-----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, APfwKnDUpA+zPqYJXNW1a7oI+Cddq8rR1AQx6OeEv+lB7CNegaX4BdawdsC142h2 PEOcXmfAJHHPb/stpU5hAg== 0000950135-01-001138.txt : 20010409 0000950135-01-001138.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950135-01-001138 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 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: 10-K SEC ACT: SEC FILE NUMBER: 000-26313 FILM NUMBER: 1590676 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 10-K 1 b38201npe10-k.txt NETWORK PLUS, CORP. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 000-26313 NETWORK PLUS CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------- DELAWARE 04-3430576 (STATE OR OTHER (I.R.S. EMPLOYER JURISDICTION OF INCORPORATION) IDENTIFICATION NO.) 234 COPELAND STREET QUINCY, MASSACHUSETTS 02169 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ------------------------- REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 786-4000 ------------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Depositary Shares each representing 1/10 of a share of 7.5% Series A Cumulative Convertible Preferred Stock 7.5% Series A Cumulative Convertible Preferred Stock, par value $.01 per share Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of outstanding shares of the Registrant's Common Stock held by non-affiliates as of March 9, 2001 was $73,667,393. For this purpose, any officer, director and known 5% stockholder is deemed to be an affiliate. The number of shares of the registrant's Common Stock outstanding on March 9, 2001 was 63,442,766. DOCUMENTS INCORPORATED BY REFERENCE Specifically identified portions of the registrant's definitive proxy statement to be filed in connection with the registrant's 2001 annual meeting of stockholders (the "2001 Proxy Statement") are incorporated by reference into Part III of this Form 10-K. - ------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page PART I Item 1. Business ........................................................ 1 Item 2. Properties ...................................................... 17 Item 3. Legal Proceedings ............................................... 18 Item 4. Submission of Matters to a Vote of Security Holders ............. 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ......................................................... 19 Item 6. Selected Financial Data ......................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 40 Item 8. Financial Statements and Supplementary Data...................... 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................. 40 PART III Item 10. Directors and Executive Officers of the Registrant............... 41 Item 11. Executive Compensation........................................... 41 Item 12. Security Ownership of Certain Beneficial Owners and Management... 41 Item 13. Certain Relationships and Related Transactions................... 41 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 42 SIGNATURES................................................................ 44 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1 REPORT OF INDEPENDENT ACCOUNTANTS......................................... F-2
3 This Annual Report on Form 10-K 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 in this Annual Report including, without limitation, such statements under "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 Annual Report, including, without limitation, in conjunction with the forward-looking statements in this Annual Report and under the heading "Risk Factors" under Item 7. Network Plus and the Network Plus logo are registered service marks, and LOGOS is a service mark of Network Plus. All other trade names, trademarks and service marks used herein are the property of their respective owners. PART I ITEM 1. BUSINESS OVERVIEW Network Plus is a network-based communications provider offering a comprehensive suite of broadband data, telecommunications and data hosting services. As of March 1, 2001, we served approximately 46,000 customers representing in excess of 192,000 local access lines and 285,000 long distance access lines. We provide communication services primarily to business customers located on the East Coast of the United States. Our services include local exchange service, long distance service, both broadband and narrowband Internet and private line data services, web server and managed server hosting services. We offer these services from a single company on a single bill directly to our customers. As of March 1, 2001: - We sell our services through a 401 person sales force located in 14 sales offices throughout the northeastern and southeastern regions of the United States. To support our anticipated growth, we expect to expand our sales force to approximately 600 members by year-end 2001. - We sell our services in the following target markets: Connecticut, Florida, Georgia, Massachusetts, New Hampshire, New York, and Rhode Island and by year end 2001 intend to commence selling services in Maryland, New Jersey, Pennsylvania, Virginia, and Washington DC. - We operate local exchange switches in Cambridge, Massachusetts, New York City, Atlanta and Miami, Nortel international and interexchange switches in Los Angeles and Quincy, Massachusetts and Nortel interexchange switches in Orlando and Chicago. We intend to deploy additional local exchange switches in New Jersey, Philadelphia and Washington, D.C. by year-end 2001. 1 4 - We control and operate 27,221 digital fiber miles of long-haul and metropolitan fiber optic cable in our target markets. - We have deployed and operate 110,000 square feet of Internet Data Center space to support both web server and managed server hosting services. These geographically diverse Internet Data Centers, all of which are connected to our fiber optic network, are located in Cambridge, Massachusetts, Braintree, Massachusetts, New York City, Miami and Newark, New Jersey. - We were incorporated in Delaware in 1998. Our predecessor and wholly owned operating subsidiary, Network Plus, Inc. was incorporated in 1990. BUSINESS STRATEGY We have an aggressive growth strategy to become the provider of choice offering one-stop local exchange services, long distance services, both broadband and narrowband Internet and private line data services and web server and managed server hosting services to small and medium-sized business customers in our target markets, which include Connecticut, Florida, Georgia, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Virginia and Washington DC. Our future success will depend upon our ability to successfully market, expand and run our network and provision services in our target markets. We believe that our substantial operating history, existing customer base, expansive network and sales force, and our experienced management team, will enable us to effectively implement and execute our growth strategy. The principal elements of our business strategy are to: BE A SINGLE-SOURCE PROVIDER OF TELECOMMUNICATIONS, BROADBAND DATA, AND DATA HOSTING SERVICES A key to our growth is the continued implementation of our marketing plan that emphasizes our comprehensive suite of telecommunications, broadband data, and data hosting services on both a bundled and individual basis. To a large extent, we believe the customers we target have not previously had the opportunity to purchase bundled services from a single-source provider, and we believe that they will prefer one source for all of their telecommunications and data requirements. We provide bundled services, invoice these services on a single bill and provide a single point of contact for customer service, product inquiries, repairs and billing questions. We believe that our ability to provide a bundled suite of services will enable us to better meet the needs of our customers, penetrate our target markets, capture a larger portion of our customers' total expenditures on telecommunications and data hosting services and increase customer retention. TARGET UNDERSERVED MARKETS We target small and medium-sized businesses and we seek to be among the first to market integrated telecommunications and data services in many of our markets, which include small and medium-sized communities in which there is relatively little competition from integrated telecommunications and data providers. We believe that small and medium-sized businesses have been 2 5 underserved by our large competitors with respect to sales and customer service and that our integrated and comprehensive product suite and emphasis on customer support and satisfaction provides us with a competitive advantage. EXPAND GEOGRAPHIC REACH We currently service primarily the northeastern and southeastern regions of the United States and during 2001 we intend to expand into the mid-Atlantic region. Our plan is to establish a single contiguous network footprint from New England to Florida. We believe that these three regions are particularly attractive due to a number of factors, including the population density in the northeast and mid-Atlantic, the large number of rapidly growing metropolitan clusters in the southeast and the relatively small number of significant competitors to the incumbent local exchange carriers. CROSS-SELL SERVICES TO OUR EXISTING CUSTOMERS AND CAPTURE NEW CUSTOMERS As of March 1, 2001, we had approximately 46,000 customers representing in excess of 192,000 local access lines and 285,000 long distance access lines. In addition to capturing new customers, we believe that our ongoing customer relationships, our comprehensive product suite and our focus on customer care provide us with a significant opportunity to cross-sell local exchange service, long distance service, both broadband and narrowband Internet and private line data services, web server and managed server hosting services to our existing customers. BUILD A CAPITAL-EFFICIENT NETWORK INFRASTRUCTURE We believe that operating our own network results in higher long-term operating margins, greater control and an enhanced service quality. We intend to expand our network where economically or strategically justifiable. As we expand our infrastructure with fiber, switches, co-locations and Internet Data Centers, we believe the portion of our customer's traffic that is carried on our network ("on-net") will increase. An important element of our network strategy is to build our network to take advantage of our existing customer base, our sales office coverage and our planned expansion in the mid-Atlantic region. EXPAND THROUGH STRATEGIC ACQUISITIONS AND ALLIANCES As part of our expansion strategy, we plan to consider strategic acquisitions of, and alliances with, related or complementary businesses. We believe that strategic acquisitions of, and alliances with, related or complementary businesses may enable us to expand more rapidly by adding new customers and services, network assets and experienced employees. These acquisitions and alliances could be funded by cash, bank financing or the issuance of debt or equity securities. We periodically evaluate and engage in discussions regarding various acquisition and alliance opportunities, but are not currently a party to any agreement for a material acquisition or alliance. LEVERAGE THE EXPERIENCE OF OUR MANAGEMENT TEAM Our management team has significant experience in the telecommunications industry in general and, in particular, in the critical functions of network operations, sales and marketing, back office operations, finance and customer 3 6 service. We believe that the quality, experience and teamwork of our management team will be critical factors in the implementation of our growth strategy. RETAIL SERVICE OFFERINGS Our retail services, which we offer on a stand-alone or bundled basis, currently include the following: Voice Services We offer a full range of local and long distance voice services including voice mail, directory assistance, call forwarding, conference calling, return call hunting services, call pick-up, repeat dialing and speed calling. DSL, Internet and Data Services Our digital subscriber line, or DSL, services provide an "always on" high-speed local connection to the Internet and to private and local area networks. Our DSL technology can increase the data transfer rates of a standard phone line by up to 25 times. We also offer both dial-up and dedicated Internet access and private line, frame relay, mail, news and domain name, or DNS, services. Internet Data Center Services We offer a full range of web server and managed server hosting services including shared server, vertical rack space, cabinet units, cage and vault space and managed NT and UNIX servers with both burstable and guaranteed bandwidth. These services are offered in our geographically dispersed and environmentally and technologically controlled carrier class Internet Data Centers. INTERNATIONAL WHOLESALE SERVICES We offer international wholesale termination and transport services primarily to major domestic and international telecommunications carriers. We intend to build on our relationships with large domestic and international carriers and to maintain the capacity needed to support our international service offerings. In addition, we believe that providing comprehensive international services lowers our cost of carrying international traffic and results in more attractive service offerings in our core retail markets. SALES AND MARKETING OVERVIEW Our sales force seeks to provide our existing and potential customers with a comprehensive array of telecommunications and data services customized for the increasingly convergent voice and data marketplace. Our sales force targets small and medium-sized businesses that generally have telecommunications and data 4 7 expenditures of less than $10,000 per month. We believe that neither the regional Bell operating companies, large long distance carriers nor the nationally based data and Internet service providers have historically concentrated their sales and marketing efforts on this business segment. Our sales and marketing approach is to build long-term business relationships with our customers, with the intent of becoming the single-source provider for all their telecommunications and data services. We train our sales force in-house with a customer-focused program that promotes increased sales through both customer attraction and customer retention. SALES CHANNELS DIRECT SALES. Our direct sales force markets our retail services directly to end users. As of March 1, 2001, we employed 401 direct sales representatives working in sales offices throughout the northeastern, mid-Atlantic and southeastern regions of the United States. By year-end 2001, we intend to increase our direct sales force to approximately 600 sales representatives. We provide compensation incentives to our sales teams to sell to customers within pre-assigned co-location areas. In doing so, the sales force is motivated to sell to new customers that can be provisioned onto our network where we realize higher margins. All new sales representatives are required to receive formal in-house training, in which we expect them to gain a thorough knowledge of our services and the telecommunications industry. AGENCY SALES. Our agency sales force markets our services to various resellers, independent marketing representatives, associations and affinity groups. This sales force seeks to locate established, high-quality organizations with extensive distribution. We also sell our services on a wholesale basis to resellers, who in turn sell such services at retail to their customers. CURRENT CUSTOMER BASE RETAIL CUSTOMERS As of March 1, 2001, we provided service to approximately 46,000 customers representing in excess of 192,000 local access lines and 285,000 long distance access lines. We segment our customers by monthly revenue to ensure that those customers generating higher monthly revenues experience a higher level of customer care. We believe we are beginning to achieve name recognition in the small and medium-sized business communities in which we operate. INTERNATIONAL WHOLESALE CUSTOMERS We provide international wholesale services to numerous national and international telecommunications carriers. We strive to establish close working relationships with our international wholesale customers. Once we interconnect with a carrier customer, the carrier may utilize us on an as-needed basis, depending upon the pricing offered by us and our competitors, as well as the available capacity. 5 8 NETWORK OVERVIEW We pursue 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. Our strategy has been to build a geographic concentration of customers before building, acquiring or extending our network to serve that concentration of customers. As network economics or strategic opportunities justify the deployment of additional switching or transport capacity, we will expand our network and migrate customers onto our network. An important element in our network strategy is to build our network to take advantage of our existing customer base and our current and planned sales office coverage. We believe that, where economically or strategically justified, owning network components, rather than relying on the facilities of third parties, enables us to maintain greater control over our network operations and service quality while increasing our ability to offer new products and services, generate higher operating margins. INTEGRATED NETWORK ARCHITECTURE We provide services to our customers over an integrated network that supports local exchange service, long distance, both broadband and narrowband Internet and private line data services, web server and managed server hosting services. We believe that the integrated design of our local, long distance and data networks significantly reduces our cost of providing services. Our integrated network architecture includes customer premise equipment, unbundled network elements, co-locations located in the central offices of incumbent local exchange carriers as well as carrier access hotels, class 5 switches, gateway and long distance switches, digital subscriber line access multiplexers, or DSLAMs, Internet protocol-based routers and switches, application servers, asynchronous transfer mode, or ATM, switches, SONET fiber rings and our own SS7 service control points, or SCPs. REACHING THE CUSTOMER PREMISES -- UNBUNDLED NETWORK ELEMENTS To reach our customers, we purchase or lease simple copper loops, or, if customer traffic justifies, T-1 facilities, as unbundled network elements, or UNEs, from the incumbent local exchange carrier. By utilizing UNEs, we are able to rapidly connect the customer directly to our co-location. We are also able to avoid the cost and delay associated with deploying our own facilities to our customers' premises. To support our DSL services, we provide our customer with a specialized modem or access equipment that we connect to a digitally conditioned copper loop that we have purchased or leased as a UNE. To enable us to purchase these UNEs, we negotiate interconnection agreements with the incumbent local exchange carrier in each of our targeted jurisdictions. We currently have interconnection agreements with Verizon (formerly Bell Atlantic) in Connecticut, the District of Columbia, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania and Rhode Island, with Southern New England Telephone of Connecticut, and with Bell South of Georgia and Florida. We are in the process of negotiating an interconnection agreement with Verizon of Delaware, Maryland, Vermont and Virginia. 6 9 CO-LOCATION FACILITIES Each UNE we deploy is a direct connection from our customer to one of our co-location facilities located in the central office of the incumbent local exchange carrier. Within each co-location facility we have deployed central office telephony equipment and in co-locations which we serve through fiber we have deployed or we are deploying, digital access nodes or DSLAMS. As of March 1, 2001, we operate 127 co-locations in our targeted market and we intend to deploy additional co-locations both on strategic and an opportunistic basis as we expand into the Mid-Atlantic states. Until we have deployed the necessary co-location facilities in a specific geographical region, our local exchange services utilize the underlying network of the incumbent local exchange carrier and our DSL services utilize the network of another DSL provider. NETWORK ACCESS POINTS AND LOCAL SWITCHING PLATFORM Our local switching platform consists of digital switches in Cambridge, Massachusetts, New York City, Atlanta and Miami. We intend to deploy additional digital switches in New Jersey, Philadelphia and Washington, D.C. by year-end 2001. Each switch acts as a centralized switching node and data center for each co-location within the footprint served by that switch. In addition, each of these centralized switching nodes serves as an interconnection and concentration point for our data network and the Internet. LONG DISTANCE SWITCHING PLATFORM We have deployed Nortel DMS interexchange and international gateway switches in Quincy, Massachusetts and Los Angeles and Nortel DMS interexchange switches in Orlando and Chicago. Where traffic concentration justifies we intend to increase our long distance footprint through expanded tandem or end-office trunking and deployment of additional points of presence. INTERNET DATA CENTERS As of March 1, 2001 we operate 110,000 square feet of carrier class Internet Data Center space in seven geographically diverse data centers located in New York City, Cambridge, Massachusetts, Braintree, Massachusetts, Newark, New Jersey and Miami. By year-end 2001, we anticipate that this will increase to 250,000 square feet. Our Internet Data Centers are located on our backbone fiber routes and, where possible, are co-located with our class 5 local switches. To support our Internet Data Center services, we maintain redundant T-3 (45mb) circuits to the Internet ensuring broadband availability. We lease 23" racks for traditional telephony equipment, 19" racks for open mounting of servers and data equipment and both full and partitioned cabinets with locking front and rear doors and managed servers running both NT or UNIX. Ancillary features of our Internet Data Centers include always-available technicians, power and redundant power, environmental and security controls. 7 10 FIBER AND TRANSPORT -- SONET RINGS AND DWDM As of March 1, 2001 we control and operate 3,152 route miles of fiber optic cable, representing 27,221 digital fiber miles. Deployed in a SONET topology, this fiber acts as our network backbone connecting our network elements through a combination of long haul SONET rings and metropolitan rings. In the Northeast our fiber serves major cities including the New York metropolitan area , White Plains, Stamford, New Haven, New London, Providence, Boston, Nashua, Springfield and Worcester. In the Southeast our fiber serves major cities including Atlanta, Marietta, Roswell, Norcross, Miami, Ft. Lauderdale, Boca Raton, West Palm Beach, Pompano Beach, Boyton Beach, Delray Beach and Deerfield Beach. In the mid-Atlantic our fiber not only connects our northeast and southeast regions but it will also serve major mid-Atlantic cities including Newark, Princeton, Philadelphia, Baltimore and Washington, D.C. Where we have not acquired fiber optic cable through long-term leases, we lease long-haul network transport capacity from major network-based carriers and local access from the incumbent local carriers in their respective territories. We also use competitive access provider facilities where available and economically justified. Metropolitan area fiber rings or SONET services are generally leased or, where economically justified, constructed to interconnect with our co-locations, switching nodes, Internet Data Centers and long haul SONET backbone. To ensure seamless off-net termination and origination, we also utilize interconnection agreements with major carriers. INTERNATIONAL FACILITIES In addition to being interexchange switches, the Nortel switches located in Quincy, Massachusetts and Los Angeles are international gateway switches that enable us to interconnect direct international routes with a number of U.S. and foreign wholesale international carriers. This allows us to provide state-of-the- art least-cost routing and network reliability for international calling. These interconnected international carriers are also a source of wholesale international traffic and revenue that enable us to provide competitive international rates to our retail customers. NETWORK MANAGEMENT AND OPERATIONAL SUPPORT Our technical network interface is a fully redundant frame relay network that enables us to monitor our network from our network management and surveillance center. Centralized electronic monitoring and control of our network increase the security, reliability and efficiency of our operations and allow us to avoid duplication of this function in each region. MANAGEMENT INFORMATION SYSTEMS We are committed to the implementation of integrated and scalable operational support systems that enable "flow-through" service provisioning, a high level of customer support, accurate and timely billing and web-based self-help. 8 11 The cornerstone of our operational support system is a custom-designed system we call LOGOS. LOGOS integrates important elements of our operations, including convergent and integrated product management, service order entry, provisioning, customer service, trouble ticket management, work flow and product and rate management. LOGOS is complimented by additional software packages provided by third-party vendors. CUSTOMER SERVICE We maintain an emphasis on customer care and provide 24-hours-per-day, 365-days-per-year customer support. We monitor and measure 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 our automated call distribution system. Our call distribution system also prioritizes incoming support requests, assuring that our largest customers receive support in the most expedient manner. In addition, our most knowledgeable and experienced customer support representatives typically handle the support requests from our largest customers. EMPLOYEES As of March 1, 2001, we had 920 employees. We also hire temporary employees and independent contractors as needed. In connection with our growth strategy, we anticipate hiring a significant number of additional personnel in sales and other areas of our operations by year-end 2001. Our employees are not unionized, and we believe our relations with our employees are good. Our success will continue to depend in part on our ability to attract and retain highly qualified employees. COMPETITION We operate in the highly competitive telecommunications services industry. We believe that the traditional distinctions between the local, long distance, data, and Internet access markets and Internet Data Center providers are eroding. Both new competitors and the incumbent providers are beginning to offer bundled offerings similar to our own. The regional Bell operating companies and the operating subsidiaries of GTE and Sprint dominate the local services market. AT&T, WorldCom and Sprint currently are the major competitors in the long distance market. Existing telecommunications companies, cable companies and newer companies such as Internet service providers and both national and regionally based DSL providers and Internet Data Center providers compete in the market to provide data and Internet services. We do not have a significant market share in any segment of the market, and many of our existing and potential competitors have financial resources and name recognition significantly greater than our own. Competition for our products and services is based on price, actual and perceived quality, reputation, name recognition, network reliability, service features, billing services and responsiveness to customers' needs. 9 12 Implementation of the Telecommunications Act of 1996 (the "Telecommunications Act") and the related trend toward business combinations and alliances in the telecommunications industry may create significant new competitors to us. The Telecommunications Act was designed to eliminate most barriers to local competition and to permit the regional Bell operating companies, if they demonstrate compliance with certain pro-competitive conditions, to provide long distance services. Our primary competitors in local service markets are regional Bell operating companies, such as Verizon in the northeast, or Bell South in the southeast. These carriers, called incumbent local exchange carriers, provide dedicated and local telephone services to most telephone subscribers within their respective service areas. These providers have long-standing relationships with customers and regulatory authorities at the federal and state levels. If future regulatory or court decisions afford incumbent local exchange carriers increased rates for access or interconnection services, greater pricing flexibility, the ability to refuse to offer particular services or network elements on an unbundled basis, or other regulatory relief, such decisions could have a material adverse effect on us. In addition, as permitted by the Telecommunications Act, AT&T, WorldCom and Sprint, the major competitors in the long distance market, each have begun to offer local telecommunications services in major U.S. markets using their own facilities or by resale of other providers' services. New competitive local exchange carriers, cable television companies, electric utilities, microwave carriers, wireless telephone system operators and large customers who build private networks and both national and regional DSL providers also seek to compete in the local services market. These entities, upon entering into appropriate interconnection agreements or resale agreements, may offer single-source local, long distance, DSL and Internet Data services similar to those that we offer or propose to offer. Significant competition in the long distance market is expected to be provided by incumbent local exchange carriers, including the regional Bell operating companies. Prior to enactment of the Telecommunications Act, a federal court order known as the modified final judgement prohibited regional Bell operating companies from providing long distance service that originated, or, in certain cases, terminated, in one of its in-region states, with several limited exceptions. The limitations imposed on the regional Bell operating companies by the modified final judgement will be lifted for each affected company if and when it has satisfied certain statutory conditions specified in the Telecommunications Act. The process for demonstrating compliance with the statutory 14 point checklist of pro-competitive actions includes approval by the relevant state regulatory authority and the FCC. To date, in our target markets, only Verizon-New York has succeeded in obtaining approval to provide long distance service from the state regulatory authority and the FCC. As each regional Bell operating company is allowed to offer widespread in-region long distance services, both the regional Bell operating company and the largest long distance providers will be in a position to offer single-source local and long distance service. Our success will depend upon our ability to provide high-quality services at prices generally competitive with, or lower than, those charged by our competitors. 10 13 Additional pricing pressure may come from carriers providing services through Internet protocol transport, a packet-switched technology that currently can be used to provide voice and data services at a cost that may be below that of traditional circuit-switched local and long distance service. Although this service currently is not regarded as comparable 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 our results of operations. We will also face competition from fixed and mobile wireless services providers. The FCC has authorized cellular, personal telecommunications services and other providers to offer wireless services to both fixed and mobile locations. These providers can offer wireless local loop service and other services to fixed locations, such as office and apartment buildings, in direct competition with us and existing providers of traditional wireless telephone service. In addition, FCC rules went into effect in February 1998 that make it substantially easier for many foreign telecommunications companies to enter the U.S. market, thus potentially further increasing the number of competitors. The market for data communications and Internet access services also is extremely competitive. There are no substantial barriers to entry, and we expect that competition will intensify in the future. Our success in selling these services will depend heavily upon our ability to provide high-quality Internet connections at competitive prices. GOVERNMENT REGULATION OVERVIEW Our communications common carrier services are subject to regulation by federal, state and local government agencies. Most data and Internet services are not subject to regulation, although telecommunications services used for access to the Internet are regulated. Through our operating subsidiary, we hold various federal, state and local regulatory authorizations for our regulated service offerings. The FCC exercises jurisdiction over our facilities and services to the extent those facilities are used to provide, originate or terminate interstate domestic or international common carrier communications. State regulatory commissions retain jurisdiction over carriers' facilities and services to the extent they are used to originate or terminate intrastate common carrier 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 and are the subject of various judicial proceedings, legislative hearings and administrative proposals. We cannot predict the results of any changes. 11 14 FEDERAL REGULATION The FCC regulates us as a non-dominant communications common carrier. Our interstate domestic and international services are not subject to significant federal regulation, although we are subject to the general requirement that our charges and terms for our telecommunications services be "just and reasonable" and that we not make any "unjust or unreasonable" discrimination in our charges or terms. We have obtained authority from the FCC to provide international services between the United States and authorized foreign countries. The FCC imposes prior approval requirements on transfers of control and assignments of radio licenses and operating authorizations. The FCC has the authority to condition, modify, cancel, terminate or revoke such licenses and authorizations for failure to comply with federal laws or the rules, regulations and policies of the FCC. The FCC may also impose fines or other penalties for such violations. While we believe we are in compliance with applicable laws and regulations, we cannot assure you that the FCC or third parties will not raise issues with regard to our compliance. The FCC's role with respect to local telephone competition arises principally from the Telecommunications Act, which became effective on February 8, 1996. The Telecommunications Act preempts state and local laws to the extent that they prevent competitive entry into the provision of any telecommunications service and gives the FCC jurisdiction over important issues related to local competition. However, state and local governments retain authority over significant aspects of the provision of intrastate toll and local telecommunications. The Telecommunications Act imposes a variety of new duties on local exchange carriers, in order to promote competition in local exchange and access services. Where we provide local services, we will be required: - to interconnect with other telecommunications carriers - to establish reciprocal compensation arrangements for the transport and termination of telecommunications - to permit resale of services - to permit users to retain their telephone numbers when changing carriers - to provide dialing parity to competing providers of telephone exchange service and telephone toll service, and the duty to permit all such providers to have nondiscriminatory access to telephone numbers, operator services, directory assistance and directory listing, with no unreasonable dialing delays - to provide competing carriers access to poles, ducts, conduits and rights-of-way at regulated prices. 12 15 Incumbent local exchange carriers, such as the regional Bell operating companies and affiliates of GTE (recently acquired by Verizon) and Sprint, are also subject to additional requirements. These duties include, but are not limited to, obligations of the incumbent local exchange carriers: - to interconnect their networks with competitors - to offer co-location of competitors' equipment at their premises - to make available elements of their networks (including network facilities, features and capabilities) on non-discriminatory, cost- based terms - to offer wholesale versions of their retail services for resale at discounted rates. Collectively, these requirements recognize that local exchange competition is dependent upon cost-based and non-discriminatory interconnection with and use of incumbent local exchange carrier networks. Failure to achieve such interconnection arrangements could have an adverse impact on our ability or that of other entities to provide competitive local exchange services. Under the Telecommunications Act, incumbent local exchange carriers are required to negotiate in good faith with carriers requesting any or all of the above arrangements. In addition, the FCC has adopted more specific rules to implement these requirements. The U.S. Supreme Court affirmed the authority of the FCC to establish rules governing interconnection. We believe that additional disputes regarding interconnection issues and other related FCC actions are likely. In particular, the U.S. Supreme Court remanded to the FCC issues regarding what unbundled elements the FCC will require incumbent local exchange carriers to make available to competitors. On November 5, 1999, the FCC released a decision modifying the list of unbundled network elements that all incumbent local exchange carries must offer to other carriers. This decision is under reconsideration before the FCC and on appeal at the D.C. Circuit Court of Appeals. We cannot predict the outcome of either proceeding. An adverse decision could affect our local service product offerings. The Supreme Court is also considering the pricing methodology the FCC adopted to establish rates for unbundled network elements and resale. We cannot predict the outcome of this proceeding. In its July 18, 2000 decision, the United States Court of Appeals for the Eight Circuit also vacated the FCC's rule regarding the methodology for calculating the discount rate at which incumbent local exchange carriers must resell retail telecommunications services to competitors, and remanded that rule to the FCC. That order is now final. As a result of this decision Network Plus could experience reduced margins on the incumbent local exchange carrier services that it resells. Network Plus and other carriers have challenged a Verizon proposal to reduce the discount rate in Massachusetts, but it is impossible to predict the outcome of this proceeding. The FCC adopted rules designed to make it easier and less expensive for competitive local exchange carriers to obtain co-location at incumbent local exchange carrier central offices by, among other things, restricting the incumbent local exchange carriers' ability to prevent certain types of equipment 13 16 from being co-located and requiring incumbent local exchange carriers to offer alternative co-location arrangements to competitive local exchange carriers. On March 17, 2000, however, the United States Court of Appeals for the District of Columbia vacated the FCC's rule regarding the types of equipment that incumbent local exchange carriers are required to permit competitors to co-locate at their central offices. The FCC is reconsidering its co-location rules in response to the Court of Appeals decision. We cannot predict the outcome of these proceedings or the effect they may have on our business. The Telecommunications Act also eliminates previous prohibitions on the provision of long distance services by the regional Bell operating companies. The regional Bell operating companies are permitted to provide long distance service outside those states in which they provide local exchange service, known as "out-of-region long distance service," upon receipt of any necessary state and federal regulatory approvals that are otherwise applicable to the provision of intrastate or interstate long distance service. Under the Telecommunications Act, the regional Bell operating companies will be allowed to provide long distance service within the regions in which they also provide local exchange service, known as "in-region service", on a state-by-state basis upon specific approval of the FCC and satisfaction of other conditions, including a checklist of requirements intended to open local telephone markets to competition. When determining whether to approve the application of a regional Bell operating company, the FCC must consult with the Department of Justice and the respective state commission for which the regional Bell operating company is requesting expanded regional long distance authority. To date, when notified that the regional Bell operating company in their state intended to file an application with the FCC, state commissions have investigated the regional Bell operating company's compliance in order to provide the FCC with an opinion when requested. The New York Public Service Commission found that Verizon -- New York had complied with the necessary statutory requirements for in-region authority. On December 22, 1999, the FCC granted Verizon - New York's application to provide long distance service to New York customers. Verizon -- New York is now able to offer integrated local and long distance services in New York, which may give Verizon a significant competitive advantage in marketing those services to their existing local customers. Verizon-Massachusetts has an application pending before the FCC to provide in-region interLATA services in Massachusetts that may be approved during the first quarter of 2001. Verizon is expected to submit applications to provide in-region interLATA services in other states during 2001. An increasingly important element of providing competitive services is the ability to offer customers high-speed broadband local connections. The FCC is considering a proposal that would allow incumbent local exchange carriers to offer these and other services through separate affiliates, in which case their network elements for providing these services would not be made available to us or other competitors. AT&T is entering into arrangements with and acquiring cable companies to use their local networks for broadband telecommunications, and several cable companies are offering broadband Internet access over their network facilities. If we are unable to meet future demands of our customers for broadband local access services on a timely basis at competitive rates, we may be at a significant competitive disadvantage. 14 17 The FCC also regulates the interstate access rates charged by incumbent local exchange carriers for the origination and termination of interstate long distance traffic and DSL services. Those access rates make up a significant portion of the cost of providing such services. The FCC has implemented changes in interstate access rules that result in restructuring of the access charge system and changes in access charge rate levels. On May 21, 1999, the U.S. Court of Appeals (D.C. Circuit) sent the access rate formula back to the FCC for further explanation regarding how certain factors were calculated. On May 31, 2000, the FCC adopted the proposal of the Coalition for Affordable Long Distance Service that significantly restructured, and in some respects reduced, the interstate access charges of incumbent local exchange carriers subject to price cap regulation. These and related actions change access rates. When access rates are reduced, the result is a lower cost of providing long distance service and, to the extent we provide local access service to other competitive long distance carriers, a reduction in our potential revenue. The impact of these new changes will not be known until they are fully implemented over the next several years. In a related proceeding, the FCC has adopted changes to the methodology by which access has been used in part to subsidize universal telephone service and other public policy goals. Telecommunications providers like us pay fees calculated as a percentage of their revenues to support these goals. The full implications of these changes also remain uncertain and subject to change. In addition, the FCC and the states are considering related questions regarding the applicability of access charge and universal service fees to Internet service providers. Currently, Internet service providers are not subject to traditional access charges. Many incumbent local exchange carriers and other parties have argued that access charges should be imposed on such traffic. The FCC has not ordered Internet service providers to pay access charges, but it is considering a variety of issues related to Internet and data services, and we cannot predict how the FCC or the states may decide such issues. If the FCC or state regulators decide to change rate structures for the services we employ in a way that affects our services disproportionately to the comparable services offered by competing carriers, such action could have a material adverse affect on our business. The FCC has also granted local exchange carriers additional flexibility in pricing their interstate special and switched access services on a central office specific basis. In a series of decisions, the FCC pricing rules restructured local exchange carrier switched transport rates in order to facilitate competition for switched access. In addition, the FCC adopted rules that required incumbent local exchange carriers to substantially decrease the prices they charge for switched and special access, and changed how access charges are calculated. These changes were intended to reduce access charges paid by long distance carriers to local exchange companies and shift certain usage-based charges to flat-rate, monthly per line charges. On August 5, 1999, the FCC adopted an order granting price cap local exchange carriers additional pricing flexibility. The order provides certain immediate regulatory relief of price cap local exchange carriers and sets forth a framework of "triggers" to provide those companies with greater flexibility to set rates for interstate access services. The order also initiated a rulemaking to determine whether the FCC should regulate the access charges of CLECs, such as us. On February 2, 2001, the D.C. Circuit upheld the FCC rules regarding pricing flexibility. The FCC has recently granted pricing flexibility applications for switched access services provided by BellSouth in a number of cities in its service territory, for 15 18 dedicated transport and special access services provided by SBC entities in certain cities, and for dedicated transport and special access services provided by Verizon entities in certain cities. Sprint has an application for access charge pricing flexibility pending at the FCC. STATE REGULATION We provide intrastate common carrier services and are subject to various state laws and regulations. Most public utility commissions require some form of certification or registration. We must acquire such authority before commencing service. In most states, we are also required to file tariffs or price lists setting forth the terms, conditions and prices for services that are classified as intrastate. We are required to update or amend these tariffs when we adjust our rates or add new products and are subject to various reporting and record-keeping requirements in these states. Many states also require prior approval for transfers of control of certified carriers, corporate reorganizations, acquisitions of telecommunications operations, assignment of carrier assets, carrier stock offerings and incurrence of significant debt obligations. States generally retain the right to sanction a carrier or to revoke certification if a carrier violates relevant laws or regulations. If any state regulatory agency were to conclude that we are or were 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. We hold authority to provide intrastate long distance in all 50 states. We have authority to provide competitive local exchange service in California, Connecticut, Delaware, District of Columbia, Florida, Georgia, Illinois, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Tennessee and Vermont. We have an application pending to provide resold and network-based competitive local exchange services in Virginia. There can be no assurance that we will receive the authorizations we seek currently or in the future. LOCAL INTERCONNECTION The Telecommunications Act imposes a duty upon all incumbent local exchange carriers to negotiate in good faith with potential interconnectors to provide interconnection to their networks, exchange local traffic, make unbundled network elements available and permit resale of most local services. In the event that negotiations do not succeed, we have a right to seek state public utility commission arbitration of any unresolved issues. Arbitration decisions involving interconnection arrangements in several states have been challenged and appealed to Federal courts. We may experience difficulty in obtaining timely incumbent local exchange carriers implementation of local interconnection agreements, and we can provide no assurance we will offer local services in these areas in accordance with our projected schedule, if at all. We have entered into 16 19 interconnection agreements with Verizon (formerly Bell Atlantic) in Connecticut, the District of Columbia, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania and Rhode Island, with Southern New England Telephone of Connecticut, and with Bell South of Florida and Georgia. We are in the process of negotiating an interconnection agreement with Verizon of Delaware, Maryland, Vermont and Virginia. LOCAL GOVERNMENT AUTHORIZATIONS For construction of our local networks, we are required to obtain street use and construction permits and licenses or franchises to install and expand our fiber optic networks using municipal rights-of-way. In some municipalities, we 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. We can provide no assurance that we will not be required to post bonds or letters of credit in the future. In many markets, the incumbent local exchange carrier does not pay these franchise fees or pays fees that are substantially less than those that we will be required to pay. To the extent that competitors do not pay the same level of fees as we do, we could be at a competitive disadvantage. The Telecommunications Act provides, however, 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 the government entity. SEGMENT RESULTS Certain segment results are incorporated herein by reference from "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Segment Results." ITEM 2. PROPERTIES PROPERTIES Our corporate headquarters are located in a 39,500-square foot facility in Quincy, Massachusetts. We lease the Quincy facility from a realty trust whose beneficiaries are Robert T. Hale, who is a director and significant stockholder and Robert T. Hale, Jr., who is an executive officer, director and significant stockholder of Network Plus. In addition to the Quincy facility, we sublease an 80,000-square foot office building in Randolph, Massachusetts, which is owned by a company wholly owned by Messrs. Hale and Hale, Jr. We lease several additional sales offices, switching facilities and data centers. Our facilities are not segregated by the reportable segments identified in Item 7 of this report. The aggregate amount we paid under our leases in 2000 was approximately $5.8 million. Although our facilities are adequate at this time, we believe that we will be required to lease additional facilities, including additional sales offices, switching facilities and data centers, as a result of anticipated growth. 17 20 ITEM 3. LEGAL PROCEEDINGS From time to time we are a party to routine litigation and proceedings in the ordinary course of our business. We are not aware of any current or pending litigation to which we are or may be a party that we believe could have a material adverse effect on our financial position, or results of operations or cash flow. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE COMPANY The following table provides certain information regarding our executive officers, including their ages, as of March 9, 2001:
NAME AGE POSITIONS - ---- --- --------- Robert T. Hale....................... 62 Chairman of the Board of Directors Robert T. Hale, Jr. ................. 34 Chief Executive Officer, President and Director James J. Crowley..................... 36 Executive Vice President, Chief Operating Officer, Secretary and Director Robert J. Cobuzzi.................... 59 Executive Vice President, Chief Financial Officer and Treasurer
ROBERT T. HALE is one of our co-founders and has served as chairman of our board of directors since our inception in 1990. Mr. Hale is a founding member of Ascent, an industry trade group, and has served as chairman of its Carrier Committee since 1993 and served as chairman of its board from May 1995 to May 1997. ROBERT T. HALE, JR., is one of our co-founders and has served as chief executive officer, president and a director since our 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, secretary and a director in July 1998. He was an attorney at Hale and Dorr LLP, a Boston law firm, from 1992 to 1994. ROBERT J. COBUZZI has served as executive vice president, chief financial officer and treasurer since July 2000. He was employed at Kollmorgen Corporation, a multinational manufacturer and seller of high performance electronic motion control equipment, systems and services, from 1992 to 2000 most recently as Chief Financial Officer, Senior Vice President and Director. 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 our executive officers and directors. 18 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock began trading on the Nasdaq National Market on June 30, 1999, under the symbol "NPLS". The following table sets forth for the indicated periods the high and low sale prices of our common stock as reported by the Nasdaq National Market.
