account of the Lender Group at Agent's address set forth in Section 12, and shall be made in immediately available funds, no later than 2:00 p.m. (New York time) on the date specified herein. Any payment received by Agent later than 2:00 p.m. (New York time), at the option of Agent, shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. (ii) Whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. (iii) Unless Agent receives notice from Borrower prior to the date on which any payment is due to the Lenders that Borrower will not make such payment in full as and when required, Agent may assume that Borrower has made such payment in full to Agent on such date in immediately available funds and Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrower has not made such payment in full to Agent, each Lender shall repay to Agent on demand such amount distributed to such Lender, together with interest thereon at the Base Rate for each day from the date such amount is distributed to such Lender until the date repaid. (b) Apportionment, Application, and Reversal of Payments. 34 (i) All payments shall be remitted to Agent. So long as no Event of Default has occurred and is continuing, except as otherwise provided with respect to defaulting Lenders, such payments shall be applied: first, ratably, to pay any fees or expense reimbursements then due to Agent or S&A Agent from Borrower under this Agreement or the other Loan Documents (collectively, "Reimbursable Agent Expenses"); second, to pay any fees or expense reimbursements then due to the Lenders from Borrower under this Agreement or the other Loan Documents (collectively, "Reimbursable Lender Expenses"); third, to pay interest due in respect of all Advances; fourth, to pay the outstanding principal of Tranche B Advances; fifth, to pay the outstanding principal of Tranche A Advances; and sixth, ratably to pay any other Obligations due to Agent, S&A Agent, or any Lender by Borrower. (ii) Upon the occurrence and during the continuation of an Event of Default, except as otherwise provided with respect to defaulting Lenders, all Collections and other proceeds in respect of Collateral shall be applied: first, ratably, to pay Reimbursable Agent Expenses; second, to pay the Reimbursable Lender Expenses; third, to pay interest due in respect of all Tranche A Advances; fourth, to pay the outstanding principal of all Tranche A Advances; fifth, to pay interest due in respect of all Tranche B Advances; sixth, to pay the outstanding principal of Tranche B Advances; and seventh, ratably to pay any other Obligations due to Agent, S&A Agent, or any Lender by Borrower. (iii) All Collections applied pursuant to Subsections (i) or (ii) above shall, within each category of application, be apportioned ratably among those Lenders having a Pro Rata Share of the Tranche A Advances or of the Tranche B Advances, as applicable, to which such amounts are to be applied (other than fees designated for the sole and separate account of Agent or S&A Agent). (iv) If Agent determines at any time that any amount received by Agent under this Agreement must be returned to Borrower or paid to any other Person pursuant to any requirement at law, court order or otherwise, then, notwithstanding any other term or condition of this Agreement, Agent will not be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to Agent on demand any portion of such amount that Agent previously has distributed to such Lender, together with interest at such rate, if any, as Agent is required to pay to Borrower or such other Person, without set-off, counterclaim or deduction of any kind. 2.5 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to the Lender Group pursuant to Sections 2.1 and 2.2 is greater than either the Dollar or percentage limitations set forth in Sections 2.1 or 2.2, (an "Overadvance"), Borrower shall pay to Agent, in cash, the amount of such excess, without premium or penalty, which amount shall be used by Agent to reduce the Obligations in accordance with the priority set forth in Section 2.4(b). If such Overadvance is caused by Agent's exercise of its 35 discretionary right to (a) make payments on behalf of Borrower and to charge such payments to Borrower's Loan Account, or (b) to adjust the Borrowing Base or Dilution Reserve, then, in either case, Agent shall give Borrower notice of such Overadvance and Borrower shall make such payment to Agent within 5 Business Days after Borrower's receipt of such notice; otherwise such payment by Borrower to Agent shall be made immediately upon the occurrence of the Overadvance. In connection with any such required notice, Agent shall endeavor to provide Borrower with reasonable detail concerning any adjustments to the Borrowing Base or Dilution Reserve that created or contributed to such Overadvance. 2.6 Interest: Rates, Payments, and Calculations. (a) Interest Rate. Except as provided in clause (c) below, all Obligations shall bear interest at a per annum rate of 1 percentage point above the Base Rate. (b) [intentionally omitted] (c) Default Rate. Upon the occurrence and during the continuation of an Event of Default, all Obligations shall bear interest at a per annum rate equal to 3 percentage points above the per annum rate otherwise applicable thereto as set forth in Section 2.6(a). (d) [intentionally omitted] (e) Payments. Interest payable hereunder shall be due and payable, in arrears, on the first day of each month during the term hereof. Borrower hereby authorizes Agent, at its option, without prior notice to Borrower, to charge such interest, all Lender Group Expenses (as and when incurred), the fees and charges provided for in Section 2.11 (as and when accrued or incurred), and all installments or other payments due under any Loan Document to Borrower's Loan Account, which amounts thereafter shall accrue interest at the rate then applicable to Advances hereunder. Any interest not paid when due shall be compounded and shall thereafter accrue interest at the rate then applicable to Advances hereunder. (f) Computation. In the event the Base Rate is changed from time to time hereafter, the applicable rates of interest hereunder automatically and immediately shall be increased or decreased by an amount equal to such change in the Base Rate. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. (g) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrower and the Lender Group, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or 36 manner of payment exceeds the maximum allowable under applicable law, then, ipso facto as of the date of this Agreement, Borrower is and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrower in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.7 Collection of Accounts. (a) Borrower shall at all times maintain the lockboxes or similar arrangement (the "Lockboxes") currently in place between Borrower and FNB. The parties hereto agree that from and after the Closing Date, any and all agreements between Borrower and FNB with respect to the Lockboxes (collectively, the "Lockbox Agreements") shall be deemed to be amended to the extent, but only to the extent, necessary to reflect that FNB is a party to the Lockbox Agreements in FNB's capacity as Agent. Borrower, Agent, and FNB shall open and maintain the Lockbox Account for the deposit of Collections. (b) Borrower shall, immediately after the Closing Date, (a) instruct all Account Debtors of Borrower to remit all Collections in respect thereof to such Lockboxes, and (b) deposit all Collections in respect of Accounts received by Borrower immediately upon receipt in to the Lockbox Accounts. Borrower agrees that all Collections and other amounts received by Borrower from any Account Debtor immediately upon receipt shall be deposited into the Lockbox Account. (c) All amounts received in the Lockbox Account shall be wired each Business Day into the Designated Account; provided, however, that upon the occurrence and during the continuance of an Event of Default, all amounts received in the Lockbox Account shall be wired each Business Day into an account (the "Agent Account") maintained by Agent at a depositary selected by Agent. 2.8 Crediting Payments; Application of Collections. The receipt of any Collections by Agent (whether from transfers to Agent by the Lockbox Banks pursuant to the Lockbox Agreements or otherwise) shall not be considered a payment on account unless such Collection item is a wire transfer of immediately available federal funds and is made to the Agent Account or unless and until such Collection item is honored when presented for payment. Should any Collection item received by Agent not be honored when presented for payment, then Borrower shall be deemed not to have made such payment. Anything to the contrary contained herein notwithstanding, any Collection item shall be deemed received by Agent only if it is received into the Agent Account on a Business Day on or before 2:00 p.m. New York time. If any Collection item is received into the Agent Account on a non-Business Day or after 2:00 p.m. New York time on a Business Day, it shall be deemed to have been received by Agent as of the opening of business on the immediately following Business Day. 2.9 Designated Account. 37 Agent and the Lenders are authorized to make the Advances under this Agreement based upon telephonic or other instructions received from anyone reasonably believed by Agent to be an Authorized Person, or without instructions if pursuant to Section 2.6(e). Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrower and made by Agent or the Lenders hereunder. Unless otherwise agreed by Agent and Borrower, any Advance requested by Borrower and made by hereunder shall be made to the Designated Account. 2.10 Maintenance of Loan Account; Statements of Obligations. Agent shall maintain an account on its books in the name of Borrower (the "Loan Account") on which Borrower will be charged with all Advances made by Agent or the Lenders to Borrower or for Borrower's account, including, accrued interest, Lender Group Expenses, and any other payment Obligations of Borrower. In accordance with Section 2.8, the Loan Account will be credited with all payments received by Agent from Borrower or for Borrower's account, including all amounts received in the Agent Account from any Lockbox Bank. Agent shall render statements regarding the Loan Account to Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Lender Group Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and the Lender Group unless, within 60 days after receipt thereof by Borrower, Borrower shall deliver to Agent written objection thereto describing the error or errors contained in any such statements. 2.11 Fees. Borrower shall pay to the following fees, which fees shall be non-refundable when paid: (a) Unused Line Fees. Payable in arrears and fully earned on the first day of each month during the term of this Agreement, (i) for the ratable benefit of the Tranche A Lenders, an unused line fee in an amount equal to 0.5% per annum times the Average Unused Portion of the Maximum Tranche A Amount, and (ii) for the ratable benefit of the Tranche B Lenders, an unused line fee in an amount equal to 0.5% per annum times the Average Unused Portion of the Maximum Tranche B Amount. (b) Financial Examination, Documentation, and Valuation Fees. For the sole and separate accounts of Agent or S&A Agent, as applicable, (i) a fee of $650 per day per examiner, plus out-of-pocket expenses for each financial analysis and examination (i.e., audits) of Borrower performed pursuant to Section 4.6 by the respective personnel employed by Agent, or S&A Agent, as applicable, and (ii) the actual charges paid or incurred by Agent or S&A Agent, as applicable, if it elects to employ the services of one or more third Persons to perform such financial analyses and examinations (i.e., audits) of Borrower; and (iii) the actual charges paid or incurred by Agent or S&A Agent to employ the services of one or more third Persons to perform an enterprise valuation of Borrower 38 pursuant to Section 4.6. (c) Fee Letter. As and when provided thereunder, the fees payable under the terms of the Fee Letter. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 Conditions Precedent to the Initial Advance. The obligation of the Lender Group (or any member thereof) to make the initial Advance is subject to the fulfillment, to the satisfaction of Agent, each Lender, and their respective counsel, of each of the following conditions on or before the Closing Date: (a) the Closing Date shall occur on or before October 15, 1998; (b) Agent shall have received all financing statements and fixture filings required by the Lender Group, duly executed by Borrower, and Agent shall have searches reflecting the filing of its financing statements with the Secretary of the Commonwealth of Massachusetts and the City Clerk of Quincy, Massachusetts; (c) Agent shall have received each of the following documents, duly executed, and each such document shall be in full force and effect: (i) the Disbursement Letter; (ii) the Pay-Off Letter; (iii) the Suretyship Agreement; (iv) the Fee Letter; (v) the Agents' Side Letter; (vi) the Intercompany Subordination Agreement; (vii) the Stock Pledge Agreement; (viii) Termination statements relative to all financing statements filed by Sprint Communications; (ix) WorldCom Subordination Agreement (or termination statements relative to all financing statements filed by WorldCom Network Services, Inc. dba WilTel, Inc.); (x) the Hale Subordination Agreement; (xi) the Customer List Escrow Agreement; and 39 (d) Agent shall have received a certificate from the Secretary of each Borrower attesting to the resolutions of such Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which such Borrower is a party and authorizing specific officers of such Borrower to execute the same; (e) Agent shall have received copies of each Borrower's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Borrower; (f) Agent shall have received a certificate of status with respect to each Borrower, dated as of a date within a reasonable proximity to the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Borrower, which certificate shall indicate that such Borrower is in good standing in such jurisdiction; (g) Agent shall have received certificates of status with respect to each Borrower, each dated as of a date within a reasonable proximity to the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that such Borrower is in good standing in such jurisdictions; (h) Agent shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 6.10, the form and substance of which shall be satisfactory to Agent, each Lender, and their respective counsel; (i) Agent shall have received the Closing Date Business Plan certified by an officer of Borrower as being such officer's good faith