High Low ---- --- 1999 June 30, 1999 $30.56 $20.75 Third Quarter $25.13 $12.00 Fourth Quarter $21.50 $10.00 2000 First Quarter $62.63 $19.13 Second Quarter $39.44 $10.00 Third Quarter $16.31 $ 6.25 Fourth Quarter $ 9.03 $ 1.69 2001 First Quarter (through March 9, 2001) $11.13 $ 2.13
As of March 9, 2001, there were 63,442,766 shares of common stock issued and outstanding and held of record by 102 stockholders. The number of stockholders of record does not include stockholders holding their shares in "street name" or through broker or nominee accounts. DIVIDEND POLICY In 1999 we paid an aggregate of three thousand dollars in dividends to enable the holders of our common stock to pay taxes and related tax preparation expenses in respect of income allocated to them as a result of our former status as an S corporation. We have not paid any dividends since our initial public offering in June 1999. For the foreseeable future we intend to retain our earnings for our operations and the expansion of our business and do not expect to pay dividends on our common stock. The payment of any future dividends will be at the discretion of our board of directors and will depend upon, among other factors, our earnings, financial condition, capital requirements, contractual restrictions in financing agreements and general business outlook at the time payment is considered. In addition, our ability to pay dividends will depend upon the amount of distributions, if any, received from Network Plus, Inc. or any of our future operating subsidiaries. Our Credit Facility does, and any future indebtedness incurred by us may, restrict our ability to pay dividends. See "Management Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources". 19 22 ITEM 6. SELECTED FINANCIAL DATA The following tables present our selected consolidated financial data for the years ended December 31, 1996 through 2000. The statement of operations, cash flows and balance sheet data for the years ending December 31, 1996 through 2000 have been derived from financial statements, including those included elsewhere in this report. For periods prior to our formation in July 1998, the financial data reflect the financial statements of Network Plus, Inc., our wholly owned subsidiary, as it was our sole operating entity. We believe that earnings before interest, tax, depreciation and amortization, ("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. EBITDA 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 accounting principles generally accepted in the United States of America or as a measure of profitability or liquidity. EBITDA consists of operating loss before depreciation, amortization and 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 our results of operations and cash flows. EBITDA may not be comparable to similarly titled amounts reported by other companies. 20 23 Long-term obligations consist of long-term capital lease obligations, long-term note payable to stockholder and other long-term liabilities.
Year Ended December 31, ------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- -------- -------- (In thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues $ 235,956 $ 152,520 $ 105,545 $ 98,209 $ 75,135 Costs of services 185,668 122,664 78,443 78,106 57,208 Selling, general and administrative 101,882 51,709 29,426 25,704 19,230 Depreciation and amortization 29,963 8,564 2,037 994 533 --------- --------- --------- -------- -------- Operating loss (81,557) (30,417) (4,361) (6,595) (1,836) Interest income 5,767 1,896 395 86 95 Interest expense (7,566) (3,804) (1,474) (557) (313) Other income (loss), net (1,947) 432 151 3,917 3,529 Provision (benefit) for Income taxes -- (961) 906 (42) (60) --------- --------- --------- -------- -------- Net income (loss) (85,303) (32,854) (4,383) (3,191) 1,415 Preferred stock dividends and accretion (7,514) (10,725) (2,005) -- -- --------- --------- --------- -------- -------- Net income (loss) applicable to common stockholders $ (92,817) $ (43,579) $ (6,388) $ (3,191) $ 1,415 ========= ========= ========= ======== ======== Net income (loss) per share applicable to common stockholders - basic and diluted $ (1.57) $ (0.87) $ (0.14) $ (0.07) $ 0.03 ========= ========= ========= ======== ======== Weighted average common shares outstanding - basic and diluted 59,173 49,969 45,333 45,333 45,333 ========= ========= ========= ======== ========
21 24
Year Ended December 31, --------------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------- -------- -------- ------- ------- (In thousands) OTHER FINANCIAL DATA: Capital expenditures $ 195,022 $ 94,264 $ 10,919 $ 3,363 $ 2,135 EBITDA (53,541) (21,421) (2,173) (1,684) 2,226 Net cash provided by (used for) operating activities (58,002) 3,702 (10,768) 184 (322) Net cash used for investing activities (201,713) (51,221) (1,402) (3,474) (644) Net cash provided by financing activities 229,158 78,353 22,800 2,554 1,596
December 31, --------------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------- -------- -------- -------- ------- (In thousands) BALANCE SHEET DATA: Cash and cash equivalents $ 12,474 $ 43,031 $ 12,197 $ 1,567 $ 2,303 Current assets 84,098 76,292 31,050 28,521 19,771 Working capital (deficit) (20,400) 9,872 16,168 (3,128) 1,621 Property and equipment, net 269,073 101,944 15,822 6,957 3,075 Total assets 404,659 185,972 48,868 35,581 22,915 Long-term obligations 33,041 30,271 5,072 3,623 664 Redeemable 7.5% series A cumulative convertible preferred stock 120,065 -- -- -- -- Redeemable series A preferred stock -- -- 35,146 -- -- Total stockholders' equity (deficit) 147,055 89,281 (6,723) 309 4,101
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial statements, the related notes and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. For this purpose, any statement that is not a statement of historical fact is forward-looking information, including without limitation statements concerning the company's future capital requirements, sufficiency of available capital and availability of additional financing. Without limiting the generality of the foregoing, words 22 25 such as "believes," "anticipates," "expects" and similar expressions identify forward-looking statements. The Company's actual results could differ materially from those anticipated by such forward-looking information due to competitive factors, risk associated with the Company's expansion plans and other factors discussed below under "Risk Factors" and elsewhere in this report. For periods prior to our formation in July 1998, the financial data reflect the financial statements of Network Plus, Inc., our wholly owned subsidiary, as it was our sole operating entity. OVERVIEW The Company, founded in 1990, is a network-based communications provider offering a comprehensive suite of telecommunications, broadband data, and Internet Data Center hosting services. The Company's services include local and long distance voice, high-speed data, Internet and web server and managed server hosting. The Company currently utilizes digital subscriber line, or DSL, technology to provide high-speed data and Internet access and provides local and long distance services using traditional switched access, ATM, and other technologies. The Company currently serves primarily small and medium-sized business customers in the northeastern and southeastern regions of the United States. COMPARISON OF 1999 AND 2000 REVENUES. Revenues increased $83.4 million, or 55%, to $236.0 million for the year ended December 31, 2000 from $152.5 million in 1999. Approximately one half of the increase was due to the $44.8 million increase in revenues from the sale of local services, which totaled $59.3 million in 2000. Revenues from the sale of local services contributed 25% of total revenues in 2000 compared to 10% of total revenues in 1999. Local lines in service at December 31, 2000 increased 177% to 183,000 from 66,000 lines at December 31, 1999. Revenues generated from data services, which included co-location and Internet Data Center hosting services, DSL, Internet services and leasing of fiber-optic capacity, totaled $25.1 million in 2000, an increase of $23.6 million over the prior year, representing 11% of total revenues as compared to 1% of total revenues in 1999. We expect revenues from local services and data services to continue to increase as a percent of total revenues as we continue to focus on selling these products. Revenues generated from international wholesale traffic, which results from utilizing excess capacity on our long distance switches during off-peak hours, increased $25.6 million as compared to 1999, to $87.0 million. International wholesale traffic as a percent of total revenues declined to 37% of total revenues in 2000, decreasing from 40% of total revenues during 1999. Retail long distance revenues decreased $10.5 million to $64.6 million during 2000 representing 27% of total revenues compared to 49% of total revenues in 1999 despite an increase in minutes during 2000. We operate in a competitive market for long distance service, which has experienced price erosion of the average rate per minute from the prior year. We expect this price trend to continue in the future. COSTS OF SERVICES. Costs of services increased $63.0 million, or 51%, to $185.7 million for the year ended December 31, 2000 from $122.7 million 23 26 in the prior year. The increase in total costs of services is due primarily to the increase in total revenues of 55% in 2000 over 1999. As a percent of revenues, total cost of services decreased to 79% for 2000 from 80% for 1999. The cost of services as a percent of revenues was positively impacted by a shift of services to local and data, which have lower costs of services as a percent of revenue, but were offset by higher costs of services from international and long distance traffic. As we continue to move our local services on our network, increase data services and reduce our wholesales international and long distance traffic, we expect cost of services as a percent of revenue to decrease. As the deployment of our local network continues and the facilities become operational, the costs associated with the co-location facilities, including rent, power and access charges, are reflected in costs of services. These costs are generally fixed and will result in fluctuations in margin in the future as these costs are incurred for capacity which is not immediately utilized. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased $50.2 million, or 97%, to $101.9 million for 2000 from $51.7 million for 1999. As a percentage of revenues, selling, general and administrative expenses increased to 43% for 2000 from 34% for 1999. We employed 930 people at December 31, 2000, compared with 577 at December 31, 1999, resulting in an increase in payroll and related expenses of 98% for the year. The sales organization increased by 137 people as compared to the prior period, and we added 173 people to support the build-out of our local and data network. We expect selling, general and administrative expenses to continue to increase as a result of our growth in revenues and the expansion of the infrastructure to support future growth. However, we believe these expenses as a percent of revenue will begin to decline as our rate of network and infrastructure expansion reduces relative to our projected revenue growth. Costs associated with the co-location facilities including rent, power, access and leased line charges for facilities which are not fully deployed are included in selling, general and administrative expenses. We expect these charges will fluctuate depending upon the number of co-location facilities becoming operational, at which time the related costs are reclassified to costs of services. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $21.4 million, or 250%, to $30.0 million during 2000 from $8.6 million in the prior year. The increase is primarily due to additional local network facilities, data services equipment and other telecommunications equipment to support our network expansion. In particular, the southeastern local switching and co-location equipment and northeastern data centers were put into service and began depreciating during 2000. We expect depreciation and amortization expense to increase as we bring additional local network facilities on-line and as we make additional investments in our network and operational infrastructure including the mid-Atlantic region. INTEREST. Interest expense net of interest income decreased slightly to $1.8 million for 2000 from $1.9 million for 1999. The decrease in net interest expense is primarily due to the investment of capital obtained from the common and preferred stock offerings in April 2000. Offsetting the interest income from the investment of capital was $2.5 million of amortization of issuance costs resulting from the $225 million senior secured Credit Facility. Interest expense is expected to dramatically increase as the amortization of issuance costs 24 27 associated with the $225 million senior secured Credit Facility are expensed and as we begin drawing on this facility to fund the continued build-out of the local network and operating activities. NET LOSS AND NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. The contribution from increased revenues was offset by an increase in selling, general and administrative expenses, and depreciation and amortization expense, which combined with a $2.5 million loss on an equity investment resulted in a net loss of $85.3 million during 2000, compared to $32.9 million in 1999. During the fourth quarter 2000, we wrote-off our entire equity investment of $2.5 million in NorthPoint Communications Corp. common stock, as a result of their recent bankruptcy filing. The effect of the net loss combined with the preferred stock dividends and accretion to redemption value of $7.5 million during 2000 and $10.7 million during 1999 resulted in net losses applicable to common stockholders of $92.8 million for 2000 compared to $43.6 million for 1999. Dividends payable on the convertible preferred stock sold by us in our April 12, 2000 offering and our anticipated increase in net losses will result in net losses applicable to common stockholders in the future. EBITDA. EBITDA was negative $53.5 million for 2000 compared to negative $21.4 million for 1999. Higher selling, general and administrative expenses due to the rapid implementation of our local network and infrastructure to support our growth as well as the $2.5 million charge related to the investment in Northpoint offset the increased contribution from revenue. COMPARISON OF 1998 AND 1999 REVENUES. Revenues increased $47.0 million, or 45%, to $152.5 million in 1999 from $105.5 million in 1998. The increase was primarily due to a 35% increase in long distance revenues, which represented 89% of total revenues for the period, resulting from services to new customers and increased revenues from existing customers. Revenues generated from international wholesale traffic, which results from excess capacity on our long distance switches represented 70% of the increase in revenues for the period. The resale of local service contributed $13.6 million in revenues for the period, representing 27% of the increase in total revenues for the period. We operate in a competitive market for long distance service, which has experienced price erosion of the average rate per minute from the prior year. We expect this price trend to continue in the future. COSTS OF SERVICES. Costs of services increased $44.2 million, or 56%, to $122.7 million in 1999 from $78.4 million in 1998. As a percentage of revenues, costs of services increased to 80% for 1999 from 74% for 1998. The increase was primarily due to the increased volume of international wholesale traffic, which has higher origination, transport and termination costs as compared to other long distance traffic. In addition, we maintain rate agreements with various local and long distance carriers for access, termination and transport which are continually reviewed and negotiated based on changes in volume and types of traffic. These changes to rate agreements may result in credits for costs associated with prior traffic or reductions in current costs based on the mix of traffic and rate. Cost of services is currently comprised exclusively of carrier costs to originate, transport and terminate traffic for our network switches. As 25 28 the deployment of the local network continues and the facilities become operational the costs associated with the co-location facilities including rent and access charges will be reflected in cost of services. These costs are generally fixed and will result in fluctuations in margin in the future as a result of costs incurred for capacity, which is not immediately utilized in these co-locations. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased $22.3 million, or 76%, to $51.7 million for 1999 from $29.4 million for 1998. As a percentage of revenues, selling, general and administrative expenses increased to 34% for 1999 from 28% for 1998. We employed 577 people at December 31, 1999, compared with 403 at December 31, 1998, resulting in a 63% increase in payroll and related expenses. The sales organization increased by 19 people for the period, and we added 83 people to support the build-out of our local network. Other selling, general and administrative expenses increased as a result of our growth in revenues and the expansion of the infrastructure to support future growth. Costs associated with the co-location facilities including rent and access charges for facilities which are not fully deployed are included in selling, general and administrative expenses. When the facilities become operational the related costs are reclassified to costs of services. To date these costs have been immaterial. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $6.5 million, or 320%, to $8.6 million 1999 from $2.0 million for 1998. The increase was primarily due to additional local network facilities, fiber, computer and other telecommunications and data services equipment to support our network expansion. In particular the Cambridge, Massachusetts and New York City local switch equipment, the northeast fiber ring and the Los Angeles and Chicago long distance switches, which were put into service during 1999, began depreciating. We expect the depreciation and amortization expense to increase as we bring additional local network facilities on-line and as we make additional investments in our network and operational infrastructure. INTEREST. Interest expense net of interest income increased $829,000, or 77%, to $1.9 million for 1999 from $1.1 million for 1998. The increase was primarily due to interest paid on our capital lease obligations and outstanding balances on the line of credit. We expect interest expense to increase as a result of the continued financing of the local network buildout. NET LOSS AND NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. As a result of the increases in selling, general and administrative expenses, depreciation and amortization, and net interest expense exceeding the increase in revenues net of operating costs noted above, we incurred a net loss of $32.9 million for 1999 compared to $4.4 million in 1998. The effect of the preferred stock dividends of $10.7 million in 1999 and $2.0 million in 1998 resulted in net loss applicable to common stockholders in the years ended December 31, 1999 and 1998 of $43.6 million and $6.4 million, respectively. EBITDA. EBITDA was negative $21.4 million for the year ended December 31, 1999 compared to negative $2.2 million for the year ended December 31, 1998. This decline was due to the changes in revenues, related costs of services and selling, general and administrative expenses due to the rapid implementation of our local network and infrastructure to support future growth. 26 29 SEGMENT RESULTS We have two reportable segments which management operates as distinct market segments delineated by the customer base to whom services are provided. The two customer base segments are: retail telecommunications and data services, and wholesale telecommunications. We measure and evaluate our reportable segments based on revenues and costs of services. The retail telecommunications and data services segment provides local and long distance services, including voice and data transport, and enhanced and custom calling features. In this segment, we focus on selling these services to end user customers, principally businesses. The wholesale telecommunications segment provides international transport and termination services. We focus this segment on selling these services to large telecommunication carriers who utilize our excess capacity to provide telephone voice services to their customers.
2000 1999 1998 -------- -------- -------- (In thousands) Revenues: Retail telecommunications and data services $148,995 $ 91,132 $ 75,506 Wholesale telecommunications 86,961 61,388 30,039 -------- -------- -------- Total revenues $235,956 $152,520 $105,545 ======== ======== ======== Costs of services: Retail telecommunications and data services $ 98,030 $ 65,255 $ 51,371 Wholesale telecommunications 87,638 57,409 27,072 -------- -------- -------- Total costs of services $185,668 $122,664 $ 78,443 ======== ======== ========
27 30 QUARTERLY RESULTS The following tables set forth certain unaudited financial data for each of the quarters in 2000 and 1999. 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 this 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, 2000 2000 2000 2000 -------- -------- -------- -------- (Unaudited) (In thousands) Revenues $ 50,259 $ 54,427 $ 62,158 $ 69,112 Costs of services 40,854 41,562 48,528 54,725 Selling, general and administrative 20,053 27,490 27,443 26,895 Depreciation and amortization 4,748 6,560 7,780 10,874 -------- -------- -------- -------- Operating loss (15,396) (21,185) (21,593) (23,382) Interest income 408 2,634 1,992 733 Interest expense (1,449) (1,163) (947) (4,007) Investment loss -- -- -- (2,500) Other income (expense), net 28 (10) (176) 711 -------- -------- -------- -------- Net loss $(16,409) $(19,724) $(20,724) $(28,445) ======== ======== ======== ========
Quarter Ended ----------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, 1999 1999 1999 1999 -------- -------- -------- -------- (Unaudited) (In thousands) Revenues $ 33,581 $ 36,313 $ 39,381 $ 43,244 Costs of services 26,546 29,771 31,851 34,496 Selling, general and administrative 10,716 12,404 12,983 15,606 Depreciation and Amortization 984 1,844 2,386 3,349 -------- -------- -------- -------- Operating loss (4,665) (7,706) (7,839) (10,207) Interest income 141 21 929 805 Interest expense (521) (795) (987) (1,502) Other income (expense), net 1,828 21 (2,608) 231 -------- -------- -------- -------- Net loss $ (3,217) $ (8,459) $(10,505) $(10,673) ======== ======== ======== ========
28 31 We could experience quarterly variations in revenues and operating income (loss) as a result of many factors, including: - the introduction of new services - actions taken by competitors or suppliers - 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 - changes in our revenue mix among our various service offerings. Many of the factors that could cause such variations are outside of our control. We plan our operating expenditures based on revenue forecasts, and a revenue shortfall below such forecasts in any quarter could adversely affect our operating results for that quarter. LIQUIDITY AND CAPITAL RESOURCES Total assets were $404.7 million at December 31, 2000 compared to $186.0 million at December 31, 1999. Cash and cash equivalents were $12.5 million at December 31, 2000 compared to $43.0 million at December 31, 1999. Net cash used for operating activities was $58.0 million during 2000 as compared to net cash provided by operating activities of $3.7 million during 1999. Capital expenditures were $195.0 million for the year ended December 31, 2000. On September 27, 2000 we entered into a new senior Credit Facility agreement with Goldman Sachs Credit Partners, Fleet Securities, DLJ Bridge Finance and Fleet National Bank. This facility provides up to $225 million in total principal based on eligible receivables and eligible net property as defined by the agreement. This facility replaced the $60 million senior Credit Facility, which we allowed to expire in June 2000. The proceeds from the new $225 million Credit Facility are expected to be used for the purchase and acquisition of telecommunications assets and to finance operating losses and working capital. All borrowings under this facility are collateralized by substantially all of the Company's assets. There were no borrowings outstanding under this facility at December 31, 2000. The new senior Credit Facility agreement imposes operating and financial restrictions on us. These restrictions affect, and in many cases limit, among other things, our ability to: - pay dividends or make distributions to our common stockholders - incur additional indebtedness - make investments or other restricted payments - sell or dispose of assets 29 32 On April 12, 2000, we sold in concurrent underwritten public offerings (i)5,000,000 shares of common stock for aggregate net proceeds of $122.9 million to us and $13.4 million to certain selling stockholders and (ii) 2,500,000 depository shares, each representing 1/10 of a share redeemable 7.5% Series A Cumulative Convertible Preferred Stock, for aggregate net proceeds to us of $119.8 million. Each depository share is initially convertible into 1.4368 shares of our common stock. Our strategic initiatives include the deployment of additional local switches, the co-location of network equipment, the offering of new local and data services the expansion of our sales force and other personnel, and significant investment in our information technology systems. These initiatives will require a substantial amount of capital for the installation of network switches and related equipment, fiber, personnel additions and funding of operating losses and working capital. The Company currently anticipates that its available cash and Credit Facility will be sufficient to meet its anticipated working capital and capital expenditure requirements through fiscal 2001. In the event its operations are not profitable or do not generate sufficient cash to fund the business, or if the Company fails to comply with its restrictions and obligations under the Credit Facility, which could result in a default that could limit the availability of borrowings under the facility, the Company may have to substantially reduce it level of operations. In addition, the Company may need to raise additional capital to meet its needs after 2001, to fund more rapid expansion, to develop new services and to enhance existing services in response to competitive pressures, and to acquire complementary services, businesses or technologies. However, the Company may not be able to obtain additional financing on terms favorable to it, if at all. If adequate funds are not available or are not available on terms favorable to the Company, its business, results of operations and financial condition could be materially and adversely affected. Our estimate of future capital requirements is a forward-looking statement within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The actual amount and timing of our future capital requirements may differ substantially from our estimate due to factors such as the costs of building the mid-Atlantic region , capital requirements and growth projections, cost overruns, changes in demand for our services, regulatory, technological or competitive developments. RECENTLY ISSUED ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective January 1, 2001. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. In June 2000, the FASB issued SFAS 138, which amended certain provisions of SFAS 133. This pronouncement will not have a material impact on our financial position or results of operations. 30 33 RISK FACTORS WE HAVE A HISTORY OF NEGATIVE CASH FLOW AND SIGNIFICANT OPERATING LOSSES We had operating losses in each of the last five years and negative cash flow from operating activities in 2000. In 2000, we had operating losses of $81.6 million and cash flows used for operating activities of $58.0 million and a loss of $1.57 per share applicable to common stockholders. We expect to incur significant expenditures in connection with the continued acquisition, development and expansion of our network infrastructure, product offerings, information technology systems and employee base. As a result, we expect to incur significant future operating losses and negative cash flow. If our revenues do not increase significantly or the increase in our expenses is greater than expected, we may not achieve or sustain profitability or generate positive cash flow in the future. WE MAY REQUIRE ADDITIONAL THIRD PARTY FINANCING Our ability to meet our projected growth will require substantial cash resources. The anticipated expansion of our network infrastructure after 2001, including the addition of co-locations, switches, Internet Data Centers and other network elements, and our anticipated funding of negative cash flow from operating activities after 2001, may require additional capital. The maturity of our credit facility in mid-2002 may require additional capital. Furthermore, if we acquire other businesses, we may require additional financing. Our ability to satisfy future capital needs will depend upon the continued availability of our credit and equipment lease facilities and cash from operations. If for any reason our Credit Facility becomes unavailable or our ability to draw on this facility is limited, including as a result of a breach by us of the financial or other covenants contained in the Credit Facility, we may be required to seek alternative financing or modify our business plan. Additional financing may place significant limits on our financial and operating flexibility or may not be available to us. Failure to obtain future financing when needed or on acceptable terms could cause us to delay or abandon our development and expansion plans and could materially adversely affect our growth and ability to compete. OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE NOT INDICATIVE OF FUTURE PERFORMANCE AND ARE DIFFICULT TO FORECAST As a result of our limited operating history as a provider of broadband data, telecommunications and data hosting services and the evolving nature of the telecommunications and Internet industries, we may not be able to accurately forecast our revenues. We do not believe that period-to-period comparisons of our operating results are necessarily meaningful, or that investors should rely upon them as indicators of future performance. In one or more future quarters, our results of operations may fall below the expectations of securities analysts and investors. This would likely materially adversely affect the trading price of our stock. 31 34 WE CANNOT PREDICT MARKET ACCEPTANCE FOR OUR LOCAL, DSL, INTERNET AND DATA HOSTING SERVICES The markets for Internet access, broadband data, including DSL, web and managed server hosting and competitive local service are in the early stages of development. We have limited experience providing these additional services and can give no assurance that our services will receive market acceptance or that prices and demand for these services will be sufficient to achieve or sustain profitable operations. If the markets for our new services fail to develop, grow more slowly than anticipated or become saturated with competitors, our success in these markets could be materially adversely affected. WE MAY BE UNABLE TO MANAGE RAPID GROWTH Our future operating performance will depend upon our ability to implement and manage our growth effectively. Our rapid growth to date has placed, and in the future will continue to place, a significant strain on our administrative, operational, managerial and financial resources. Failure to attract and retain additional qualified sales and other personnel, including management personnel who can manage our growth effectively, or failure to successfully train or integrate such personnel, could materially adversely affect our future operating performance. To manage our growth effectively, we will also have to continue to improve and upgrade operational, financial and accounting information systems, controls and infrastructure, as well as control costs and maintain regulatory compliance. The failure to adequately strengthen our financial controls and systems or otherwise manage our growth could materially adversely affect our business, prospects, financial condition and results of operations. OUR FAILURE TO ACHIEVE OR SUSTAIN MARKET ACCEPTANCE AT DESIRED PRICING LEVELS COULD IMPAIR OUR ABILITY TO ACHIEVE PROFITABILITY OR POSITIVE CASH FLOW Prices for telecommunications services have fallen historically, a trend we expect will continue. Accordingly, we cannot predict to what extent we may need to reduce our prices to remain competitive or whether we will be able to sustain future pricing levels as our competitors introduce competing services or similar services at lower prices. Our failure to achieve or sustain market acceptance at desired pricing levels could impair our ability to achieve profitability or positive cash flow, which would have a material adverse effect on our business, prospects, financial condition and results of operations. WE MAY BE UNABLE TO MEET OUR DEBT OBLIGATIONS We have a significant amount of indebtedness and our indebtedness will increase as we begin to draw on our Credit Facility. Our ability to repay our indebtedness will depend on our future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors. Some of these factors are beyond our control. If we are unable to service our indebtedness or other obligations, we will be forced to examine alternative strategies. These strategies may include reducing or delaying capital expenditures, restructuring or refinancing indebtedness or seeking additional debt or equity financing. We can give no assurance that any of these strategies could be effected on satisfactory terms. 32 35 Our level of indebtedness could have important consequences to our stockholders, including the following: - we will have significant and increasing cash interest expense and significant principal repayment obligations with respect to outstanding indebtedness - our degree of leverage and debt service obligations could limit our ability to plan for, and make us more vulnerable than some of our competitors to the effects of, an economic downturn or other adverse developments - we may need to dedicate cash flow from our operations to debt service payments, making these funds unavailable for other purposes - our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements or other purposes could be impaired - we will have a competitive disadvantage relative to the other companies in our industry with less debt OUR INDEBTEDNESS SUBJECTS US TO FINANCIAL AND OPERATING RESTRICTIONS Our senior Credit Facility imposes operating and financial restrictions on us. These restrictions may limit our ability to: - incur additional indebtedness - issue stock of any subsidiaries - create liens on assets - pay dividends, redeem our proposed convertible preferred stock or make other distributions - sell assets - make capital expenditures - enter into sale and leaseback transactions - engage in mergers or acquisitions - make investments Failure to comply with any of these restrictions, including pre-established levels of revenue, earnings before interest, taxes, depreciation, and amortization (EBITDA), days sales outstanding (DSO) and access lines, as defined by the agreement, could limit the availability of borrowings or result in a default under our senior Credit Facility. For the year ended December 31, 2000, the lenders agreed to amend a financial covenant to grant us additional operating flexibility. We can give no assurance that we will obtain a waiver or amendment for any future noncompliance. 33 36 OUR BUSINESS STRATEGY DEPENDS ON SECURING AND MAINTAINING INTERCONNECTION AGREEMENTS WITH INCUMBENT LOCAL EXCHANGE CARRIERS We must enter into agreements for the interconnection of our network with the networks of the incumbent local exchange carriers and other carriers covering each market in which we intend to offer local service. Although we have entered into interconnection agreements in a number of jurisdictions, we can give no assurance that we will successfully renegotiate these agreements as they are due to expire or negotiate additional agreements as we enter new markets. WE DEPEND ON OUR SUPPLIERS AND OTHER SERVICE PROVIDERS TRANSMISSION FACILITIES. We lease a portion of our transport capacity. We are dependent upon the availability of fiber optic transmission facilities owned by interexchange carriers, incumbent local exchange carriers, Internet service providers, competitive local exchange carriers and others who lease their fiber optic networks to us. Many of these entities are, or may become, our competitors. Integration of leased fiber mileage into our network will subject us to the risk that the owners of the underlying facilities, who may be competitors, will not maintain or will deny us access to these facilities. Some of these providers are currently experiencing delays in the development of their facilities, and we can give no assurance that we will be able to obtain use of these facilities on a timely basis and in the quantities we require. DIGITAL SUBSCRIBER LINE SERVICES. DSL services depend on the quality of copper lines and the maintenance of such lines by incumbent local exchange carriers. We can give no assurance that we will be able to obtain copper lines and the services we require from these carriers on a timely basis or on terms and in quantities satisfactory to us. OTHER COMPONENTS. We also rely on other companies to supply key components of our network infrastructure, including switching and networking equipment and paging services. These components are only available in the quantities and quality we require from sole or limited sources. From time to time we have experienced delays or other problems in receiving these key components. We can give no assurance that we will be able to obtain such services or facilities on the scale and within the time frames required by us at an affordable cost, or at all. CALL RECORDS. The accurate and prompt billing of our customers is dependent upon the timeliness and accuracy of call detail records, including those provided by carriers whose services we resell. We can give no assurance that the current carriers will continue to provide, or that new carriers, including incumbent local exchange carriers, will provide, accurate information on a timely basis. 34 37 WE MAY FACE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS We may acquire other businesses that we believe will complement our existing business. These acquisitions will likely involve some or all of the following risks: - the difficulty of assimilating the acquired operations and personnel - the potential disruption of our ongoing business - the diversion of resources - the possible inability of management to maintain uniform standards, controls, procedures and policies - the possible difficulty of managing our growth and information systems - the risks of entering markets in which we have little experience - the potential impairment of relationships with employees or customers. These transactions may be required for us to remain competitive. We can give no assurance that we will be able to obtain required financing for such transactions or that such transactions will occur. COMPETITION IN OUR INDUSTRY IS INTENSE AND GROWING, AND WE MAY BE UNABLE TO COMPETE EFFECTIVELY Our industry is highly competitive, and we expect competition to intensify in the future. We do not have a significant market share in any of our markets. Most of our actual and potential competitors have substantially greater financial, technical, marketing and other resources, including brand or corporate name recognition, than we do. Our success will depend upon our ability to provide high-quality services at competitive prices. Any reduction in the prices of long distance, local, VoDSL, DSL, data hosting or other services by our competitors could materially adversely affect our business, prospects and financial condition. We also face the following competitive risks: OVERALL TELECOMMUNICATIONS MARKET A continuing trend towards business combinations and alliances in the telecommunications industry may create significant new competitors to us. We also face competition from fixed wireless services, wireless devices that do not require site or network licensing, cellular, personal telecommunications services, other commercial mobile radio service providers and Internet telephony. In addition, in February 1998, Federal Communications Commission rules went into effect that make it substantially easier for many foreign telecommunications companies to enter the U.S. telecommunications market. In the highly competitive international wholesale market, the routes that we can sell favorably are subject to change without notice, and it is very difficult to forecast revenue and associated margins. Loss of traffic could materially adversely affect our operating revenues. 35 38 LONG DISTANCE SERVICES MARKET The long distance industry is characterized by a high level of customers attrition, or "churn". Our revenues have been, and are expected to continue to be, affected by churn. New price plans and simplified rate structures may continue to lower long distance prices. Also, we anticipate that a number of regional Bell Operating companies will seek authority to provide in-region long distance Services in 2001 and beyond. Regional Bell operating companies which receive authority to offer widespread in-region long distance services are in a position to offer single-source local and long distance services in direct competition with us. LOCAL SERVICES MARKET In the local telecommunications market, our primary competitor is currently the incumbent local exchange carrier serving each geographic area. An incumbent local exchange carrier is an established provider of dedicated and local telephone services to all or virtually all telephone subscribers within its service area. We also face competition in local markets from other new entrants, including long distance and other carriers, many of which have significantly greater financial resources than we do. DATA SERVICES AND WEB AND MANAGED SERVER HOSTING MARKETS The markets for data communications, web and managed server hosting and Internet access services are extremely competitive and characterized by rapid technological innovation. There are no substantial barriers to entry, and we expect that competition will intensify in the future. We expect significant competition from a large variety of companies, including long-distance service providers, cable modem service providers, Internet service providers, on-line service providers, wireless and satellite data service providers and other companies focusing on DSL services. WE MAY BE UNABLE TO ADAPT TO TECHNOLOGICAL CHANGE The telecommunications industry has been, and is likely to continue to be, subject to: - rapid and significant technological change, including continuing developments in DSL technology, which does not presently have widely accepted standards - frequent introductions of new services and alternative technologies, including new technologies for providing high-speed data services - evolving industry standards. We expect that new products and technologies will emerge that may be superior to, or may not be compatible with, some of our products or technologies. Changes in technology could cause more competitors to enter the industry, including the network-based local market and high-speed data transport market in 36 39 which we compete. Also, technological changes, including advancements in emerging wireline and wireless technologies and Internet services and technologies, could result in lower retail rates for telecommunications services. These changes could materially adversely affect our ability to price services competitively or achieve profitability. WE DEPEND ON INDEFEASIBLE RIGHTS-OF-USE, RIGHTS-OF-WAY AND SIMILAR AGREEMENTS We currently rely on, and may need to obtain additional indefeasible rights-of-use, local franchises, permits, rights to utilize underground conduit and aerial pole space and other rights-of-way. We would need to obtain these rights from entities such as incumbent local exchange carriers, other utilities, railroads, long distance companies, state highway authorities, local governments and transit authorities. We can give no assurance that we, or the providers on whom we depend, will be able to obtain and maintain the permits and rights we may need on acceptable terms. Cancellation or non-renewal of these arrangements could materially adversely affect our business in the affected area. THE TELECOMMUNICATIONS ACT OF 1996 AND OTHER GOVERNMENT REGULATION COULD ADVERSELY AFFECT US Telecommunications services are subject to significant regulation at the federal, state, local and international levels. Delays in receiving required regulatory approvals, or new legal requirements, may materially adversely affect our business, financial condition, results of operations and prospects. In particular, we face the following regulatory risks: - NEED TO COMPLY WITH FEDERAL REGULATIONS. The FCC has the authority to sanction us or revoke our authorization if we violate applicable law. - LEGAL AND ADMINISTRATIVE BURDEN OF COMPLIANCE WITH DIVERSE STATE REGULATIONS. Compliance with state regulations, challenges by third parties to our tariffs or complaints about our practices could cause us to incur substantial expenses. - DIFFICULTY PREDICTING THE IMPACT OF THE TELECOMMUNICATIONS ACT. We cannot predict how the FCC, state regulators, courts and the incumbent local exchange carriers will interpret and implement the relevant provisions of the Telecommunications Act. - CHANGES IN ACCESS CHARGES AND UNIVERSAL SERVICE. Changes in the regulations requiring incumbent local exchange carriers to provide equal access for the origination and termination of calls by long distance subscribers, or in the regulations governing access charge rates or universal service contribution, could materially adversely affect our business, prospects, financial condition and results of operations. - UNCERTAINTY OF THE EVOLVING REGULATORY ENVIRONMENT. There is considerable uncertainty regarding numerous regulatory issues in the telecommunications industry, including the legal status of complaints filed at the FCC to enforce interconnection agreements and the applicability of existing regulations to new technologies such as Internet telephony. We cannot predict the impact of these and other regulatory developments on our business. 37 40 WE DEPEND ON OUR BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS Integrated management information and processing systems are vital to our growth and our ability to monitor costs, bill customers, process customer orders and operate efficiently. The cost of implementing these systems has been, and we expect will continue to be, substantial. In addition, any of the following developments could materially adversely affect our business condition, prospects or financial condition: - failure of vendors to deliver the required services or information in a timely and effective manner and at acceptable costs - our failure to adequately identify and integrate all of our information and processing needs - failure of our processing or information systems to perform as expected - our failure to upgrade systems as necessary and on a timely basis. WE DEPEND ON THE PROMPT COLLECTION OF CUSTOMER PAYMENTS AND FACE RISKS RELATING TO OUR CUSTOMERS' LIQUIDITY The failure of our customers to pay their bills in a timely manner or our failure to accurately assess the creditworthiness of our customers and implement adequate revenue assurance programs could materially adversely affect our financial results. WE MUST SECURE AND MAINTAIN PEERING ARRANGEMENTS WITH INTERNET SERVICE PROVIDERS We may need agreements, which are referred to as peering agreements, with Internet service providers in order to exchange traffic with these providers without being required to pay transmission costs. Failure to establish and maintain peering relationships would cause us to incur additional operating expenses or abandon certain elements of our strategy, which could materially adversely affect our business condition, prospects and financial condition. WE MAY BE UNABLE TO ATTRACT AND RETAIN MANAGEMENT PERSONNEL AND OTHER EMPLOYEES Our success depends to a significant extent upon the abilities and continued efforts of our management team, particularly Robert T. Hale, Jr., our chief executive officer and president, Robert T. Hale, the chairman of our board, and other members of our senior management team. The loss of any of these individuals could materially adversely affect our business, prospects and financial condition. Our success will also depend upon our ability to hire and retain additional personnel, including technical and sales personnel. Competition for qualified personnel is intense. Difficulty in hiring and retaining personnel could materially adversely affect our future operating performance. 38 41 WE ARE SUBJECT TO THE RISK OF SYSTEM FAILURE AND SECURITY RISKS Our success in attracting and retaining customers requires us to provide adequate network reliability, capacity and security. Our networks and the networks upon which we depend are subject to physical damage, power loss, capacity limitations, software defects, breaches of security by computer virus, break-ins or otherwise and other factors. Any of these occurrences may cause interruptions in service or reduced customer capacity. Interruptions in service, capacity limitations or security breaches could materially adversely affect future operating performance. EXISTING STOCKHOLDERS CAN EXERT CONSIDERABLE CONTROL OVER US As of December 31, 2000 approximately 74% of our common stock was owned or voted by Robert T. Hale, a director, and Robert T. Hale, Jr., an officer and director. Consequently, management has considerable control over all of our affairs and controls the election of all members of our board of directors and the outcome of all corporate actions requiring stockholder approval. The interests of our management may differ from those of other stockholders, and non-management stockholders have limited control over our affairs. PROVISIONS OF OUR CHARTER AND BY-LAWS COULD ADVERSELY AFFECT OUR STOCK PRICE Our certificate of incorporation and by-laws include provisions that may discourage, delay or impede a change in control of Network Plus or prevent the removal of incumbent directors, even if stockholders believe the action is in their best interests. Among other things, the certificate of incorporation provides 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, including the stock issuable in our proposed convertible preferred stock offering. Any issuance of preferred stock could make it more difficult for a third-party to acquire control of Network Plus. In addition, our certificate of incorporation and by-laws limit the manner in which directors may be nominated by the stockholders and in which proposals may be made at stockholder meetings. We are also subject to Section 203 of the Delaware general corporation law, which could delay or prevent a change of control. 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 trading price of our stock. OUR STOCK PRICE IS EXTREMELY VOLATILE, AND INVESTORS MAY NOT BE ABLE TO RESELL THEIR SHARES AT OR ABOVE THEIR PURCHASE PRICE The price at which our stock trades is likely to continue to be volatile and may fluctuate widely due to factors such as: - our historical and anticipated quarterly and annual operating results 39 42 - variations between our actual results and analyst and investor expectations or changes in financial estimates and recommendations by securities analysts - announcements by us or others and developments affecting our business - investor perceptions of our company and comparable public companies - conditions and trends in the telecommunications and Internet industries. In particular, the stock market has from time to time experienced significant price and volume fluctuations affecting the stock of telecommunications and Internet companies. Fluctuations may be unrelated or disproportionate to company performance. These fluctuations may result in a material decline in the trading price of our stock. In addition, fluctuation in the market price of our stock could result in shareholder lawsuits, which potentially could impact our business. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not believe that it faces any material risk exposure with respect to derivative or other financial instruments that would require disclosure under this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements, including our consolidated balance sheets as of December 31, 2000 and 1999, consolidated statements of operations , consolidated statements of stockholders' equity, consolidated statements of cash flows for each of the three years in the period ended December 31, 2000, and notes of our consolidated financial statements, together with a report thereon of PricewaterhouseCoopers LLP, dated March 21, 2001, are attached hereto as pages F-1 through F-27. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 40 43 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except as provided below, information with respect to this item will appear in the sections captioned "Directors and Nominees" and "Section 16(a) Beneficial Ownership Reporting Compliance" appearing in the 2001 Proxy Statement, and such information is incorporated herein by reference. Information required by this item with respect to our executive officers may be found under the section captioned "Executive Officers of the Company" in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Information with respect to this item will appear in the sections captioned "Executive Compensation," "Director Compensation" and "Certain Transactions" appearing in the 2000 Proxy Statement. Such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item will appear in the section captioned "Beneficial Ownership of Common Stock" appearing in the 2001 Proxy Statement. Such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this item will appear in the section captioned "Certain Transactions" appearing in the 2001 Proxy Statement. Such information is incorporated herein by reference. 41 44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 1(a) -- The following consolidated financial statements of Network Plus Corp. and report of independent public accountants are included in Item 8 of this Form 10-K: Report of Independent Accountants Consolidated Balance Sheets December 31, 2000 and 1999 Consolidated Statements of Operations Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows Years Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements 2(a) and (d) -- Financial Statement Schedules The following consolidated financial statement schedule of Network Plus Corp. is filed on pages S-1 and S-2 hereto and is incorporated herein: Schedule II -- Valuation and Qualifying Accounts Report of Independent Accountants on the Financial Statement Schedule All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable and, therefore, have been omitted. (b) Reports on Form 8-K None. 3(a) and (c) -- Exhibits The exhibits listed on the Exhibit Index hereto are filed with this report. 42 45 EXHIBIT INDEX
EXHIBIT DESCRIPTION ------- ----------- 3.1(1) Amended and Restated Certificate of Incorporation of the Company. 3.2(1) Amended and Restated By-laws of the Company. 3.3(4) Certificate of Designation for 7.5% Series A Cumulative Convertible Preferred Stock. 3.4(4) Deposit Agreement for Depositary Shares representing 7.5% Series A Cumulative Convertible Preferred Stock, among the Company, the Depositary and the Holders from time to time of the Depositary Shares, dated as of April 6, 2000. 4.1(2) Exchange and Registration Rights Agreement dated as of September 1, 1998 between the Company and the Purchasers. 4.2(1) Form of Common Stock Certificate. 10.1(1)* 1998 Stock Incentive Plan, as amended. 10.2(1)* 1998 Director Stock Option Plan, as amended. 10.3(2) Net Lease by and between Network Plus Realty Trust, Landlord, and Network Plus, Inc., Tenant, dated July 1, 1993. 10.3A First Amendment to Lease, dated January 31, 2001, by and between Robert T. Hale and Robert T. Hale, Jr. as trustees of Network Plus Realty Trust, Landlord, and Network Plus, Inc., Tenant. 10.4 Sublease by and between PACSCI Motion Control, Inc., Landlord, and Network Plus, Inc., Tenant, dated October 22, 1999. 10.5(6) Lease between Network Plus, Inc. as Tenant, and Trucks Up LLC, as Landlord, dated August 31, 2000. 10.6+(6) Credit and Guaranty Agreement, dated as of September 27, 2000, among the Company, Network Plus, Inc., various lenders (the "Lenders"), Goldman Sachs Credit Partners, L.P., as a Joint Lead Arranger, Book Runner and Syndication Agent, FleetBoston Robertson Stephens Inc., as a Joint Lead Arranger, DLJ Bridge Finance, Inc., as Documentation Agent, and Fleet National Bank, as Collateral Agent and Administrative Agent. 10.6A First Amendment, dated as of February 9, 2001, by and among the Company, Network Plus, Inc., the Lenders, Goldman Sachs Credit Partners, L.P., as a Joint Lead Arranger, Book Runner and Syndication Agent, Fleet Securities, Inc., as a Joint Lead Arranger, DLJ Bridge finance, Inc., as Documentation Agent, and Fleet National Bank as Collateral Agent and Administrative Agent. 10.7(6) Pledge and Security Agreement, dated as of September 27, 2000, between the Company, Network Plus, Inc. and Fleet National Bank, as Collateral Agent for the Secured Parties. 10.8 Form of Common Stock Purchase Warrant of the Company originally issued as of September 27, 2000 to the Lenders. 10.9+(2) Master Lease Agreement, dated as of August 8, 1997, by and between Chase Equipment Leasing, Inc. and Network Plus, Inc., as amended. 10.10(3) Master Agreement, dated December 30, 1998, by and between Comdisco, Inc. and Network Plus, Inc., along with Product Supplement dated December 30, 1998, Addendum dated December 30, 1998 and Guarantee of Network Plus Corp. dated December 30, 1998. 10.10A(5) Letter agreement, dated March 9, 2000, by and between Comdisco, Inc. and Network Plus, Inc., amending the Master Lease Agreement, dated as of December 30, 1998, as amended, by and among Comdisco, Inc. and Network Plus, Inc. 10.11(1)* Form of Incentive Stock Option Agreement under 1998 Stock Incentive Plan 10.12(1)* Form of Stock Option Agreement under 1998 Director Stock Option Plan 10.13(1)* Form of Incentive Stock Option Agreement with James J. Crowley under 1998 Stock Incentive Plan. 10.14(6) Separation Agreement and Release, dated as of July 12, 2000, by and between the Company and George C. Alex. 10.15 Promissory Note for $1.87 million from Robert T. Hale, Jr. to the Company, dated September 2, 1998. 21 Subsidiaries of the Registrant. 23 Consent of PricewaterhouseCoopers LLP.
- --------------- (1) Incorporated herein by reference to the Company Registration Statement on Form S-1, as amended (File No. 333-79479). (2) Incorporated herein by reference to the Company's Registration Statement on Form S-1, as amended (File No. 333-64663). (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (4) Incorporated by reference to the Company's Form 8-A filed with the Securities and Exchange Commission on April 13, 2000. (5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000. (6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. + Confidential treatment granted as to certain portions. * Management contract or compensation plan on arrangement filed in response to Item 14(c) of Form 10-K. 43 46 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NETWORK PLUS CORP. By: /s/ Robert J. Cobuzzi ------------------------------------ Robert J. Cobuzzi Executive Vice President of Finance, Chief Financial Officer and Treasurer Date: March 30, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ Robert T. Hale Chairman of the Board March 30, 2001 - --------------------------- Robert T. Hale /s/ Robert T. Hale, Jr. President, Chief Executive March 30, 2001 - --------------------------- Officer and Director Robert T. Hale, Jr. (Principal Executive Officer) /s/ James J. Crowley Executive Vice President, Chief March 30, 2001 - --------------------------- Operating Officer and Director James J. Crowley /s/ Robert J. Cobuzzi Executive Vice President, Chief March 30, 2001 - --------------------------- Financial Officer and Treasurer Robert J. Cobuzzi (Principal Financial and Accounting Officer) /s/ David Martin Director March 30, 2001 - --------------------------- David Martin /s/ Joseph McNay Director March 30, 2001 - --------------------------- Joseph McNay /s/ Lawrence Strickling Director March 30, 2001 - --------------------------- Lawrence Strickling
44 47 NETWORK PLUS CORP. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants........................... F-2 Consolidated Financial Statements: Consolidated balance sheets as of December 31, 2000 and 1999................................................... F-3 Consolidated statements of operations for the years ended December 31, 2000, 1999 and 1998....................... F-4 Consolidated statements of stockholders' equity for the years ended December 31, 2000, 1999 and 1998... F-5 Consolidated statements of cash flows for the years ended December 31, 2000, 1999 and 1998....................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 48 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Network Plus Corp.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Network Plus Corp. and its subsidiaries (the "Company") at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts March 30, 2001 F-2 49 NETWORK PLUS CORP. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Per Share Data)
December 31, --------------------------- 2000 1999 --------- --------- ASSETS Current Assets: Cash and cash equivalents $ 12,474 $ 43,031 Accounts receivable, net of allowance for doubtful accounts of $3,294 and $2,624, respectively 55,922 31,814 Prepaid expenses 1,185 489 Other current assets 14,517 958 --------- --------- Total current assets 84,098 76,292 Property and equipment, net 269,073 101,944 Other assets, net 51,488 7,736 --------- --------- TOTAL ASSETS $ 404,659 $ 185,972 ========= ========= LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 72,231 $ 48,704 Accrued liabilities 14,979 6,370 Current portion capital lease obligations 17,288 11,346 --------- --------- Total current liabilities 104,498 66,420 Long-term capital lease obligations 28,351 27,567 Long-term note payable to stockholder 1,875 1,875 Other long-term liabilities 2,815 829 Commitments -- -- Preferred stock, $.01 par value, 1,000 shares authorized: Redeemable Series A Cumulative Convertible Preferred Stock, 500 and no shares authorized, 250 and no shares issued and outstanding, respectively (aggregate liquidation preference of $127,566 at December 31, 2000) 120,065 -- Stockholders' Equity: Common Stock, $.01 par value, 150,000 shares authorized, 61,810 and 54,795 shares issued and outstanding, respectively 618 548 Additional paid-in capital 271,399 138,767 Stock subscription receivable (176) (155) Warrants 15,634 4,405 Other comprehensive income -- 833 Accumulated deficit (140,420) (55,117) --------- --------- Total stockholders' equity 147,055 89,281 --------- --------- TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY $ 404,659 $ 185,972 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F-3 50 NETWORK PLUS CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data)
Year ended December 31, ---------------------------------------------- 2000 1999 1998 --------- --------- --------- Revenues $ 235,956 $ 152,520 $ 105,545 Operating expenses Costs of services 185,668 122,664 78,443 Selling, general and administrative expenses 101,882 51,709 29,426 Depreciation and amortization 29,963 8,564 2,037 --------- --------- --------- 317,513 182,937 109,906 --------- --------- --------- Operating loss (81,557) (30,417) (4,361) Other income (expense) Interest income 5,767 1,896 395 Interest expense (7,566) (3,804) (1,474) Other income, net 553 432 151 Loss on investment (2,500) -- -- --------- --------- --------- (3,746) (1,476) (928) --------- --------- --------- Net loss before income taxes (85,303) (31,893) (5,289) Provision (benefit) for income taxes -- 961 (906) --------- --------- --------- Net loss (85,303) (32,854) (4,383) Preferred stock dividends and accretion of offering expenses and discount (7,514) (10,725) (2,005) --------- --------- --------- Net loss applicable to common stockholders $ (92,817) $ (43,579) $ (6,388) ========= ========= ========= Net loss per share applicable to common stockholders -- basic and diluted $ (1.57) $ (0.87) $ (0.14) ========= ========= ========= Weighted average shares outstanding - basic and diluted 59,173 49,969 45,333 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F-4 51 NETWORK PLUS CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In Thousands)
Common Stock, Shares $0.01 Additional Stock Of Common Par Paid-In Subscription Stock Value Capital Receivable Warrants ---------- ------- ---------- ------------ -------- Balance at December 31, 1997 45,333 $453 -- -- -- Comprehensive loss: Net loss -- -- -- -- -- Distributions to stockholders -- -- -- -- -- Common stock dividends -- -- -- -- -- Issuance of 1,405 warrants -- -- -- -- $ 4,359 Dividends on preferred stock -- -- -- -- -- Accretion of preferred stock to redemption value -- -- -- -- -- ------ ---- --------- ----- -------- Balance at December 31, 1998 45,333 453 -- -- 4,359 Comprehensive loss: Net loss -- -- -- -- -- Unrealized investment gain -- -- -- -- -- Total comprehensive loss -- -- -- -- -- Distributions to stockholders -- -- -- -- -- Issuance of 23 Warrants -- -- -- -- 92 Issuance of common stock in initial public offering 9,200 92 $ 135,504 -- -- Common stock option exercises 96 1 628 $(155) -- Issuance of common stock in connection with acquisition 155 2 2,431 -- -- Stock compensation charge -- -- 158 -- -- Dividends on preferred stock -- -- -- -- -- Accretion of preferred to redemption value -- -- -- -- -- Preferred stock dividend for premium paid on redemption of preferred stock -- -- -- -- -- Common stock warrant exercise 11 -- 46 -- (46) ------ ---- --------- ----- -------- Balance at December 31, 1999 54,795 548 138,767 (155) 4,405 Comprehensive loss: Net loss -- -- -- -- -- Receipt of stock subscription receivable -- -- -- 155 -- Issuance of common stock 4,510 45 123,270 -- -- Issuance of 2,803 warrants -- -- -- -- 15,043 Common stock option exercises 738 7 5,149 (176) -- Common stock warrant exercise 1,230 12 3,805 -- (3,814) Issuance of common stock under Employee Stock Purchase Plan 46 1 557 -- -- Stock compensation charge -- -- 171 -- -- Dividends on redeemable convertible preferred stock -- -- (7,199) -- -- Accretion of preferred stock to redemption value -- -- (315) -- -- Issuance of common stock for settlement of redeemable convertible preferred stock dividends 491 5 4,628 -- -- Payable of common stock for settlement of redeemable convertible preferred stock dividends -- -- 2,566 -- -- Loss on investment -- -- -- -- -- ------ ---- --------- ----- -------- Balance at December 31, 2000 61,810 $618 $ 271,399 $(176) $ 15,634 ====== ==== ========= ===== ========
Other Compre- hensive Accumulated Comprehensive Income Deficit Total Loss -------- ---------- --------- -------------- Balance at December 31, 1997 -- $ (144) $ 309 Comprehensive loss: Net loss -- (4,383) (4,383) $ (4,383) Distributions to stockholders -- (3) (3) ======== Common stock dividends -- (5,000) (5,000) Issuance of 1,405 warrants -- -- 4,359 Dividends on preferred stock (1,814) (1,814) Accretion of preferred stock to redemption value (191) (191) ------- --------- --------- Balance at December 31, 1998 -- (11,535) (6,723) Comprehensive loss: Net loss -- (32,854) (32,854) $(32,854) Unrealized investment gain $ 833 -- 833 833 -------- Total comprehensive loss -- -- -- $(32,021) Distributions to stockholders -- (3) (3) ======== Issuance of 23 Warrants -- -- 92 Issuance of common stock in initial public offering -- -- 135,596 Common stock option exercises -- -- 474 Issuance of common stock in connection with acquisition -- -- 2,433 Stock compensation charge -- -- 158 Dividends on preferred stock -- (2,870) (2,870) Accretion of preferred to redemption value -- (286) (286) Preferred stock dividend for premium paid on redemption of preferred stock -- (7,569) (7,569) Common stock warrant exercise -- -- -- ------- --------- --------- Balance at December 31, 1999 833 (55,117) 89,281 Comprehensive loss: Net loss -- (85,303) (85,303) $(85,303) Receipt of stock subscription receivable -- -- 155 ======== Issuance of common stock -- -- 123,315 Issuance of 2,803 warrants -- -- 15,043 Common stock option exercises -- -- 4,980 Common stock warrant exercise -- -- 3 Issuance of common stock under Employee Stock Purchase Plan -- -- 558 Stock compensation charge -- -- 171 Dividends on redeemable convertible preferred stock -- -- (7,199) Accretion of preferred stock to redemption value -- -- (315) Issuance of common stock for settlement of redeemable convertible preferred stock dividends -- -- 4,633 Payable of common stock for settlement of redeemable convertible preferred stock dividends -- -- 2,566 Loss on investment (833) -- (833) ------- --------- --------- Balance at December 31, 2000 $ -- $(140,420) $ 147,055 ======= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. F-5 52 NETWORK PLUS CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Year Ended December 31, ---------------------------------------------------- 2000 1999 1998 --------- --------- -------- Cash flows from operating activities: Net loss $ (85,303) $ (32,854) $ (4,383) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 29,963 8,564 2,037 Amortization of debt issuance costs 2,457 92 -- Loss on disposal of fixed assets 88 18 -- Deferred taxes -- 961 (961) Interest payable on capital lease and note payable to stockholder 201 158 -- Compensation expense related to issuance of stock options 171 158 -- Loss on investment 2,500 -- -- Changes in assets and liabilities, net of effect of acquisition: Accounts receivable (24,108) (15,559) 702 Prepaid expenses (696) 271 (345) Other current assets (3,435) 633 (1,479) Other assets (91) (299) (718) Accounts payable 9,027 24,146 (6,043) Accrued liabilities 8,609 16,791 422 Other liabilities 2,615 622 -- --------- --------- -------- Net cash provided by (used for) operating activities (58,002) 3,702 (10,768) Cash flows from investing activities: Capital expenditures (176,167) (52,337) (10,902) Purchase of investment -- (2,500) -- Purchase of fiber capacity (25,546) -- -- Proceeds from sale of Tel-Save common stock -- -- 9,500 Business acquisitions -- (900) -- Proceeds from sale and leaseback of fixed assets -- 4,516 -- --------- --------- -------- Net cash used for investing activities (201,713) (51,221) (1,402) Cash flows from financing activities: Net payments on line of credit -- -- (4,510) Principal payments on capital lease obligations (12,702) (11,843) (5,307) Principal payment of acquisition note payable (200) -- -- Proceeds from stockholder loan -- -- 1,875 Issuance costs associated with credit facility (6,701) -- -- Payments on stockholder loans -- -- (1,755) Net proceeds from issuance of preferred stock 119,750 -- 37,500 Payment on redemption of preferred stock -- (45,871) -- Net proceeds from issuance of common stock 129,011 136,070 -- Distribution to stockholders -- (3) (5,003) --------- --------- -------- Net cash provided by financing activities 229,158 78,353 22,800 --------- --------- -------- Net increase (decrease) in cash (30,557) 30,834 10,630 Cash and cash equivalents at beginning of year 43,031 12,197 1,567 --------- --------- -------- Cash and cash equivalents at end of year $ 12,474 $ 43,031 $ 12,197 ========= ========= ========
The accompanying notes are an integral part of the consolidated financial statements. F-6 53 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands, Except Share and Per Share Data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Activity Network Plus Corp. (the "Company") is a network-based communications provider offering a comprehensive suite of telecommunications, broadband data, and Internet data hosting services. The Company's bundled product offerings include local and long distance voice services and high-speed data, Internet and web server and managed server hosting services. The Company provides its services primarily to 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 termination and transport services primarily to major domestic and international telecommunication carriers. All revenues are billed and collected in U.S. dollars. Basis of Presentation On July 15, 1998, Network Plus Corp. was incorporated in the State of Delaware. The stockholders of Network Plus, Inc. contributed 100% of their shares to the Company, in return for an aggregate of 45,333,333 shares of the common stock. Accordingly, Network Plus, Inc. became a wholly-owned subsidiary of the Company. For periods prior to the formation of the Company on July 15, 1998, the financial statements reflect the activities of Network Plus, Inc., as it was the sole operating entity. The Company's consolidated financial statements reflect the financial position and results of operations of its wholly owned subsidiaries, Network Plus, Inc. All intercompany transactions are eliminated in consolidation. 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. Liquidity and Operations The Company currently anticipates that its available cash and Credit Facility (See Note 8) will be sufficient to meet its anticipated working capital and capital expenditure requirements through fiscal 2001. In the event its operations are not profitable or do not generate sufficient cash to fund the business, or if the Company fails to comply with its restrictions and obligations under the Credit Facility, which could result in a default that could limit the availability of borrowings under the facility, the Company may have to substantially reduce its level of operations. In addition, the Company may need to raise additional capital to meet its needs after 2001, to fund more rapid expansion, to develop new services and to enhance existing services in response to competitive pressures, and to acquire complementary services, businesses or technologies. However, the Company may not be able to obtain additional financing on terms favorable to it, if at all. If adequate funds are not available or are not available on terms favorable to the Company, its business, results of operations and financial condition could be materially and adversely affected. F-7 54 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) Cash and Cash Equivalents All highly liquid cash investments with maturities of three months or less at date of purchase are considered to be cash equivalents. At December 31, 2000 and 1999, $596 and $271, respectively, of cash equivalents are restricted for use as collateral for outstanding letters of credit. 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. Costs incurred in the repairing and maintaining of facilities and equipment are expensed as incurred. The Company capitalizes costs associated with the design and implementation of its internal use software. Capitalized internal software costs generally include personnel costs incurred in the development, enhancement and implementation of proprietary and purchased software packages. Through December 31, 2000, $5,351 of internal costs have been capitalized, the carrying value of which is $4,316. Intangible Assets Intangible assets consist principally of goodwill and acquired customer base. Goodwill represents the excess of purchase price over the fair value of the net assets acquired and is being amortized using the straight-line method over three years. Customer base represents the fair value of the customer base obtained in acquisitions (see Note 3) and is being amortized using the straight-line method over a period of 6 months to one year. The carrying value of the intangible assets is reviewed on a quarterly basis for the existence of facts or circumstances, both internally and externally, that may suggest impairment. The Company determines whether an F-8 55 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) impairment has occurred based on undiscounted future cash flows and measures the amount of the impairment based on the related future discounted cash flows. The cash flow estimates used to determine the impairment, if any, contain management's best estimates, using appropriate and customary assumptions and projections at that time. 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. Redeemable Preferred Stock The carrying value of redeemable preferred stock is increased by periodic accretions so that the carrying amount will equal the redemption amount at the mandatory redemption date. Such accretions are recorded as dividends, which increase net loss applicable to common stockholders. Revenue Recognition and Accounts Receivable Telecommunication and related data services revenues and accounts receivable are recognized when calls are completed or when services are provided and collection of the receivable is reasonably assured. Accounts receivable includes 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 prior to the reporting date. These amounts are billed subsequent to the reporting date and are expected to be collected under standard terms offered to customers. Unbilled amounts were $19,501 and $13,295 at December 31, 2000, and 1999, respectively. The Company transacts with customers for the sale of dark fiber-optic capacity. When ownership in the dark fiber-optic cables transfer to the customer, the Company accounts for such transactions as sales-type leases. All other such transactions are recorded as either operating leases or service arrangements. Sales-type leases accounted for approximately $4,000 of revenues during fiscal 2000. Operating leases and service arrangements relating to fiber-optic capacity transactions accounted for approximately $4,000 of revenues. F-9 56 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) Costs of Services Costs of services include costs of origination, transport and termination of traffic, exclusive of depreciation and amortization. Costs associated with co-location facilities including rent, power and access charges for facilities which are not operational are included in selling, general and administrative expenses. When the facilities are considered operational the related costs are included in costs of services. Income Taxes Prior to September 3, 1998, the Company was taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Company did not pay corporate Federal income taxes on its taxable income. The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". SFAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, SFAS 109 generally considers all expected future events other than enactment of changes in the tax law or rates. Earnings (Loss) Per Share The computations of basic and diluted loss per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities. Potentially dilutive securities include redeemable cumulative convertible preferred stock, stock options and warrants. 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%. Concentration of Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. 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 credit worthiness of customers, as appropriate, and maintains an adequate allowance for potential uncollectible accounts. F-10 57 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, 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. 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 (9.5% at December 31, 2000). Accrued interest on this loan, included in other long-term liabilities, totaled $409 and $209 at December 31, 2000 and 1999, respectively. Principal and interest will be payable July 31, 2003. On December 31, 1997, the Company's stockholders made loans to the Company totaling $1,755. Interest on the loans accrued at the prevailing prime rate and was payable monthly. Interest expense related to these loans totaled $49 in 1998. There was no required period for principal repayment. The loans were repaid in May 1998. Office space, located in Quincy, Massachusetts is leased from a trust, the beneficiaries of which are the principal stockholders of the Company. The Company makes monthly rental and condominium fee payments to the trust of $71 relating to the Quincy space. The Company paid $941 to the trust in 2000, $849 in 1999 and $808 in 1998. Additionally, on March 1, 2000, the Company entered into a 13 year lease for an 80,000 square foot office building in Randolph, Massachusetts with a company that is wholly owned by the principal stockholders of Network Plus. To date, the Company has incurred $857 for monthly rental fees and $4,652 for leasehold improvements related to this facility. 3. ACQUISITIONS On November 30, 1999, the Company acquired certain assets of Infohouse Inc. for cash of $300, a note payable of $200 and 155,039 shares of common stock of the Company with a fair market value of $2,432. The transaction was accounted for using the purchase method. The aggregate purchase price of $3,408 included assumed liabilities of $333, which consisted primarily of capital leases. The fair value of net tangible assets acquired was $385, which consisted primarily of computer, network and communications equipment. The remaining purchase price was allocated to customer base and goodwill. The $1,206 allocated to the customer F-11 58 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) base was amortized over a one-year period and was fully amortized as of December 31, 2000. The goodwill, which totaled $1,674, is being amortized over a three-year period. Amortization expense during 2000 and 1999 was $606 and $50, respectively. The results of operations of the acquired company would not have had a material impact on the actual results reported for the year ended December 31, 2000 and 1999 had the transaction been consummated at the beginning of each respective year. On December 17, 1999, the Company acquired certain customers from a reseller of the Company's services in exchange for the forgiveness of a $448 note receivable. The transaction was accounted for using the purchase method. The purchase price of $448 was allocated to the fair value of the customer base, which was amortized over a six-month period. As of December 31, 2000, the value of this customer base was fully amortized. 4. INVESTMENTS AND TRANSFER OF CUSTOMERS In 1998, the Company received $9,500 as a final settlement of a 1995 transaction whereby certain customers to whom it provided telecommunications services under a resale agreement were transferred to Tel-Save Holdings, Inc. Following the June 1998 settlement, there have been no additional transactions between the parties. 5. PROPERTY AND EQUIPMENT
December 31, Estimated --------------------------- Useful Life 2000 1999 ----------- -------- -------- Network infrastructure and equipment 5 & 10 years $162,665 $ 50,276 Computer equipment 3-5 years 14,665 5,228 Office furniture and equipment 7 years 3,783 1,975 Software 3 years 15,496 6,325 Motor vehicles 5 years 947 256 Leasehold improvements Shorter of term 28,684 7,959 of lease or life of asset Construction in progress 81,068 40,355 -------- -------- 307,308 112,374 Less accumulated depreciation and Amortization (38,235) (10,430) -------- -------- $269,073 $101,944 ======== ========
F-12 59 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) Property and equipment under capital leases are as follows:
December 31, ----------------------------- 2000 1999 -------- -------- Network infrastructure and equipment $ 61,072 $ 34,770 Computer equipment 3,700 2,062 Motor vehicles 696 99 Construction in Process 14 9,696 -------- -------- 65,482 46,627 Less accumulated amortization (15,893) (4,004) -------- -------- $ 49,589 $ 42,623 ======== ========
Depreciation and amortization expense related to property and equipment for the years ended December 31, 2000, 1999 and 1998 amounted to $27,805, $8,379 and $2,037, respectively. 6. OTHER ASSETS Other assets consist of the following:
December 31, -------------------------- 2000 1999 ------- ------ Prepaid fiber capacity $39,707 $ -- Debt issuance costs, net 9,164 446 Rent deposits 1,218 509 Intangible assets, net 1,071 3,286 Investment -- 3,333 Other 328 162 ------- ------ $51,488 $7,736 ======= ======
Prepaid fiber capacity relates to payments made for long-haul transport capacity. These fees were paid by the Company in exchange for a 20 year indefeasible right to use pre-determined fiber routes connecting the northeastern and southeastern regional networks. Based on the terms of the agreement, these pre-determined routes may be changed at the option of the Company. These fees are being amortized to operations over the 20 year service period, of which $339 has been amortized in fiscal year 2000. F-13 60 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) During 1999, the Company purchased common stock of NorthPoint Communications, Inc. for $2.5 million. The securities were deemed to be available-for-sale and, accordingly, to the extent considered temporary, unrealized gains or losses in value were recorded as a component of Other Comprehensive Income. At December 31, 2000, the Company's management determined the $2.5 million impairment of this investment to be other than temporary and, accordingly, a $2.5 million loss was recorded during 2000. 7. ACCRUED LIABILITIES
December 31, ------------------------- 2000 1999 ------- ------ Accrued network service fees $ 4,859 $1,551 Deferred revenue 1,854 512 Accrued taxes, other than income taxes 1,572 -- Accrued payroll and related expenses 1,302 2,083 Other accrued liabilities 5,392 2,224 ------- ------ $14,979 $6,370 ======= ======
8. REVOLVING CREDIT AGREEMENTS AND LETTERS OF CREDIT On September 27, 2000, the Company entered into a Senior Secured Credit Facility as amended, (the "Credit Facility"), with various lenders allowing for maximum borrowings of $225 million. Subsequent to December 31, 2000 through February 22, 2001, the Company has borrowed $55.0 million under the Credit Facility. No amounts were outstanding at December 31, 2000. The Credit Facility matures on June 30,2002, when all unpaid borrowings become immediately due. Under this facility, the Company is entitled to borrowings not to exceed the sum of (i) 80% of eligible accounts receivable, (ii) 70% of eligible unbilled accounts, and (iii) 50% of eligible net property and equipment, as defined by the agreement. Based on the terms of this agreement, the Company is subject to various covenants, including the maintenance of certain financial ratios. The Company is also required to maintain pre-established levels of revenue, earnings before interest, taxes, depreciation, and amortization (EBITDA), days sales outstanding (DSO) and access lines, as defined by the agreement. Additionally, the Company is restricted as to the level of capital assets it may acquire within any given quarter and is restricted from paying cash dividends. Failure to comply with the restriction and covenant obligations under this Credit Facility could result in a default. The lenders have a right, under events of default, and an event deemed by the Lenders to be an adverse change in the Company's business to terminate future borrowings under the Credit Facility and require accelerated repayment of outstanding borrowings. On February 9, 2001, the Credit Facility was amended. Included in this amendment was a provision to exclude the loss on the NorthPoint equity investment recognized in 2000 from the calculation of EBITDA for purposes of maintaining minimum EBITDA covenants as defined by the agreement. If this amendment was not made, the Company would have not been in compliance with the financial covenants under this facility. F-14 61 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) Borrowings under this facility are available in increments of $1 million, with minimum proceeds of $5 million under each borrowing. The Company may choose to classify each borrowing as either a base rate loan or a Eurodollar rate loan. Base rate loans accrue interest on unpaid principal at a rate per annum equal to the applicable margin plus the greater of (i) the prime rate in effect on such day and (ii) the federal funds effective rate in effect on such day plus .5 of 1% with changes effective daily. Interest payments on base rate loans are due the last day of each fiscal quarter. Euro rate loans accrue interest on unpaid principal at a rate per annum equal to the adjusted LIBOR rate plus the applicable margin. Changes become effective and interest payments become due in accordance with the interest period of one, two, three, or six months, as determined by the Company on the borrowing date. The applicable margin as defined by the agreement is a percentage per annum which increases on a quarterly basis beginning July 1, 2001. The initial applicable margin for base rate loans and Euro rate loans is 4.00% and 6.50%, respectively, through June 30, 2001. Beginning July 1, 2001 and the first day of each quarter through maturity, the applicable margin on both the base rate loans and Euro rate loans will increase in increments of 0.75%. In connection with the Credit Facility, the Company issued warrants entitling the holders to purchase in aggregate 3,854,000 shares of the Company's common stock at an exercise price of $7.01 per share. Upon entering the Credit Facility, 72.73% of the warrants were exercisable, with 13.64% exercisable on a pro rata basis with each amount drawn by the Company on the first $100,000 of loans under the Credit Facility, and the remaining 13.63% exercisable at any time on or after the date the amount drawn by the Company under the credit agreement exceeds $100,000. These warrants were valued using a black-scholes valuation model assuming an interest rate of 5.83%, volatility of 93%, no dividends, and an estimated life of 3 years. The $15,043 value assigned to these warrants along with $6,701 of other issuance costs is included in debt issuance costs and is being accreted to interest expense on a straight-line basis through the maturity date. At December 31, 2000, $10,123 and $9,164 of unamortized debt issuance costs remains in other current and long-term assets, respectively. F-15 62 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) The Company is obligated to pay a fee (the "commitment fee") for all unused portions of this facility. The commitment fee is calculated on a quarterly basis by multiplying the average daily unused commitments within each quarter by 0.50% per annum and is due quarterly in arrears, beginning September 30, 2000. To date, the Company has incurred $291 for this commitment fee, which is recorded as interest expense. Additionally, the Company has agreed to pay a fee (the "lenders fee") equal to 1.0% of requested borrowings, on each such borrowing date. Along with this agreement, the Company has also entered into a pledge and security agreement, pledging substantially all of the Company's assets of the lenders as collateral. 9. DEBT AND CAPITAL LEASE OBLIGATIONS Debt and capital lease obligations consist of the following:
December 31, ----------------------------- 2000 1999 -------- -------- Note payable $ -- $ 200 Capital lease obligations 45,639 38,713 -------- -------- 45,639 38,913 Less current portion (17,288) (11,346) -------- -------- $ 28,351 $ 27,567 ======== ========