best estimate of the financial performance of Borrower during the period covered thereby; (j) Agent shall have received a Collateral Access Agreement relative to Borrower's location in Quincy, Massachusetts; (k) Agent shall have received opinions of Borrower's counsel in form and substance satisfactory to Agent and each Lender in their sole discretion; (l) Agent and Agent's counsel shall have been provided with a copy of each Carrier Agreement in respect of a Material Carrier, the Bell Atlantic Interconnection Agreement, and each agreement in respect of any Indefeasible Right to Use granted to Borrower, certified by an officer of Borrower as true, correct, and complete, and Agent shall have had a reasonable opportunity to review each such Carrier Agreement; (m) Agent shall have received a certificate from an officer of each Borrower certifying that all tax returns required to be filed such Borrower have been timely filed and all taxes upon such Borrower or its properties, assets, income, and franchises (including real property taxes and payroll taxes) have been paid prior to delinquency, except 40 such taxes that are the subject of a Permitted Protest; (n) Agent shall have received a certificate from an officer of each Borrower certifying that to the best of such Borrower's knowledge there are no outstanding complaints against any Borrower made to any public utilities commission in any jurisdiction in which any Borrower operates, except such complaints that have been fully disclosed to the Lenders and are satisfactory to Agent and the Lenders; (o) Agent shall have received a letter from Chase Equipment Leasing, Inc. ("Chase"), in form and substance satisfactory to each Lender, acknowledging that Chase's liens in the Equipment leased by Borrower from Chase does not extend to the Accounts generated by such Equipment; (p) Agent shall have received payment of all accrued and unpaid Lender Group Expenses; (q) Agent shall have received a certificate from an officer of each Borrower certifying that there has been no Material Adverse Change in the financial condition of such Borrower or the Collateral since July 31, 1998; and (r) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Agent, each Lender, and their respective counsel. 3.2 Conditions Precedent to all Advances. The following shall be conditions precedent to all Advances hereunder: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; and (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any governmental authority against Borrower, Agent, S&A Agent, any Lender, or any of their Affiliates. 3.3 Condition Subsequent. As a condition subsequent to initial closing hereunder, Borrower shall perform or cause to be performed the following (the failure by Borrower to so perform or cause to be 41 performed constituting an Event of Default): (a) within 30 days of the Closing Date, deliver to Agent the certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.10, the form and substance of which shall be reasonably satisfactory to Agent, each Lender, and their respective counsel. 3.4 Term. This Agreement shall become effective upon the execution and delivery hereof by Borrower and the Lender Group and shall continue in full force and effect for a term ending on the date that is 18 months from the Closing Date (the "Maturity Date"), unless sooner terminated pursuant to the terms hereof. The foregoing notwithstanding, the Lender Group, in accordance with Section 9, shall have the right to terminate its obligations to make Advances under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.5 Effect of Termination. On the date of termination of this Agreement, all Obligations immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrower of Borrower's duties, Obligations, or covenants hereunder, continuing security interests in the Collateral, for the benefit of the Lender Group, shall remain in effect until all Obligations have been fully and finally discharged and the Lender Group's obligations to provide additional credit hereunder have been terminated. Upon termination of this Agreement and after all Obligations have been fully and finally discharged and the Lender Group's obligations to provide additional credit hereunder have been terminated, Agent shall execute and deliver any Uniform Commercial Code termination statements, lien releases, mortgage releases, reassignments of trademarks, discharges of security interests, and other similar discharge or release documents (and if applicable, in recordable form) as are reasonably necessary to release, as of record, the security interests, financing statements, and all other notices of security interests and liens previously filed by Agent with respect to the Obligations. 3.6 Early Termination by Borrower. Borrower has the option, at any time upon 45 days prior written notice to Agent, to terminate this Agreement by paying to Agent for the ratable benefit of the Lender Group, in cash, the Obligations, without penalty or premium (other than as provided in the Fee Letter). In the event any such notice is timely received by Agent, and Borrower thereafter fails to timely pay to Agent the amount set forth in the immediately preceding sentence, such notice shall be deemed to never have been given. 3.7 [Intentionally Omitted]. 42 4. CREATION OF SECURITY INTEREST. 4.1 Grant of Security Interest. (a) Each Borrower hereby grants to Agent, for the benefit of the Lender Group, a continuing security interest in all right, title, and interest of such Borrower in and to all currently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Tranche A Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents ("Agent's Tranche A Liens"). The Agent's Tranche A Liens in and to the Collateral shall attach to all Collateral without further act on the part of the Lender Group or Borrower. (b) Each Borrower hereby grants to Agent, for the benefit of the Lender Group, a continuing security interest in all right, title, and interest of such Borrower in and to all currently existing and hereafter acquired or arising Collateral in order to secure prompt repayment of any and all Tranche B Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents ("Agent's Tranche B Liens"). The Agent's Tranche B Liens in and to the Collateral shall attach to all Collateral without further act on the part of the Lender Group or Borrower. (c) Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, Borrower has no authority, express or implied, to dispose of any item or portion of the Collateral. 43 4.2 Negotiable Collateral. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, Borrower, immediately upon the request of Agent, shall endorse and deliver physical possession of such Negotiable Collateral to Agent. 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral. At any time after an Event of Default has occurred and is continuing, Agent or Agent's designee may (a) notify customers or Account Debtors of Borrower that the Accounts, General Intangibles, or Negotiable Collateral have been assigned to Agent for the benefit of the Lender Group or that Agent for the benefit of the Lender Group or that Agent for the benefit of the Lender Group has a security interest therein, and (b) collect the Accounts, General Intangibles, and Negotiable Collateral directly and charge the collection costs and expenses to the Loan Account. Borrower agrees that it will hold in trust for the Lender Group, as the Lender Group's trustee, any Collections that it receives and immediately will deliver said Collections to Agent in their original form as received by Borrower. 4.4 Delivery of Additional Documentation Required. At any time upon the request of Agent, Borrower shall execute and deliver to Agent, all financing statements, continuation financing statements, fixture filings, security agreements, pledges, assignments, endorsements of certificates of title, applications for title, affidavits, reports, notices, schedules of accounts, letters of authority, and all other documents that Agent reasonably may request, in form satisfactory to Agent, to perfect and continue perfected Agent's Liens on the Collateral (whether now owned or hereafter arising or acquired), and in order to fully consummate all of the transactions contemplated hereby and under the other the Loan Documents. 4.5 Power of Attorney. Borrower hereby irrevocably makes, constitutes, and appoints Agent (and any of Agent's officers, employees, or agents designated by Agent) as Borrower's true and lawful attorney, with power to (a) if Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of Borrower on any of the documents described in Section 4.4, (b) at any time that an Event of Default has occurred and is continuing , sign Borrower's name on any invoice relating to any Account, drafts against Account Debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to Account Debtors, (c) send requests for verification of Accounts, (d) at any time that an Event of Default has occurred and is continuing, endorse Borrower's name on any Collection item that may come into the Lender Group's possession, (e) at any time that an Event of Default has occurred and is continuing, notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Agent, to receive and open all mail addressed to Borrower, and to retain all mail relating to the Collateral and forward all other mail to Borrower, (f) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under Borrower's policies of insurance and 44 make all determinations and decisions with respect to such policies of insurance, and (g) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts directly with Account Debtors, for amounts and upon terms that Agent determines to be reasonable, and Agent may cause to be executed and delivered any documents and releases that Agent reasonably determines to be necessary. The appointment of Agent as Borrower's attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and the Lender Group's obligations to extend credit hereunder are terminated. With respect to sending requests for verification of Accounts, Agent shall make reasonable efforts to respect Borrower's relationship with the Account Debtors. 4.6 Right to Inspect. (a) Agent and S&A Agent (through any of their respective officers, employees, or agents) shall have the right, from time to time hereafter and during normal business hours, (i) to inspect Borrower's Books in order to verify Borrower's financial condition or any other matter relating to Borrower (an "Audit"), or (ii) to perform an enterprise valuation of Borrower (a "Valuation"). (b) So long as no Event of Default has occurred and is continuing, the party performing such Audit or Valuation shall give reasonable prior notice to Borrower, and no such Audit or Valuation, in each case, shall be conducted more often than quarterly. Upon the occurrence and during the continuation of an Event of Default, prior notice shall not be required prior to the performance of any such Audit or Valuation, and such Audits or Valuations may be performed more often than quarterly. (c) All information developed pursuant to any Audit or Valuation shall be subject to the confidentiality provisions contained in Section 17.16(d). 5. REPRESENTATIONS AND WARRANTIES. In order to induce the Lender Group to enter into this Agreement, Borrower makes the following representations and warranties to the Lender Group which shall be true, correct, and complete in all respects as of the date hereof, and shall be true, correct, and complete in all respects as of the Closing Date, and at and as of the date of the making of each Advance made thereafter, as though made on and as of the date of such Advance (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1 No Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of Liens except for Permitted Liens. 5.2 Eligible Accounts. 45 The Eligible Accounts are bona fide existing obligations created by the sale of goods, the sale General Intangibles, or the rendition of services to Account Debtors in the ordinary course of Borrower's business. Except as set forth on the applicable Borrowing Base Certificate, (a) the Eligible Accounts are unconditionally owed to Borrower without defenses, disputes, offsets, counterclaims, or rights of return or cancellation, (b) (i) the property giving rise to such Eligible Accounts has been delivered to the Account Debtor, or to the Account Debtor's agent for immediate shipment to and unconditional acceptance by the Account Debtor, or (ii) the service giving rise to such Eligible Accounts has been performed by Borrower for the Account Debtor, and (c) Borrower has not received notice of actual or imminent bankruptcy, insolvency, or material impairment of the financial condition of any Account Debtor regarding any Eligible Account. 5.3 Compliance with Laws, etc. (a) Each Borrower is in compliance in all material respects with all applicable laws and regulations, for which such Borrower's non-compliance would be a Material Adverse Change, including the Communications Act, FCC Rules, and those relating to telecommunications, copyright, pollution and environmental control, equal employment opportunity and employee safety, in all jurisdictions in which any Borrower is currently doing business. (b) All material Permits are in full force and effect and there are no pending or threatened material complaints, investigations, inquiries or proceedings by or before the FCC or other Governmental Authority or any actions or events that (i) could result in the revocation, cancellation, adverse modification or non-renewal of any material Permit or the imposition of a material fine or forfeiture, or (ii) otherwise result in a Material Adverse Change. 5.4 Equipment. All of the Equipment is used or held for use in Borrower's business and is fit for such purposes. 5.5 Location of Inventory and Equipment. The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party (without Agent's prior written consent) and are located only at the locations identified on Schedule 6.12 or otherwise permitted by Section 6.12. 5.6 [Intentionally omitted]. 5.7 Location of Chief Executive Office; FEIN. The chief executive office of Borrower is located at the address indicated in the preamble to this Agreement and Holding's FEIN is 04-3430576. 