F-16 63 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) 10. LEASE COMMITMENTS The Company has entered into noncancellable operating leases for office space in several locations in the United States. The leases have termination dates through 2015 and require the payment of various operating costs including condominium fees. Rental expense related to the leases for the years ended December 31, 2000, 1999 and 1998 were $7,582, $3,058 and $1,263, respectively. Minimum lease payments for the next five years and thereafter are as follows:
Capital Operating Year Ended December 31, Leases Leases - ----------------------- -------- -------- 2001 $ 19,392 $ 9,531 2002 12,765 9,806 2003 8,461 9,733 2004 4,232 9,698 2005 1,719 9,668 Thereafter 9,819 74,135 -------- -------- Total minimum lease payments $ 56,388 $122,571 ======== Less imputed interest (10,749) -------- Present value of minimum lease payments 45,639 Less current portion (17,288) -------- Long-term capital lease obligations $ 28,351 ========
11. STOCKHOLDERS' EQUITY Common Stock The amended certificate of incorporation of the Company authorizes the issuance of up to 150,000,000 shares of $.01 par value common stock. The holders of common stock are entitled to receive dividends when and if dividends are declared by the Board of Directors of the Company out of funds legally available therefore, provided that the payment of dividends on the common stock or other distributions are 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 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 the preferred stock will be distributed to the holders of common stock ratably in proportion to the number of shares held by them. F-17 64 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) On April 12, 2000, the Company completed an offering for the sale of 5,000,000 shares of common stock at a price of $29.00 per share, 490,196 of which shares were sold by selling stockholders. The Company issued 4,509,804 shares of common stock in this offering resulting in proceeds to the Company of $123,315, net of issuance costs and underwriting discounts of $7,469. Common Stock Dividends On September 2, 1998, the Company issued a $5,000 dividend to its stockholders. Following receipt of the dividend, one stockholder loaned the Company $1,875 (representing the distribution to that stockholder, net of the estimated tax liability resulting from such distribution). Interest accrues at prime rate. In accordance with the terms of the agreement, interest and principal will be payable on July 31, 2003. Preferred Stock Under the certificate of incorporation of the Company, 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 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. 12. REDEEMABLE 7.5% SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK On April 12, 2000, the Company issued 2,500,000 depositary shares each representing 1/10 of a share of Redeemable 7.5% Series A Cumulative Convertible Preferred Stock ("Series A Preferred Stock"). In consideration for this offering, the Company received cash proceeds of $119,750, net of issuance costs and underwriting discounts of $5,250. Holders of Series A Preferred Stock have no voting rights except upon the occurrence of a voting rights triggering event as defined by the preferred stock terms. Conversion Each share of Series A Preferred Stock is convertible, at any time at the option of the holder, into a number of common shares as determined by dividing the liquidation preference plus all accrued and unpaid dividends, by the conversion price. The conversion price, which is subject to adjustment to prevent the dilution of the interest of the holders of the Series A Preferred Stock, is equal to $34.80 at December 31, 2000. F-18 65 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) Liquidation Upon the event of voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, each Series A Preferred Stockholder is entitled to the liquidation preference plus any accumulated and unpaid dividends. The liquidation preference is equal to the sum of $500 per share of Series A Preferred Stock. Series A Preferred Stockholders have liquidating preference ranking above common stockholders; however, they are not entitled to participate in any distribution of the Company's assets beyond payment of liquidation preference. The Company is not required to designate or set aside any funds to protect the liquidation preference. Redemption Series A Preferred Stock may be redeemed, at the option of the Company, beginning April 10, 2005, for each of the following five years, and thereafter, at an amount equal to 103.75%, 103.00%, 102.25%, 101.50%, 100.75%, and 100.00% of the liquidation preference, respectively. Redemption payment may be in the form of cash or in the number of common shares determined by dividing the redemption amount otherwise payable in cash by 95% of the average market price for the 10 days following the redemption effective date. The Company will be required to redeem all of the outstanding shares of Series A Preferred Stock on April 1, 2012 at a redemption price equal to 100% of the liquidation preference, together with accumulated and unpaid dividends. Accordingly, the Company is accreting the carrying value of the Series A Preferred Stock to the redemption amount, on a straight-line basis over 12 years. Additionally, in the event of a change in control, unless the closing price of common stock exceeds 105% of the effective conversion rate at the time of announcement or unless all of the consideration received by holders of common stock in the transaction giving rise to the change in control is publicly traded common stock, the Company must at the option of each Series A Preferred Stockholder, offer a payment in cash equal to 100% of the liquidation preference plus all accumulated and unpaid dividends in exchange for all of the then-outstanding shares of Series A Preferred Stock held by such stockholders. Dividends Holders of Series A Preferred Stock are entitled to receive dividends when and if declared by the Company's Board of Directors. Dividends on the Series A Preferred Stock are cumulative at a rate of 7.50% per annum, and are payable quarterly in arrears in cash, common stock, or any combination thereof. Dividends paid in common stock are payable in the number of shares calculated by dividing the amount otherwise payable in cash by 95% of the arithmetic average of the closing price of the Company's common stock for the 5 trading days preceding the dividend payment date. The terms of the Credit Facility restrict the Company from paying cash dividends. Through December 31, 2000, the Company issued F-19 66 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) 491,100 shares of common stock for payment of Series A Preferred Stock dividends and, accordingly, a premium of $454 associated with payment of dividends in common shares has been recorded as an additional dividend. During December 2000, the Company declared a common stock dividend totaling $2,566 to settle the accumulated but unpaid Series A Preferred Stock dividend. Accordingly, at December 31, 2000, the Company has accounted for the payable of common stock as an adjustment to additional paid-in-capital. The Company issued 1,026,610 shares of common stock in January 2001 in payment of this dividend. 13. 13.5% SERIES A CUMULATIVE PREFERRED STOCK On September 3, 1998, the Company issued 40,000 shares of 13.5% Series A Cumulative Preferred Stock due 2009, warrants to purchase, for $.01 per share, 1,405,333 shares of the Company's common stock ("Initial Warrants") and rights to receive warrants to purchase 2,720,000 shares of the Company 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. On July 6, 1999, the Company redeemed all outstanding shares of its 13.5% Series A Cumulative Preferred Stock due 2009 including all accrued dividends for $46,371, and eliminated its obligation to issue the Contingent Warrants. At redemption, the Company recorded a dividend of $7,569 to reflect the difference between the redemption amount and the carrying amount of the preferred stock. The difference was due to the value ascribed to the Initial Warrants, discount attributed to offering expenses and redemption premium. 14. STOCK OPTION PLANS On July 15, 1998, the Company 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, 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 ("non-statutory options"), restricted stock and other stock-based awards. Incentive stock options may be granted only to employees of the Company or its subsidiaries. A total of 9,000,000 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 3,171,333 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 The 1998 Incentive Plan expires in July 2008, unless sooner terminated by the Board. F-20 67 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) On July 15, 1998, the Company adopted the 1998 Director Stock Option Plan (as amended, the "Director Plan"). Under the terms of the Director Plan, 22,666 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 11,333 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 prior to December 31, 1998 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). Options granted after December 31, 1998 are fully vested upon issuance. 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 453,333 shares of common stock may be issued upon the exercise of stock options granted under the Director Plan. As of December 31, 2000, the Company's two non-employee directors have received options to purchase a total of 90,664 shares of common stock with a weighted average exercise price of $8.51 per share under the Director Plan. Additionally, the Company's two non-employee directors have received options to purchase a total of 65,000 shares of common stock under the 1998 Incentive Plan, with a weighted average exercise price of $7.43 per share. The Company elected to adopt the disclosure only provision of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock Based Compensation", for stock based compensation issued to employees. The Company accounts for its stock based compensation issued to employees 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, and compensation expense of $171 and $158 was recognized in 2000 and 1999, respectively. No compensation expense was recognized in 1998. Stock option activity for the years ended December 31, 2000, 1999 and 1998 is as follows:
Number Weighted-Average Of Shares Exercise Price --------- ---------------- Shares under option, December 31, 1997 -- $ -- Options granted 3,405,168 7.25 Options cancelled (26,475) 8.45 Shares under option, December 31, 1998 3,378,693 7.24 Options granted 1,885,944 12.66 Options exercised (95,509) 6.59 Options cancelled (355,371) 8.23 Shares under option, December 31, 1999 4,813,757 9.30 Options granted 3,132,580 8.28 Options exercised (737,701) 6.99 Options cancelled (461,739) 15.21 --------- Shares under option, December 31, 2000 6,746,897 8.68 =========
F-21 68 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) The following table summarizes information about the stock options outstanding at December 31, 2000.
Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Exercise Outstanding Contractual Exercise Exercisable Exercise Price At 12/31/00 Life (Years) Price At 12/31/00 Price - ------------- ----------- ----------- --------- ----------- ----------- $ 2.00- 2.72 1,266,910 10.0 $ 2.50 341,744 $ 2.50 3.03- 4.41 905,324 5.6 3.60 481,486 3.85 5.38- 8.03 1,523,577 7.6 6.67 489,336 6.64 8.06-12.06 1,411,792 7.8 10.44 571,768 10.45 12.25-53.75 1,639,294 9.1 16.60 322,693 16.87 - ------------ --------- ----- ------ --------- ------ $ 2.00-53.75 6,746,897 8.2 $ 8.68 2,207,027 $ 7.87 ============ ========= ===== ====== ========= ======
At December 31, 2000, 2,207,027 options were exercisable and the Company had an aggregate of 1,873,226 shares available for future grant under its Stock Incentive Plan and Director Stock Option Plan. 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 assumptions used for stock options granted in 2000, 1999 and 1998, respectively: no dividends, 89%, 77% and 0% volatility, weighted average risk-free rate of return of 5.0%, 6.0% and 6.3%, and an expected life of four to five years for all grants. The weighted-average fair value of the stock options granted in 2000, 1999 and 1998 was $5.52, $6.33 and $0.42, respectively. Had the Company determined compensation expense for the stock-based compensation plans in accordance with the fair value methodology prescribed by SFAS 123, the Company's pro forma net loss and loss per share would have been:
Year Ended December 31, ------------------------------------------------- 2000 1999 1998 -------- -------- ------- Net loss applicable to common stockholders $(92,817) $(43,579) $(6,388) Amortization of stock compensation expense (6,313) (754) (168) -------- -------- ------- Pro forma net loss applicable to common Stockholders $(99,130) $(44,333) $(6,556) ======== ======== ======= Pro forma net loss per share -- basic and Diluted $ (1.68) $ (0.89) $ (0.14) ======== ======== =======
F-22 69 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) 15. EMPLOYEE STOCK PURCHASE PLAN On June 9, 1999, the Company approved the 1999 Employee Stock Purchase Plan (as amended the "ESPP"), which provides for the issuance of up to 2,500,000 shares of common stock. Generally, all employees of Network Plus employed more than 20 hours per week, including officers and directors who are employees, are eligible to participate in the ESPP. The ESPP consists of semiannual offerings beginning on January 1 and July 1 of each year. The first offering under the ESPP commenced on January 1, 2000. Each offering under the ESPP will be six months in length. During each offering, the maximum number of shares of common stock that may be purchased by an employee is determined on the first day of the offering period under a formula whereby 2,083 is multiplied by the number of months in the offering, and the result is divided by the market value of a share of common stock on the first day of the offering period. An employee may elect to have up to a maximum of 10% deducted from his or her regular salary for the purpose of purchasing shares under the ESPP. The price at which the employee's shares are purchased is the lower of (1) 85% of the closing price of the common stock on the day that the offering commences or (2) 85% of the closing price of the common stock on the day that the offering terminates. The Board generally retains the authority to change the timing of any offering. 16. INCOME TAXES The provision (benefit) for income taxes consists of the following:
Year Ended December 31, ------------------------------------------- 2000 1999 1998 -------- ----- ----- Current taxes: $ -- $ -- $ 55 ======== ===== ===== Deferred taxes: Federal $ -- $ 983 $(880) State -- (22) (81) -------- ----- ----- Total $ -- $ 961 $(961) ======== ===== ===== Provision (benefit) for income taxes $ -- $ 961 $(906) ======== ===== =====
F-23 70 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) Deferred tax assets and liabilities consist of the following:
December 31, ----------------------------- 2000 1999 -------- -------- Accrued expenses $ 5,785 $ 500 Allowance for doubtful accounts 1,252 997 Net operating loss carryforwards 36,635 11,479 Valuation allowance (40,744) (12,295) -------- -------- Deferred tax assets $ 2,928 $ 681 ======== ======== Depreciation $ 2,928 $ 681 -------- -------- Deferred tax liabilities $ 2,928 $ 681 ======== ========
The provision (benefit) for income taxes differs from the amount computed by applying the U.S. Federal income tax rate due to the following items:
Year Ended December 31, ------------------------------------------------- 2000 1999 1998 -------- -------- ------- Tax at U.S. Federal income tax rate $(29,003) $(10,844) $(1,798) State income taxes, net of U.S. Federal income tax benefit -- (106) 41 Recognition of deferred taxes upon Conversion from S Corp. to C Corp. -- -- 349 Permanent timing differences and other 554 (384) 32 S Corp. loss -- -- 470 Increase in valuation allowance 28,449 12,295 -- -------- -------- ------- Provision (benefit) for income taxes $ -- $ 961 $ (906) ======== ======== =======
In September 1998, the Company terminated its S election, and subsequently is filing its returns as a C Corporation. Prior to the termination, deferred income taxes were provided for state tax purposes, for those states which tax S corporation earnings. The Company has provided a valuation allowance for the full amount of its net deferred tax assets since the realization of any future benefit from the deductible temporary differences and net operating loss carryforwards cannot be sufficiently assured at December 31, 2000 and 1999. The Company has available federal net operating loss carryforwards of approximately $111,177, which will expire in various amounts in 2013 to 2015. F-24 71 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) 17. 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 for the Company include redeemable convertible preferred stock options and warrants. The following table sets forth the computation of basic and diluted loss per share:
Year Ended December 31, -------------------------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Net loss applicable to Network Plus Corp. common stockholders $ (92,817) $ (43,579) $ (6,388) Shares used in net loss per share -- basic and diluted 59,173,000 49,969,000 45,333,000 ============ ============ ============ Net loss per share applicable to common stockholders -- basic and diluted $ (1.57) $ (0.87) $ (0.14) ============ ============ ============
Warrants for the purchase of 4,041,077, 1,416,666 and 1,405,333 shares of common stock were not included in the 2000, 1999 and 1998 computations of diluted net 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 2000, 1999 and 1998 periods. Stock options for the purchase of 6,746,897, 4,813,757 and 3,378,698 shares of common stock were not included in the 2000, 1999 and 1998 computation of diluted net loss per share because the exercise prices of those stock options are assumed to be at or above the average fair value of the Company's common stock, or inclusion of such shares would have an anti-dilutive effect on net loss per share. F-25 72 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data) Shares of redeemable convertible preferred stock which are convertible into an aggregate of 3,665,690 shares of common stock were not included in the 2000 computation of diluted net loss per share because inclusion of such shares would have an anti-dilutive effect on net loss per share. 18. SIGNIFICANT CUSTOMER During the year ended December 31, 1998, the Company had one wholesale customer that accounted for approximately 13% of the Company's revenue. No other customer comprised greater than 10% of total revenue for the years ended December 31, 2000 and 1999. 19. 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 2000, 1999 or 1998. 20. SEGMENT INFORMATION The Company has two reportable segments which management operates as distinct sales organizations; these two segments are segregated by type of customer base to whom services are provided. The two customer base types are: retail telecommunications and data services, and wholesale telecommunications. The Company measures and evaluates its two reportable segments based on revenues and costs of services. The retail telecommunications and data services segment provides local and long distance services including voice and data transport, and enhanced and custom calling features. This segment focuses on selling these services to end user customers, principally businesses. The wholesale telecommunications segment provides transport and termination services. This segment focuses on selling these services to large communication carriers, who utilize the Company's excess capacity to provide telephone voice services to their customers. F-26 73 NETWORK PLUS CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (In Thousands, Except Share and Per Share Data)
Year Ended December 31, ------------------------------------------------ 2000 1999 1998 -------- -------- -------- Revenues: Retail telecommunications and data services $148,995 $ 91,132 $ 75,506 Wholesale telecommunications 86,961 61,388 30,039 -------- -------- -------- Total revenues $235,956 $152,520 $105,545 ======== ======== ======== Costs of services: Retail telecommunications and data services $ 98,030 $ 65,255 $ 51,371 Wholesale telecommunications 87,638 57,409 27,072 -------- -------- -------- Total costs of services $185,668 $122,664 $ 78,443 ======== ======== ========
21. SUPPLEMENTAL CASH FLOWS INFORMATION
Year Ended December 31, ------------------------------------------------ 2000 1999 1998 --------- --------- ------ Cash paid during the year for: Interest $ 3,492 $ 4,012 $1,114 ========= ========= ====== Income taxes $ -- $ -- $ 111 ========= ========= ====== Noncash investing and financing activities: Fixed assets acquired under capital Leases $ 18,855 $ 41,825 $ 28 ========= ========= ====== Accrued fiber capacity $ 14,500 $ -- $ -- ========= ========= ====== Dividends recorded on preferred stock, paid or to be paid in common stock $ 7,199 $ -- $ -- ========= ========= ====== Note converted to customer list $ -- $ 448 $ -- ========= ========= ====== Common stock issued for purchase of Infohouse $ -- $ 2,432 $ -- ========= ========= ====== Note issued for purchase of Infohouse $ -- $ 200 $ -- ========= ========= ======
F-27 74 NETWORK PLUS CORP. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
Additional Balance At Charges To Balance Beginning Costs and Deductions At End Description Of Period Expenses (1) Of Period - ----------- --------- -------- --- --------- Allowance for doubtful accounts: Year Ended December 31, 2000 $ 2,624 $ 3,457 $2,787 $ 3,294 Year Ended December 31, 1999 513 3,048 937 2,624 Year Ended December 31, 1998 926 1,931 2,344 513 Year Ended December 31, 1997 850 4,104 4,028 926 Tax valuation allowance: Year ended December 31, 2000 $12,295 $28,449 -- $40,744 Year ended December 31, 1999 -- 12,295 -- 12,295
- --------------- (1) Write-off of bad debts less recoveries. S-1 75 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of Network Plus Corp. Our report on the consolidated financial statements of Network Plus Corp. is included in this Form 10-K in Item 8. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14(d) of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts March 30, 2001 S-2 EX-10.3(A) 2 b38201npex10-3a.txt FIRST AMENDMENT TO LEASE 1 EXHIBIT 10.3A FIRST AMENDMENT TO LEASE This FIRST AMENDMENT TO LEASE (this "Amendment") is made as of the 31st day of January, 2001 by and between ROBERT T. HALE, ROBERT T. HALE, JR. and JUDITH B. HALE, not individually but as TRUSTEES OF NETWORK PLUS REALTY TRUST, u/d/t dated June 30, 1993 and recorded with the Norfolk County Registry of Deeds, with an address of 238-240 Copeland Street, Quincy, Massachusetts 02169 ("Landlord") and NETWORK PLUS, INC., a Massachusetts corporation with an address of 41 Pacella Park Drive, Randolph, Massachusetts 02368 ("Tenant"). R E C I T A L S A. Landlord and Tenant entered into a certain lease entitled "Net Lease," dated July 1, 1993 (the "Lease") for approximately 34,359 rentable square feet on the second, third and fourth floors and comprising units 20, 21, 30, 40, 41, 43 and 44 of the Furnace Brook Office Condominium (the "Premises") in the building located at and commonly known as 238-240 Copeland Street, Quincy, MA (the "Building"), all as more particularly described in the Lease. B. By mutual agreement, Landlord and Tenant have expanded the Premises to include approximately 7,347 additional rentable square feet on the first floor of the Building, as shown on Exhibit A attached hereto. C. The Lease commenced on July 1, 1993 and expired on June 30, 2000. D. Landlord and Tenant wish to enter into this Amendment to (i) extend the term of the Lease, and (ii) amend certain other terms and conditions of the Lease. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, Landlord and Tenant agree as follows: 1. Recitals; Capitalized Terms. All of the foregoing recitals are true and correct. Any capitalized term not otherwise modified or defined herein shall have the meaning ascribed to such term in the Lease. 2. Term. The term of the Lease is hereby extended for an additional term (the "Term") of twelve (12) years and eight (8) months commencing as of July 1, 2000 (the "Effective Date") and expiring on February 28, 2013 (the "Termination Date"), unless extended pursuant to paragraph 5 below. The Term shall be upon all of the terms and conditions of the Lease, except as otherwise provided in this Amendment. 3. Premises. Commencing on the Effective Date, the Premises shall be deemed to consist of approximately 41,706 square feet on the first, second, third and fourth floors of the 1 2 Building. 4. Annual Fixed Rent. Commencing on the Effective Date and continuing through the Termination Date, the Annual Fixed Rent payable with respect to the Premises shall be as follows:
RENTAL PERIOD ANNUAL BASE RENT MONTHLY PAYMENT PER SQ. FT. - ----------------------------------------------------------------------------------------------------------------- From the Effective Date through February 28, 2005 $875,826.00 $72,985.50 $21.00 From March 1, 2005 through February 28, 2009 $959,238.00 $79,936.50 $23.00 From March 1, 2009 through the Termination Date $1,042,650.00 $86,887.50 $25.00
5. Extension Option. (a) Provided that, at the time of each such exercise, (i) the Lease is in full force and effect, and (ii) no default of Tenant, as such term is defined in Section 7.1 of the Lease, shall have occurred and be continuing (either at the time of exercise or at the commencement of an Extended Term, as hereinafter defined), Tenant shall have the right and option to extend the Term of the Lease for two (2) extended terms (collectively, the "Extended Terms") of five (5) years each by giving written notice to Landlord not later than six (6) months prior to the expiration date of the Term with respect to the first Extended Term and not later than six (6) months prior to the expiration date of the first Extended Term with respect to the second Extended Term. The effective giving of such notice of extension by Tenant shall automatically extend the Term of the Lease for the applicable Extended Term, and no instrument of renewal or extension need be executed. In the event that Tenant fails timely to give such notice to Landlord, the Lease shall automatically terminate at the end of the Term then in effect, and Tenant shall have no further option to extend the Term of the Lease. Each Extended Term shall commence on the day immediately succeeding the expiration date of the Term or the preceding Extended Term, as the case may be, and shall end on the day immediately preceding the fifth (5th) anniversary of the first day of such Extended Term. The Extended Terms shall be on all the terms and conditions of the Lease, except: (i) during the Extended Terms, Tenant shall have no further option to extend the Term, except as provided herein during the first Extended Term with respect to the second Extended Term, and (ii) the Annual Fixed Rent for the Extended Terms shall be the Fair Market Rental Value of the Premises as of the commencement of the Extended Term in question, taking into account all relevant factors, determined pursuant to PARAGRAPH (b) below but in no event shall the Annual Fixed Rent for the Extended Term be less than the Annual Fixed Rent at the expiration of the Term or 2 3 Extended Term immediately preceding the commencement of the Extended Term in question. (b) Promptly after receiving Tenant's notice extending the Term of this Lease pursuant to PARAGRAPH (a) above, Landlord shall provide Tenant with Landlord's good faith estimate of the Fair Market Rental Value of the Premises for the upcoming Extended Term based upon rents being paid by tenants entering into leases in the area in which the Premises is located. If Tenant is unwilling to accept Landlord's estimate of Fair Market Rental Value as set forth in Landlord's notice referred to above, and the parties are unable to reach agreement thereon within thirty (30) days after the delivery of such notice by Landlord, then Landlord and Tenant shall, not later than thirty (30) days after the expiration of the aforesaid thirty (30) day period, each retain a real estate professional with at least ten (10) years continuous experience in the business of appraising or marketing commercial real estate in the greater Boston area who shall, within thirty (30) days of his or her selection, prepare a written report summarizing his or her determination of the Fair Market Rental Value for the applicable Extended Term. Landlord and Tenant shall simultaneously exchange such reports; provided, however, if either party has not obtained such a report within sixty (60) days after Tenant receives Landlord's notice, then the determination set forth in the other party's report shall be final and binding upon the parties. If both parties receive reports within such time and the lower determination is within ten percent (10%) of the higher determination, then the greater of (i) the Annual Fixed Rent in effect immediately preceding such Extended Term or (ii) the average of the two determinations shall be deemed to be the Fair Market Rental Value for such Extended Term. If the lower determination is not within ten percent (10%) of the higher determination, then Landlord and Tenant shall mutually select a person with the qualifications stated above (the "Final Professional") to resolve the dispute as to the Fair Market Rental Value for such Extended Term. If Landlord and Tenant cannot agree upon the designation of the Final Professional within thirty (30) days of the exchange of the first valuation reports, either party may apply to the American Arbitration Association, the Greater Boston Real Estate Board, or any successor thereto, for the designation of a Final Professional. Within ten (10) days of the selection of the Final Professional, Landlord and Tenant shall each submit to the Final Professional a copy of their respective real estate professional's determination of the Fair Market Rental Value for such Extended Term. The Final Professional shall not perform his or her own valuation, but rather shall, within thirty (30) days after such submissions, select the submission which is closest to the determination of the Fair Market Rental Value for such Extended Term which the Final Professional would have made acting alone. The Final Professional shall give notice of his or her selection to Landlord and Tenant and such decision shall, subject to the terms of the last two (2) sentences of this PARAGRAPH (b) below, be final and binding upon Landlord and Tenant, provided, however, in no event shall the Fair Market Rental Value be less than the Annual Fixed Rent in effect immediately preceding such Extended Term. Each party shall pay the fees and expenses of its real estate professional and counsel, if any, in connection with any proceeding under this paragraph, and the parties shall each pay one-half of the fees and expenses of the Final Professional. If Tenant is unwilling to accept the Fair Market Rental Value determined in accordance with the process set forth above, then Tenant shall have the option to rescind its notice of election to extend the Term of 3 4 the Lease by delivering written notice to Landlord within ten (10) days of, as applicable, (i) receipt of both reports from each of Tenant's and Landlord's respective selected real estate professionals, if the lower determination is within ten percent (10%) of the higher determination, (ii) the expiration of the sixty (60) day period after Tenant receives Landlord's notice of its estimate of Fair Market Value, if Tenant is unwilling to accept such estimate and either party has not obtained a report summarizing a real estate professional's determination of Fair Market Value within such sixty (60) day period, or (iii) receipt of notice from the Final Professional of his or her selection of the determination of the Fair Market Rental Value. The effective giving of such notice by Tenant shall rescind its notice of extension, and thereafter Tenant shall have no further option to extend the Term of the Lease, and the Lease shall expire on the originally scheduled expiration date of the Term or, if Tenant has extended the Term in accordance with the terms hereof, the first Extended Term, as applicable. 6. Ratification. Except as expressly modified by this Amendment, the Lease shall remain in full force and effect and, as further modified by this Amendment, is expressly ratified and confirmed by the parties hereto. 7. Binding Agreement. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for extension, and this document shall become effective and binding only upon the execution and delivery of this Amendment by both Landlord and Tenant. 8. Brokerage. Landlord and Tenant each represent and warrant to the other that neither of them has employed or dealt with any broker, agent or finder in carrying on the negotiations relating to this Amendment. Tenant shall indemnify and hold Landlord harmless from and against any claim or claims for brokerage or other commissions asserted by any broker, agent or finder engaged by Tenant or with whom Tenant has had prior dealings. Similarly, Landlord shall indemnify and hold Tenant harmless from and against any claims asserted by any broker, agent or finder engaged by Landlord or with whom Landlord has had prior dealings. The representations and warranties contained in this Paragraph 8 shall survive any termination of the Lease. 9. Miscellaneous. Tenant hereby acknowledges that (i) Landlord has no undischarged obligations under the Lease to perform any work or improvements to the Premises, or otherwise; (ii) there are no offsets or defenses that Tenant has against the full enforcement of the Lease by Landlord; (iii) neither Tenant nor, to Tenant's knowledge, Landlord is in any respect in default under the Lease; and (iv) Tenant has not assigned, transferred or hypothecated the Lease or any interest therein or subleased all or any portion of the Premises. 10. Governing Law; Interpretation and Partial Invalidity. This Amendment shall be governed and construed in accordance with the laws of The Commonwealth of Massachusetts. If any term of this Amendment, or the application thereof to any person or circumstances, shall 4 5 to any extent be invalid or unenforceable, the remainder of this Amendment, or the application of such term to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term of this Amendment shall be valid and enforceable to the fullest extent permitted by law. The titles for the paragraphs are for convenience only and not to be considered in construing this Amendment. This Amendment contains all of the agreements of the parties with respect to the subject matter hereof, and supersedes all prior dealings between them with respect to such subject matter. No delay or omission on the part of either party to this Amendment in requiring performance by the other party or exercising any right hereunder shall operate as a waiver of any provision hereof or any rights hereunder, and no waiver, omission or delay in requiring performance or exercising any right hereunder on any one occasion shall be construed as a bar to or waiver of such performance or right on any future occasion. 11. Counterparts and Authority. This Amendment may be executed in multiple counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. Landlord hereby warrants and represents to Tenant that it is the current record owner of the Building. Landlord and Tenant each warrant and represent to the other that the person or persons executing this Amendment on its behalf has or have authority to do so and that such execution has fully obligated and bound such party to all terms and provisions of this Amendment. 5 6 IN WITNESS WHEREOF, the undersigned executed this Amendment as of the date and year first written above. NETWORK PLUS REALTY TRUST By: /s/ Robert T. Hale ---------------------------------------- Robert T. Hale, not individually but as Trustee of Network Plus Realty Trust By: /s/ Robert T. Hale, Jr. ---------------------------------------- Robert T. Hale, Jr., not individually but as Trustee of Network Plus Realty Trust By: /s/ Judith B. Hale ---------------------------------------- Judith B. Hale, not individually but as Trustee of Network Plus Realty Trust NETWORK PLUS, INC., a Massachusetts corporation By: /s/ James J. Crowley ---------------------------------------- Name: James J. Crowley Its: EVP/COO 6 7 EXHIBIT A First Floor Premises (see attached) 7 8 [FIRST FLOOR PREMISES FLOORPLAN] 8 EX-10.4 3 b38201npex10-4.txt SUBLEASE 1 Exhibit 10.4 SUBLEASE By and Between PACSCI MOTION CONTROL, INC. and NETWORK PLUS, INC. Sublease Premises Known As 41 Pacella Park Drive Randolph, Massachusetts 02368 2 TABLE OF CONTENTS 1. Recitals and Capitalized Terms................................................................................ 1 2. Basic Sublease Provisions..................................................................................... 1 2.1 Building.................................................................................................. 1 2.2 Sublease Premises......................................................................................... 1 2.3 Utilities, Janitorial and Building Services............................................................... 1 2.4 Sublease Term............................................................................................. 2 2.5 Early Access to the Sublease Premises..................................................................... 2 2.6 Rent Commencement Date.................................................................................... 2 2.7 Base Fixed Rent........................................................................................... 2 2.8 Annual CPI Rental Adjustment.............................................................................. 2 2.9 Permitted Use............................................................................................. 2 2.10 Late Charges............................................................................................. 2 2.11 Acceptance of Sublease Premises.......................................................................... 3 2.12 Address for Payment of Rent and Notices.................................................................. 4 2.13 Parking.................................................................................................. 4 2.14 Brokers.................................................................................................. 4 2.15 Subtenant Improvements................................................................................... 4 2.16 [Intentionally Omitted].................................................................................. 4 3. Demise; Conditions............................................................................................ 4 3.1 Demise.................................................................................................... 4 3.2 Landlord's Written Consent................................................................................ 5 3.3 Compliance with Laws...................................................................................... 5 4. Master Lease.................................................................................................. 5 4.1 Incorporation By Reference; Assumption.................................................................... 5 4.2 Assumption of Master Lease Obligations.................................................................... 5 4.3 No Assumption by Sublandlord.............................................................................. 5 4.4 Performance Directly to Landlord.......................................................................... 6 4.5 Landlord Default; Consents................................................................................ 6 4.6 Termination of Master Lease............................................................................... 6 5. Covenant Of Quiet Enjoyment................................................................................... 6 6. Hazardous Substances.......................................................................................... 6 7. Indemnity..................................................................................................... 6 8. Attorneys' Fees............................................................................................... 7 9. No Encumbrance................................................................................................ 7 10. Assignment and Subletting.................................................................................... 7 10.1 Restriction on Assignment and Subletting................................................................. 7 10.2 Determining Factors...................................................................................... 7 10.3 Consents................................................................................................. 8 10.4 Profit Sharing........................................................................................... 8 11. Alterations; Signs........................................................................................... 8 11.1 Alterations and Improvements By Subtenant................................................................ 8 11.2 Signs.................................................................................................... 9 11.3 Disposition on Termination............................................................................... 9 12. Removal of Personal Property................................................................................. 9 13. Holding Over................................................................................................. 9
-i- 3 14. Liens....................................................................................................... 10 15. Maintenance and Repairs..................................................................................... 10 16. Insurance................................................................................................... 10 17. Events of Default........................................................................................... 10 18. Estoppel Certificates....................................................................................... 10 18.1 Obligation to Provide................................................................................... 10 18.2 Failure to Provide...................................................................................... 10 19. Real Estate Brokers......................................................................................... 10 20. Miscellaneous............................................................................................... 11 20.1 Counterparts............................................................................................ 11 20.2 Construction............................................................................................ 11 20.3 Governing Law........................................................................................... 11 20.4 Exhibits................................................................................................ 11
EXHIBIT A MASTER LEASE EXHIBIT B [INTENTIONALLY OMITTED] EXHIBIT C WORK LETTER AGREEMENT EXHIBIT D CONSENT OF LANDLORD -ii- 4 SUBLEASE 41 Pacella Park Drive Randolph, Massachusetts 02368 THIS SUBLEASE, dated as of October 22, 1999 is entered into by and between PACSCI MOTION CONTROL, INC., a Massachusetts corporation, successor-in-interest to Pacific Scientific Company ("Sublandlord") and NETWORK PLUS, INC., a Massachusetts corporation ("Subtenant"). RECITALS A. North America Investors, Inc., a California corporation ("Original Landlord") and Sublandlord, as tenant, entered into a written lease dated December 16, 1994, a copy of which is attached hereto as EXHIBIT A ("Master Lease") covering premises described in the Master Lease. B. By deed dated August 7, 1998, North Queen Street Limited Partnership, a Massachusetts limited partnership ("Landlord") acquired the property described in the Master Lease and succeeded to the Original Landlord's interest as landlord under the Master Lease. C. Subtenant desires to sublet the entire premises described in the Master Lease from Sublandlord on the terms and conditions contained in this Sublease. NOW, THEREFORE, in consideration of the premises subleased to Subtenant hereunder and the mutual covenants and conditions herein contained, Sublandlord and Subtenant agree as follows: 1. Recitals and Capitalized Terms. All of the foregoing Recitals to this Sublease are true and correct and are hereby incorporated in and made a part of this Sublease to the same extent as if herein set forth in full. All capitalized terms not otherwise modified or defined herein shall have the same respective meanings ascribed to them in the Master Lease. 2. Basic Sublease Provisions. 2.1 Building: 41 Pacella Park Drive Randolph, Massachusetts 2.2 Sublease Premises: Pursuant to the Master Lease, Sublandlord is leasing the Building consisting of approximately 80,000 square feet and the lot upon which the Building is located, all as more particularly described in the Master Lease (the "Master Premises"). Pursuant to this Sublease, Sublandlord hereby leases to Subtenant, and Subtenant hereby subleases from Sublandlord, the entire Master Premises, as such is described in the Master Lease (the "Sublease Premises"). In the event of any discrepancy between the actual square footage of the Sublease Premises and the square footage set forth herein, this Paragraph 2.2 shall govern. 2.3 Utilities, Janitorial and Building Services: Subtenant shall contract with the utility providers for service to the Sublease Premises and pay for such service directly. 5 Subtenant shall separately contract and pay for its own janitorial services. Sublandlord shall provide plowing and landscaping services at its own expense. 2.4 Sublease Term: Commencing on March 1, 2000 (the "Commencement Date"), and ending, unless earlier terminated pursuant to the terms hereof, on February 28, 2005. 2.5 Early Access to the Sublease Premises. Upon (i) mutual execution of this Sublease and (ii) Landlord's execution of the Consent of Landlord (as such requirement is set forth in Section 3.2 herein), Subtenant and its agents shall be permitted to enter the Sublease Premises for the purpose of performing the Subtenant Improvements and installing furniture, fixtures, telephones and other equipment related to Subtenant's use of the Sublease Premises. From such entry date until the Commencement Date (the "Early Access Period") Subtenant shall have no obligation to pay Base Fixed Rent. All other terms of this Sublease, however, shall be in effect during the Early Access Period. 2.6 Rent Commencement Date: April 1, 2001. 2.7 Base Fixed Rent: The annual Base Fixed Rent shall be $800,000 based on an annual lease rate of $10.00 per square foot, which shall be paid by Subtenant in equal monthly installments of 1/12th of the annual Base Fixed Rent or $66,666.66. All rent installments must be paid without demand, deduction, set-off or counter claim, in advance, on the first day of each calendar month during the Sublease Term, and in the event of a partial rental month, rent installments will be prorated on the basis of a thirty (30) day month. Notwithstanding the foregoing, Base Fixed Rent will be abated for thirteen (13) months from the Commencement Date. Monthly payments hereunder will commence on April 1, 2001. Such abatement will be conditioned upon the performance by Subtenant of all of its obligations under this Sublease. If a material default by Subtenant under this Sublease, or under the Master Lease as incorporated herein, occurs at any time during the Sublease Term and causes Sublandlord to incur obligations which it would not otherwise have under the Sublease or Master Lease but for such default, all amounts abated hereunder, in addition to all other amounts payable to Sublandlord, will be due and payable to Sublandlord as a result of such default. The foregoing rental abatement will apply to Base Fixed Rent only. Any additional charges and monetary obligations of Subtenant under this Sublease will be payable commencing on the Commencement Date, provided that such adjustment will not alter the terms of such abatement. 2.8 Annual CPI Rental Adjustment: Base Fixed Rent shall be adjusted annually on the anniversary of the Sublease Term Commencement Date in accordance with the formula for adjustment of fixed rent as set forth in Section 4.2 of the Master Lease. Such adjustment will occur on the first anniversary of the Sublease Term Commencement Date notwithstanding the rental abatement set forth in Section 2.7, above, provided that such adjustment will not alter the terms of such abatement. 2.9 Permitted Use: Any use permitted by the Master Lease. 2.10 Late Charges: The parties agree that late payments by Subtenant to Sublandlord of rent will cause Sublandlord to incur costs not contemplated by this Sublease, the amount of which is extremely difficult to ascertain. Therefore, the parties agree that if any installment of -2- 6 Basic Monthly Rent is not received by Sublandlord within 10 days after due, Subtenant will pay to Sublandlord a late charge equal to 5% of the late payment. Interest on any amounts payable by Subtenant under this Sublease shall accrue at the rate of 12% per annum from the date delinquent until paid in full. 2.11 Acceptance of Sublease Premises: Subtenant agrees to accept the Sublease Premises in an "as is" condition. Without limiting the foregoing, Subtenant's rights in the Sublease Premises are subject to all local, state and federal laws, regulations and ordinances governing and regulating the use and occupancy of the Sublease Premises and subject to all matters now or hereafter of record. Subtenant acknowledges that neither Sublandlord nor Sublandlord's agent has made any representation or warranty as to: (i) the present or future suitability of the Sublease Premises for the conduct of Subtenant's business; (ii) the physical condition of the Sublease Premises; (iii) the expenses of operation of the Sublease Premises; (iv) the safety of the Sublease Premises, whether for the use of Subtenant or any other person, including Subtenant's employees, agents, invitees or customers; (v) the compliance of the Sublease Premises with any applicable laws, regulations or ordinances; or (vi) any other matter or thing affecting or related to the Sublease Premises. Subtenant acknowledges that no rights, easements or licenses are acquired by Subtenant by implication or otherwise except as expressly set forth herein. Subtenant will, prior to delivery of possession of the Sublease Premises, inspect the Sublease Premises and become thoroughly acquainted with their condition. Subtenant acknowledges that the taking of possession of the Sublease Premises by Subtenant will be conclusive evidence that the Sublease Premises were in good and satisfactory condition at the time such possession was taken. Subtenant specifically agrees that, except as specifically provided by laws in force as of the date hereof, Sublandlord has no duty to make any disclosures concerning the condition of the Building and the Sublease Premises and/or the fitness of the Building and the Sublease Premises for Subtenant's intended use and Subtenant expressly waives any duty which Sublandlord might have to make any such disclosures. Subtenant further agrees that, in the event Subtenant subleases all or any portion of the Sublease Premises, Subtenant will indemnify and defend Sublandlord (in accordance with Paragraph 7 hereof) for, from and against any matters which arise as a result of Subtenant's failure to disclose any relevant information about the Building or the Sublease Premises to any sub-subtenant or assignee of Subtenant. Subtenant will comply with all laws and regulations relating to the use or occupancy of the Sublease Premises, including, without limitation, making structural alterations or providing auxiliary aids and services to the Sublease Premises as required by the Americans with Disabilities Act of 1990, 42 -3- 7 U.S.C. Section 12101 et seq. (the "ADA"). Subtenant will be solely responsible for all of its telephone and communication installation and usage costs. 2.12 Address for Payment of Rent and Notices: All payments of rent due from Subtenant to Sublandlord under this Sublease shall be made payable to Sublandlord and sent to Sublandlord at the address for Sublandlord set forth below. All notices hereunder shall be sent in the manner provided in the Master Lease to each of the parties at the following addresses: Sublandlord: Subtenant: Pacific Scientific Company Network Plus, Inc. 110 Fordham Road 41 Pacella Park Drive Wilmington, MA 02116 Randolph, MA 02368 Attn: Ken Owens Attn: Mr. Robert Hale, Jr. and Tel: (978) 988-9800 James J. Crowley Tel: (617) 786-4000 Landlord: with a copy to: North Queen Street Limited Network Plus, Inc. Partnership 234 Copeland Street c/o Conroy Development Quincy, MA 02110 Group, Inc. Attn: Mr. Robert Hale, Jr. and 26 Dartmouth Street James J. Crowley Westwood, MA 02116 Tel: (617) 786-4000 Attn: Terrence Conroy Tel: (781) 821-0050 2.13 Parking: Subtenant shall have the same parking rights that Sublandlord has under the Master Lease. 2.14 Brokers: As consideration for the efforts of Binswanger ("Broker") in procuring this Sublease, Sublandlord agrees to pay Binswanger a commission as set forth in that certain agreement dated June 23, 1998 by and between Binswanger and Sublandlord. As provided in Section 19 below, the Broker shall pay the cooperating broker, The Conrad Group. 2.15 Subtenant Improvements: Subtenant shall construct space improvements ("Subtenant Improvements") as set forth in the Work Letter Agreement (the "Work Letter") attached hereto as EXHIBIT C. 2.16 [Intentionally Omitted]. 3. Demise; Conditions. 3.1 Demise. Sublandlord hereby subleases to Subtenant and Subtenant hereby hires from Sublandlord the Sublease Premises for the Sublease Term, subject to the terms, covenants and conditions set forth herein. Subtenant covenants that, as a material part of the consideration for this Sublease, it shall keep and perform each and all of such terms, covenants and conditions -4- 8 by it to be kept and performed, and that this Sublease is made upon the condition of such performance. Subtenant acknowledges that Sublandlord's obligation to perform services, provide utilities, make repairs and carry insurance shall be satisfied only to the extent that the Landlord under the Master Lease satisfies those same obligations. 3.2 Landlord's Written Consent. This Sublease is expressly conditioned upon Landlord's execution of a written consent to this Sublease, and satisfaction of any conditions Landlord may impose upon Subtenant as a condition to this Sublease. The parties hereto further agree that this Sublease shall not become effective unless and until the Landlord has confirmed its written consent to this Sublease by executing the Consent of Landlord which is attached hereto as EXHIBIT D. Sublandlord covenants and agrees to diligently pursue Landlord's consent to the Sublease, and Subtenant agrees to cooperate with Sublandlord as may be required in connection therewith. 3.3 Compliance with Laws. At its own expense, Subtenant will procure, maintain in effect and comply with all conditions of any and all permits, licenses and other governmental and regulatory approvals required for Subtenant's use of the Sublease Premises. 4. Master Lease. 4.1 Incorporation By Reference; Assumption. All of the Sections of the Master Lease are incorporated into this Sublease as if fully set forth in this Sublease except for the following: the last paragraph of Section 2.2, Section 2.4, the last paragraph of Section 3.1 and Section 5.1. Subject to Paragraph 4.3 below, and where applicable, references in the Master Lease to "Landlord" will mean Sublandlord and to "Tenant" will mean Subtenant; provided, however, that such provisions of the Master Lease as are by their nature or purport inapplicable or inappropriate to the subleasing of the Sublease premises pursuant to this Sublease, or are inconsistent with or modified by or expressly excluded by any of the provisions of this Sublease, shall not apply with respect to the Sublease Premises. 4.2 Assumption of Master Lease Obligations. Except as set forth herein, Subtenant will assume and perform to Sublandlord the tenant's obligations under the Master Lease during the Sublease Term to the extent such obligations are applicable to the Sublease Premises and have been incorporated by reference and made a part hereof, as and when required in accordance with the terms and conditions of this Sublease. Subtenant will not commit or suffer any act or omission that will violate any of the provisions of the Master Lease; provided that nothing herein shall be deemed to require Subtenant to make rent payments due from Sublandlord, as tenant, to landlord under the Master Lease, except as may be specifically provided herein. Except as otherwise limited herein, Subtenant shall have the benefit of all of Sublandlord's rights, as tenant in and to the Master Lease with respect to the Sublease Premises, in accordance with the terms of the Master Lease. 4.3 No Assumption by Sublandlord. Sublandlord does not assume the obligations of the Landlord under the Master Lease. With respect to the performance by Landlord of its obligations under the Master Lease, Sublandlord's sole obligation with respect thereto will be to request the same, on request in writing by Subtenant, and to use reasonable efforts to obtain the same from Landlord; provided, however, Sublandlord will have no obligation to institute legal -5- 9 action against Landlord. Sublandlord covenants and agrees not to do or permit anything to be done which would cause the Master Lease to be terminated during the term of this Sublease. 4.4 Performance Directly to Landlord. At any time and on reasonable prior written notice to Subtenant, Sublandlord can elect to require Subtenant to perform its obligations under this Sublease directly to Landlord, in which event Subtenant will send to Sublandlord from time to time copies of all notices and other communications it sends to and receives from Landlord. 4.5 Landlord Default; Consents. Notwithstanding any provision of this Sublease to the contrary, (a) Sublandlord will not be liable or responsible in any way for any loss, damage, cost, expense, obligation or liability suffered by Subtenant by reason or as the result of any breach, default or failure to perform by the Landlord under the Master Lease, and (b) whenever the consent or approval of Sublandlord and Landlord is required for a particular act, event or transaction (i) any such consent or approval by Sublandlord will be subject to the consent or approval of Landlord, and (ii) should Landlord refuse to grant such consent or approval, under all circumstances, Sublandlord will be released from any obligation to grant its consent or approval. 4.6 Termination of Master Lease. If the Master Lease terminates under the specific provisions under the Master Lease, this Sublease will terminate, unless the Landlord elects to accept this Sublease as a direct lease between Landlord and Subtenant, and the parties will be relieved from all liabilities and obligations under this Sublease excepting obligations which have accrued as of the date of termination; except that if this Sublease terminates as a result of a default of one of the parties under this Sublease or by Sublandlord under the Master Lease, the defaulting party will be liable to the non-defaulting party for all damage suffered by the non-defaulting party as a result of the termination. 5. Covenant Of Quiet Enjoyment. Sublandlord represents as of the date hereof and as of the Commencement Date that (i) the Master Lease is in full force and effect, (ii) the Master Lease has not been modified or amended, and (iii) there are no defaults on Sublandlord's part (or, to Sublandlord's actual knowledge, on Landlord's part) under it as of the Commencement Date. Subject to this Sublease terminating in the event the Master Lease is terminated, if Subtenant performs all the provisions in this Sublease to be performed by Subtenant, Subtenant will have and enjoy throughout the Sublease Term the quiet and undisturbed possession of the Sublease Premises. Sublandlord will have the right to enter the Sublease Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Sublease Premises and for verifying compliance by Subtenant with this Sublease and the Master Lease and permitting Sublandlord to perform its obligations under this Sublease and the Master Lease. For purposes of this Section 5, Sublandlord's actual knowledge shall be limited to the actual knowledge of Kenneth M. Owens, without investigation or inquiry. 6. Hazardous Substances. As provided in Section 9.3 of the Master Lease. 7. Indemnity. Subtenant's indemnification of Sublandlord shall be governed by the provisions of Section 9.5 of the Lease. -6- 10 8. Attorneys' Fees. If there is any legal action or proceeding between Sublandlord and Subtenant to enforce any provision of this Sublease or to protect or establish any right or remedy of either Sublandlord or Subtenant hereunder, the non-prevailing party to such action or proceeding will pay to the prevailing party all costs and expenses, including reasonable attorneys' fees incurred by such prevailing party in such action or proceeding and in any appearance in connection therewith, and if the prevailing party recovers a judgment in any such action, proceeding or appeal, such costs, expenses and attorney's fees will be determined by the court or arbitration panel handling the proceeding and will be included in and as a part of the judgment. 9. No Encumbrance. Subtenant will not voluntarily, involuntarily or by operation of law mortgage or otherwise encumber all or any part of Subtenant's interest in the Sublease or the Sublease Premises. 10. Assignment and Subletting. 10.1 Restriction on Assignment and Subletting. Subtenant will not voluntarily, involuntarily or by operation of law assign this Sublease or any interest therein and will not sublet the Sublease Premises or any part thereof, or any right or privilege appurtenant thereto, without first obtaining the written consent of Sublandlord, which consent will not be unreasonably withheld or delayed. The transfer of more than a fifty percent (50%) partnership interest in Subtenant, if Subtenant is a partnership, or more than fifty percent (50%) of the stock of Subtenant, if Subtenant is a corporation, or more than a fifty percent (50%) membership interest in Subtenant, if Subtenant is an LLC, in any single transaction will be deemed to be an assignment for purposes of this Paragraph 10.1, provided that for so long as equity interests in Subtenant are traded on a public stock exchange, such transfer shall not be deemed an assignment within the meaning of this Section 10.1. 10.2 Determining Factors. In determining whether or not to consent to a proposed assignment or subletting, Sublandlord may consider the following factors, among others, all of which are deemed reasonable: (a) whether the proposed sublessee or assignee has a net worth equal to or greater than Subtenant; (b) whether the proposed use of the Sublease Premises by the proposed sublessee or assignee is consistent with the Permitted Use set forth in Paragraph 2.9; (c) whether the experience and business reputation of the proposed sublessee or assignee is equal to or greater than Subtenant; (d) whether Sublandlord's consent will result in a breach of the Master Lease or any other lease or agreement to which Sublandlord is a party affecting the Building or Sublease Premises; and (e) whether the Landlord has consented in writing to the proposed assignment or subletting, if the Landlord's consent is required. -7- 11 10.3 Consents. Any attempted assignment or subletting, without Sublandlord's consent will be null and void and of no effect. No permitted assignment or subletting of Subtenant's interest in this Sublease, will relieve Subtenant of its obligations to pay the rent or other sum or charge due hereunder and to perform all the other obligations to be performed by Subtenant hereunder. The acceptance of rent by Sublandlord from any other person will not be deemed to be a waiver by Sublandlord of any provision of this Sublease or to be a consent to any subletting or assignment. Consent to one sublease or assignment will not be deemed to constitute consent to any subsequent attempted subletting or assignment. 10.4 Profit Sharing. (a) Within thirty (30) days following the date received by Subtenant from any assignee or sublessee, Subtenant will pay to Sublandlord as additional rent, one hundred percent (100%) of the amount by which the rent payable by the assignee or sublessee to Subtenant exceeds the rent payable by Subtenant to Sublandlord under this Sublease until the rent paid by Subtenant to Sublandlord equals the amount paid by Sublandlord to Landlord under the Master Lease and thereafter, fifty percent (50%) of the amount by which the rent payable by the assignee or sublessee to Subtenant throughout the Sublease Term exceeds the rent paid by Subtenant to Sublandlord under this Sublease. If Subtenant receives a lump sum payment in connection with an assignment, the amount of the payment will be allocated between Subtenant and Sublandlord, in the same manner taking into account the total rents payable during the remaining terms of the Master Lease and Sublease. (b) Notwithstanding the provisions set forth in subparagraph (a) above, Subtenant will not be obligated to pay Sublandlord any portion of appreciated rents until Subtenant has recovered any costs it has reasonably incurred in connection with the subletting of the Sublease Premises to any third party broker or for improvements to the Sublease Premises. Any costs to be deducted from appreciated rents will be submitted to Sublandlord and will be subject to Sublandlord's reasonable approval. (c) The profit-sharing provision set forth in subparagraph (a) above is a freely negotiated agreement between Subtenant and Sublandlord respecting the allocation of appreciated rents. This covenant will survive the expiration of the Sublease Term. 11. Alterations; Signs. 11.1 Alterations and Improvements By Subtenant. Subtenant will not make any alterations, additions or improvements to the Sublease Premises ("Alterations") without obtaining the prior written consent of Landlord, if required, in accordance with the Master Lease. The term "Alterations" includes any alterations, additions or improvements made by Subtenant to comply with the ADA as required by Paragraph 2.11 above. All Alterations must be constructed (i) in a good and workmanlike manner, (ii) in conformance with all relevant codes, regulations and ordinances and (iii) only after necessary permits, licenses and approvals have been obtained by Subtenant from appropriate governmental agencies. Except as may be provided in the Work Letter, all Alterations will be made at Subtenant's sole cost (including all -8- 12 costs relating to the removal of asbestos, if any, in connection with the Alterations) and diligently prosecuted to completion. 11.2 Signs. Subtenant shall have the right to all of the signage allowed by applicable municipal signage rules and restrictions at the Master Premises. All such approved signs shall strictly conform to all legal requirements and shall be installed at Subtenant's sole expense (except as may be provided in the Work Letter). Subtenant shall remove its signage upon termination of this Sublease. Subtenant shall maintain such signs in good condition and repair. If Subtenant fails to remove such signs upon the expiration or earlier termination of this Sublease, and repair any damage caused by such removal, Sublandlord may do so at Subtenant's expense, which expense, together with interest thereon at the rate for late payments set forth in Paragraph 2.10 shall be paid by Subtenant to Sublandlord upon demand. 11.3 Disposition on Termination. Upon the expiration of the Sublease Term or earlier termination of this Sublease, Sublandlord may elect to have Subtenant either (i) surrender with the Sublease Premises any or all of the Alterations as Sublandlord may determine at the time it grants its approval of such Alterations (except personal property as provided in Paragraph 12 below), which Alterations will become the property of Sublandlord, or (ii) promptly remove any or all of the Alterations designated by Sublandlord to be removed, in which case Subtenant must, at Subtenant's sole cost, repair and restore the Sublease Premises to their condition as of the Commencement Date, reasonable wear and tear excepted. 12. Removal of Personal Property. All articles of personal property, and all business and trade fixtures, machinery and equipment, cabinet work, furniture and movable partitions, if any, owned or installed by Subtenant at its expense in the Sublease Premises will be and remain the property of Subtenant and may be removed by Subtenant at any time, provided that Subtenant, at its expense, must repair any damage to the Sublease Premises caused by such removal or by the original installation. Sublandlord may elect to require Subtenant to remove all or any part of Subtenant's personal property at the expiration of the Sublease Term or sooner termination of this Sublease, in which event the removal will be done at Subtenant's expense and Subtenant, prior to the end of the Sublease Term or upon sooner termination of this Sublease, will repair any damage to the Sublease Premises caused by its removal. 13. Holding Over. If Subtenant holds over after the expiration of the Sublease Term or earlier termination of this Sublease, with or without the express or implied consent of Sublandlord, then at the option of Sublandlord, Subtenant will become and be only a month-to-month tenant at a rent equal to one hundred and fifty percent (150%) of the rent payable by Subtenant immediately prior to such expiration or termination, and otherwise upon the terms, covenants and conditions herein specified. Notwithstanding any provision to the contrary contained herein, (i) Sublandlord expressly reserves the right to require Subtenant to surrender possession of the Sublease Premises upon the expiration of Sublease Term or upon the earlier termination of this Sublease and the right to assert any remedy at law or in equity to evict Subtenant and/or collect damages in connection with any holding over, and (ii) Subtenant will indemnify, defend and hold Sublandlord harmless from and against any and all liabilities, claims, demands, actions, losses, damages, obligations, costs and expenses, including, without limitation, attorneys' fees (including the allocated costs of Sublandlord's in-house attorneys) incurred or -9- 13 suffered by Sublandlord by reason of Subtenant's failure to surrender the Sublease Premises on the expiration of the Sublease Term or earlier termination of this Sublease. 14. Liens. Subtenant will keep the Sublease Premises and the Building free from any liens arising out of any work performed, materials furnished, or obligations incurred by Subtenant. If a lien is filed, Subtenant will discharge the lien or post a bond within ten (10) days after receiving a request from Sublandlord or Landlord to do so. Sublandlord has the right to post and keep posted on the Sublease Premises any notices that may be provided by law or which Sublandlord may deem to be proper for the protection of Sublandlord, the Sublease Premises and the Building from such liens. 15. Maintenance and Repairs. At all times during the Sublease Term, Subtenant, at its sole cost, will maintain the Sublease Premises and every part thereof and all equipment, fixtures and improvements therein in good condition and repair. At the end of the Sublease Term, Subtenant will surrender the Subleased Premises in the condition the Sublease Premises were in on the Commencement Date, reasonable wear and tear excepted. Subtenant will be responsible for all repairs required to be performed by the Tenant under the Lease. 16. Insurance. At all times during the Sublease Term, Subtenant will, at its sole cost, procure and maintain at a minimum the insurance coverage set forth in Section 6 of the Master Lease, and shall name Sublandlord as an additional insured in each instance where Landlord is so named. Subtenant shall provide copies of any policies and/or certificates of insurance to Sublandlord where such is required of Tenant under the Master Lease. 17. Events of Default. As provided in Section 11 of the Master Lease. 18. Estoppel Certificates. 18.1 Obligation to Provide. Subtenant will comply with the provisions of Section 9.10 of the Master Lease relating to provision estoppel certificates. 18.2 Failure to Provide. At Sublandlord's option, Subtenant's failure to deliver a statement within the time required by Paragraph 18.1 above, will be conclusive upon Subtenant (i) that this Sublease is in full force and effect, without modification except as may be represented by Sublandlord, (ii) that there are no uncured defaults in Sublandlord's performance hereunder or in Landlord's performance under the Master Lease, and (iii) that not more than one month's rent has been paid in advance, or such failure may be considered by Sublandlord as a material default by Subtenant under this Sublease. 19. Real Estate Brokers. Each party warrants to the other that there are no brokerage commissions or fees payable in connection with this Sublease except to the Broker and to The Conrad Group, which will be paid by the Broker pursuant to an agreement between the Broker and The Conrad Group. Each party further agrees to indemnify and hold the other party harmless, from any cost, liability and expense (including attorneys' fees) which the other party may incur as the result of any breach of this Paragraph 19. -10- 14 20. Miscellaneous. 20.1 Counterparts. This Sublease may be executed in one (1) or more counterparts, and all of the counterparts shall constitute but one and the same agreement, notwithstanding that all parties hereto are not signatory to the same or original counterpart. 20.2 Construction. The parties acknowledge that each party and its counsel have reviewed and revised this Sublease and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Sublease or any amendment or exhibits hereto. 20.3 Governing Law. This Sublease shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, as the same may exist from time to time. 20.4 Exhibits. All exhibits and any schedules or riders attached to this Sublease are incorporated herein by this reference and made a part hereof, and any reference in the body of the Sublease or in the exhibits, schedules or riders to the Sublease shall mean this Sublease, together with all exhibits, schedules and riders. (Signature page follows) -11- 15 IN WITNESS WHEREOF, Sublandlord and Subtenant have executed this Sublease as of the date first above written. SUBLANDLORD PACSCI MOTION CONTROL, INC., a Massachusetts corporation By: /s/ David A. Burnworth Name: David A. Burnworth Title: VP, Treasurer By: Name: Title: SUBTENANT NETWORK PLUS, INC., a Massachusetts corporation By: /s/ Robert T. Hale Name: Robert T. Hale Title: Chairman By: Name: Title: -12- 16 EXHIBIT A Master Lease -1- 17 EXHIBIT A Lease by and between NORTH AMERICA INVESTORS, INC. Landlord and PACIFIC SCIENTIFIC COMPANY Tenant Dated December 16, 1994 Premises at 41 Pacella Park Drive Randolph, Massachusetts 18 Table of Contents SECTION 1 Lease....................................................................................... 1 Section 1.1. Reference Information....................................................................... 1 Section 1.2. Exhibits.................................................................................... 1 SECTION 2 Premises and Term........................................................................... 2 Section 2.1. Premises.................................................................................... 2 Section 2.2. Term........................................................................................ 2 Section 2.3. Option to Terminate Lease................................................................... 2 Section 2.4. Option to Extend Term....................................................................... 3 SECTION 3 Condition of Premises....................................................................... 3 Section 3.1. Condition of Premises....................................................................... 3 SECTION 4 Fixed Rent.................................................................................. 3 Section 4.1. The Fixed Rent.............................................................................. 3 Section 4.2. Adjustment of Fixed Rent.................................................................... 3 SECTION 5 Real Estate and Other Taxes................................................................. 4 Section 5.1. Real Estate Taxes........................................................................... 4 SECTION 6 Insurance................................................................................... 5 Section 6.1. Tenant's Insurance.......................................................................... 5 Section 6.2. Requirements Applicable to Insurance Policies............................................... 5 Section 6.3. Waiver of Subrogation....................................................................... 6 SECTION 7 Utilities................................................................................... 6 Section 7.1. Utilities................................................................................... 6 SECTION 8 Intentionally deleted....................................................................... 6 SECTION 9 Tenant's Covenants.......................................................................... 6 Section 9.1. Use......................................................................................... 6 Section 9.2. Repair and Maintenance...................................................................... 6 Section 9.3. Compliance with Law and Insurance Requirements.............................................. 7 Section 9.4. Alterations; Tenant's Work.................................................................. 7 Section 9.5. Indemnity................................................................................... 8 Section 9.6. Landlord's Right to Enter................................................................... 8 Section 9.7. Personal Property at Tenant's Risk.......................................................... 9 Section 9.8. Payment of Landlord's Cost of Enforcement................................................... 9 Section 9.9. Yield Up.................................................................................... 9 Section 9.10. Estoppel Certificate........................................................................ 9 Section 9.11. Intentionally deleted....................................................................... 9 Section 9.12. Rules and Regulations; Park Restrictions.................................................... 10 Section 9.13. Holding Over................................................................................ 10 Section 9.14. Assignment and Subletting................................................................... 10 Section 9.15. Overloading and Nuisance.................................................................... 10 SECTION 10 Casualty or Taking.......................................................................... 10 Section 10.1. Termination................................................................................. 10 Section 10.2. Restoration................................................................................. 11 Section 10.3. Award....................................................................................... 11 SECTION 11 Default..................................................................................... 11 Section 11.1. Events of Default........................................................................... 11 Section 11.2. Remedies.................................................................................... 12
-i- 19 Section 11.3. Remedies Cumulative......................................................................... 13 Section 11.4. Landlord's Right to Cure Defaults........................................................... 13 Section 11.5. Effect of Waivers of Default................................................................ 13 Section 11.6. No Accord and Satisfaction.................................................................. 13 Section 11.7. Late Charge................................................................................. 14 SECTION 12 Mortgages................................................................................... 14 Section 12.1. Rights of Mortgage Holders.................................................................. 14 Section 12.2. Superiority of Lease; Option to Subordinate................................................. 14 SECTION 13 Miscellaneous Provisions.................................................................... 15 Section 13.1. Notices from One Party to the Other......................................................... 15 Section 13.2. Quiet Enjoyment............................................................................. 15 Section 13.3. Lease Not to be Recorded; Notice of Lease................................................... 15 Section 13.4. Bind and Inure; Limitation of Landlord's Liability.......................................... 15 Section 13.5. Acts of God................................................................................. 15 Section 13.6. Landlord's Default.......................................................................... 15 Section 13.7. Miscellaneous............................................................................... 16
-ii- 20 LEASE SECTION 1 Section 1.1. Reference Information. Reference in this Lease to any of the following shall have the meaning set forth below: Date of this Lease: December 16, 1994 Premises: The building (the "Building") and the lot (the "Lot") shown on Exhibit A, situated at 41 Pacella Park Drive, Randolph, Massachusetts. Landlord: North America Investors, Inc., a California corporation Address of Landlord: Suite 2800 1999 Avenue of the Stars Los Angeles, CA 90067 Tenant: Pacific Scientific Company, a California corporation Address of Tenant: Suite 700 620 Newport Center Drive Newport Beach, CA 92660 Term Commencement Date: February 1. 1995 Building Square Footage: Approximately 80,000 square feet. Annual Fixed Rental Rate: $720,000 per annum, subject to adjustment an provided in Section 4.2 Permitted Uses: Office, warehouse and light manufacturing Commercial General Liability Insurance Limit: Bodily Injury and Property Combined single limit of $3,000,000, Damage: or greater amount as reasonably required by Landlord from time to time and which shall be customary with respect to similar buildings located in the vicinity of the Premises. Signs: Tenant shall be permitted to install signs on the Premises, provided that any signs installed by Tenant shall be in compliance with all laws, rules, regulations and ordinances applicable to the Premises and with the Randolph Industrial Park Restrictions. Section 1.2. Exhibits. The following Exhibits are attached to and incorporated in this Lease: Exhibit A: Plan of Premises 21 Exhibit B: Randolph Industrial Park Restrictions SECTION 2 Premises and Term Section 2.1. Premises. Landlord hereby leases and demises the Premises to Tenant and Tenant hereby leases the Premises from Landlord, subject to any and all existing encumbrances and other matters of record and subject to the terms and provisions of this Lease. Section 2.2. Term. TO HAVE AND TO HOLD for an original term beginning on the Term Commencement Date and continuing until the last day of the month in which the fifteenth (15th) anniversary of the Term Commencement Date shall occur, subject to Sections 2.3 and 2.4, unless sooner terminated as hereinafter provided. Beginning January 2, 1995 to the Term Commencement Date, Tenant shall be entitled to (a) use five offices and five office cubicles in the area so designated on Exhibit A and (b) have access to the balance of the Premises for the purpose of planning construction of its improvements, including, without limitation, taking measurements and making inspections to facilitate the preparation of construction drawings and obtaining permits. Tenant agrees to sublet to Johnson & Johnson Professional, Inc. ("J&J") the areas designated on Exhibit A (the "Subleased Premises"), and Landlord hereby consents to Tenant's subletting the Subleased Premises to J&J. As a condition precedent in the effectiveness of the Lease, Tenant and J&J shall enter into a separate sublease which shall be subject to and incorporate all of the terms of this Lease, to the extent applicable, and include the following basic terms: The term of such sublease shall commence on the Term Commencement Date and shall expire (a) with respect to the approximately 10,000 square feet of open space shown on Exhibit A, on April 15, 1995 or such earlier date as J&J shall determine, (b) with respect to the balance of the portion of the Premises to be subleased to J&J (excluding the approximately 4,000 square foot clean room), on May 15, 1995 or such earlier date as J&J shall determine and (c) with respect to such 4,000 square foot clean room, on July 15, 1995 or such earlier date as J&J shall determine. J&J shall pay rent at the rate of $1.50 per square foot per annum for the office and the open space and at the rate of $2.00 per square foot for the clean room. Such rent shall include all utilities, taxes and insurance. J&J shall provide commercial general liability insurance in the form required under this Lease, naming Landlord and Tenant as additional insureds, with limits of at least $1,000,000. Section 2.3. Option to Terminate Lease. Tenant may terminate this Lease effective as of the last day of the month in which the tenth (l0th) anniversary of the Term Commencement Date shall occur provided (a) no default in the obligations of Tenant under this Lease shall exist at the time Tenant shall give notice of its election to so terminate this Lease, (b) Tenant shall not have exercised its option to extend the term pursuant to Section 2.4 and (c) Tenant shall give notice to Landlord of its election to so terminate this Lease prior to the ninth (9th) anniversary of the Term Commencement Date. -2- 22 Section 2.4. Option to Extend Term. In the event Tenant shall construct improvements in the Premises after the fifth (5th) anniversary of the Term Commencement Date having an aggregate cost (for all such improvements constructed at substantially the same time) in excess of $500,000, Tenant shall have a single option to extend the term of this Lease so that the term of this Lease shall expire on the last day of the month in which the tenth (l0th) anniversary of the date of substantial completion of such improvements shall occur ("Extension Term"), provided (a) no default in the obligations of Tenant under this Lease shall exist at the time such option is exercised and (b) Tenant shall give notice to Landlord of its exercise of such option not later than one (1) month after the date of substantial completion of such improvements (which date shall be specified in such notice) and in any event not less than one (1) year prior to expiration of the original term. All of the terms and provisions of this Lease shall be applicable during the Extension Term except that Tenant shall have no further option to extend the term of this Lease. SECTION 3 Condition of Premises Section 3.1. Condition of Premises. Tenant agrees to accept the Premises in its present "as is" condition. Landlord shall have no obligation to perform any work or construction. If Tenant shall desire to perform any work or construction, the same shall be done only in accordance with this Lease. Landlord shall provide Tenant with a report from Dacon Construction Company with respect to the physical condition of the Premises. If such report shall indicate any material defect in the Premises, Tenant may terminate this Lease by notice to Landlord within five (5) business days after delivery of such report to Tenant. SECTION 4 Fixed Rent Section 4.1. The Fixed Rent. Tenant shall pay rent to Landlord at the Address of Landlord or at such other place or to such other person or entity as Landlord may by notice to Tenant from time to time direct, at the Annual Fixed Rental Rate set forth in Section 1, in equal installments equal to 1/12th of the Annual Fixed Rental Rate in advance on the first day of each calendar month included in the term, and for any portion of a calendar month at the beginning or end of the term, at that rate payable in advance for such portion. Section 4.2. Adjustment of Fixed Rent. The Annual Fixed Rent shall be adjusted (hereinafter referred to as the "Adjustment") as of the fifth (5th) anniversary of the Term Commencement Date and thereafter annually effective as of each anniversary of the Term Commencement Date (each, an "Adjustment Date"), to reflect any increase in the cost of living based upon the Consumer Price Index for Urban Wage Earners and Clerical Workers, Boston, Massachusetts, all items - Series A (1982-84 = 100) (hereinafter referred to as the "Index") published by the Bureau of Labor Statistics of the United States Department of Labor. The Adjustment shall be calculated by multiplying the Annual Fixed Rent in effect on the Term Commencement Date by a fraction, the numerator of which shall be the Index number last -3- 23 published prior to such Adjustment Date and the denominator which shall be the corresponding Index number last published prior to the Term Commencement Date. If the Adjustment would result in the Annual Fixed Rent in any year being less than the prior year, the Adjustment shall not be made, and in no event shall the Adjustment result in the Annual Fixed Rent exceeding the original Annual Fixed Rent increased 5% per year, compounded annually, from the Term Commencement Date to the applicable Adjustment Date. In the event the publication of the Index shall be discontinued for the City of Boston, there shall be made in the method of calculation herein provided such revisions as the circumstances may require to carry out the intent of this paragraph, and any dispute between the parties as to the making of such revisions shall be determined by arbitration. SECTION 5 Real Estate and Other Taxes Section 5.1. Real Estate Taxes. As Additional Rent, Tenant shall pay to Landlord (or directly to the taxing authority, as Landlord shall direct from time to time) Tenant's Proportionate Fraction of all taxes, assessments (special, betterment or otherwise), levies, fees, water and sewer rents and charges, and all other government levies and charges, general and special, ordinary and extraordinary, foreseen and unforeseen, which are allocable to the term hereof, imposed or levied upon or assessed against the Lot or Building or any rent (collectively "taxes and assessments" or if singular "tax or assessment"). If Landlord shall elect to pay betterment assessments over any period permitted by law, only the installments thereof (and interest thereon) becoming due during the term shall be payable by Tenant hereunder. All payments shall be made by Tenant within ten (10) days prior to the due date after receipt of Landlord's invoice therefor or prior to the due date if taxes and assessments are to be paid by Tenant directly to