5.8 Due Organization and Qualification; Subsidiaries. (a) Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its incorporation and qualified and licensed to do business in, and in good standing in, any state where the failure to be so licensed or qualified reasonably 46 could be expected to have a Material Adverse Change. (b) Set forth on Schedule 5.8, is a complete and accurate description of the authorized capital Stock of Borrower, by class, and, as of the Closing Date, a description of the number of shares of each such class that are issued and outstanding and the number of such shares that are held in Borrower's treasury. All such outstanding shares have been validly issued and, as of the Closing Date, are fully paid, nonassessable shares free of contractual preemptive rights. The issuance and sale of all such shares have been in compliance with all applicable federal and state securities laws. Other than as described on Schedule 5.8, as of the Closing Date, there are no subscriptions, options, warrants, or calls relating to any shares of Borrower's capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. Borrower is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital Stock or any security convertible into or exchangeable for any of its capital Stock. (c) Set forth on Schedule 5.8, is a complete and accurate list of Borrower's direct and indirect Subsidiaries as of the Closing Date, showing: (i) the jurisdiction of their incorporation; (ii) the number of shares of each class of common and preferred Stock authorized for each of such Subsidiaries; and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by Borrower. All of the outstanding capital Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. (d) Except as set forth on Schedule 5.8, as of the Closing Date, no capital Stock (or any securities, instruments, warrants, options, purchase rights, conversion or exchange rights, calls, commitments or claims of any character convertible into or exercisable for Stock) of any direct or indirect Subsidiary of Borrower is subject to the issuance of any security, instrument, warrant, option, purchase right, conversion or exchange right, call, commitment or claim of any right, title, or interest therein or thereto. 5.9 Due Authorization; No Conflict. (a) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary corporate action. (b) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation (including Regulations T, U, and X of the Federal Reserve Board) applicable to Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation or material lease of Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or (iv) require any approval of stockholders or any approval or consent of any Person under any material contractual obligation of Borrower. (c) Other than the filing of appropriate financing statements or fixture filings, as applicable, the execution, delivery, and performance by Borrower of this 47 Agreement and the Loan Documents to which Borrower is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any federal, state, foreign, or other Governmental Authority or other Person. (d) This Agreement and the other Loan Documents to which Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by Borrower will be the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Agent's Liens granted by Borrower to Agent, for the benefit of the Lender Group, in and to its properties and assets pursuant to this Agreement and the other Loan Documents are validly created, perfected, and first priority Liens, subject only to Permitted Liens. 5.10 Litigation. There are no actions or proceedings pending by or against Borrower before any court or administrative agency and Borrower does not have knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving Borrower or any guarantor of the Obligations, except for: (a) ongoing collection matters in which Borrower is the plaintiff; (b) matters disclosed on Schedule 5.10; and (c) matters that, if decided adversely to Borrower, reasonably could not be expected to result in a Material Adverse Change. 5.11 No Material Adverse Change. All financial statements relating to Borrower or any guarantor of the Obligations that have been delivered by Borrower to the Lender Group have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present Borrower's (or such guarantor's, as applicable) financial condition as of the date thereof and Borrower's results of operations for the period then ended. There has not been a Material Adverse Change with respect to Borrower (or such guarantor, as applicable) since the date of the latest financial statements submitted to the Lender Group on or before the Closing Date. 5.12 Fraudulent Transfer. (a) Borrower is Solvent. (b) No transfer of property is being made by Borrower and no obligation is being incurred by Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrower. 5.13 Employee Benefits. None of Borrower, any of its Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan. 5.14 Environmental Condition. Except as set forth on Schedule 5.14, none of Borrower's properties or assets has ever been used by Borrower or, to the best of Borrower's knowledge, by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials. None of Borrower's properties or assets has ever been designated or 48 identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, or a candidate for closure pursuant to any environmental protection statute. No Lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned or operated by Borrower. Borrower has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 5.15 Brokerage Fees. No brokerage commission or finders fees has or shall be incurred or payable in connection with or as a result of Borrower's obtaining financing from the Lender Group under this Agreement, and Borrower has not utilized the services of any broker or finder in connection with Borrower's obtaining financing from the Lender Group under this Agreement. 5.16 Year 2000 Compliance. (a) On the basis of a review and assessment currently being undertaken by Borrower of Borrower's computer applications utilized by Borrower or contained in products produced or sold by Borrower, and upon inquiry made of Borrower's material suppliers and vendors, Borrower's management is of the considered view that Borrower and its products will be Year 2000 Compliant before October 1, 1999, and to the best of Borrower's management's knowledge, that all such suppliers and vendors will be Year 2000 Compliant before October 1, 1999. (b) Borrower (i) is currently undertaking a review and assessment of all areas within its business and operations that could be adversely affected by the failure of Borrower or its products to be Year 2000 Compliant on a timely basis, (ii) is developing a detailed plan and timeline for becoming Year 2000 Compliant on a timely basis, and (iii) to date, is implementing that plan in accordance with that timetable in all material respects. Borrower reasonably anticipates that it will be Year 2000 Compliant on a timely basis. 49 5.17 Intellectual Property. Borrower and each of its Subsidiaries own, or hold licenses in, all trademarks, trade names, copyrights, patents, patent rights, and licenses which are necessary in all material respects to conduct their respective businesses and to operate their respective properties as now conducted and operated. The consummation of the transactions contemplated by this Agreement and the Loan Documents will not alter or impair, in any material respect, any of such rights of Borrower or any of its Subsidiaries. 5.18 Leases. Borrower and each of its Subsidiaries enjoy peaceful and undisturbed possession under all leases material to the business, operations, and financial condition of Borrower and its Subsidiaries, taken as a whole, to which any of them is a party or under which any of them is operating. All of such leases are valid and subsisting (in all material respects) and no material default by Borrower or any of its Subsidiaries exists under any of them. 5.19 Material Carriers. Schedule 5.19 contains the names of all Material Carriers. Each Carrier Agreement in respect of a Material Carrier is in full force and effect and Borrower is not in default thereunder. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, and unless the Lender Group shall otherwise consent in writing, Borrower shall do all of the following: 6.1 Accounting System. Maintain a standard and modern system of accounting that enables Borrower to produce financial statements in accordance with GAAP, and maintain records pertaining to the Collateral that contain information as from time to time may be requested by Agent. 6.2 Collateral Reporting. (a) Provide Agent with the following documents at the following times in form satisfactory to Agent: (i) on a monthly basis, as soon as practicable but in any event by no later than the 30th day of each month during the term of this agreement, (A) a Borrowing Base Certificate dated as of the last day of the immediately preceding month (a "Month End Borrowing Base Certificate"), (B) a report reconciling the balance owing to each Material Carrier according to Borrower's records with the amount claimed by such Material Carrier as being owed by Borrower together with a certificate from an officer of Borrower stating that there are no material disputes with any material carriers except as are set forth in such certificate, and (C) a calculation of the Dilution for the prior month; (ii) on a weekly basis, by no later than the 2nd Business Day following the last day of each week (for which purpose, weeks shall be deemed to end at the close of business on each Friday) a report detailing Borrower's available cash, Collections for the then current month, and planned disbursements for the week following the date of such report; (iii) on a quarterly basis, a detailed list of Borrower's customers delivered to Customer List Escrow Agent pursuant to the Customer List Escrow Agreement; and (iv) such other reports as to the Collateral or the financial condition of Borrower as Agent may reasonably request from time to time. (b) If at any time, Availability, as determined based on a Month End 50 Borrowing Base Certificate, is less than $7,500,000, then until such time as Availability, as determined based on a subsequent Month End Borrowing Base Certificate exceeds $7,500,000, Borrower shall deliver any and all reports, certificates, and other information required to be delivered pursuant to Section 6.2(a) on a weekly basis, or as frequently as Agent may otherwise reasonably request. 6.3 Financial Statements, Reports, Certificates. Deliver to Agent, with copies to each Lender (a) as soon as available, but in any event within 45 days after the end of each month during each of Borrower's fiscal years, a company prepared balance sheet and income statement, in each case, on a consolidated basis, covering Borrower's operations during such period; (b) as soon as available, but in any event within 45 days after the end of each quarter during Borrower's fiscal years, a company prepared balance sheet, income statement, and statement of cash flows, in each case on a consolidated basis, covering Borrower's operations during such period; and (c) as soon as available, but in any event within 90 days after the end of each of Borrower's fiscal years, financial statements of Borrower on a consolidated basis for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Agent and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP, together with a certificate of such accountants addressed to Agent stating that such accountants do not have knowledge of the existence of any Default or Event of Default. Such audited financial statements shall include a balance sheet, profit and loss statement, and statement of cash flow and, if prepared, such accountants' letter to management. Together with the above, Borrower also shall deliver to Agent, with copies to each Lender, Borrower's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and any other filings made by Borrower with the Securities and Exchange Commission, if any, as soon as the same are filed, or any other information that is provided by Borrower to its shareholders, and any other report reasonably requested by the Lender Group relating to the financial condition of Borrower. Each month, together with the financial statements provided pursuant to Section 6.3(a), Borrower shall deliver to Agent, with copies to each Lender a certificate signed by its chief financial officer to the effect that: (i) with respect to financial statements, all financial statements delivered or caused to be delivered to any one or more members of the Lender Group hereunder have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments, and in the case of monthly statements for months other than the last month of a fiscal quarter of Borrower, quarter-end adjustments, and provided, further, that, with respect to such monthly statements, such certificate may be qualified by the representation that such financial statements may not be fully in compliance with GAAP but are in the same form as is provided internally by Borrower to the senior management of Borrower) and fairly present the financial condition of Borrower, (ii) the representations and warranties of Borrower contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), (iii) Borrower is not in default with respect to any of its obligations to any Material Carrier under any Carrier Agreement, or, if Borrower is in such default, specifying the details 51 of each such default, (iv) for each month that also is the date on which a financial covenant in Section 7.20 or 7.21 is to be tested, a Compliance Certificate demonstrating in reasonable detail compliance at the end of such period with the applicable financial covenants contained in Section 7.20 or 7.21, and (v) on the date of delivery of such certificate to Agent there does not exist any condition or event that constitutes a Default or Event of Default (or, in the case of clauses (i), (ii), (iii), or (iv), to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrower has taken, is taking, or proposes to take with respect thereto). Borrower shall issue, upon the request of Agent, written instructions to its independent certified public accountants authorizing them to communicate with Agent and to release to Agent such financial information concerning Borrower that Agent reasonably may request. Borrower hereby irrevocably authorizes all auditors, accountants, or other third parties to deliver to Agent, upon Agent's request, at Borrower's expense, copies of Borrower's financial statements, papers related thereto. 6.4 Billing System Conversion. Prior to the Billing System Conversion, Borrower shall employ a qualified Person, reasonably acceptable to the Lender Group (the "Qualified Advisor"), to advise Borrower with respect to the Billing System Conversion. Borrower shall deliver to Agent and S&A Agent a written implementation plan for the Billing System Conversion (the "Implementation Plan") reviewed by the Qualified Advisor (or developed by the Qualified Advisor for the purposes of implementing an industry recognized integration package provided by the Qualified Advisor). The Qualified Advisor shall communicate with Agent and S&A Agent regarding the Implementation Plan, and prepare a written assessment of the Implementation Plan, such assessment to include any and all material deficiencies identified by the Qualified Advisor in the Implementation Plan. Prior to the implementation of the Billing System Conversion, Borrower shall resolve any such material deficiencies identified by the Qualified Advisor. 