the taxing authority. Nothing herein shall, however, require Tenant to pay any income taxes, excess profits taxes, excise taxes, franchise taxes, estate, succession, inheritance or transfer taxes, provided, however, that if at any time during the term the present system of ad valorem taxation of real property shall be changed so that in lieu of the whole or any part of the ad valorem tax on real property, or in lieu of increases therein, there shall be assessed on Landlord a capital levy or other tax on the gross rents received with respect to the Building or Lot or a federal, state, county, municipal, or other local income, franchise, excise or similar tax, assessment, levy or charge (distinct from any now in effect) measured by or based, in whole or in part, upon gross rents, then any and all of such taxes, assessments, levies or charges, to the extent so measured or based ("Substitute Taxes"), shall be payable by Tenant, provided, however, Tenant's obligation with respect to the aforesaid Substitute Taxes shall be limited to the amount thereof as computed at the rates that would be payable if the Building and Lot were the only property of Landlord. -4- 24 SECTION 6 Insurance Section 6.1. Tenant's Insurance. Tenant shall, as Additional Rent, commencing with its first entry into the Premises and thereafter until the end of the Term, maintain the following insurance: (a) Commercial general liability insurance for any injury to person or property occurring on the Premises, naming as additional insureds Tenant, Landlord and such persons, including, without limitation, Landlord's managing agent, as Landlord shall designate from time to time, in amounts which shall, at the beginning of the Term, be at least equal to the limits set forth in Section 1, and, from time to time during the term, shall be for such higher limits as are reasonably required by Landlord; and are customary with respect to similar buildings located in the vicinity of the Premises; (b) Worker's compensation insurance with statutory limits covering all of Tenant's employees working at the Premises; (c) All risk property insurance, and builders risk insurance during periods of construction, on a replacement value, agreed amount basis, with an increased cost of construction endorsement, together with rental lose coverage insuring Landlord in the amount of one year's Annual Fixed Rental and additional rent, and, if Landlord so elects, flood coverage to the extent the same is available, insuring the Building and its rental value; and (d) Insurance against loss or damage from sprinklers and from leakage or explosions or cracking of boilers, pipes carrying steam or water, or both, pressure vessels or similar apparatus, in the so-called "broad form", in such amounts as Landlord shall specify and are customary with respect to similar buildings located in the vicinity of the Premises and insurance against such other hazards and in such amounts as may from time to time be required by Landlord or any bank, insurance company or other lending institution holding a mortgage on the Building. The insurance provided pursuant to clauses (c) and (d) above shall name Landlord and Landlord's mortgagees as loss payees as their respective interests may appear, and, if requested by any of Landlord's mortgagees, shall include a mortgagee loss payable endorsement in form satisfactory to such mortgagees. Tenant shall have no right to the proceeds of any such insurance or to participate in the settlement of any claims thereunder. Without limiting the foregoing, Tenant shall promptly comply with all requests of Landlord in connection with the negotiation and settlement of any claim under the insurance provided pursuant to clauses (c) and (d) above, and Tenant shall endorse to Landlord any check representing proceeds of such insurance promptly upon Landlord's request. Section 6.2. Requirements Applicable to Insurance Policies. All policies of insurance required under the provisions of Section 6.1 shall be reasonably acceptable to Landlord and obtained from responsible companies qualified to do business in the Commonwealth of Massachusetts and in good standing therein, which companies and the amount of insurance -5- 25 allocated thereto shall be subject to Landlord's reasonable approval. Tenant agrees to furnish Landlord with insurance company certificates of all such insurance prior to the earlier of the time it shall first enter the Premises or the beginning of the Term hereof and of each renewal policy at least fifteen (15) days prior to the expiration of the policy it renews. Each such policy shall be noncancelable with respect to the interest of Landlord and such mortgagee without at least thirty (30) days' prior written notice thereto. On Landlord's request from time to time, Tenant shall also provide Landlord with copies of each such policy. Section 6.3. Waiver of Subrogation. All insurance which is carried by either party with respect to the Premises or to furniture, furnishings, fixtures or equipment therein or alterations or improvements thereto, whether or not required, shall include provisions which either designate the other party as one of the insured or deny to the insurer acquisition by subrogation of rights of recovery against the other party to the extent such rights have been waived by the insured party prior to occurrence of loss or injury, insofar as, and to the extent that such provisions may be effective without making it impossible to obtain insurance coverage from responsible companies qualified to do business in the Commonwealth of Massachusetts (even though extra premium may result therefrom) and without voiding the insurance coverage in force between the insurer and the insured party. On reasonable request, each party shall be entitled to have duplicates or certificates of policies containing such provisions. Each party hereby waives all rights of recovery against the other for loss or injury against which the waiving party is protected by insurance containing said provisions, reserving, however, any rights with respect to any excess of loss or injury over the amount recovered by such insurance. SECTION 7 Utilities Section 7.1. Utilities. Tenant shall promptly pay all charges for water, sewer, gas, electricity and other utilities or services used or consumed in the Building, whether called charge, tax, assessment, fee or otherwise, including, without limitation, water and sewer use charges and taxes, if any. Landlord shall not be liable for any interruption or failure in the supply of any such utilities to the Premises, unless such interruption or failure is the result of Landlord's negligence or misconduct. SECTION 8 Intentionally deleted. SECTION 9 Tenant's Covenants Section 9.1. Use. Tenant shall use the Premises only for the Permitted Uses and shall from time to time procure all licenses and permits necessary therefor at Tenant's sole expense. Section 9.2. Repair and Maintenance. Except as otherwise provided in Section 10, Tenant shall keep all structural and non-structural portions of the Premises, including all -6- 26 plumbing, electrical, heating, air conditioning and other systems (collectively, the "Systems") therein, in good order, condition and repair and in at least as good order, condition and repair as they are in on the Term Commencement Date or may be put in during the term, reasonable use and wear only excepted. Tenant shall make all repairs and replacements and do all other work necessary for the foregoing purposes whether the same may be ordinary or extraordinary, foreseen or unforeseen. Tenant shall keep in a safe, secure and sanitary condition all trash and rubbish temporarily stored at the Premises and shall arrange for and be responsible for all of the costs or a trash and rubbish removal service in connection with Tenant's use of the Premises. Section 9.3. Compliance with Law and Insurance Requirements. Tenant shall make all repairs, alterations, additions or replacements to the Premises required by any law or ordinance or any order or regulation of any public authority and shall keep the Premises equipped with all safety appliances so required. Tenant shall not dump, flush, or in any way introduce any hazardous substances or any other toxic substances into the septic, sewage or other waste disposal system serving the Premises. Tenant shall not generate, store or dispose of hazardous substances (as defined below) in or on the Premises or dispose of hazardous substances from the Premises to any other location without prior written notice to Landlord and in any event only in compliance with the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. Section 6901 et seq., the Massachusetts Hazardous Waste Management Act, M.G.L. c.21C, as amended, the Massachusetts Oil and Hazardous Material Release Prevention and Response Act, M.G.L. c. 21E, as amended, and all other applicable codes, regulations, ordinances and laws. Tenant shall notify Landlord of any incident which would require the filing of a notice under Chapter 232 of the Acts of 1982 and shall comply with the orders and regulations of all governmental authorities with respect to zoning, building, fire, health and other codes, regulations, ordinances or laws applicable to the Premises. "Hazardous substances" as used in this Section shall mean "hazardous substances" as defined in the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 and regulations adopted pursuant to said Act. Tenant will provide Landlord, from time to time upon Landlord's request, with all records and information regarding any hazardous substance maintained on the Premises by Tenant. Landlord shall have the right, at Tenant's expense, to make such inspections as Landlord shall reasonably elect from time to time to determine if Tenant is complying with this Section. Tenant shall comply promptly with the recommendations of any insurer, foreseen or unforeseen, ordinary as well as extraordinary, which may be applicable to the Premises, by reason of Tenant's use thereof. In no event shall any activity be conducted by Tenant on the Premises which may give rise to any cancellation of any insurance policy or make any insurance unobtainable. Section 9.4. Alterations; Tenant's Work. (a) Tenant shall not make any installations, alterations, additions or improvements in or to the Premises, including, without limitation, any apertures in the walls, partitions, ceilings or floors, the cost of which shall exceed $50,000 in the aggregate in any calendar year without on each occasion obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. -7- 27 (b) Landlord acknowledges that Tenant may desire to expand the Premises during the term of this Lease. Tenant shall obtain Landlord's prior consent to any expansion of the Premises, which consent will not be unreasonably withheld or delayed, provided that if Landlord shall fail to respond to any requested consent within twenty (20) business days after a request therefor, Landlord's consent shall be deemed given with respect to the request. (c) The expansion referred to in clause (b) above and any work requiring Landlord's approval under clause (a) above shall be performed only in accordance with plans and specifications therefor approved by Landlord, which approval shall not be unreasonably withheld or delayed. Tenant shall procure at Tenant's sole expense all necessary permits and licenses before undertaking any work (whether or not requiring Landlord's approval) on the Premises and shall perform all such work in a good and workmanlike manner employing materials of good quality and so as to conform with all applicable zoning, building, fire, health and other codes, regulations, ordinances and laws and with all applicable insurance requirements. Tenant shall keep the Premises at all times free of liens for labor and materials. Tenant shall employ for such work requiring Landlord's approval only contractors approved by Landlord, which approval shall not be unreasonably withheld or delayed, and, whether or not such work shall require Landlord's approval, shall require all contractors employed by Tenant to carry worker's compensation insurance in accordance with statutory requirements and comprehensive public liability insurance covering such contractors on or about the Premises in amounts that at least equal the limits set forth in Section 1 and to submit certificates evidencing such coverage to Landlord prior to the commencement of such work. Tenant shall save Landlord harmless and indemnified from all injury, loss, claims or damage to any person or property occasioned by or growing out of such work (whether or not requiring Landlord's approval). Landlord may inspect the work (whether or not requiring Landlord's approval) of Tenant at reasonable times and upon reasonable notice and give notice of observed defects. Section 9.5. Indemnity. Tenant shall defend, with counsel approved by Landlord, all actions against Landlord, any partner, trustee, stockholder, officer, director, employee or beneficiary of Landlord, holders of mortgages secured by the Building and any other party having an interest in the Premises ("Indemnified Parties") with respect to, and shall pay, protect, indemnify and save harmless, to the extent permitted by law, all Indemnified Parties from and against, any and all liabilities, losses, damages, costs, expenses (including reasonable attorneys' fees and expenses), causes of action, suits, claims, demands or judgments of any nature arising from (a) injury to or death of any person, or damage to or loss of property, occurring in the Premises or connected with the use, condition or occupancy of any thereof unless caused by the negligence of Landlord or its servants or agents, (b) violation of this Lease by Tenant, or (c) any act, fault, omission, or other misconduct of Tenant or its agents, contractors, licensees, sublessees or invitees. Section 9.6. Landlord's Right to Enter. Tenant shall permit Landlord and its agents to enter into the Premises at reasonable times and upon reasonable notice to examine the Premises, make such repairs and replacements as Landlord may be required to make under the terms of this Lease or may elect, without however, any obligation to do so, and show the Premises to prospective purchasers and lenders, and, during the last year of the term, to show the Premises to prospective tenants and to keep affixed in suitable places notices of availability of the Premises. -8- 28 Section 9.7. Personal Property at Tenant's Risk. All furnishings, fixtures, equipment, effects and property of every kind of Tenant and of all persons claiming by, through or under Tenant which may be on the Premises, shall be at the sole risk and hazard of Tenant and if the whole or any part thereof shall be destroyed or damaged by fire, water or otherwise, or by the leakage or bursting of water pipes, steam pipes, or other pipes, by theft or from any other cause, no part of said loss or damage shall be charged to or to be borne by Landlord, except that Landlord shall in no event be indemnified or held harmless or exonerated from any liability to Tenant for any injury, loss, damage or liability not covered by Tenant's insurance to the extent prohibited by law. Tenant shall insure Tenant's personal property. Section 9.8. Payment of Landlord's Cost of Enforcement. Tenant shall pay, on demand, Landlord's expenses, including reasonable attorney's fees, incurred in enforcing any obligation of Tenant under this Lease or in curing any default by Tenant under this Lease as provided in Section 11.4. Section 9.9. Yield Up. At the expiration of the term or earlier termination of this Lease, Tenant shall surrender all keys to the Premises, remove all of its trade fixtures and personal property in the Premises, remove such installations and improvements made by Tenant which required Landlord's approval but which have not been approved by Landlord as Landlord may request and all Tenant's signs wherever located, repair all damage caused by such removal and yield up the Premises (including all installations and improvements made by Tenant except for trade fixtures and such installations or improvements made by Tenant as Landlord shall so request Tenant to remove) broom-clean and in the same good order and repair in which Tenant is obliged to keep and maintain the Premises under this Lease, ordinary wear and tear excepted. Any property not so removed shall be deemed abandoned and may be removed and disposed of by Landlord in such manner as Landlord shall determine and Tenant shall pay Landlord the entire cost and expense incurred by it in effecting such removal and disposition and in making any incidental repairs and replacements to the Premises and for use and occupancy during the period after the expiration of the term and prior to Tenant's performance of its obligations under this Section 9.9. Section 9.10. Estoppel Certificate. Upon not less than fifteen (15) business days' prior notice by Landlord, Tenant shall execute, acknowledge and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect and that, except as stated therein, Tenant has no knowledge of any defenses, offsets or counterclaims against its obligations to pay the Fixed Rental and Additional Rent and any other charges and to perform its other covenants under this Lease (or, if there have been any modifications that the same is in full force and effect as modified and stating the modifications and, if there are any defenses, offsets or counterclaims, setting them forth in reasonable detail), the dates to which the Fixed Rental and Additional Rent and other charges have been paid and a statement that Landlord is not in default hereunder (or if in default, the nature of such default, in reasonable detail). Any such statement delivered pursuant to this Section 9.10 may be relied upon by any prospective purchaser or mortgagee of the Building. Section 9.11. Intentionally deleted. -9- 29 Section 9.12. Rules and Regulations; Park Restrictions. Tenant shall comply with the Randolph Industrial Park Restrictions attached as Exhibit B and with such reasonable Rules and Regulations as may be adopted from time to time by Landlord to provide for the beneficial operation of the Lot and Building. Section 9.13. Holding Over. Tenant shall vacate the Premises immediately upon the expiration or sooner termination of this Lease. If Tenant retains possession of the Premises or any part thereof after the termination of the term without Landlord's express consent, Tenant shall pay Landlord Annual Fixed Rent at 125% the monthly rate specified in Section 1 for the time Tenant thus remains in possession and, in addition thereto, shall pay Landlord for all damages, consequential as well as direct, sustained by reason of Tenant's retention of possession. The provisions of this Section do not exclude Landlord's rights of re-entry or any other right hereunder, including without limitation, the right to increase the monthly rent as described in this Section, and instead to remove Tenant through summary proceedings for holding over beyond the expiration of the term of this Lease. Section 9.14. Assignment and Subletting. Except as provided in Section 2.2 of this Lease, Tenant shall not assign, transfer, mortgage or pledge this Lease or grant a security interest in Tenant's rights hereunder or sublease all or any part of the Premises or suffer or permit this Lease or the leasehold estate hereby created or any other rights arising under this Lease to be assigned, transferred or encumbered, in whole or in part, whether voluntarily, involuntarily or by operation of law, or permit the occupancy of the Premises by anyone other than Tenant without Landlord's prior written approval, which approval shall not be unreasonably withheld. Any attempted assignment, transfer, mortgage, pledge, grant of security interest, sublease or other encumbrance, except with prior written approval thereof from Landlord, shall be void. No assignment, transfer, mortgage, grant of security interest, sublease or other encumbrance, whether or not approved, and no indulgence granted by Landlord to any assignee or sublessee, shall in any way impair the continuing primary liability (which after an assignment shall be joint and several with the assignee) of Tenant hereunder, and no approval in a particular instance shall be deemed to be a waiver of the obligation to obtain Landlord's approval in any other case. Section 9.15. Overloading and Nuisance. Tenant shall not injure, overload, deface or otherwise harm the Premises, commit any nuisance, permit the emission of any objectionable noise, vibration or odor, make, allow or suffer any waste or make any use of the Premises which is improper, offensive or contrary to any law or ordinance. SECTION 10 Casualty or Taking Section 10.1. Termination. In the event that greater than twenty-five (25) percent of the Building or the Lot shall be taken by any public authority or for any public use or destroyed by the action of any public authority (a "Taking") then this Lease may be terminated by either Landlord or Tenant effective on the effective date of the Taking. In the event that the Premises shall be totally or partially destroyed or damaged by fire or casualty (a "Casualty") and if Landlord's architect, engineer or contractor shall determine that it will require in excess of 180 days from the date of the Casualty to restore the Premises, this Lease may be terminated by -10- 30 either Landlord or Tenant by notice to the other within thirty days after the Casualty or receipt of the written estimate of the time required to restore the Premises. In the case of a Taking, such election, which may be made notwithstanding the fact that Landlord's entire interest may have been divested, shall be made by the giving of notice by Landlord or Tenant to the other within thirty (30) days after Landlord or Tenant, as the case may be, shall receive notice of the Taking. Section 10.2. Restoration. In the event of a Taking or a Casualty, if neither Landlord nor Tenant exercises the election to terminate provided in Section 10.1, this Lease shall continue in force and a just proportion of the Fixed Rent and other charges hereunder, according to the nature and extent of the damages sustained by the Premises, shall be abated until the Premises, or what may remain thereof, shall be put by Landlord in proper condition for use subject to zoning and building laws or ordinances then in existence, which, unless Landlord or Tenant has exercised its option to terminate pursuant to Section 10.1, Landlord covenants to do with reasonable diligence at Landlord's expense. Landlord's obligations with respect to restoration shall not require Landlord to expend more than the net proceeds of insurance recovered or damages awarded for such Casualty or Taking and made available for restoration by Landlord's mortgagees. "Net proceeds of insurance recovered or damages awarded" refers to the gross amount of such insurance or damages less the reasonable expenses of Landlord in connection with the collection of the same, including without limitation, fees and expenses for legal and appraisal services. Section 10.3. Award. Irrespective of the form in which recovery may be had by law, all rights to damages or compensation shall belong to Landlord in all cases. Tenant hereby grants to Landlord all of Tenant's rights to such damages and compensation and covenants to deliver such further assignments thereof as Landlord may from time to time request. Nothing contained in this Section 10.3 shall be deemed to give Landlord any interest in, or prevent Tenant from seeking, any separate award from the condemning authority for the taking of personal property or fixtures of Tenant or for relocation or business interruption expenses recoverable by Tenant from the condemning authority, provided the same shall not reduce Landlord's award. SECTION 11 Default Section 11.1. Events of Default. If: (a) Tenant shall default in the performance of any of its obligations to pay the Fixed Rental, Additional Rent or any other sum payable hereunder and if such default shall continue for five (5) days after notice from Landlord designating such default; (b) if within thirty (30) days after notice from Landlord to Tenant specifying any other default or defaults Tenant has not commenced diligently to correct the default or defaults so specified or, if such default cannot be cured within such thirty (30) day period, Tenant thereafter shall fail to diligently pursue such correction to completion; -11- 31 (c) if any assignment for the benefit of creditors shall be made by Tenant; (d) if Tenant's leasehold interest shall be taken on execution or other process of law in any action against Tenant; (e) if a lien or other involuntary encumbrance is filed against Tenant's leasehold interest, and is not discharged within ten (10) days thereafter; (f) if a petition is filed by Tenant for liquidation, or for reorganization or an Arrangement or any other relief under any provision of the Bankruptcy Code as then in force and effect; or (g) if an involuntary petition under any of the provisions of said Bankruptcy Code is filed against Tenant and such involuntary petition is not dismissed within thirty (30) days thereafter, then, and in any of such cases, Landlord and the agents and servants of Landlord lawfully may, in addition to and not in derogation of any remedies for any preceding breach of covenant, immediately or at any time thereafter and without demand or notice and with or without process of law (forcibly, if necessary) enter into and upon the Premises or any part thereof in the name of the whole, or mail a notice of termination addressed to Tenant, and repossess the same as of Landlord's former estate and expel Tenant and those claiming through or under Tenant and remove its and their effects without being deemed guilty of any manner of trespass and without prejudice to any remedies which might otherwise be used for arrears of rent or prior breach of covenant, and upon such entry or mailing as aforesaid this Lease shall terminate, Tenant hereby waiving all statutory rights (including, without limitation, rights of redemption, if any) to the extent such rights may be lawfully waived. Landlord, without notice to Tenant, may store Tenant's effects, and, those of any person claiming through or under Tenant at the expense and risk of Tenant, and if Landlord so elects, may sell such effects at public auction or private sale and apply the net proceeds to the payment of all sums due to Landlord from Tenant, if any, and pay over the balance, if any, to Tenant. Section 11.2. Remedies. In the event that this Lease is terminated under any of the provisions contained in Section 11.1, Tenant shall pay forthwith to Landlord, as compensation, the excess of the total rent reserved for the residue of the Term over the fair market rental value of the Premises for the residue of the term, such excess to be discounted to present value at the then current Federal Reserve Bank discount rate. In calculating the rent reserved there shall be included, in addition to the Fixed Rental and Additional Rent, the cost of performing all obligations which Tenant has agreed to perform under this Lease during the residue. As additional and cumulative obligations after any such termination, Tenant shall also pay punctually to Landlord all the sums and shall perform all the obligations which Tenant covenants in this Lease to pay and to perform in the same manner and to the same extent and at the same time as if this Lease had not been terminated. In calculating the amounts to be paid by Tenant pursuant to the preceding sentence, Tenant shall be credited with any amount paid to Landlord pursuant to the first sentence of this Section 11.2 and also with the net proceeds of any rent obtained by Landlord by reletting the Premises, after deducting all Landlord's reasonable expenses in connection with such reletting, including, without limitation, all repossession costs, -12- 32 brokerage commissions, fees for legal services and expenses of preparing the Premises for such reletting, it being agreed by Tenant that Landlord may (i) relet the Premises or any part or parts thereof for a term or terms which may at Landlord's option be equal to or less than or exceed the period which would otherwise have constituted the balance of the term hereof and may grant such concessions and free rent as Landlord in its reasonable judgment considers advisable or necessary to relet the same and (ii) make such alterations, repairs and decorations in the Premises as Landlord in its reasonable judgment considers advisable or necessary to relet the same, and no action of Landlord in accordance with the foregoing or failure to relet or to collect rent under reletting shall operate or be construed to release or reduce Tenant's liability as aforesaid. Section 11.3. Remedies Cumulative. Except as otherwise expressly provided herein, any and all rights and remedies which Landlord may have under this Lease and at law and equity shall be cumulative and shall not be deemed inconsistent with each other, and any two or more of all such rights and remedies may be exercised at the same time to the greatest extent permitted by law. Section 11.4. Landlord's Right to Cure Defaults. At any time following ten (10) days' prior notice to Tenant (except in cases of emergency when no notice shall be required), Landlord may (but shall not be obligated to) cure any default by Tenant under this Lease, and whenever Landlord so elects, all costs and expenses incurred by Landlord, including reasonable attorneys' fees, in curing a default shall be paid by Tenant to Landlord as Additional Rent on demand, together with interest thereon at the rate provided in Section 11.7 from the date of payment by Landlord to the date of payment by Tenant. Section 11.5. Effect of Waivers of Default. Any consent or permission by Landlord to any act or omission which otherwise would be a breach of any covenant or condition herein, or any waiver by Landlord of the breach of any covenant or condition herein, shall not in any way be held or construed (unless expressly so declared) to operate so as to impair the continuing obligation of any covenant or condition herein, or otherwise operate to permit the same or similar acts or omissions except as to the specific instance. The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease shall not be deemed a waiver of such violation nor prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of rent with knowledge of the breach of any covenant of this Lease shall not be deemed to have been a waiver of such breach by Landlord or of any of Landlord's remedies on account thereof, including its right of termination for such default. Section 11.6. No Accord and Satisfaction. No acceptance by Landlord of a lesser sum than the Fixed Rental, Additional Rent or any other charge then due shall be deemed to be other than on account of the earliest installment of such rent or charge due, unless Landlord elects by notice to Tenant to credit such sum against the most recent installment due. Any endorsement or statement on any check or any letter accompanying any check or payment as rent or other charge shall not be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or pursue any other remedy under this Lease or otherwise. -13- 33 Section 11.7. Late Charge. If Tenant fails to pay Fixed Rental, Additional Rent or any other sum payable by Tenant to Landlord within seven (7) days after Landlord shall give Tenant notice of non-payment thereof, Tenant shall, on demand, pay a late charge equal to five percent (5%) of the overdue amount. SECTION 12 Mortgages Section 12.1. Rights of Mortgage Holders. No Fixed Rental, Additional Rent or any other charge shall be paid more than one (1) month prior to the due date thereof and payments made in violation of this provision shall (except to the extent that such payments are actually received by a mortgagee in possession or in the process of foreclosing its mortgage) be a nullity as against such mortgagee and Tenant shall be liable for the amount of such payments to such mortgagee. In the event of any act or omission by Landlord which would give Tenant the right to terminate this Lease or to claim a partial or total eviction, Tenant shall not exercise any such right until it shall have given notice, in the manner provided in Section 13.1, of such act or omission to the holder of any mortgage encumbering the Premises whose name and address shall have been furnished to Tenant in writing, at the last address so furnished. In the event any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale under, any mortgage now or hereafter encumbering the Premises, Tenant shall attorn to the purchaser upon such foreclosure or sale or upon any grant of a deed in lieu of foreclosure and recognize such purchaser as Landlord under this Lease. Section 12.2. Superiority of Lease; Option to Subordinate. Unless Landlord exercises the option set forth below in this Section 12.2, this Lease shall be superior to and shall not be subordinate to any mortgage on the Premises. Landlord shall have the option to subordinate this Lease to any mortgage of the Premises provided that the holder of record thereof enters into an agreement with Tenant, in form reasonably acceptable to Tenant by the terms of which such holder will agree to (a) recognize the rights of Tenant under this Lease, (b) perform Landlord's obligations hereunder arising after the date of such holder's acquisition of title and (c) accept Tenant as tenant of the Premises under the terms and conditions of this Lease in the event of acquisition of title by such holder through foreclosure proceedings or otherwise and Tenant will agree to recognize the holder of such mortgage as Landlord in such event, which agreement shall be made expressly to bind and inure to the benefit of the successors and assigns of Tenant and of the holder and upon anyone purchasing the Premises at any foreclosure sale. Tenant agrees to execute and deliver any appropriate instruments necessary to carry out the agreements contained in this Section 12.2. -14- 34 SECTION 13 Miscellaneous Provisions Section 13.1. Notices from One Party to the Other. All notices required or permitted hereunder shall be in writing and addressed, if to Tenant, at the Original Address of Tenant or such other address as Tenant shall have last designated by notice in writing to Landlord and, if to Landlord, at the Original Address of Landlord or such other address as Landlord shall have last designated by notice in writing to Tenant. Any notice shall be deemed duly given when delivered or tendered for delivery at such address by personal service, or as an alternate to personal service, by mailing the same by registered or certified mail, postage prepaid. Section 13.2. Quiet Enjoyment. Landlord agrees that upon Tenant's paying the rent and performing and observing the terms, covenants, conditions and provisions on its part to be performed and observed, Tenant shall and may peaceably and quietly have, hold and enjoy the Premises during the term without any manner of hindrance or molestation from Landlord or anyone claiming under Landlord, subject, however, to the terms of this Lease. Section 13.3. Lease Not to be Recorded; Notice of Lease. Tenant agrees that it will not record this Lease. If the Term of this Lease, including options, exceeds seven years, Landlord and Tenant agree that, on the request of either, they will enter and record a notice of lease in form reasonably acceptable to Landlord. Section 13.4. Bind and Inure; Limitation of Landlord's Liability. The obligations of this Lease shall run with the land, and this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. No owner of the Premises shall be liable under this Lease except for breaches of Landlord's obligations occurring while owner of the Premises. The obligations of Landlord shall be binding upon the assets of Landlord which comprise the Premises but not upon other assets of Landlord. No individual partner, trustee, stockholder, officer, director, employee or beneficiary of Landlord shall be personally liable under this Lease and Tenant shall look solely to Landlord's interest in the Premises in pursuit of its remedies upon an event of default hereunder, and the general assets of Landlord and its partners, trustees, stockholders, officers, employees or beneficiaries of Landlord shall not be subject to levy, execution or other enforcement procedure for the satisfaction of the remedies of Tenant. Section 13.5. Acts of God. In any case where either party hereto is required to do any act, delays caused by or resulting from acts of God, war, civil commotion, fire, flood or other casualty, labor difficulties, shortages of labor, materials or equipment, government regulations, unusually severe weather, or other causes beyond such party's reasonable control shall not be counted in determining the time during which work shall be completed, whether such time be designated by a fixed date, a fixed time or a "reasonable time", and such time shall be deemed to be extended by the period of such delay. Section 13.6. Landlord's Default. Landlord shall not be deemed to be in default in the performance of any of its obligations hereunder unless it shall fail to perform such obligations and unless within thirty (30) days after notice from Tenant to Landlord specifying such default -15- 35 Landlord has not commenced diligently to correct the default so specified or has not thereafter diligently pursued such correction to completion. Tenant shall have no right, for any default by Landlord, to offset or counterclaim against any rent due hereunder. Section 13.7. Miscellaneous. This Lease shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. There are no prior oral or written agreements between Landlord and Tenant affecting this Lease, WITNESS the execution hereof under seal as of the day and year first above written. Tenant: PACIFIC SCIENTIFIC COMPANY By: ------------------------------------- Its Landlord: NORTH AMERICA INVESTORS, INC. By: ------------------------------------- Its -16- 36 EXHIBIT A Doc #272135 Transfer Certificate of Title No. 79697 Book 399 Page 97 From Original Certificate No. 79672, Originally Registered March 2, 1966, in Registration Book 399 Page 72 for the Registry District of Norfolk County. This is to Certify that Codman & Shurtleff, Inc. a corporation duly organized and existing under the laws of the Commonwealth of Massachusetts and having an usual place of business in Boston in the County of Suffolk and said Commonwealth, of in the County of and Commonwealth of Massachusetts, married to is the owner in fee simple of that certain parcel of land situate in RANDOLPH in the County of Norfolk and said Commonwealth, bounded and described as follows: Easterly by the Westerly line of Pacella Park Drive, seven hundred (700) feet; Southerly by land now or formerly of Pacella Concrete Pipe Corporation, six hundred forty-nine and 29/100 (649.29) feet; Westerly by lands now or formerly of said Pacella Concrete Pipe Corporation and of the Town of Randolph, five hundred forty-eight (548) feet; and Northerly by land now or formerly of said Pacella Concrete Pipe Corporation, seven hundred twenty-one and 36/100 (721.36) feet. Said parcel is shown as lot numbered 7 on a plan drawn by Gale Engineering Company, Inc., Surveyors, dated February 14, 1966, as approved by the Land Court, filed in the Land Registration Office as No. 34183B, a copy of a portion of which is filed in Norfolk Registry District with Certificate No. 79697, Book 399. The above described land is subject to the restrictions as set forth in a grant made by Pacella Brothers Corporation to Henri R. Salaun et al, dated June 28, 1965, duly recorded in Book 4270, Page 617. The above described land is subject also to the terms of a Stipulation made by the Petitioners, William J. Brady and Ward Steel Company, filed with the papers in this case on December 9, 1965, a copy of which is filed with Decree No. 4864. The above described land is subject also to the restrictions as set forth in Document No. 272135, expiring on March 4, 1996. And it is further certified that said land is under the operation and provisions of Chapter 185 of the General Laws, and that the title of said Codman & Shurtleff, Inc. to said land is registered under said chapter, subject, however, to any of the encumbrances mentioned in Section forty-six of said Chapter, which may be subsisting, and subject also to as aforesaid. WITNESS, ELWOOD H. HETTRICK, Esquire, Judge of the Land Court, at Dedham, in said County of Norfolk, the fourth day of March in the year nineteen hundred and sixty-six, at 3 o'clock and 50 minutes in the afternoon. Attest, with the Seal of said Court, _________________________________ Assistant Recorder 37 EXHIBIT B RANDOLPH INDUSTRIAL PARK RESTRICTIONS 1. No building or structure shall be erected maintained on said lot, or lots, contained herein, unless the elevation, plan and specifications, especially exterior material thereof, shall be approved in writing by Pacella Bros. Inc., or its successor or assigns, to said Randolph Industrial Park, which approval shall not be unreasonably withheld. 2. The front side at least of all buildings or structures shall be brick faced, or faced with other materials of equal attractiveness, such other materials to be approved in writing by Pacella Bros. Inc., or its successor or assigns, which approval shall not be unreasonably withheld. 3. Not more than fifty (50) per cent of the area of any lot shall be built upon and no building shall be erected within fifty (50) feet of street lines or within fifteen (15) feet of side or rear lot lines. For these purposes the term "building shall not include open loading platforms, outside stairs, or other projections. 4. After substantial completion of any building or structure, or within a reasonable time thereafter, parking areas shall be properly and adequately paved, land frontage area of all buildings and structures shall be properly and adequately landscaped. The entire land area shall be properly and adequately drained to avoid adverse drainage or run-off on adjoining and such drainage shall be properly tied in so as to become an integral part of the Industrial Park drainage. All such paving and landscaping and drainage shall be subject to approval by Pacella Bros. Inc., its successor or assigns, which approval shall not be unreasonably withheld. 5. All areas which have not been paved, and all areas other than frontage shall be attractively graded and seeded and maintained so as to be consistent with a garden type industrial park. 6. Reasonable care shall be used to maintain the appearance of buildings and grounds. 7. Each lot shall have facilities for loading, unloading and parking reasonably sufficient to service the building constructed thereon without using the adjacent streets for such activity. 8. Pacella Bros. Inc. reserves the right at any time to make other restrictions on other parcels which it deems reasonable and necessary for the proper development and/or maintenance of said Industrial Park. 9. No excavated material shall be removed from this Park by the purchaser or tenant of any parcel of this Park. The area in which such excavated material may be disposed of will be designated from time to time at the discretion of Pacella Bros. Inc., its successor or assigns. 10. There shall be no open storage of material by any owner or tenant unless suitably screened from public view by green fencing. 38 EXHIBIT B [INTENTIONALLY OMITTED] 39 EXHIBIT C WORK LETTER AGREEMENT This Work Letter Agreement ("Work Letter"), is incorporated into and made a part of the Sublease dated October 18, 1999 ("Sublease") by and between PacSci Motion Control, Inc., ("Sublandlord") and Network Plus, Inc. ("Subtenant"). All capitalized terms used herein and not defined herein shall have the meaning given to them in the Sublease. Sublandlord and Subtenant agree as follows: 1. General. 1.1 Definition of Subtenant Improvements. The term "Subtenant Improvements" shall mean all improvements shown in the Final Plans (hereinafter defined) and, to the extent specified in the Final Plans, all signage, partitions, built-ins, related cabinets, carpets and floor coverings, electrical, HVAC and plumbing work, ceiling plan and security plan. The "cost of the Subtenant Improvements" means the entire cost of the design and construction of the Subtenant Improvements including, without limitation, all fees and costs of any architect, engineer, or contractor and any other consultants, and all permit fees and other governmental costs and fees. 1.2 Subtenant to Construct. Subtenant shall construct the Subtenant Improvements pursuant to this Work Letter. Sublandlord shall provide the Subtenant Improvement Allowance as set forth in Section 5 of this Work Letter. 1.3 Commencement of Construction. Subtenant shall not commence construction of the Subtenant Improvements until the Early Access Period has commenced. 1.4 Landlord Consent. Subtenant covenants and agrees not to perform any construction activities at the Sublease Premises unless and until all approvals and consents required under the Lease have been obtained from Landlord. Subtenant shall indemnify, defend (by counsel acceptable to Sublandlord in its sole discretion), protect and hold Sublandlord harmless from and against any and all liabilities, claims, demands, losses, damages, costs and expenses (including attorneys' fees and litigation and court costs) arising out of or relating to any claim by Landlord, its successors or assigns, that the Subtenant Improvements were performed without Landlord consent or otherwise in a manner that violates the terms of the Lease. 2. [Intentionally Omitted]. 3. [Intentionally Omitted]. 4. Review. 4.1 Landlord and Sublandlord Review Responsibilities. Subtenant understands and agrees that the review of all plans pursuant to the Master Lease and this Work Letter by Landlord and Sublandlord, respectively, is solely to protect the interests of Landlord and Sublandlord in the Building and the Sublease Premises and neither Landlord nor Sublandlord -1- 40 shall be the guarantor of, nor responsible for, the correctness or accuracy of any such plans or compliance of such plans with applicable laws. 4.2 Inspections. Sublandlord shall have the right to enter and inspect the progress of construction at the Sublease Premises at any time during construction of the Subtenant Improvements upon reasonable advance notice and during normal business hours. 5. Subtenant Improvement Allowance. 5.1 Amount. Sublandlord will pay on behalf of Subtenant an amount equal to: Basic allowance in the form of a 12-month rent credit: ($10.00 psf/80,000 sq. ft.) $800,000.00 Cash Allowance, payable as outlined in Section 6.2, below $475,000.00 ------------- Total: $1,275,000.00
("Subtenant Improvement Allowance"). The Subtenant Improvement Allowance shall be expendable for the costs of the design and construction of the Subtenant Improvements. 5.2 Cost Breakdown; Disbursement. Fifty percent (50%) of the Cash Allowance portion of the Subtenant Improvement Allowance shall be disbursed by Sublandlord when the Subtenant Improvements are fifty percent (50%) completed, as certified by Subtenant's architect. Sublandlord reserves the right to conduct its own inspection of the status of work completed prior to disbursing any funds. The final fifty percent (50%) of the Cash Allowance portion of the Subtenant Improvement Allowance shall be disbursed by Sublandlord within thirty (30) days after all of the following have occurred: (i) Subtenant receives a certificate of occupancy for the Subleased Premises; and (ii) Sublandlord receives from Subtenant final lien releases signed by all contractors and subcontractors, pursuant to local custom. 5.3 Application. Subtenant shall pay the entire cost of the Subtenant Improvements in excess of the Subtenant Improvement Allowance. 6. Presence of Hazardous Substances. In the event that at any time the Subleased Premises are determined to contain Hazardous Substances, Subtenant shall cease work and promptly notify Landlord and Sublandlord, who shall determine, pursuant to the terms of the Lease and Sublease, the procedure and cost allocation to remove, encapsulate, contain, or otherwise dispose of such Hazardous Substances. 7. "As Built" Plans. Within thirty (30) days following completion of the Subtenant Improvements, Subtenant shall deliver to Sublandlord and Landlord a final set of "as built" plans which incorporate all changes to the Final Plans. -2- 41 EXHIBIT D CONSENT OF LANDLORD 41 Pacella Park Drive Randolph, Massachusetts 02368 This Consent of Landlord (this "Consent") dated as of October 18, 1999 is entered into by and between North Queen Street Limited Partnership, a Massachusetts limited partnership ("Landlord") and PacSci Motion Control, Inc. ("Tenant") with reference to that certain Sublease dated as of October 18, 1999 ("Sublease") between Tenant and Network Plus, Inc., a Massachusetts corporation ("Subtenant"). R E C I T A L S A. North America Investors, Inc., predecessor-in-interest to Landlord, and Tenant entered into a written lease dated December 16, 1994 ("Lease") for the premises described therein and commonly known as 41 Pacella Park Drive, Randolph, Massachusetts 02368 (the "Premises"). B. Tenant desires to Sublease the Premises to Subtenant pursuant to the Sublease, and Landlord desires to consent to such subletting on the terms and conditions contained herein. NOW, THEREFORE, in consideration of the mutual agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Tenant and Landlord hereby agree as follows: 1. Consent. Landlord hereby consents to the subletting of the Premises to Subtenant and to Subtenant's proposed use of the Premises, and Landlord represents and warrants to Tenant and Subtenant that no other consents to the Sublease are required, including, without limitation, the consent of any lender on the Premises. Landlord further agrees that if the Master Lease terminates, Landlord shall accept this Sublease as a direct lease between Landlord and Subtenant. 2. Subtenant Improvements. Landlord hereby approves and consents to the proposed Subtenant Improvements, including, but not limited to, demolition and rebuilding of the interior, and replacement of the roof and HVAC. Landlord agrees upon expiration or earlier termination of the Lease to accept surrender of the Premises in its then "as is" condition, together with any and all installations and improvements which may be left at the Premises at Tenant's option. 3. Roof Warranty. Tenant shall immediately assign all its rights under the existing roof warranty to Landlord, and Landlord agrees that Tenant is thereby fully released from any and all obligations under the Lease to maintain and repair the roof throughout the term of the Lease. From the date hereof until expiration or earlier termination of the Lease, Landlord assumes all repair, replacement and maintenance obligations with respect to the roof. 42 4. Satisfaction of Repair and Maintenance Obligations. Landlord acknowledges and agrees that by providing a build-out allowance in the amount of $1,275,000 to be paid by PacSci Motion Control, Inc. to Subtenant and by assigning the existing roof warranty to Landlord, as of the date hereof Subtenant has satisfied all repair and maintenance obligations in the Master Lease, including, but not limited to, those items outlined in the letter dated October 15, 1998 from Terrence W. Conroy to David Burnworth. 5. Option to Terminate. Tenant hereby gives notice, pursuant to Section 2.3 of the Lease, of its election to terminate the Lease effective February 28, 2005, and Landlord accepts and acknowledges such early termination date. 6. Status of Lease. Landlord certifies to Tenant and Subtenant that (i) the Lease is in full force and effect and has not been modified or amended and (ii) there are no defaults on the part of either party thereunder. IN WITNESS WHEREOF, the parties hereto have executed this Consent as of the day and year first above written. LANDLORD: North Queen Street Limited Partnership, a Massachusetts limited partnership By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- TENANT: PacSci Motion Control, Inc. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- 43 ADDENDUM TO SUBLEASE BY AND BETWEEN PACSCI MOTION CONTROL, INC. AND NETWORK PLUS, INC. DATED OCTOBER 22, 1999 (41 PACELLA PARK DRIVE, RANDOLPH, MASSACHUSETTS) 1. Paragraph 16 is deleted in its entirety and replaced with the following: "All insurance required under Section 6.1 of the Master Lease, except for worker's compensation insurance as described in Subsection (b) therein, shall be paid by Sublandlord. Notwithstanding anything to the contrary in the Sublease or Master Lease, Subtenant is responsible for insuring any personal property or trade fixtures." 2. All other provisions of the Sublease remain unchanged and in full force and effect. Sublandlord's Subtenant's Initials Initials EX-10.6(A) 4 b38201npex10-6a.txt FIRST AMENDMENT TO CREDIT AND GUARANTEE AGREEMENT 1 EXHIBIT 10.6A EXECUTION NETWORK PLUS, INC. FIRST AMENDMENT TO CREDIT AND GUARANTY AGREEMENT This FIRST AMENDMENT, dated as of February 9, 2001 (this "AMENDMENT"), to the Credit and Guaranty Agreement, dated as of September 27, 2000 (as amended through the date hereof, the "CREDIT AGREEMENT"), by and among NETWORK PLUS, INC., a Massachusetts corporation ("COMPANY"), NETWORK PLUS CORP., a Delaware corporation ("HOLDINGS"), the Lenders party hereto from time to time, GOLDMAN SACHS CREDIT PARTNERS L.P. ("GSCP"), as a Joint Lead Arranger (in such capacity, a "JOINT LEAD ARRANGER"), Book Runner (in such capacity,"BOOK RUNNER") and as Syndication Agent (in such capacity, "SYNDICATION AGENT"), FLEET SECURITIES, INC., ("FLEET SECURITIES"), as a Joint Lead Arranger (in such capacity, a "JOINT LEAD ARRANGER"), DLJ BRIDGE FINANCE, INC., as Documentation Agent (in such capacity, "DOCUMENTATION AGENT") and FLEET NATIONAL BANK, as Administrative Agent (together with its permitted successors and assigns in such capacity, "ADMINISTRATIVE AGENT") and as Collateral Agent (together with its permitted successors and assigns in such capacity, "COLLATERAL AGENT"). Capitalized terms used herein not otherwise defined herein or otherwise amended hereby shall have the meanings ascribed thereto in the Credit Agreement. RECITALS: WHEREAS, Company and Holdings have requested that Requisite Lenders agree to amend the Credit Agreement, subject to the terms and conditions set forth herein, to (i) allow for the cash collateralization of letters of credit with Loans, (ii) account for a one-time charge Company and Holdings will be taking in the fiscal quarter ended December 31, 2000 relating to a write-off of an investment in securities of NorthPoint Communications Group, Inc. and (iii) make certain other modifications; and NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto agree as follows: 2 SECTION 1. AMENDMENTS TO CREDIT AGREEMENT 1.1 AMENDMENTS TO SECTION 1: DEFINITIONS. A. Section 1.1 of the Credit Agreement is hereby amended by adding thereto the following definitions in proper alphabetical order: "FIRST AMENDMENT" means the First Amendment dated February 9, 2001 to this Agreement by and among Company, Holdings, Lenders as of the date of such amendment, the Joint Lead Arrangers, Book Runner, Syndication Agent, Documentation Agent, Administrative Agent and Collateral Agent." "FIRST AMENDMENT CLOSING DATE" has the meaning assigned to that term in the First Amendment." B. Section 1.1 of the Credit Agreement is hereby further amended by adding the following proviso at the end of clause (e) in the definition of "Consolidated Net Income": ";plus (iii) solely for the purposes of subsection 6.6(c) and solely for any relevant period of measurement under such subsection and only to the extent otherwise deducted in calculating net income, the amount equal to the write-off taken by the Company and Holdings in the fiscal quarter ended December 31, 2000 of an investment in the securities of Northpoint Communications Group, Inc." 1.2 AMENDMENTS TO SECTION 6: NEGATIVE COVENANTS. A. Subsection 6.2(i) is hereby amended by deleting the parenthetical clause "(provided such cash collateral shall not consist of monies funded hereunder)" contained therein. SECTION 2. CONDITIONS PRECEDENT TO EFFECTIVENESS 2.1 The effectiveness of the amendments set forth at Section 1 hereof are subject to the satisfaction, or waiver, of the following conditions on or before the date hereof (the "FIRST AMENDMENT CLOSING DATE"): (a) The Company, Holdings and the Requisite Lenders shall have indicated their consent by the execution and delivery of the signature pages hereof to the Administrative Agent. 2 3 (b) As of the First Amendment Closing Date, the representations and warranties contained herein and in the other Credit Documents shall be true, correct and complete in all respects on and as of the First Amendment Closing Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true, correct and complete in all respects on and as of such earlier date. (c) As of the First Amendment Closing Date, no event shall have occurred and be continuing that would constitute an Event of Default or a Default. (d) The Administrative Agent and Lenders shall have received such other documents and information regarding Credit Parties and the Credit Agreement as the Administrative Agent or Lenders may reasonably request. SECTION 3. REPRESENTATIONS AND WARRANTIES 3.1 In order to induce Lenders to enter into this Amendment, each applicable Credit Party represents and warrants to each Lender, as of the date hereof and upon giving effect to this Amendment: (a) as of the date hereof, there exists no Event of Default under the Credit Agreement; and (b) that the representations and warranties contained in each of the Credit Documents is true, correct and complete in all respects on and as of the date hereof to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true, correct and complete in all respects on and as of such earlier date. SECTION 4. ACKNOWLEDGMENT AND CONSENT 4.1 Holdings has (i) guaranteed the Obligations and (ii) created Liens in favor of Lenders on certain Collateral to secure its obligations under Section 7 of the Credit Agreement. Holdings is referred to herein as the "CREDIT SUPPORT PARTY", and the Credit Agreement and the Pledge and Security Agreement, dated as of September 27, 2000, between the Company, each of the grantors party thereto and Fleet National Bank, as Collateral Agent (as such may be amended, supplemented or modified) (the "PLEDGE AND SECURITY AGREEMENT") are collectively referred to herein as the "CREDIT SUPPORT DOCUMENTS". 3 4 4.2 The Credit Support Party hereby acknowledges that it has reviewed the terms and provisions of the Credit Agreement and this Amendment and consents to the amendment of the Credit Agreement effected pursuant to this Amendment. The Credit Support Party hereby confirms that each Credit Support Document to which it is a party or otherwise bound and all Collateral encumbered thereby will continue to guarantee or secure, as the case may be, to the fullest extent possible in accordance with the Credit Support Documents, the payment and performance of all Guaranteed Obligations under the Credit Agreement Secured Obligations (as such term is defined in the Pledge and Security Agreement) under the Pledge and Security Agreement, as the case may be, including without limitation the payment and performance of all such Guaranteed Obligations under the Credit Agreement and Secured Obligations (as such term is defined in the Pledge and Security Agreement) under the Pledge and Security Agreement in respect of the Obligations of Company now or hereafter existing under or in respect of the Credit Agreement, as amended by this Amendment, and grants to the Collateral Agent a continuing lien on and security interest in and to all Collateral as collateral security for the prompt payment and performance in full when due of the Guaranteed Obligations under the Credit Agreement and the Secured Obligations (as such term is defined in the Pledge and Security Agreement) under the Pledge and Security Agreement (whether at stated maturity, by acceleration or otherwise). 4.3 The Credit Support Party acknowledges and agrees that any of the Credit Support Documents to which it is a party or otherwise bound shall continue in full force and effect and that all of its obligations thereunder shall be valid and enforceable and shall not be impaired or limited by the execution or effectiveness of this Amendment. The Credit Support Party represents and warrants that all representations and warranties contained in the Credit Agreement, as amended by this Amendment, and the Credit Support Documents to which it is a party or otherwise bound are true, correct and complete in all material respects on and as of the First Amendment Closing Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date. 4.4 The Credit Support Party acknowledges and agrees that (i) notwithstanding the conditions to effectiveness set forth in this Amendment, such Credit Support Party is not required by the terms of the Credit Agreement or any other Credit Document to consent to the amendments to the Credit Agreement effected pursuant to this Amendment and (ii) nothing in the Credit Agreement, this Amendment or any other Credit Document shall be deemed to require the consent of such Credit Support Party to any future amendments to the Credit Agreement. SECTION 5. MISCELLANEOUS 5.1 This Amendment shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and assigns of Lenders. No Credit Party's rights or obligations hereunder or any interest therein may be assigned or delegated by any Credit Party without the prior written consent of all Lenders. 4 5 5.2 In case any provision in or obligation hereunder shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 5.3 On and after the First Amendment Closing Date, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Credit Agreement, and each reference in the other Credit Documents to the "Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended by this Amendment. 5.4 Except as specifically amended by this Amendment, the Credit Agreement and the other Credit Documents shall remain in full force and effect and are hereby ratified and confirmed. 5.5 The execution, delivery and performance of this Amendment shall not, except as expressly provided herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of any Agent or Lender under, the Credit Agreement or any of the other Credit Documents. 5.6 Section headings herein are included herein for convenience of reference only and shall not constitute a part hereof for any other purpose or be given any substantive effect. 5.7 THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. 5.8 This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. As set forth herein, this Amendment shall become effective upon the execution of a counterpart hereof by each of the parties hereto and receipt by Company, Holdings and Administrative Agent and Syndication Agent of written or telephonic notification of such execution and authorization of delivery thereof. [The remainder of this page is intentionally left blank.] 5 6 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. NETWORK PLUS, INC. By: /s/ Robert J. Cobuzzi ---------------------------------- Name: Robert J. Cobuzzi Title: Executive V.P. & C.F.O. CREDIT SUPPORT NETWORK PLUS CORP. PARTIES: By: /s/ Robert J. Cobuzzi ---------------------------------- Name: Robert J. Cobuzzi Title: Executive V.P. & C.F.O. S-1 7 GOLDMAN SACHS CREDIT PARTNERS L.P., as Joint Lead Arranger, Book Runner, Syndication Agent and a Lender By: /s/ R. Wagner ------------------------------------ Authorized Signatory S-2 8 FLEET NATIONAL BANK, as Administrative Agent, Collateral Agent and a Lender By: /s/ Kay H. Campbell ------------------------------------ Name: Kay H. Campbell Title: Vice President S-3 9 DLJ BRIDGE FINANCE, INC., as Documentation Agent By: /s/ Eugene F. Martin ------------------------------------ Name: Eugene F. Martin Title: Director S-4 10 NETPLUS FUNDING, INC. as a Lender By: /s/ Eugene F. Martin ------------------------------------ Name: Eugene F. Martin Title: Director S-5 11 IBM CREDIT CORPORATION as a Lender By: /s/ Thomas S. Oureio ------------------------------------ Name: Thomas S. Oureio Title: Manager of Credit S-6 EX-10.8 5 b38201npex10-8.txt FORM OF COMMON STOCK PURCHASE AGREEMENT 1 Exhibit 10.8 -------------------------------------------------------- NETWORK PLUS CORP. Common Stock Purchase Warrant Dated as of _________, 2000 --------------------------------------------------------- [THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF EXCEPT WHILE A REGISTRATION UNDER SUCH ACT IS IN EFFECT OR PURSUANT TO AN EXEMPTION THEREFROM UNDER SUCH ACT. THIS WARRANT AND SUCH SHARES MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH THE CONDITIONS SPECIFIED IN THIS WARRANT.] 2 Table of Contents 1. Exercise of Warrant................................................................. 1 1.1. Manner of Exercise............................................................ 1 1.2. When Exercise Effective....................................................... 2 1.3. Delivery of Stock Certificates, etc........................................... 2 1.4. Payment by Application of Shares Otherwise Issuable........................... 2 1.5. Exercise of Warrants.......................................................... 3 2. Adjustment of Common Stock Issuable Upon Exercise................................... 3 2.1. General; Warrant Price........................................................ 3 2.2. Adjustment of Warrant Price................................................... 3 2.2.1 Issuance of Additional Shares of Common Stock............................ 3 2.2.2 Extraordinary Dividends and Distributions................................ 4 2.3. Treatment of Options and Convertible Securities............................... 4 2.4. Treatment of Stock Dividends, Stock Splits, etc............................... 7 2.5. Computation of Consideration.................................................. 7 2.6. Adjustments for Combinations, etc............................................. 9 2.7. Minimum Adjustment of Warrant Price........................................... 9 3. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, etc.......... 10 4. Other Dilutive Events............................................................... 10 5. No Dilution or Impairment........................................................... 10 6. Report as to Adjustments............................................................ 11 7. Notices of Corporate Action......................................................... 11 8. Registration of Common Stock........................................................ 12 9. Restrictions on Transfer............................................................ 13 9.1. Restrictive Legends........................................................... 13 9.2. Notice of Proposed Transfer; Opinions of Counsel.............................. 13 9.3. Termination of Restrictions................................................... 15 10. Reservation of Stock, etc........................................................... 15 11. Registration and Transfer of Warrants, etc.......................................... 15 11.1. Warrant Register; Ownership of Warrants....................................... 15 11.2. Transfer and Exchange of Warrants............................................ 16 11.3. Replacement of Warrants...................................................... 16 12. Registration under Securities Act, etc............................................. 16 12.1. Registration on Request...................................................... 16 12.2. Incidental Registration...................................................... 19
3 12.3. Registration Procedures...................................................... 21 12.4. Underwritten Offerings....................................................... 27 12.5. Preparation; Reasonable Investigation........................................ 30 12.6. Indemnification.............................................................. 30 13. Definitions........................................................................ 34 14. Remedies........................................................................... 41 15. No Rights or Liabilities as Stockholder............................................ 41 16. Notices............................................................................ 41 17. Amendments......................................................................... 41 18. Expiration......................................................................... 42 19. Descriptive Headings............................................................... 42 20. GOVERNING LAW...................................................................... 42 21. Judicial Proceedings; Waiver of Jury............................................... 42 FORM OF SUBSCRIPTION.................................................................... 53 FORM OF ASSIGNMENT...................................................................... 54
4 NETWORK PLUS CORP. Form Of Common Stock Purchase Warrant New York, New York No. FW-1 _____________, 2000 NETWORK PLUS CORP. (the "COMPANY"), a Delaware corporation, for value received, hereby certifies that [____________________], or registered assigns, is entitled to purchase from the Company [________] duly authorized, validly issued, fully paid and nonassessable shares of Common Stock, par value $0.01 per share (the "COMMON STOCK") of the Company at the purchase price per share of $7.01, at any time or from time to time prior to 5:00 [P.M.], New York City time, on September 27, 2003 (or such earlier date as may be determined pursuant to section 3), all subject to the terms, conditions and adjustments set forth below in this Warrant. This Warrant evidences rights to purchase an aggregate of ______ shares of Common Stock subject to adjustment as provided herein. Certain capitalized terms used in this Warrant are defined in section 13; references to an "Exhibit" are, unless otherwise specified, to one of the Exhibits attached to this Warrant and references to a "section" are, unless otherwise specified, to one of the sections of this Warrant. 1. Exercise of Warrant. 1.1. Manner of Exercise. This Warrant may be exercised by the holder hereof, in whole or in part, during normal business hours on any Business Day, by surrender of this Warrant to the Company at its principal office, accompanied by a subscription in substantially the form attached to this Warrant (or a reasonable facsimile thereof) duly executed by such holder and accompanied by payment, in cash, by certified or official bank check payable to the order of the Company, or in the manner provided in section 1.4 or section 1.5 (or by any combination of such methods), in the amount obtained by multiplying (a) the whole number of shares of Common Stock (without giving effect to any adjustment thereof) designated in such subscription by (b) $7.01 (as adjusted pursuant to the terms hereof), and such holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) determined as provided in sections 2 through 4. 5 1.2. When Exercise Effective. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the Business Day on which this Warrant shall have been surrendered to the Company as provided in section 1.1, and at such time the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock (or Other Securities) shall be issuable upon such exercise as provided in section 1.3 shall be deemed to have become the holder or holders of record thereof. 1.3. Delivery of Stock Certificates, etc. As soon as practicable after each exercise of this Warrant, in whole or in part, and in any event within ten Business Days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof or, subject to section 9, as such holder (upon payment by such holder of any applicable transfer taxes) may direct, (a) a certificate or certificates for the number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash in an amount equal to the same fraction of the Market Price per share on the Business Day next preceding the date of such exercise, and (b) in case such exercise is in part only, a new Warrant or Warrants of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment thereof) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the holder upon such exercise as provided in section 1.1. The holder hereof shall comply will all applicable provisions of the Hart-Scott-Rodino Antitrust Improvements Law of 1976, as amended, and any successor statute, in connection with the exercise of this Warrant, and shall provide to the Company upon its reasonable request a certificate of such compliance. 1.4. Payment by Application of Shares Otherwise Issuable. Upon any exercise of this Warrant, the holder hereof may, at its option, instruct the Company, by written notice accompanying the surrender of this Warrant at the time of such exercise, to apply to the payment required by section 1.1 such number of the shares of Common Stock otherwise issuable to such holder upon such exercise as shall be specified in such notice, in which case an amount equal to the excess of the aggregate Current Market Price of such specified number of shares on the date of exercise over the portion of the payment required by section 1.1 attributable to such shares shall be deemed to have been paid to the Company 6 and the number of shares issuable upon such exercise shall be reduced by such specified number. 1.5. Exercise of Warrants. Notwithstanding anything to the contrary set forth herein, no Warrant shall be exercisable other than in accordance with this section 1.5. The Warrants shall be exercisable as follows: (i) 72.73% of holder's Warrants shall be exercisable at any time on or after the Closing Date (as defined in the Credit Agreement), (ii) 13.64% shall be exercisable on a pro rata basis with each amount drawn by the Company on the first $100 million of loans under the Credit Agreement divided by $100 million, and (iii) 13.63% shall be exercisable at any time on or after the date the amount drawn by the Company under the Credit Agreement exceeds $100 million 2. Adjustment of Common Stock Issuable Upon Exercise. 2.1. General; Warrant Price. The number of shares of Common Stock which the holder of this Warrant shall be entitled to receive upon each exercise hereof shall be determined by multiplying the number of shares of Common Stock which would otherwise (but for the provisions of this section 2) be issuable upon such exercise, as designated by the holder hereof pursuant to section 1.1, by the fraction of which (a) the numerator is $7.01 and (b) the denominator is the Warrant Price in effect on the date of such exercise. The "Warrant Price" shall initially be $7.01 per share, shall be adjusted and readjusted from time to time as provided in this section 2 and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by this section 2. 2.2. Adjustment of Warrant Price. 2.2.1 Issuance of Additional Shares of Common Stock. In case the Company at any time or from time to time after the date hereof shall issue or sell Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to section 2.3 or 2.4) without consideration or for a consideration per share less than the Current Market Price in effect immediately prior to such issue or sale, then, subject to section 2.8, the Warrant Price shall be reduced, concurrently with such issue or sale, to a price (calculated to the nearest .001 of a cent) determined by multiplying such Warrant Price by a fraction (a) the numerator of which shall be (i) the number of shares of Common Stock outstanding immediately prior to such issue or sale plus (ii) the number of shares of Common Stock which the aggregate consideration 3 7 received by the Company for the total number of such Additional Shares of Common Stock so issued or sold would purchase at such Current Market Price, and (b) the denominator of which shall be the number of shares of Common Stock outstanding immediately after such issue or sale, provided that, for the purposes of this section 2.2.1, (x) immediately after any Additional Shares of Common Stock are deemed to have been issued pursuant to section 2.3 or 2.4, such Additional Shares shall be deemed to be outstanding, and (y) treasury shares shall not be deemed to be outstanding. 2.2.2 Extraordinary Dividends and Distributions. In case the Company at any time or from time to time after the date hereof shall declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of other or additional stock or other securities or property or Options by way of dividend or spin-off, reclassification, recapitalization or similar corporate rearrangement) on the Common Stock, other than a dividend payable in Additional Shares of Common Stock, then, and in each such case, subject to section 2.8, the Warrant Price in effect immediately prior to the close of business on the record date fixed for the determination of holders of any class of securities entitled to receive such dividend or distribution shall be reduced, effective as of the close of business on such record date, to a price (calculated to the nearest .001 of a cent) determined by multiplying such Warrant Price by a fraction (x) the numerator of which shall be the Current Market Price in effect on such record date or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading, less the amount of such dividend or distribution (as determined in good faith by the Board of Directors of the Company) applicable to one share of Common Stock, and (y) the denominator of which shall be such Current Market Price. 2.3. Treatment of Options and Convertible Securities. In case the Company at any time or from time to time after the date hereof shall issue, sell, grant or assume, or shall fix a record date for the determination of holders of any class of securities entitled to receive, any Options or Convertible Securities, then, and in each such case, the maximum number of Additional Shares of Common Stock (as set forth in the instrument relating thereto, without regard 4 8 to any provisions contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue, sale, grant or assumption or, in case such a record date shall have been fixed, as of the close of business on such record date (or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading), provided that such Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to section 2.5) of such shares would be less than the Current Market Price in effect on the date of and immediately prior to such issue, sale, grant or assumption or immediately prior to the close of business on such record date (or, if the Common Stock trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading), and provided, further, that in any such case in which Additional Shares of Common Stock are deemed to be issued (a) no further adjustment of the Warrant Price shall be made upon the subsequent issue or sale of Convertible Securities or shares of Common Stock upon the exercise of such Options or the conversion or exchange of such Convertible Securities, except in the case of any such Options or Convertible Securities which contain provisions requiring an adjustment, subsequent to the date of the issue or sale thereof, of the number of Additional Shares of Common Stock issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities by reason of (x) a change of control of the Company, (y) the acquisition by any Person or group of Persons of any specified number or percentage of the Voting Securities of the Company or (z) any similar event or occurrence, each such case to be deemed hereunder to involve a separate issuance of Additional Shares of Common Stock, Options or Convertible Securities, as the case may be; (b) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company, or decrease in the number of Additional Shares of Common Stock issuable, upon the exercise, conversion or exchange thereof (by change of rate or otherwise), the Warrant Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date, or date prior to the commencement of ex-dividend trading, as the case may be, with respect thereto), and any subsequent adjustments based thereon, shall, upon any 5 9 such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options, or the rights of conversion or exchange under such Convertible Securities, which are outstanding at such time; (c) upon the expiration (or purchase by the Company and cancellation or retirement) of any such Options which shall not have been exercised or the expiration of any rights of conversion or exchange under any such Convertible Securities which (or purchase by the Company and cancellation or retirement of any such Convertible Securities the rights of conversion or exchange under which) shall not have been exercised, the Warrant Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date, or date prior to the commencement of ex-dividend trading, as the case may be, with respect thereto), and any subsequent adjustments based thereon, shall, upon such expiration (or such cancellation or retirement, as the case may be), be recomputed as if: (i) in the case of Options for Common Stock or Convertible Securities, the only Additional Shares of Common Stock issued or sold were the Additional Shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration actually received by the Company upon such exercise, or for the issue or sale of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Company upon such conversion or exchange, and (ii) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued or sold upon the exercise of such Options were issued at the time of the issue, sale, grant or assumption of such Options, and the consideration received by the Company for the Additional Shares of Common Stock deemed to have then been issued was the consideration actually received by the Company for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Company (pursuant to section 2.5) upon the issue or sale of such Convertible Securities with respect to which 6 10 such Options were actually exercised; (d) no readjustment pursuant to subdivision (b) or (c) above shall have the effect of increasing the Warrant Price by an amount in excess of the amount of the adjustment thereof originally made in respect of the issue, sale, grant or assumption of such Options or Convertible Securities; and (e) in the case of any such Options which expire by their terms not more than 30 days after the date of issue, sale, grant or assumption thereof, no adjustment of the Warrant Price shall be made until the expiration or exercise of all such Options, whereupon such adjustment shall be made in the manner provided in subdivision (c) above. 2.4. Treatment of Stock Dividends, Stock Splits, etc. In case the Company at any time or from time to time after the date hereof shall declare or pay any dividend on the Common Stock payable in Common Stock, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by reclassification or otherwise than by payment of a dividend in Common Stock), then, and in each such case, Additional Shares of Common Stock shall be deemed to have been issued (a) in the case of any such dividend, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend, or (b) in the case of any such subdivision, at the close of business on the day immediately prior to the day upon which such corporate action becomes effective. 2.5. Computation of Consideration. For the purposes of this section 2, (a) the consideration for the issue or sale of any Additional Shares of Common Stock shall, irrespective of the accounting treatment of such consideration, (i) insofar as it consists of cash, be computed at the net amount of cash received by the Company, (ii) insofar as it consists of property (including securities) other than cash, be computed at the fair value thereof at the time of such issue or sale, as determined in good faith by the Board of Directors of the Company, and 7 11 (iii) in case Additional Shares of Common Stock are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, be the portion of such consideration so received, computed as provided in clauses (i) and (ii) above, allocable to such Additional Shares of Common Stock, all as determined in good faith by the Board of Directors of the Company; (b) Additional Shares of Common Stock deemed to have been issued pursuant to section 2.3, relating to Options and Convertible Securities, shall be deemed to have been issued for a consideration per share determined by dividing (i) the total amount, if any, received and receivable by the Company as consideration for the issue, sale, grant or assumption of the Options or Convertible Securities in question, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration to protect against dilution) payable to the Company upon the exercise in full of such Options or the conversion or exchange of such Convertible Securities or, in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, in each case computing such consideration as provided in the foregoing subdivision (a), by (ii) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number to protect against dilution) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities; and (c) Additional Shares of Common Stock deemed to have been issued pursuant to section 2.4, relating to stock dividends, stock splits, etc., shall be deemed to have been issued for no consideration. 2.6. Adjustments for Combinations, etc. In case the outstanding 8 12 shares of Common Stock shall be combined or consolidated, by reclassification, reverse stock-split or otherwise, into a lesser number of shares of Common Stock, the Warrant Price in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. 2.7. Minimum Adjustment of Warrant Price. If the amount of any adjustment of the Warrant Price required pursuant to this section 2 would be less than one tenth (1/10) of one percent (1%) of the Warrant Price in effect at the time such adjustment is otherwise so required to be made, such amount shall be carried forward and adjustment with respect thereto made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate at least one tenth (1/10) of one percent (1%) of such Warrant Price. 3. Adjustments for Consolidation, Merger, Sale of Assets, Reorganization, etc. In case the Company after the date hereof (a) shall consolidate with or merge into any other Person and shall not be the continuing or surviving corporation of such consolidation or merger, or (b) shall permit any other Person to consolidate with or merge into the Company and the Company shall be the continuing or surviving Person but, in connection with such consolidation or merger, the Common Stock or Other Securities shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (c) shall transfer all or substantially all of its properties or assets to any other Person, or (d) shall effect a capital reorganization or reclassification of the Common Stock or Other Securities (other than a capital reorganization or reclassification resulting in the issue of Additional Shares of Common Stock for which adjustment in the Warrant Price is provided in section 2.2.1 or 2.2.2), then, this Warrant shall automatically terminate in its entirety immediately upon the consummation of such transaction, provided that, upon the basis and the terms and in the manner provided in this Warrant, the holder of this Warrant shall be permitted to exercise this Warrant immediately preceding the consummation of such transaction and immediately after such exercise shall be entitled to receive (at the aggregate Warrant Price in effect at the time of such consummation for all Common Stock or Other Securities issuable upon such exercise immediately prior to such consummation), in lieu of the Common Stock or Other Securities issuable upon such exercise prior to such consummation, the stock and other securities, cash and property to which such holder would have been entitled upon such consummation if such holder had exercised the rights represented by this Warrant immediately prior thereto. 9 13 4. Other Dilutive Events. In case any event shall occur as to which the provisions of section 2 or section 3 are not strictly applicable but the failure to make any adjustment would not fairly protect the purchase rights represented by this Warrant in accordance with the essential intent and principles of such sections, then, in each such case, the Company shall appoint a firm of independent certified public accountants of recognized national standing (which may be the regular auditors of the Company), which shall give their opinion upon the adjustment, if any, on a basis consistent with the essential intent and principles established in sections 2 and 3, necessary to preserve, without dilution, the purchase rights represented by this Warrant. Upon receipt of such opinion, the Company will promptly mail a copy thereof to the holder of this Warrant and shall make the adjustments described therein. 5. No Dilution or Impairment. The Company will not, by amendment of its certificate of incorporation or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holder of this Warrant against dilution or other impairment. Without limiting the generality of the foregoing, the Company (a) will not permit the par value of any shares of stock receivable upon the exercise of this Warrant to exceed the amount payable therefor upon such exercise, (b) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock on the exercise of the Warrants from time to time outstanding and (c) will not take any action which results in any adjustment of the Warrant Price if the total number of shares of Common Stock (or Other Securities) issuable after the action upon the exercise of all of the Warrants would exceed the total number of shares of Common Stock (or Other Securities) then authorized by the Company's certificate of incorporation and available for the purpose of issue upon such exercise. 6. Report as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable upon the exercise of this Warrant, the Company at its expense will promptly compute such adjustment or readjustment in accordance with the terms of this Warrant and provide to holder an officers certificate verifying such computation (other than any computation of the fair value of property as determined in good faith by the Board of Directors of the Company) and prepare a report setting forth such adjustment or readjustment and showing in reasonable detail the method 10 14 of calculation thereof and the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or to be received by the Company for any Additional Shares of Common Stock issued or sold or deemed to have been issued, (b) the number of shares of Common Stock outstanding or deemed to be outstanding, and (c) the Warrant Price in effect immediately prior to such issue or sale and as adjusted and readjusted (if required by section 2) on account thereof. The Company will forthwith mail a copy of each such report to each holder of a Warrant and will, upon the written request at any time of any holder of a Warrant, furnish to such holder a like report setting forth the Warrant Price at the time in effect and showing in reasonable detail how it was calculated. 7. Notices of Corporate Action. In the event of (a) any taking by the Company of a record of the holders of Common Stock for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a regular periodic dividend payable in cash out of earned surplus in an amount not exceeding the amount of the immediately preceding cash dividend for such period) or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger involving the Company and any other Person or any transfer of all or substantially all the assets of the Company to any other Person, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, the Company will mail to each holder of a Warrant a notice specifying (i) the date or expected date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right, and (ii) the date or expected date on which any such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of Common Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock (or Other Securities) for the securities or other property deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, 11 15 transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least twenty days prior to the date therein specified. 