6.5 [intentionally omitted]. 6.6 [intentionally omitted]. 6.7 Title to Equipment. Upon Agent's request, Borrower immediately shall deliver to Agent, properly endorsed, any and all evidences of ownership of, certificates of title, or applications for title (as applicable) to any items of Equipment. 6.8 Maintenance of Equipment. Maintain the Equipment in good operating condition and repair (ordinary wear and tear excepted), and make all necessary replacements thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved. Other than those items of Equipment that constitute fixtures on the Closing Date or are financed pursuant to Permitted Indebtedness, Borrower shall not permit any item of Equipment to become a fixture to real estate or an accession to other property, and such Equipment shall at all times remain personal property. 6.9 Taxes. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrower or any of its property to be paid 52 in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Borrower shall make due and timely payment or deposit of all such federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Agent, on demand, appropriate certificates attesting to the payment thereof or deposit with respect thereto. Borrower will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Agent with proof satisfactory to Agent indicating that Borrower has made such payments or deposits. 6.10 Insurance. Borrower agrees to maintain, and to cause each of its Subsidiaries to maintain, public liability insurance, third party property damage insurance, and replacement value insurance on the Collateral under such policies of insurance, with such insurance companies, in such amounts, and covering such risks, as are at all times satisfactory to Agent in its reasonable judgment (from the perspective of a secured lender). All policies covering the Collateral shall name Agent (on behalf of the Lender Group) as an additional insured and sole loss payee in case of Casualty Loss, and are to contain such other provisions as Agent reasonably may require to fully protect the Lender Group's interest in the Collateral and to any payments to be made under such policies, including a standard form 438BFU (NS) lenders loss payable endorsement, or an equivalent endorsement satisfactory to Agent. Original policies or certificates thereof satisfactory to Agent evidencing such insurance shall be delivered to Agent at least 30 days prior to the expiration of the existing or preceding policies. Borrower shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.10, unless Agent is included thereon as named insured with the loss payable to Agent under a standard form 438BFU (NS) lenders loss payable endorsement, or an equivalent satisfactory to Agent. Borrower immediately shall notify Agent whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and originals of such policies immediately shall be provided to Agent. If Borrower fails to provide and pay for such insurance, Agent may, at its option, but shall not be required to, procure the same and charge Borrower therefor. Borrower shall deliver to Lender, promptly as rendered, true copies of all reports made in any reporting forms to insurance companies. 6.11 No Setoffs or Counterclaims. Make payments hereunder and under the other Loan Documents by or on behalf of Borrower without setoff or counterclaim and free and clear of, and, subject to Section 17.10, without deduction or withholding for or on account of, any federal, state, or local taxes. 6.12 Location of Inventory and Equipment. (a) Keep the Inventory and Equipment only at the locations identified on Schedule 6.12; provided, however, that Borrower may amend Schedule 6.12 so long as such amendment occurs by written notice to Agent not more than 30 days after the date on which the Inventory or Equipment is moved to such new location, so long as such new location is within the continental United States, and so long as, at the time of such written 53 notification, Borrower provides any financing statements or fixture filings requested by Agent which are reasonably necessary to perfect and continue perfected the Agent's Liens on such assets and shall use its best efforts to obtain for Agent a Collateral Access Agreement, if applicable. 6.13 Compliance with Laws. Comply with the requirements of all applicable laws, rules, regulations, and orders of any governmental authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, would not result in and reasonably could not be expected to result in a Material Adverse Change. 6.14 [Intentionally Omitted. 6.15 Leases. Pay when due all rents and other amounts payable under any leases to which Borrower is a party or by which Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. To the extent that Borrower fails timely to make payment of such rents and other amounts payable when due under its leases unless such payments are the subject of a Permitted Protest, Agent shall be entitled, in its discretion, to reserve an amount equal to such unpaid amounts against the Borrowing Base. 6.16 Brokerage Commissions. Pay any and all brokerage commission or finders fees incurred in connection with or as a result of Borrower's obtaining financing from the Lender Group under this Agreement. Borrower agrees and acknowledges that payment of all such brokerage commissions or finders fees shall be the sole responsibility of Borrower, and Borrower agrees to indemnify, defend, and hold Agent and the Lender Group harmless from and against any claim of any broker or finder arising out of Borrower's obtaining financing from the Lender Group under this Agreement. 6.17 Year 2000 Compliance. Be Year 2000 Compliant by October 1, 1999. 6.18 Projections. Not later than 30 days prior to the end of each fiscal year of Borrower, deliver to Agent Projections of Borrower, in form and substance (including as to scope and underlying assumptions) satisfactory to each Lender in its discretion, for the forthcoming 3 years, year by year, and for the forthcoming fiscal year, month by month, certified by the chief financial officer of Borrower as being such officer's good faith best estimate of the financial performance of Borrower during the period covered thereby. 6.19 Corporate Existence, etc. At all time preserve and keep in full force and effect Borrower's valid corporate existence and good standing and any rights and franchises material to Borrower's businesses. 6.20 Disclosure Updates. Promptly and in no event later than 5 Business Days after obtaining knowledge thereof, (i) notify Agent if any written information, exhibit, or report furnished to the Lender Group contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made, and (ii) correct any defect or error that may be discovered 54 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. therein or in any Loan Document or in the execution, acknowledgement, filing, or recordation thereof. 6.21 Carrier Agreements. From time to time at the request of Agent, deliver to Agent copies of all Carrier Agreements in effect between Borrower and a Carrier, certified by a Secretary to be true, correct, and complete. 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrower will not do (and will not permit any of its Subsidiaries to do) any of the following without the Lender Group's prior written consent: 7.1 Indebtedness. Create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement; (b) NPI may be liable for Indebtedness set forth on Schedule 7.1; (c) NPI may be liable for Indebtedness evidenced by Permitted Interest Rate or Currency Protection Agreements; (d) Purchase Money Indebtedness of NPI incurred after the Closing Date not to exceed $[**] in the aggregate during any fiscal year; (e) Permitted Subordinated Debt of Holdings; (f) Indebtedness of NPI to Holdings, or Holdings to NPI, provided that such Indebtedness shall be the subject of the Intercompany Subordination Agreement; (g) Indebtedness of Holdings to Robert T. Hale, Jr. in a principal amount outstanding, as of the Closing Date, not to exceed $2,000,000, provided that such Indebtedness shall be the subject of the Hale Subordination Agreement; (h) Indebtedness for letters of credit in an aggregate amount not to exceed $[**] at any one time; (i) Unsecured Indebtedness, not otherwise permitted under this section, in an aggregate amount outstanding at any one time not to exceed $[**]; and (j) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) through (i) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not materially impair the prospects of repayment of the Obligations by Borrower, (ii) the net cash proceeds of such refinancings, renewals, or extensions do not result in an increase in the aggregate principal amount of the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, refundings, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that Indebtedness that is refinanced was subordinated in right of payment to the Obligations, then the subordination terms and conditions of the refinancing Indebtedness must be at least as favorable to the Lender Group as those applicable to the refinanced Indebtedness. 55 7.2 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of its property or assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced under Section 7.1(j) and so long as the replacement Liens only encumber those assets or property that secured the original Indebtedness). 7.3 Restrictions on Fundamental Changes. (a) Enter into any merger, consolidation, or recapitalization, or reclassify its Stock. (b) Liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution). (c) Convey, sell, assign, lease, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or substantially all of its property or assets. 7.4 Disposal of Assets. Sell, lease, assign, transfer, or otherwise dispose (including pursuant to a Sale and Leaseback Transaction) of any of Borrower's properties or assets, other than (a) Permitted Dispositions, (b) distributions and dividends permitted under Section 7.11, (c) Permitted Investments, and (d) so long as no Event of Default has occurred and is continuing or would result therefrom, Permitted Sale and Leaseback Transactions. 56 7.5 Change Name. Change Borrower's name, FEIN, corporate structure (within the meaning of Section 9-402(7) of the Code), or identity, or add any new fictitious name, in each case, unless Borrower shall have given Agent written notice of such change not less than 30 days prior to the date on which change shall be effective, and at the time of such written notification, Borrower provides any financing statements or fixture filings requested by Agent which are reasonably necessary to perfect and continue perfected Agent's Liens. 7.6 Guarantee. Guarantee or otherwise become in any way liable with respect to the obligations of any third Person except by endorsement of instruments or items of payment for deposit to the Lockbox Account of Borrower or which are transmitted or turned over to Agent. 7.7 Nature of Business. Make any material change in the principal nature of Borrower's business. 7.8 Prepayments and Amendments. (a) Except in connection with a refinancing permitted by Section 7.1(j), prepay, redeem, retire, defease, purchase, or otherwise acquire any Indebtedness owing to any third Person, other than the Obligations in accordance with this Agreement, and (b) Directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under clauses (b) through (i) of Section 7.1. 7.9 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control. 7.10 [intentionally omitted]. 7.11 Distributions. Make any distribution or declare or pay any dividends (in cash or other property, other than Stock) on, or purchase, acquire, redeem, or retire any of Borrower's Stock, of any class, whether now or hereafter outstanding except (a) distributions or dividends by NPI to Holdings, and (b) so long as no Event of Default has occurred and is continuing or would result therefrom, Holdings may repurchase Stock of Holdings owned by employees or former employees of Borrower who have become permanently disabled, died, or otherwise have terminated their employment with Borrower, in an aggregate amount not to exceed $1,000,000 in any 12 month period. 7.12 Accounting Methods. Modify or change its method of accounting or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrower's accounting records without said accounting firm or service bureau agreeing to provide Agent information regarding the Collateral or Borrower's financial condition. 7.13 Investments. Except for Permitted Investments, directly or indirectly make, acquire, or incur any liabilities (including contingent obligations) for or in connection with (a) the acquisition of the securities (whether debt or equity) of, or other interests in, a Person, (b) loans, 57 advances, capital contributions, or transfers of property to a Person, or (c) the acquisition of all or substantially all of the properties or assets of a Person. 7.14 Transactions with Affiliates. Except as fully disclosed on Schedule 7.14, directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms and that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-Affiliate. 7.15 Suspension. Suspend or go out of a substantial portion of its business. 7.16 Compensation. Increase the annual fee or per-meeting fees paid to directors during any year by more than 15% over the prior year; or pay or accrue total cash compensation, during any year, to the Hales or any of their Family Members in an aggregate amount in excess of 150% of that paid or accrued in the prior year; provided, however, so long as no Event of Default has occurred and is continuing, Borrower may pay additional amounts to Mr. Robert T. Hale, Jr. in an amount sufficient to enable him to pay all income taxes attributable to interest accrued, but not paid in cash, on the Indebtedness referred to in Section 7.1(g). 7.17 Use of Proceeds. Use the proceeds of the Advances made hereunder for any purpose other than (i) on the Closing Date, (y) to repay in full the outstanding principal, accrued interest, and accrued fees and expenses owing to Existing Lender, and (z) to pay transactional fees, costs, and expenses incurred in connection with this Agreement, and (ii) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted corporate purposes. 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees. Relocate its chief executive office to a new location without providing 30 days prior written notification thereof to Agent and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings requested by Agent that are reasonably necessary to perfect and continue perfected the Agent's Liens and also shall use its best efforts to obtain a Collateral Access Agreement with respect to such new location. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Agent's prior written consent. 7.19 [Intentionally Omitted]. 7.20 Financial Covenants. Fail to: (a) Profitability. Achieve EBITDA of not less than the amount shown below for the period corresponding thereto:
============================================================================== Period Minimum EBITDA ============================================================================== the 6 month period on December 31, ($3,800,000) 1998 - ------------------------------------------------------------------------------ the 6 month period ending on March ($3,000,000) 31, 1999 - ------------------------------------------------------------------------------
58
============================================================================== Period Minimum EBITDA ============================================================================== the 6 month period ending on June ($1,000,000) 30, 1999 - ------------------------------------------------------------------------------ the 6 month period ending on $3,000,000 September 30, 1999 - ------------------------------------------------------------------------------ the 6 month period ending on $10,700,000 December 31, 1999 - ------------------------------------------------------------------------------ the 6 month period ending on March $18,000,000 31, 2000 ==============================================================================
(b) Total Revenues. Achieve total revenues, determined in accordance with GAAP, of not less than the amount shown below for the period corresponding thereto:
============================================================================== Period Minimum Total Revenue ============================================================================== the 6 month period ending on $47,900,000 December 31, 1998 - ------------------------------------------------------------------------------ the 6 month period ending on March $56,100,000 31, 1999 - ------------------------------------------------------------------------------ the 6 month period ending on June $70,300,000 30, 1999 - ------------------------------------------------------------------------------ the 6 month period ending on $89,300,000 September 30, 1999 - ------------------------------------------------------------------------------ the 6 month period ending on $110,100,000 December 31, 1999 - ------------------------------------------------------------------------------ the 6 month period ending on March $126,800,000 31, 2000 ==============================================================================
(c) Maximum Debt to Annualized Quarterly Revenue Ratio. Achieve a Debt to Annualized Quarterly Revenue Ratio of 27.5% or less, measured on a monthly basis. (d) Monthly Churn Rate. Achieve Churn (i) as of November 1, 1998, of 2.5%, or less, (ii) as of December 1, 1998, of 2.55%, or less, (iii) as of January 1, 1999, of 2.6, or less, (iv) as of February 1, 1999, of 2.65%, or less, (v) as of March 1, 1999, of 2.7%, or less, (vi) as of April 1, 1999, of 2.75%, or less, (vii) as of May 1, 1999, of %, or less, (viii) as of June 1, 1999, of 2.8%, or less, (ix) as of July 1, 1999, of 2.85%, or less, (x) as of August 1, 1999, of 2.95%, or less, and (xi) as of September 1, 1999 and as of the first day of each month thereafter, of 3.0%, or less. 7.21 Capital Expenditures. Expend or commit capital to (a) acquire a new switch unless Borrower has Customers representing line density sufficient to utilize 33%, or more, of Borrower's paid for capacity of such switch, or (b) acquire a new co-location access node unless Borrower has customers representing 225 access lines to be served by that co-location access node. 59 7.22 Contracts with Carriers. Enter into any new contractual arrangements with Carriers, or materially amend, modify, or extend existing contractual arrangements with Carriers, if the effect would be (a) to prohibit (or continue to prohibit) Agent from having a Lien on the rights of Borrower thereunder, (b) to grant a Lien to the Carrier on the Collateral unless such Lien is the subject of a subordination agreement, in form and substance satisfactory to each Lender, among Borrower, such Carrier, and Agent, or (c) to authorize any Carrier to contact or directly bill customers of Borrower with respect to services provided by such Carrier to Borrower for resale to such customers of Borrower. 7.23 Holding Company. Holdings shall not have any material amount of property or assets or engage in any material business activity, in each case, other than its ownership and control of the Stock of NPI and Permitted Investments. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: If Borrower fails to pay when due and payable or when declared due and payable, any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due the Lender Group, reimbursement of Lender Group Expenses, or other amounts constituting Obligations); (a) If Borrower fails or neglects to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in Sections 6.1 (Accounting System), 6.2 (Collateral Reporting), 6.3 (Financial Statements, Reports, Certificates), 6.12 (Location of Inventory and Equipment), 6.13 (Compliance with Laws), or 6.14 (Employee Benefits) of this Agreement and such failure continues for a period of 10 Business Days; (b) if Borrower fails or neglects to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in Section 6.15 (Leases) of this Agreement and such failure continues for a period of 30 days; or (c) if Borrower fails or neglects to perform, keep, or observe any other term, provision, condition, covenant, or agreement contained in this Agreement, or in any of the other Loan Documents (giving effect to any grace periods or required notices, if any, expressly provided for in such Loan Documents), in each case, other than any such term, provision, condition, covenant, or agreement that is the subject of another provision of this Section 8, in which event such other provision of this Section 8 shall govern); If there is a Material Adverse Change; If any material portion of Borrower's properties or assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any 60 third Person and the same is not discharged before the earlier of 30 days after the date it first arises or 5 days prior to the date on which such property or asset is subject to forfeiture by Borrower; If an Insolvency Proceeding is commenced by Borrower; If an Insolvency Proceeding is commenced against Borrower and any of the following events occur: (a) Borrower consents to the institution of the Insolvency Proceeding against it; (b) the petition commencing the Insolvency Proceeding is not timely controverted; (c) the petition commencing the Insolvency Proceeding is not dismissed within 60 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Agent (including any successor agent) and each other member of the Lender Group shall be relieved of its obligation to extend credit hereunder; (d) an interim trustee is appointed to take possession of all or a substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, Borrower; or (e) an order for relief shall have been issued or entered therein; If Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; (a) If a notice of Lien, levy, or assessment is filed of record with respect to any of Borrower's properties or assets by the United States Government, or any department, agency, or instrumentality thereof, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon any of Borrower's properties or assets and the same is not paid on the payment date thereof; or (b) If a notice of Lien, levy, or assessment in excess of $1,000,000 in the aggregate is filed of record with respect to any of Borrower's properties or assets by any state, county, municipal, or other non-federal governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities in excess of $1,000,000 in the aggregate becomes a Lien, whether choate or otherwise, upon any of Borrower's properties or assets and the same is not paid on the payment date thereof and the same is not release, discharged, bonded against, or stayed pending appeal before the earlier of 30 days after the date it first arises or 5 days prior to the date when such property or asset is subject to being forfeited by Borrower; If one or more judgments or other claims involving an aggregate amount of $1,000,000, or more, in excess of the amount covered by insurance becomes a Lien or encumbrance upon any material portion of Borrower's properties or assets and the same is not released, discharged, bonded against, or stayed pending appeal before the earlier of 30 days after the date it first arises or 5 days prior to the date on which such property or asset is subject to being forfeited by Borrower; (a) If there is a default in one or more agreements to which Borrower is a party with one or more third Persons relative to Borrower's Indebtedness for money borrowed involving an aggregate amount of $500,000 or more and such default (i) occurs at the final 61 maturity of the obligations thereunder, or (ii) results in a right by such third Person(s), irrespective of whether exercised, to accelerate the maturity of Borrower's obligations thereunder to terminate such agreement, or to refuse to renew such agreement pursuant to an automatic renewal right therein; or (b) If there is a default in any other material agreement to which Borrower is a party with one or more third Persons and such default results in a right by such third Person(s), irrespective of whether exercised, to terminate such agreement; If Borrower makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; or If any material misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement, or report made to the Lender Group by Borrower or any officer, employee, agent, or director of Borrower, or if any such warranty or representation is withdrawn. 9. THE LENDER GROUP'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default, the Required Lenders (at their election but without notice of their election and without demand) may, except to the extent otherwise expressly provided or required below, authorize and instruct Agent to do any one or more of the following on behalf of the Lender Group (and Agent, acting upon the instructions of the Required Lenders, shall do the same on behalf of the Lender Group so long as Agent does not reasonably believe such conduct to be unlawful), all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under any of the Loan Documents, or under any other agreement between Borrower and the Lender Group; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Lender Group, but without affecting Agent's rights and security interests, for the benefit of the Lender Group, in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Agent considers advisable, and in such cases, Agent will credit Borrower's Loan Account with only the net amounts received by Agent in payment of 62 such disputed Accounts after deducting all Lender Group Expenses incurred or expended in connection therewith; (e) [intentionally omitted]; (f) Without notice to or demand upon Borrower or any guarantor, make such payments and do such acts as Agent reasonably considers necessary to protect its security interests in the Collateral. Borrower agrees to assemble the Collateral if Agent so requires, and to make the Collateral available to Agent as Agent may designate. Borrower authorizes Agent to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or Lien that in Agent's determination appears to conflict with the Agent's Liens and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned or leased premises, Borrower hereby grants Agent a license to enter into possession of such premises and to occupy the same, without charge, for up to 120 days in order to exercise any of the Lender Group's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of Section 9-505 of the Code), set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by the Lender Group (including any amounts received in the Lockbox Account), or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by the Lender Group; (h) Hold, as cash collateral, any and all balances and deposits of Borrower held by the Lender Group, and any amounts received in the Lockbox Account, to secure the full and final repayment of all of the Obligations; (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Borrower hereby grants to Agent a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to the Lender Group's benefit; (j) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Agent determines is commercially reasonable. It is not necessary that the Collateral be present at any such sale; (k) Agent shall give notice of the disposition of the Collateral as follows: (i) Agent shall give the applicable Borrower and each holder of a 63 security interest in the Collateral who has filed with Agent a written request for notice, a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Collateral, then the time on or after which the private sale or other disposition is to be made; (ii) The notice shall be personally delivered or mailed, postage prepaid, to such Borrower as provided in Section 12, at least 15 days before the date fixed for the sale, or at least 15 days before the date on or after which the private sale or other disposition is to be made; no notice needs to be given prior to the disposition of any portion of the Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market. Notice to Persons other than such Borrower claiming an interest in the Collateral shall be sent to such addresses as they have furnished to Agent; (iii) If the sale is to be a public sale, Agent also shall give notice of the time and place by publishing a notice one time at least 15 days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held; (l) The Lender Group may credit bid and purchase at any public sale; (m) The Lender Group shall have all other rights and remedies available to it at law or in equity pursuant to any other Loan Documents; (n) Any deficiency that exists after disposition of the Collateral as provided above will be paid immediately by Borrower. Any excess will be promptly returned, without interest and subject to the rights of third Persons, by Agent to Borrower; and (o) Require Borrower to deliver to Agent promptly upon demand a complete list of all end-user customers of Borrower with respect to the Accounts. 9.2 Remedies Cumulative. The rights and remedies of the Lender Group under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. The Lender Group shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by the Lender Group of one right or remedy shall be deemed an election, and no waiver by the Lender Group of any Event of Default shall be deemed a continuing waiver. No delay by the Lender Group shall constitute a waiver, election, or acquiescence by it. 64 10. TAXES AND EXPENSES. If Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, to the extent that Agent determines that such failure by Borrower could result in a Material Adverse Change, in its reasonable discretion and without prior notice to Borrower, Agent may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves in Borrower's Loan Account as Agent reasonably deems necessary to protect the Lender Group from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type described in Section 6.10, and take any action with respect to such policies as Agent deems prudent. Any such amounts paid by Agent shall constitute Lender Group Expenses. Any such payments made by Agent shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group of any Event of Default under this Agreement. Agent need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. To the extent permitted by law and not otherwise required under this Agreement or any other Loan Document, Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by the Lender Group on which Borrower may in any way be liable. 11.2 The Lender Group's Liability for Collateral. Borrower hereby agrees that: (a) so long as the Lender Group complies with its obligations, if any, under Section 9-207 of the Code, the Lender Group shall not in any way or manner be liable or responsible for: (i) the safekeeping of the Collateral; (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (iii) any diminution in the value thereof; or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person; and (b) all risk of loss, damage, or destruction of the Collateral shall be borne by Borrower. 11.3 Indemnification. Borrower shall pay, indemnify, defend, and hold the Agent-Related Persons, the S&A Agent-Related Persons, the Lender-Related Persons with respect to each Lender, each Participant, and each of their respective officers, directors, employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted 65 by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them in connection with or as a result of or related to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Loan Documents or the transactions contemplated herein, and with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). Borrower shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect an Indemnified Liability for which Borrower was required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrower with respect thereto. 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, or telefacsimile to the relevant party, as the case may be, at its address set forth below: If to Borrower: NETWORK PLUS, INC. 234 Copeland Street Quincy, Massachusetts 02169 Attn: Chief Financial Officer Fax No. 617.786.4013 with copies to: HALE AND DORR LLP 60 State Street Boston, Massachusetts 02109 Attn: Jeffrey Carp, Esq. Fax No. 617.526.5000 If to Agent or FNB: FLEET NATIONAL BANK One Federal Street Boston, Massachusetts 02110 66 Attn: Raymond C. Hoefling Fax No. 617.346.0799 with copies to: CHAPPELL, COHEN, DIFRONZO & ZINNERSHINE 99 Summer Street, 18th Floor Boston, Massachusetts 02110 Attn: Louis J. DiFronzo, Esq. Fax No. 617.772.9696 and GOLDMAN SACHS CREDIT PARTNERS L.P. 85 Broad Street New York, New York 10004 Attn: Mr. Craig F. Noell Fax No. 212.346.2905 and BROBECK, PHLEGER & HARRISON LLP 550 South Hope Street Los Angeles, California 90071 Attn: John Francis Hilson, Esq. Fax No. 213.745.3345 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to all other parties. All notices or demands sent in accordance with this Section 12, other than notices by the Lender Group in connection with Sections 9-504 or 9-505 of the Code, shall be deemed received on the earlier of the date of actual receipt or 3 days after the deposit thereof in the mail. Borrower acknowledges and agrees that notices sent by the Lender Group in connection with Sections 9-504 or 9-505 of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted telefacsimile or other similar method set forth above. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS 67 ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE REQUIRED LENDERS' OPTION, IN THE COURTS OF ANY JURISDICTION WHERE THE REQUIRED LENDERS ELECT TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWER AND THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13. BORROWER AND THE LENDER GROUP HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. DESTRUCTION OF BORROWER'S DOCUMENTS. All documents, schedules, invoices, agings, or other papers delivered to any one or more members of the Lender Group may be destroyed or otherwise disposed of by such member of the Lender Group 4 months after they are delivered to or received by such member of the Lender Group, unless Borrower requests, in writing, the return of said documents, schedules, or other papers and makes arrangements, at Borrower's expense, for their return. 15. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS. 15.1 Assignments and Participations. (a) Any Lender may assign and delegate to one or more Eligible Transferees (or any other assignee, if such assignment is in connection with a merger, consolidation, sale, transfer, or other disposition of all or any substantial portion of the business or loan portfolio of such Lender) (each an "Assignee") all, or any ratable part of all, of the Obligations, the Commitments and the other rights and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount of $5,000,000; provided, however, that Borrower, Agent, and S&A Agent may continue to deal solely and 68 directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to Borrower and Agent by such Lender and the Assignee; (ii) such Assignee shall have delivered to Agent and Borrower such forms, if any, that such Assignee is required to deliver pursuant to Section 17.10, and (iii) such Lender and its Assignee shall have delivered to Borrower and Agent an Assignment and Acceptance ("Assignment and Acceptance") in form and substance satisfactory to Agent. (b) From and after the date that Agent notifies the assignor Lender that it has received an executed Assignment and Acceptance, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (except with respect to Section 11.3 hereof) and be released from its obligations to make Advances under this Agreement (and in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment shall effect a novation between Borrower and the Assignee. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (1) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pursuant hereto; (2) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance or observance by Borrower of any of its obligations under this Agreement or any other Loan Document furnished pursuant hereto; (3) such Assignee confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (4) such Assignee will, independently and without reliance upon Agent, S&A Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (5) such Assignee appoints and authorizes Agent and S&A Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to Agent or S&A Agent, as applicable, by the terms hereof, together with such powers as are reasonably incidental thereto; (6) such Assignee has complied, to the extent applicable, with Section 17.10; and (7) such Assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. 69 (d) Immediately upon receipt and acknowledgment by Agent of a fully executed Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto. (e) Any Lender may at any time, with the written consent of S&A Agent, sell to one or more commercial banks, financial institutions, or other Persons (a "Participant") participating interests in the Obligations, the Commitment, and the other rights and interests of that Lender (the "originating Lender") hereunder and under the other Loan Documents (provided that no written consent of S&A Agent shall be required in connection with any sale of any such participating interests by a Lender to an Eligible Transferee); provided, however, that (i) the originating Lender's obligations under this Agreement shall remain unchanged, (ii) the originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrower, Agent, and S&A Agent shall continue to deal solely and directly with the originating Lender in connection with the originating Lender's rights and obligations under this Agreement and the other Loan Documents, (iv) no Lender shall transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating; (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating; (C) release all or a material portion of the Collateral or guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating; (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through such Lender; or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums; (v) such Participant shall agree to be bound by the confidentiality provisions of Section 17.16(d) as if such Participant were a party hereto; (vi) no participating interest shall be sold to any Person if S&A Agent or the originating Lender knows or reasonably should know that such Person's primary line of business directly competes with the business of Borrower, (vii) at Borrower's request, each Participant shall certify that the primary line of business of such Participant does not directly compete with the business of Borrower, and (viii) all amounts payable by Borrower hereunder shall be determined as if such Lender had not sold such participation; except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through the originating Lender with whom such Participant participates and no Participant shall have any direct rights as to the other Lenders, Agent, S&A Agent, Borrower, the Collections, the Collateral, or otherwise in respect of the Obligations. No Participant shall have the right to 70 participate directly in the making of decisions by the Lenders among themselves. (f) In connection with any such assignment or participation or proposed assignment or participation, a Lender may disclose all documents and information which it now or hereafter may have relating to Borrower or Borrower's business. (g) Any other provision in this Agreement notwithstanding, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR Section 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 15.2 Successors. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrower may not assign this Agreement or any rights or duties hereunder without the Lenders' prior written consent and any prohibited assignment shall be absolutely void ab initio. No consent to assignment by the Lenders shall release Borrower from its Obligations. A Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 15.1 hereof and, except as expressly required pursuant to Section 15.1 hereof, no consent or approval by Borrower is required in connection with any such assignment. 16. AMENDMENTS; WAIVERS. 16.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Borrower and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Lenders and Borrower and acknowledged by Agent, do any of the following: (a) increase or extend the Commitment of any Lender; (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document; (c) reduce the principal of, or the rate of interest specified herein on any Loan, or any fees or other amounts payable hereunder or under any other Loan Document; 71 (d) change the percentage of the Commitments that is required for the Lenders or any of them to take any action hereunder; (e) amend this Section or any provision of the Agreement providing for consent or other action by all Lenders; (f) release the Agent's Lien for the benefit of the Lender Group on any Collateral other than as permitted by Section 17.11; (g) change the definition of "Required Lenders"; (h) release Borrower from any Obligation for the payment of money; (i) amend Section 2.4(b); (j) amend any of the provisions of Section 17; (k) change the definition of Eligible Accounts; or (l) change the advance rate against Eligible Accounts or otherwise amend Section 2.1; and, provided further, however, that no amendment, waiver or consent shall, unless in writing and signed by Agent, affect the rights or duties of Agent under this Agreement or any other Loan Document; and provided further, however, that no amendment, waiver or consent shall, unless in writing and signed by S&A Agent, affect the specific rights or duties of S&A Agent under this Agreement or any other Loan Document. The foregoing notwithstanding, any amendment, modification, waiver, consent, termination, or release of or with respect to any provision of this Agreement or any other Loan Document that relates only to the relationship of the Lender Group among themselves, and that does not affect the rights or obligations of Borrower, shall not require consent by or the agreement of Borrower. 16.2 No Waivers; Cumulative Remedies. No failure by Agent or any Lender to exercise any right, remedy, or option under this Agreement, any other Loan Document, or any present or future supplement hereto or thereto, or in any other agreement between or among Borrower and Agent or any Lender, or delay by Agent or any Lender in exercising the same, will operate as a waiver thereof. No waiver by Agent or any Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by Agent or the Lenders on any occasion shall affect or diminish Agent's and each Lender's rights thereafter to require strict performance by Borrower of any provision of this Agreement. Agent's and each Lender's rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy which Agent or any Lender may have. 72 17. AGENT; THE LENDER GROUP. 17.1 Appointment and Authorization of Agent. Each Lender hereby designates and appoints FNB and GSCP as its agents under this Agreement and the other Loan Documents and each Lender hereby irrevocably authorizes Agent and S&A Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to Agent or S&A Agent, as applicable, it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Agent and S&A Agent each agrees to act as such on the express conditions contained in this Section 17. The provisions of this Section 17 are solely for the benefit of Agent, S&A Agent, and the Lenders, and Borrower shall have no rights as a third party beneficiary of any of the provisions contained herein; provided, however, that certain of the provisions of Section 17.10 hereof also shall be for the benefit of Borrower. Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, neither Agent nor S&A Agent shall have any duties or responsibilities, except those expressly set forth herein, nor shall Agent nor S&A Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Agent or S&A Agent; it being expressly understood and agreed that the use of the words "Agent" and "S&A Agent" is for convenience only, that FNB and GSCP are merely the representative of the Lenders, and have only the contractual duties set forth herein. Except as expressly otherwise provided in this Agreement, Agent and S&A Agent shall have and may use their sole discretion with respect to exercising or refraining from exercising any discretionary rights or taking or refraining from taking any actions which Agent or S&A Agent, as applicable, is expressly entitled to take or assert under or pursuant to this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders agree that Agent shall have the right to exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with its customary business practices, ledgers and records reflecting the status of the Advances, the Collateral, the Collections, and related matters; (b) execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to the Loan Documents; (c) make Advances, for itself or on behalf of Lenders as provided in the Loan Documents; (d) exclusively receive, apply, and distribute the Collections as provided in the Loan Documents; (e) open and maintain such bank accounts and lock boxes as Agent reasonably deems necessary and appropriate in accordance with the Loan Documents for the foregoing purposes with respect to the Collateral and the Collections; (f) perform, exercise, and enforce any and all other rights and remedies of the Lender Group with respect to Borrower, the Obligations, the Collateral, the Collections, or otherwise related to any of same as provided in the Loan Documents; and (g) incur and pay such Lender Group Expenses as Agent may reasonably deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to the Loan Documents. 73 17.2 Delegation of Duties. Except as otherwise provided in this section, Agent and S&A Agent may execute any of their respective duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Neither Agent nor S&A Agent shall be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects as long as such selection was made in compliance with this section and without gross negligence or willful misconduct. 17.3 Liability of Agent and S&A Agent. None of the Agent-Related Persons, nor the S&A Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by Borrower or any Subsidiary or Affiliate of Borrower, or any officer or director thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent or S&A Agent, as applicable, under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person, nor any S&A Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of Borrower or any of Borrower's Subsidiaries or Affiliates. 17.4 Reliance by Agent and S&A Agent. Agent and S&A Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation reasonably believed by it to be genuine and correct and to have been signed, sent, or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrower or counsel to any Lender), independent accountants and other experts selected by Agent or S&A Agent, as applicable. Agent and S&A Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless Agent or S&A Agent, as applicable, shall first receive such advice or concurrence of the Lenders as it deems appropriate and until such instructions are received, Agent and S&A Agent shall act, or refrain from acting, as they deem advisable. If Agent or S&A Agent so requests, Agent or S&A Agent, as applicable, shall first be indemnified to its reasonable satisfaction by Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Agent and S&A Agent shall in 74 all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the requisite Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. If in the reasonable opinion of Agent the distribution of any amount received by it in such capacity hereunder or under any of the other Loan Documents reasonably could be expected to result in it suffering a liability, Agent may refrain from making distribution until its right to make distribution shall have been adjudicated by a court of competent jurisdiction. If a court of competent jurisdiction shall adjudge that any amount received and distributed by Agent is to be repaid, each Person to whom any such distribution shall have been made shall either repay to the Agent its proportionate share of the amount so adjudged or shall pay over the same in such manner to such Persons as shall be determined by such court. 17.5 Notice of Default or Event of Default. Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees, and expenses required to be paid to Agent for the account of the Lenders, except with respect to Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Borrower referring to this Agreement, describing such Default or Event of Default, and stating that such notice is a "notice of default." Agent promptly will notify the Lenders of its receipt of any such notice or of any Event of Default of which Agent has actual knowledge. If any Lender obtains actual knowledge of any Event of Default, such Lender promptly shall notify the other Lenders and Agent of such Event of Default. Each Lender shall be solely responsible for giving any notices to its Participants, if any. Subject to Section 17.4, Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Lenders in accordance with Section 9; provided, however, that unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable. 17.6 Credit Decision. Each Lender acknowledges that none of the Agent-Related Persons nor any of the S&A Agent-Related Persons has made any representation or warranty to it, and that no act by Agent or S&A Agent hereinafter taken, including any review of the affairs of Borrower and its Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person or S&A Agent-Related Person to any Lender. Each Lender represents to Agent and to S&A Agent that it has, independently and without reliance upon any Agent-Related Person or any S&A Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document, and all applicable bank regulatory laws relating to the transactions 75 contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrower. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person or any S&A Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document. Except for notices, reports and other documents expressly herein required to be furnished to the Lenders by Agent or S&A Agent, neither Agent nor S&A Agent, as applicable, shall have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrower and any other Person party to a Loan Document that may come into the possession of any of the Agent-Related Persons or the S&A Agent-Related Persons. 17.7 Costs and Expenses; Indemnification. Agent and S&A Agent may incur and pay Lender Group Expenses to the extent Agent or S&A Agent, as applicable reasonably deems necessary or appropriate for the performance and fulfillment of their respective functions, powers, and obligations pursuant to the Loan Documents, including without limiting the generality of the foregoing, court costs, reasonable attorneys fees and expenses, costs of collection by outside collection agencies and auctioneer fees and costs of security guards or insurance premiums paid to maintain the Collateral, whether or not Borrower is obligated to reimburse Agent, S&A Agent, or Lenders for such expenses pursuant to the Loan Agreement or otherwise. Agent is authorized and directed to deduct and retain sufficient amounts from Collections to reimburse Agent and S&A Agent, as applicable, for such out-of-pocket costs and expenses prior to the distribution of any amounts to Lenders. In the event Agent or S&A Agent is not reimbursed for such costs and expenses from Collections, each Lender hereby agrees that it is and shall be obligated to pay to or reimburse Agent or S&A Agent for the amount of such Lender's Pro Rata Share thereof. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons and the S&A Agent-Related Persons (in each case, to the extent not reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment to the Agent-Related Persons or the S&A Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender shall reimburse Agent and S&A Agent upon demand for such Lender's ratable share of any costs or out-of-pocket expenses (including attorneys fees and expenses) incurred by Agent or S&A Agent, as applicable, in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the 76 extent that Agent or S&A Agent, as applicable, is not reimbursed for such expenses by or on behalf of Borrower. The undertaking in this section shall survive the payment of all Obligations hereunder and the resignation or replacement of Agent or S&A Agent, as applicable. 17.8 Agent and S&A Agent in Individual Capacity. FNB, GSCP, and their respective Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Documents as though FNB were not Agent hereunder, and GSCP were not S&A Agent hereunder, and, in each case, without notice to or consent of the Lenders. The Lenders acknowledge that, pursuant to such activities, FNB, GSCP, or their respective Affiliates may receive information regarding Borrower or its Affiliates and any other Person (other than the Lender Group) party to any Loan Documents that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver Agent or S&A Agent, as applicable, will use its reasonable best efforts to obtain), neither Agent nor S&A Agent shall be under an obligation to provide such information to them. The terms "Lender" and "Lenders" include FNB in its individual capacity and GSCP in its individual capacity. 17.9 Successor Agent and S&A Agent. (a) Agent may resign as Agent upon 45 days notice to the Lenders; provided, however, that such 45 day notice shall not be required if GSCP exercises its Purchase Option (as defined in the Agents' Side Letter). If Agent resigns under this Agreement, the Required Lenders shall appoint a successor Agent for the Lenders. If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with the Lenders, a successor Agent. If Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace Agent with a successor Agent from among the Lenders. In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor Agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 17 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor Agent has accepted appointment as Agent by the date which is 45 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above. 77 (b) S&A Agent may resign as S&A Agent upon 45 days notice to the Lenders. If S&A Agent resigns under this Agreement, the Required Lenders shall appoint a successor S&A Agent for the Lenders. If no successor S&A Agent is appointed prior to the effective date of the resignation of S&A Agent, S&A Agent may appoint, after consulting with the Lenders, a successor S&A Agent. If S&A Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace S&A Agent with a successor S&A Agent from among the Lenders. In any such event, upon the acceptance of its appointment as successor S&A Agent hereunder, such successor S&A Agent shall succeed to all the rights, powers and duties of the retiring S&A Agent and the term "S&A Agent" shall mean such successor S&A Agent and the retiring S&A Agent's appointment, powers and duties as S&A Agent shall be terminated. After any retiring S&A Agent's resignation hereunder as S&A Agent, the provisions of this Section 17 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was S&A Agent under this Agreement. If no successor S&A Agent has accepted appointment as S&A Agent by the date which is 45 days following a retiring S&A Agent's notice of resignation, the retiring S&A Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of S&A Agent hereunder until such time, if any, as the Lenders appoint a successor S&A Agent as provided for above. 17.10 Withholding Tax. (a) If any Lender is a "foreign corporation, partnership or trust" within the meaning of the IRC and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the IRC, such Lender agrees with and in favor of Agent and Borrower, to deliver to Agent and Borrower: (i) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Forms 1001 and W-8 before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; (ii) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, two properly completed and executed copies of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Lender and in each succeeding taxable year of such Lender during which interest may be paid under this Agreement, and IRS Form W-9; and (iii) such other form or forms as may be required under the IRC or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. 78 Such Lender agrees promptly to notify Agent and Borrower of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrower to such Lender, such Lender agrees to notify Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of Borrower to such Lender. To the extent of such percentage amount, Agent will treat such Lender's IRS Form 1001 as no longer valid. (c) If any Lender claiming exemption from United States withholding tax by filing IRS Form 4224 with Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrower to such Lender, such Lender agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the IRC. (d) If any Lender is entitled to a reduction in the applicable withholding tax, Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to Agent, then Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (e) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify Agent or Borrower of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify Agent fully for all amounts paid, directly or indirectly, by Agent or Borrower as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to Agent or Borrower, as applicable, under this section, together with all costs and expenses (including attorneys fees and expenses). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Agent. 17.11 Collateral Matters. (a) The Lenders hereby irrevocably authorize Agent, at its option and in its sole discretion, to release any Lien on any Collateral (i) upon the termination of the Commitments and payment and satisfaction in full by Borrower of all Obligations; (ii) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if Borrower certifies to Agent that the sale or disposition is permitted under Section 7 of this Agreement or the other Loan Documents (and Agent may rely conclusively on any such certificate, without further inquiry); (iii) constituting property 79 in which Borrower owned no interest at the time the security interest was granted or at any time thereafter; or (iv) constituting property leased to Borrower under a lease that has expired or is terminated in a transaction permitted under this Agreement. Except as provided above, Agent will not execute and deliver a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or substantially all of the Collateral, all of the Lenders, or (z) otherwise, the Required Lenders. Upon request by Agent or Borrower at any time, the Lenders will confirm in writing Agent's authority to release any such Liens on particular types or items of Collateral pursuant to this Section 17.11; provided, however, that (1) Agent shall not be required to execute any document necessary to evidence such release on terms that, in Agent's opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release of such Lien without recourse, representation, or warranty, and (2) such release shall not in any manner discharge, affect, or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of Borrower in respect of) all interests retained by Borrower, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral. (b) Agent shall have no obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by Borrower or is cared for, protected, or insured or has been encumbered, or that the Agent's Liens have been properly or sufficiently or lawfully created, perfected, protected, or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission or event related thereto, subject to the terms and conditions contained herein, Agent may act in any manner it may deem appropriate, in its sole discretion given Agent's own interest in the Collateral in its capacity as one of the Lenders and that Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein. 17.12 Restrictions on Actions by Lenders; Sharing of Payments. (a) Each Lender agrees that: (i) unless an Event of Default has occurred and is continuing, such Lender shall not without the express consent of the Required Lenders (but, if an Event of Default has occurred and is continuing, then to the extent that it is lawfully entitled to do so, such Lender may, at its election, and shall, upon the request of the Required Lenders), set off against the Obligations, any amounts owing by such Lender to Borrower or any accounts of Borrower now or hereafter maintained with such Lender; (ii) such Lender shall not, without the express consent of all the Lenders, set off against any Indebtedness (other than Obligations) of Borrower owing to such Lender any amounts owing by such Lender to Borrower, including any amounts evidenced by accounts now or hereafter maintained with such Lender; and (iii) such Lender shall not, without the express consent of all the Lenders, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings, to foreclose any Lien on, or otherwise enforce any security interest in, any of the Collateral the purpose of which is, or could be, to give such Lender any preference or priority against the other Lenders with respect to the Collateral. The foregoing 80 to the contrary notwithstanding, if any Lender provides Borrower with a letter of credit and obtains cash collateral to secure Borrower's reimbursement obligations thereunder, such Lender shall not be restricted by the foregoing provisions from applying such cash collateral to such reimbursement obligations. (b) Subject to Section 17.8, if, at any time or times any Lender shall receive (i) by payment, foreclosure, setoff or otherwise, any proceeds of Collateral or any payments with respect to the Obligations arising under, or relating to, this Agreement or the other Loan Documents, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender's ratable portion of all such distributions by Agent, such Lender promptly shall (1) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in same day funds, as applicable, for the account of all of the Lenders and for application to the Obligations in accordance with the applicable provisions of this Agreement, or (2) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such excess payment received shall be applied ratably as among the Lenders in accordance with their Pro Rata Shares; provided, however, that if all or part of such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment. 17.13 Agency for Perfection. Agent and each Lender hereby appoints each other Lender as agent for the purpose of perfecting the Agent's Liens in assets which, in accordance with Article 9 of the UCC can be perfected only by possession. Should any Lender obtain possession of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent's request therefor shall deliver such Collateral to Agent or in accordance with Agent's instructions. 17.14 Payments by Agent to the Lenders. All payments to be made by Agent to the Lenders shall be made by bank wire transfer or internal transfer of immediately available funds pursuant to such wire transfer instructions as each party may designate for itself by written notice to Agent. Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium or interest on revolving advances or otherwise. 17.15 Concerning the Collateral and Related Loan Documents. Each member of the Lender Group authorizes and directs Agent to enter into this Agreement and the other Loan Documents relating to the Collateral, for the benefit of the Lender Group. Each member of the Lender Group agrees that any action taken by Agent or all Lenders, as applicable, in accordance with the terms of this Agreement or the other 81 Loan Documents relating to the Collateral and the exercise by Agent or all Lenders, as applicable, of their respective powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders. 17.16 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information. By signing this Agreement, each Lender: (a) is deemed to have requested that Agent or S&A Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report (each a "Report" and collectively, "Reports") prepared by Agent or S&A Agent, as applicable, and Agent or S&A Agent, shall so furnish each Lender with such Reports; (b) expressly agrees and acknowledges that neither any other Lender, S&A Agent, nor Agent (i) makes any representation or warranty as to the accuracy of any Report, or (ii) shall be liable for any information contained in any Report; (c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent, S&A Agent, or other party performing any audit or examination will inspect only specific information regarding Borrower and will rely significantly upon Borrower's books and records, as well as on representations of Borrower's personnel; (d) agrees to keep all Reports and other material, non-public information regarding Borrower and its Subsidiaries and their operations, assets, and existing and contemplated business plans (collectively, the "Confidential Information") in a confidential manner; it being understood and agreed by Borrower that in any event such Lender may make disclosures (a) to counsel for and other advisors, accountants, and auditors to such Lender, (b) reasonably required by any bona fide potential or actual Assignee, transferee, or Participant in connection with any contemplated or actual assignment or transfer by such Lender of an interest herein or any participation interest in such Lender's rights hereunder, provided that such potential or Actual Assignee, transferee, or Participant shall have agreed prior to such disclosure to be bound by the terms of this Section 17.16(d) as if such potential or actual Assignee, transferee, or Participant were a party hereto, (c) of information that has become public by disclosures made by Persons other than such Lender, its Affiliates, assignees, transferees, or participants, or (d) as required or requested by any court, governmental or administrative agency, pursuant to any subpoena or other legal process, or by any law, statute, regulation, or court order; provided, however, that, unless prohibited by applicable law, statute, regulation, or court order, such Lender shall notify Borrower of any request by any court, governmental or administrative agency, or pursuant to any subpoena or other legal process for disclosure of any such non-public material information concurrent with, or where practicable, prior to the disclosure thereof; and (e) without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold Agent, S&A Agent, and any such other 82 Lender preparing a Report harmless from any action the indemnifying Lender may take or conclusion the indemnifying Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying Lender has made or may make to Borrower, or the indemnifying Lender's participation in, or the indemnifying Lender's purchase of, a loan or loans of Borrower; and (ii) to pay and protect, and indemnify, defend and hold Agent, S&A Agent, and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses and other amounts (including, attorney costs) incurred by Agent, S&A Agent, and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender. In addition to the foregoing: (x) Any Lender may from time to time request of Agent in writing that Agent provide to such Lender a copy of any report or document provided by Borrower to Agent that has not been contemporaneously provided by Borrower to such Lender, and, upon receipt of such request, Agent shall provide a copy of same to such Lender promptly upon receipt thereof from Borrower; (y) To the extent that Agent is entitled, under any provision of the Loan Documents, to request additional reports or information from Borrower, any Lender may, from time to time, reasonably request Agent to exercise such right as specified in such Lender's notice to Agent, whereupon Agent promptly shall request of Borrower the additional reports or information specified by such Lender, and, upon receipt thereof from Borrower, Agent promptly shall provide a copy of same to such Lender; and (z) Any time that Agent renders to Borrower a statement regarding the Loan Account, Agent shall send a copy of such statement to each Lender. 17.17 Several Obligations; No Liability Notwithstanding that certain of the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of Agent (if any) to make any credit available hereunder shall constitute the several (and not joint) obligations of the respective Lenders on a ratable basis, according to their respective Commitments, to make an amount of such credit not to exceed, in principal amount, at any one time outstanding, the amount of their respective Commitments. Nothing contained herein shall confer upon any Lender any interest in, or subject any Lender to any liability for, or in respect of, the business, assets, profits, losses, or liabilities of any other Lender. Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any obligation, duty, or liability to any Participant of any other Lender. Except as provided in Section 17.7, no member of the Lender Group shall have any liability for the acts or any other member of the Lender Group. No Lender shall be responsible to Borrower or any other Person for any failure by any other Lender to fulfill its obligations to make credit available hereunder, nor to advance for it or on its behalf in connection with its Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein. 17.18 Legal Representation of GSCP. 83 In connection with the negotiation, drafting, and execution of this Agreement and the other Loan Documents, or in connection with future legal representation relating to loan administration, amendments, modifications, waivers, or enforcement of remedies, Brobeck, Phleger & Harrison LLP ("Brobeck") only has represented and only shall represent GSCP in its capacity as S&A Agent and as a Lender. Each other Lender and Agent hereby acknowledges that Brobeck does not represent any other Lender or Agent in connection with any such matters. 18. GENERAL PROVISIONS. 18.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrower and each member of the Lender Group whose signature is provided for on the signature pages hereof. 18.2 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each section applies equally to this entire Agreement. 18.3 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against the Lender Group or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 18.4 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 18.5 Amendments in Writing. This Agreement can only be amended by a writing signed by Agent, the Required Lenders, and Borrower. 84 18.6 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis. 18.7 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by Borrower or any guarantor of the Obligations or the transfer by either or both of such parties to the Lender Group of any property of either or both of such parties should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, and other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if the Lender Group is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the liability of Borrower or such guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 18.8 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. 18.9 GSCP as S&A Agent. GSCP, as Syndication & Arrangement Agent, has performed, and will continue to perform, important functions with respect to the credit facilities provided for in the Loan Documents. In recognition of its role, GSCP is designated Syndication & Arrangement Agent and may so identify itself in public communications with respect to this credit. The foregoing notwithstanding, GSCP shall have no duties, responsibilities, obligations, or liabilities except the right to consent to Eligible Transferees and such, if any, other duties, responsibilities, obligations, or liabilities as may be set forth expressly in any Loan Document. 85 [Signature page to follow.] 86 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. NETWORK PLUS, INC., a Massachusetts corporation By: James J. Crowley Title: Executive Vice President NETWORK PLUS CORP., a Delaware corporation By: James J. Crowley Title: Executive Vice President FLEET NATIONAL BANK, a national banking association, as Agent and a Lender By: Raymond C. Hoefling Title: Vice President GOLDMAN SACHS CREDIT PARTNERS L.P., a Bermuda limited partnership, as S&A Agent and a Lender By: Karen Bisgeier Title: Authorized Signatory EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT NETWORK PLUS, INC., A MASSACHUSETTS CORPORATION EX-23.1 7 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 Exhibit 23.1 Consent of Independent Accountants We consent to the incorporation by reference in the prospectus of Network Plus Corp., included in Amendment No. 3, dated December 23, 1998, to the registration statement on Form S-1 (No. 333-64663), of our report dated June 24, 1998, except for the information presented in notes 12 and 15, for which the dates are July 15, 1998 and September 3, 1998, respectively, on our audits of the financial statements of Network Plus, Inc., as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which report is included in this prospectus. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears in Item 21(b) of this Form S-1, and to the references to us under the headings "Independent Accountants", "Summary Financial Data" and "Selected Financial Data". However, it should be noted that PricewaterhouseCoopers LLP has not prepared or certified such "Summary Financial Data" or "Selected Financial Data". /s/ PricewaterhouseCoopers LLP Boston, Massachusetts December 23, 1998 -----END PRIVACY-ENHANCED MESSAGE-----