8. Registration of Common Stock. If any shares of Common Stock required to be reserved for purposes of exercise of this Warrant require registration with or approval of any governmental authority under any federal or state law (other than the Securities Act) before such shares may be issued upon exercise, the Company will, at its expense and as expeditiously as possible, use its reasonable best efforts to cause such shares to be duly registered or approved, as the case may be. At any such time as Common Stock is listed on any national securities exchange, the Company will, at its expense, use its reasonable best efforts to obtain promptly and maintain the approval for listing on each such exchange, upon official notice of issuance, the shares of Common Stock issuable upon exercise of the then outstanding Warrants and maintain the listing of such shares after their issuance; and the Company will use its reasonable best efforts to list on such national securities exchange, register under the Exchange Act and maintain such listing of, any Other Securities that at any time are issuable upon exercise of the Warrants, if and at the time that any securities of the same class shall be listed on such national securities exchange by the Company. 9. Restrictions on Transfer. 9.1. Restrictive Legends. Except as otherwise permitted by this section 9, each Warrant (including each Warrant issued upon the transfer of any Warrant) shall be stamped or otherwise imprinted with a legend in substantially the following form: "This Warrant and any shares acquired upon the exercise of this Warrant have not been registered under the Securities Act of 1933, as amended, and may not be transferred, sold or otherwise disposed of except while a registration under such Act is in effect or pursuant to an exemption therefrom under such Act. This Warrant and such shares may be transferred only in compliance with the conditions specified in this Warrant." Except as otherwise permitted by this section 9, each certificate for Common Stock (or Other Securities) issued upon the exercise of any Warrant, and each certificate issued upon the transfer of any such Common Stock (or Other Securities), shall be stamped or otherwise imprinted with a legend in substantially the following form: 12 16 "The shares represented by this certificate have not been registered under the Securities Act of 1933 and may not be transferred in the absence of such registration or an exemption therefrom under such Act. Such shares may be transferred only in compliance with the conditions specified in certain Common Stock Purchase Warrants issued by Network Plus Corp. A complete and correct copy of the form of such Warrant is available from Network Plus Corp. and will be furnished to the holder of such shares upon written request and without charge." 9.2. Notice of Proposed Transfer; Opinions of Counsel. Prior to any transfer of any Restricted Securities which are not registered under an effective registration statement under the Securities Act, the holder thereof will give written notice to the Company of such holder's intention to effect such transfer and to comply in all other respects with this section 9.2. Each such notice (a) shall describe the manner and circumstances of the proposed transfer in sufficient detail to enable counsel to render the opinions referred to below, and (b) shall designate counsel for the holder giving such notice (who may be house counsel for such holder). The holder giving such notice will submit a copy thereof to the counsel designated in such notice and the Company will promptly submit a copy thereof to its counsel. The following provisions shall then apply: (i) If (A) in the opinion of such counsel for the holder the proposed transfer may be effected without registration of such Restricted Securities under the Securities Act, and (B) counsel for the Company shall not have rendered a reasoned written objection thereto within 15 days after the receipt by the Company of such written notice that such registration is required, such holder shall thereupon be entitled to transfer such securities in accordance with the terms of the notice delivered by such holder to the Company. Each warrant or certificate, if any, representing such securities issued upon or in connection with such transfer shall bear the appropriate restrictive legend required by section 9.1, unless in the opinion of each such counsel such legend is no longer required to insure compliance with the Securities Act. (ii) If in the opinion of either of or both such counsel the proposed transfer may not legally be effected without registration of such Restricted Securities under the Securities Act (such opinion or opinions to state the basis of the legal conclusions reached therein), the Company will promptly so notify the holder thereof 13 17 and thereafter such holder shall not be entitled to transfer such Restricted Securities until either (x) receipt by the Company of a further notice from such holder pursuant to the foregoing provisions of this section 9.2 and fulfillment of the provisions of clause (i) above or (y) such shares have been effectively registered under the Securities Act. Notwithstanding the foregoing provisions of this section 9.2(ii), [THE PURCHASER OF THE WARRANTS] shall be permitted to transfer any Restricted Securities to a limited number of institutional investors, provided that (A) each such investor represents in writing that it is acquiring such Restricted Securities for investment and not with a view to the distribution thereof (subject, however, to any requirement of law that the disposition thereof shall at all times be within the control of such transferee), (B) each such investor agrees in writing to be bound by all the restrictions on transfer of such Restricted Securities contained in this section 9.2 and (C) [THE PURCHASER OF THE WARRANTS] delivers to the Company an opinion of Skadden, Arps, Slate, Meagher & Flom, or other counsel satisfactory to the Company, stating that such transfer may be effected without registration under the Securities Act. The Company will pay the reasonable fees and disbursements of Skadden, Arps, Slate, Meagher & Flom or Hale & Dorr for any holder of Restricted Securities and of counsel for the Company in connection with all opinions rendered by them pursuant to this section 9.2 and pursuant to section 9.3; provided that such opinions relate to the transfer of at least 1,284,685 shares of Common Stock in the aggregate (subject to proportionate adjustment as provided for hereunder) and that such shares will cease to constitute Restricted Securities following such transfer for the purposes of this section 9.2 and section 9.3. 9.3. Termination of Restrictions. The restrictions imposed by this section 9 upon the transferability of Restricted Securities shall cease and terminate as to any particular Restricted Securities (a) when such securities shall have been effectively registered under the Securities Act, or (b) when, in the opinions of both counsel for the holder thereof and counsel for the Company, such restrictions are no longer required in order to insure compliance with the Securities Act. Whenever such restrictions shall cease and terminate as to any Restricted Securities, the holder thereof shall be entitled to receive from the Company, without expense (other than applicable transfer taxes, if any), new securities of like tenor not bearing the applicable legends required by section 9.1. 10. Reservation of Stock, etc. The Company will at all times reserve and keep available, solely for issuance and delivery upon exercise of the 14 18 Warrants, the number of shares of Common Stock (or Other Securities) from time to time issuable upon exercise of all Warrants at the time outstanding. All shares of Common Stock (or Other Securities) issuable upon exercise of any Warrants shall be duly authorized and, when issued upon such exercise, shall be validly issued and, in the case of shares, fully paid and nonassessable with no liability on the part of the holders thereof. 11. Registration and Transfer of Warrants, etc. 11.1. Warrant Register; Ownership of Warrants. The Company will keep at the principal office of the Company or its transfer agent a register in which the Company will provide for the registration of Warrants and the registration of transfers of Warrants. The Company may treat the Person in whose name any Warrant is registered on such register as the owner thereof for all other purposes, and the Company shall not be affected by any notice to the contrary, except that, if and when any Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer thereof as the owner of such Warrant for all purposes. Subject to section 9, a Warrant, if properly assigned, may be exercised by a new holder without a new Warrant first having been issued. 11.2. Transfer and Exchange of Warrants. Upon surrender of any Warrant for registration of transfer or for exchange to the Company at its principal office, the Company at its expense will (subject to compliance with section 9, if applicable) execute and deliver in exchange therefor a new Warrant or Warrants of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered. 11.3. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction of any Warrant, upon delivery of an indemnity bond in such reasonable amount as the Company may determine (or, in the case of any Warrant held by any Institutional Holder or its nominee, of an indemnity agreement from such Institutional Holder reasonably satisfactory to the Company), or, in the case of any such mutilation, upon the surrender of such Warrant for cancellation to the Company at its principal office, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 15 19 12. Registration under Securities Act, etc. 12.1. Registration on Request. (a) Request. On no more than three occasions upon the written request of one or more Initiating Holders, requesting that the Company effect the registration under the Securities Act of all or part of such Initiating Holders' Registerable Securities and specifying the intended method of disposition thereof, the Company will, subject to the terms of this Warrant, promptly give written notice of such requested registration to all registered holders of Registerable Securities, and thereupon the Company will effect the registration under the Securities Act of (i) the Registerable Securities which the Company has been so requested to register by such Initiating Holders for disposition in accordance with the intended method of disposition stated in such request, and (ii) all other Registerable Securities the holders of which shall have made a written request to the Company for registration thereof within 30 days after the giving of such written notice by the Company (which request shall specify the intended method of disposition of such Registerable Securities), all to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registerable Securities so to be registered. (b) Registration Statement Form. Registrations under this section 12.1 shall be on such appropriate registration form of the Commission (i) as shall be selected by the Company and (ii) as shall permit the disposition of such Registerable Securities in accordance with the intended method or methods of disposition specified in their request for such registration. The Company agrees to include in any such registration statement all information which holders of Registerable Securities being registered shall reasonably request. If, in connection with any registration under this section 12.1 which is proposed by the Company to be on Form S-3 or any similar short form registration statement which is a successor to Form S-3, the managing underwriters, if any, shall advise the Company in writing that in their opinion the use of another permitted form is of material 16 20 importance to the success of the offering, then such registration shall be on such other permitted form. (c) Expenses. The Company will pay all Registration Expenses in connection with any registration requested pursuant to this section 12.1 by any Initiating Holders of Registerable Securities prior to the time at which three such registrations shall have been effected in which all of the Registerable Securities requested to be included in such registration by any holders of Registerable Securities shall have been registered pursuant to this section 12.1. The Registration Expenses (and underwriting discounts and commissions and transfer taxes, if any) in connection with each other registration requested under this section 12.1 shall be allocated pro rata among all Persons on whose behalf securities of the Company are included in such registration, on the basis of the respective amounts of the securities then being registered on their behalf. (d) Effective Registration Statement. A registration requested pursuant to this section 12.1 shall not be deemed to have been effected (i) unless a registration statement with respect thereto has become effective, provided that a registration which does not become effective after the Company has filed a registration statement with respect thereto solely by reason of the refusal to proceed of the Initiating Holders (other than a refusal to proceed based upon the advice of counsel relating to a matter with respect to the Company or material adverse information concerning the business or financial condition of the Company which is made known to the Initiating Holders after the date on which such registration was requested) shall be deemed to have been effected by the Company at the request of such Initiating Holders unless the Initiating Holders shall have elected to pay all Registration Expenses in connection with such registration, (ii) if, after it has become effective, such registration becomes subject to any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason, (provided that, in lieu of such registration not being deemed to have been effected, the Company may extend the registration period may be extended by the period of such stop order, injunction or other order, up to a maximum of ninety days) or (iii) the conditions to closing specified in the purchase agreement or underwriting agreement entered into in connection with such registration are not satisfied, other than by reason of some act or omission by such Initiating Holders. (e) Selection of Underwriters. If a requested registration pursuant to this section 12.1 involves an underwritten offering, the 17 21 underwriter or underwriters thereof shall be selected by the holders of at least a majority (by number of shares) of the Registerable Securities as to which registration has been requested and shall be acceptable to the Company, which shall not unreasonably withhold its acceptance of any such underwriters. (f) Priority in Requested Registrations. If a requested registration pursuant to this section 12.1 involves an underwritten offering, and the managing underwriter shall advise the Company in writing (with a copy to each holder of Registerable Securities requesting registration) that, in its opinion, the number of securities requested to be included in such registration exceeds the number which can be sold in such offering within a price range acceptable to the holders of a majority of the Registerable Securities requested to be included in such registration, the Company will include in such registration, to the extent of the number which the Company is so advised can be sold in such offering, Registerable Securities requested to be included in such registration by the holder or holders of Registerable Securities, pro rata among the holders thereof requesting such registration on the basis of the number of such securities requested to be included by such holders. In connection with any such registration, no securities other than Registerable Securities shall be covered by such registration. (g) If at the time of any request to register Registerable Securities by any holder, pursuant to this Section 12.1, the Company is engaged or has plans to engage in a registered public offering or is engaged in any other activity which, in the good faith determination of the Company's Board of Directors, would be adversely affected by the requested registration, then the Company may at its option direct, upon no less than five days prior written notice, that such request be delayed for a period not in excess of 90 days from the date of the expiration of such notice, such right to delay a request to be exercised by the Company not more than once in any 12-month period. 12.2. Incidental Registration. (a) Right to Include Registerable Securities. If the Company at any time proposes to register any of its securities under the Securities Act (other than by a registration on Form S-4 or S-8 or any successor or similar forms and other than pursuant to section 12.1), whether or not for sale for its own account, it will each such time give prompt written notice to 18 22 all holders of Registerable Securities of its intention to do so and of such holders' rights under this section 12.2. Upon the written request of any such holder made within fifteen days after the receipt of any such notice (which request shall specify the Registerable Securities intended to be disposed of by such holder and the intended method of disposition thereof), the Company will, subject to the terms of this Warrant, effect the registration under the Securities Act of all Registerable Securities which the Company has been so requested to register by the holders thereof, to the extent requisite to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registerable Securities so to be registered, by inclusion of such Registerable Securities in the registration statement which covers the securities which the Company proposes to register, provided that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason either not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to each holder of Registerable Securities and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registerable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any holder or holders of Registerable Securities entitled to do so to request that such registration be effected as a registration under section 12.1, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registerable Securities, for the same period as the delay in registering such other securities. No registration effected under this section 12.2 shall relieve the Company of its obligation to effect any registration upon request under section 12.1 nor shall any such registration hereunder be deemed to have been effected pursuant to section 12.1. The Company will pay all Registration Expenses in connection with each registration of Registerable Securities requested pursuant to this section 12.2. (b) Priority in Incidental Registrations. If (i) a registration pursuant to this section 12.2 involves an underwritten offering of the securities so being registered, whether or not for sale for the account of the Company, to be distributed (on a firm commitment basis) by or through one or more underwriters of recognized standing under underwriting terms appropriate for such a transaction, (ii) the Registerable Securities so requested to be registered for sale for the account of holders of 19 23 Registerable Securities are not also to be included in such underwritten offering (either because the Company has not been requested so to include such Registerable Securities pursuant to section 12.4(b) or, if requested to do so, is not obligated to do so under section 12.4(b)), and (iii) the managing underwriter of such underwritten offering shall inform the Company and holders of the Registerable Securities requesting such registration by letter of its belief that the distribution of all or a specified number of such Registerable Securities concurrently with the securities being distributed by such underwriters would interfere with the successful marketing of the securities being distributed by such underwriters (such writing to state the basis of such belief and the approximate number of such Registerable Securities which may be distributed without such effect), then the Company may, upon written notice to all holders of such Registerable Securities, reduce pro rata (if and to the extent stated by such managing underwriter to be necessary to eliminate such effect) the number of such Registerable Securities the registration of which shall have been requested by each holder of Registerable Securities so that the resultant aggregate number of such Registerable Securities so included in such registration shall be equal to the number of shares stated in such managing underwriter's letter. 12.3. Registration Procedures. If and whenever the Company is required to effect the registration of any Registerable Securities under the Securities Act as provided in sections 12.1 and 12.2 the Company shall promptly: (i) prepare and (within sixty days after the end of the period within which requests for registration may be given to the Company or in any event as soon thereafter as possible) (in the case of a registration pursuant to section 12.1, such filing to be made within sixty days after the initial request of one or more Initiating Holders of Registerable Securities or in any event as soon thereafter as possible) file with the Commission the requisite registration statement to effect such registration (including such audited financial statements as may be required by the Securities Act or the rules and regulations promulgated thereunder) and thereafter use its reasonable best efforts to cause such registration statement to become and remain effective, provided, however, that the Company may discontinue any registration of its securities which are not Registerable Securities (and, under the circumstances specified in section 12.2(a), its securities which are Registerable Securities) at any time prior to the effective date of the registration statement 20 24 relating thereto; (ii) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement or (i) in the case of a registration pursuant to section 12.1, the expiration of 180 days after such registration statement becomes effective, or (ii) in the case of a registration pursuant to section 12.2, the expiration of 90 days after such registration statement becomes effective; (iii) furnish to each seller of Registerable Securities covered by such registration statement and each underwriter, if any, of the securities being sold by such seller such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents, as such seller and underwriter, if any, may reasonably request; (iv) use its reasonable best efforts to register or qualify all Registerable Securities and other securities covered by such registration statement under such other securities laws or blue sky laws of such jurisdictions as any seller thereof and any underwriter of the securities being sold by such seller shall reasonably request, to keep such registrations or qualifications in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary or advisable to enable such seller and underwriter to consummate the disposition in such jurisdictions of the securities owned by such seller, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (iv) 21 25 be obligated to be so qualified, to subject itself to taxation in any such jurisdiction or to consent to general service of process in any such jurisdiction; (v) use its reasonable best efforts to cause all Registerable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Registerable Securities; (vi) use its reasonable best efforts to furnish to each seller of Registerable Securities a signed counterpart, addressed to such seller and the underwriters, if any of (x) an opinion of counsel for the Company, dated the effective date of such registration statement (or, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), reasonably satisfactory in form and substance to such seller, and (y) a "comfort" letter (or, in the case of such Person which does not satisfy the conditions for receipt of a "comfort" letter specified in Statement on Auditing Standards No. 72, an "agreed upon procedures" letter), dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement), signed by the independent public accountants who have certified the Company's financial statements included in such registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to the underwriters in underwritten public offerings of securities (with, in the case of an "agreed upon procedures" letter, such modifications or deletions as may be required under Statement on Auditing Standards No. 35) and, in the case of the accountants' letter, such other financial matters, and, in the case of the legal opinion, such other legal matters, as such seller (or the underwriters, if any) may reasonably request; 22 26 (vii) notify the holders of Registerable Securities and the managing underwriter or underwriters, if any, promptly and confirm such advice in writing promptly thereafter: (v) when the registration statement, the prospectus or any prospectus supplement related thereto or post-effective amendment to the registration statement has been filed, and, with respect to the registration statement or any post-effective amendment thereto, when the same has become effective; (w) of any request by the Commission for amendments or supplements to the registration statement or the prospectus or for additional information; (x) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings by any Person for that purpose; (y) if at any time the representations and warranties of the Company made as contemplated by section 12.4 below cease to be true and correct; (z) of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registerable Securities for sale under the securities or blue sky laws of any jurisdiction or the initiation or threat of any proceeding for such purpose; (viii) notify each seller of Registerable Securities covered by such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon the Company's discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing, and at the request of any such seller promptly prepare and furnish to such seller and each underwriter, if any, a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; 23 27 (ix) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder, and will furnish to each such seller prior to the filing thereof a copy of any amendment or supplement to such registration statement or prospectus and shall not file any thereof to which any such seller shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act or of the rules or regulations thereunder; (x) make available for inspection by a representative or representatives of the holders of Registerable Securities any underwriter participating in any disposition pursuant to the registration statement and any attorney or accountant retained by such selling holders or underwriter (each, an "INSPECTOR"), all financial and other records, pertinent corporate documents and properties of the Company (the "RECORDS"), and cause the Company's officers, directors and employees to supply all information reasonably requested by any such Inspector in connection with such registration in order to permit a reasonable investigation within the meaning of Section 11 of the Securities Act, provided that the Company shall not be required to comply with this subdivision (xi) if there is a reasonable likelihood, in the judgment of the Company, that such delivery could result in the loss of any attorney-client privilege related thereto; and provided further that Records which the Company determines, in good faith, to be confidential and which it notifies the Inspectors are confidential shall not be disclosed by the Inspectors (other than to any holder of Registerable Securities) unless (x) such Records have become generally available to the public or (y) the disclosure of such Records may be necessary or appropriate (A) in compliance with any law, rule, regulation or order applicable to any such Inspectors or holder of Registerable Securities, (B) in response to any subpoena or other legal process or (C) in connection with any litigation to which such Inspectors or any holder of Registerable Securities is a party; 24 28 (xi) provide and cause to be maintained a transfer agent and registrar for all Registerable Securities covered by such registration statement from and after a date not later than the effective date of such registration statement; (xii) take such other actions as sellers of such Registerable Securities holding 51% of the shares so to be sold shall reasonably request in order to expedite or facilitate the disposition of such Registerable Securities; (xiii) use its best efforts to list all Registerable Securities covered by such registration statement on any securities exchange on which any of the securities of the same class as the Registerable Securities are then listed; and (xiv) use its best efforts to provide a CUSIP number for the Registerable Securities, not later than the effective date of the registration statement. The Company may require each seller of Registerable Securities as to which any registration is being effected to furnish the Company such information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registerable Securities shall be deemed to have agreed by acquisition of such Registerable Securities that, upon receipt of any notice from the Company of the occurrence of any event of the kind described in subdivision (vii) or (viii) of this section 12.3, such holder will forthwith discontinue such holder's disposition of Registerable Securities pursuant to the registration statement relating to such Registerable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by subdivision (vii) of this section 12.3 and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in such holder's possession of the prospectus relating to such Registerable Securities current at the time of receipt of such notice. In the event that, in the reasonable judgment of the Company, it is necessary or advisable to suspend use of a prospectus included in a Registration Statement due to pending material developments or other material events that 25 29 have not yet been publicly disclosed and as to which the Company believes public disclosure would be detrimental to the Company, the Company shall notify all sellers of Registerable Securities to such effect, and upon receipt of such notice, each such seller of Registerable Securities shall promptly discontinue any sales of Registerable Securities pursuant to Registration Statement until such seller of Registerable Securities has received copies of a supplemented or amended prospectus or until such seller of Registerable Securities is advised in writing by the Company that the current prospectus may be used and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in such prospectus. Notwithstanding anything to the contrary herein, the Company shall not exercise its rights under this paragraph to suspend sales of Registerable Securities for a period in excess of ninety days in any 365 day-period. If any such registration or comparable statement refers to any holder of Registerable Securities by name or otherwise as the holder of any securities of the Company then such holder shall have the right to require (i) the insertion therein of language, in form and substance satisfactory to such holder, to the effect that the holding by such holder of such securities is not to be construed as a recommendation by such holder of the investment quality of the Company's securities covered thereby and that such holding does not imply that such holder will assist in meeting any future financial requirements of the Company, or (ii) in the event that such reference to such holder by name or otherwise is not required by the Securities Act or any similar federal statute then in force, the deletion of the reference to such holder. 12.4. Underwritten Offerings. (a) Requested Underwritten Offerings. If requested by the underwriters for any underwritten offering by holders of Registerable Securities pursuant to a registration requested under section 12.1, the Company will enter into an underwriting agreement with such underwriters for such offering, such agreement to be satisfactory in substance and form to the Company, each such holder and the underwriters, and to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of this type, including, without limitation, indemnities to the effect and to the extent provided in section 12.7. The holders of the Registerable Securities will cooperate with the Company in the negotiation of the underwriting agreement and will give consideration to the reasonable suggestions of the Company regarding the form thereof, provided that 26 30 nothing herein contained shall diminish the foregoing obligations of the Company. The holders of Registerable Securities to be distributed by such underwriters shall be parties to such underwriting agreement and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registerable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registerable Securities. Any such holder of Registerable Securities shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations and warranties contained in a writing furnished by such holder expressly for use in such registration statement, customary representations and warranties contained in the relevant underwriting agreement, or agreements regarding such holder, such holder's Registerable Securities and such holder's intended method of distribution and any other representation required by law. (b) Incidental Underwritten Offerings. If the Company at any time proposes to register any of its securities under the Securities Act as contemplated by section 12.2 and such securities are to be distributed by or through one or more underwriters, the Company will, if requested by any holder of Registerable Securities as provided in section 12.2 and subject to the provisions of section 12.2(b), use its best efforts to arrange for such underwriters to include all the Registerable Securities to be offered and sold by such holder among the securities to be distributed by such underwriters, provided that if the managing underwriter of such underwritten offering shall inform the holders of the Registerable Securities requesting such registration and the holders of any other securities which shall have exercised, in respect of such underwritten offering, registration rights comparable to the rights under section 12.2 by letter of its belief that inclusion in such underwritten distribution of all or a specified number of such Registerable Securities or of such other shares of securities so requested to be included would interfere with the successful marketing of the securities (other than such Registerable Securities and other shares of securities so requested to be included) by the underwriters (such writing to state the basis of such belief and the approximate number of such Registerable Securities and shares of other securities so requested to be included which may be included in such underwritten offering without such effect), then the Company may, upon 27 31 written notice to all holders of such Registerable Securities and of such other shares of securities so requested to be included, exclude pro rata from such underwritten offering (if and to the extent stated by such managing underwriter to be necessary to eliminate such effect) the number of such Registerable Securities and shares of such other securities so requested to be included the registration of which shall have been requested by each holder of Registerable Securities and by the holders of such other so that the resultant aggregate number of such Registerable Securities and of such other shares of securities so requested to be included which are included in such underwritten offering shall be equal to the approximate number of shares stated in such managing underwriter's letter. The holders of Registerable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registerable Securities and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such holders of Registerable Securities. Any such holder of Registerable Securities shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such holder, such holder's Registerable Securities and such holder's intended method of distribution and any other representation required by law. Notwithstanding anything to the contrary contained herein, in the event that any terms of this Section 12 are inconsistent with or conflict with the terms of the proviso to Section 5.01(b) of the Warrant Agreement dated as of September 3, 1998 between the Company and American Stock Transfer & Trust Company (the "UNIT AGREEMENT"), the terms of the Unit Agreement shall govern and the terms hereof shall be deemed to be amended insofar as is necessary to resolve such inconsistency or conflict. (c) Confidentiality. Any holder receiving any written notice from the Company regarding the Company's plans to file a Registration Statement shall treat such notice confidentially and shall not disclose such information to any person other than as necessary to exercise its rights under this Warrant. (d) Participation in Underwritten Offerings. No Person may participate in any underwritten offering hereunder unless such Person (i) agrees 28 32 to sell such Person's securities on the basis provided in any underwriting arrangements approved, subject to the terms and conditions hereof, by the holders of a majority of Registerable Securities to be included in such underwritten offering and (ii) completes and executes all questionnaires, indemnities, underwriting agreements and other documents (other than powers of attorney) required under the terms of such underwriting arrangements. Notwithstanding the foregoing, no underwriting agreement (or other agreement in connection with such offering) shall require any holder of Registerable Securities to make any representations or warranties to or agreements with the Company or the underwriters other than representations and warranties contained in a writing furnished by such holder expressly for use in the related registration statement, customary representations or warranties contained in the relevant underwriting agreement, or agreements regarding such holder, such holder's Registerable Securities and such holder's intended method of distribution and any other representation required by law. 12.5. Preparation; Reasonable Investigation. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Warrant, the Company will give the holders of Registerable Securities registered under such registration statement, their underwriters, if any, and their respective counsel and accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act, provided that the Company shall not be required to comply with this section 12.5 if there is a reasonable likelihood, in the judgment of the Company, that such delivery could result in the loss of any attorney-client privilege related thereto; and provided further that Records which the Company determines, in good faith, to be confidential and which it notifies the holders of Registerable Securities are confidential shall not be disclosed by the holders of Registerable Securities unless (x) such Records have become generally available to the public or (y) the disclosure of such Records may be necessary or appropriate (A) in compliance with any law, rule, regulation or order applicable to any such holder of Registerable Securities, (B) in response to any subpoena or other legal process or (C) in connection with any litigation to which any such holder of Registerable Securities is a party. 29 33 12.6. Indemnification. (a) Indemnification by the Company. In the event of any registration of any securities of the Company under the Securities Act, the Company will, and hereby does, indemnify and hold harmless in the case of any registration statement filed pursuant to section 12.1 or 12.2, the holder of any Registerable Securities covered by such registration statement, its directors and officers, each other Person who participates as an underwriter in the offering or sale of such securities and each other Person, if any, who controls such holder or any such underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such holder or any such director or officer or underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Company will reimburse such holder and each such director, officer, underwriter and controlling person for any legal or any other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, liability, action or proceeding, provided that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such holder specifically stating that it is for use in the preparation thereof and, provided, further that the Company shall not be liable to any Person who participates as an underwriter, in the offering or sale of Registerable Securities or to any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy 30 34 of the final prospectus, as the same may be then supplemented or amended, within the time required by the Securities Act to the Person asserting an untrue statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registerable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such holder or any such director, officer, underwriter or controlling person and shall survive the transfer of such securities by such holder. (b) Indemnification by the Sellers. The Company may require, as a condition to including any Registerable Securities in any registration statement filed pursuant to section 12.3, that the Company shall have received an undertaking satisfactory to it from the prospective seller of such Registerable Securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in subdivision (a) of this section 12.6) the Company, each director of the Company, each officer of the Company and each other person, if any, who controls the Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Any such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such securities by such seller. (c) Notices of Claims, etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding subdivisions of this section 12.6 and subdivision (f) below, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action, provided that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding subdivisions of this section 12.6, except to the extent that the indemnifying party is 31 35 actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified, to the extent that the indemnifying party may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement of any such action which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability, or a covenant not to sue, in respect to such claim or litigation. No indemnified party shall consent to entry of any judgment or enter into any settlement of any action for which indemnity is required to be provided by an indemnifying party hereunder without the consent of such indemnifying party; in no event shall the indemnifying party be required to pay the expenses of more than one law firm per jurisdiction as counsel for the indemnified party. The provisions of this subsection (c) shall also apply to a contribution pursuant to subsection (f) below. (d) Other Indemnification. Indemnification similar to that specified in the preceding subdivisions of this section 12.6 (with appropriate modifications) shall be given by the Company and each seller of Registerable Securities with respect to any required registration or other qualification of securities under any Federal or state law or regulation of any governmental authority, other than the Securities Act. (e) Indemnification Payments. The indemnification required by this section 12.6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. (f) Contribution. If the indemnification provided for in the preceding subdivisions of this section 12.6 is unavailable to an indemnified party in respect of any expense, loss, claim, damage or liability referred to therein, then each indemnifying party, in lieu of indemnifying such 32 36 indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such expense, loss, claim, damage or liability (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the holder or underwriter, as the case may be, on the other from the distribution of the Registerable Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the holder or underwriter, as the case may be, on the other in connection with the statements or omissions which resulted in such expense, loss, damage or liability, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and of the holder or underwriter, as the case may be, on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission to state a material fact relates to information supplied by the Company, by the holder or by the underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, provided that the foregoing contribution agreement shall not inure to the benefit of any indemnified party if indemnification would be unavailable to such indemnified party by reason of the provisions contained in the first sentence of subdivision (a) of this section 12.6, and in no event shall the obligation of any indemnifying party to contribute under this subdivision (f) exceed the amount that such indemnifying party would have been obligated to pay by way of indemnification if the indemnification provided for under subdivisions (a) or (b) of this section 12.6 had been available under the circumstances. The Company and the holders of Registerable Securities agree that it would not be just and equitable if contribution pursuant to this subdivision (f) were determined by pro rata allocation (even if the holders and any underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth in the preceding sentence and subdivision (c) of this section 12.6, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. 33 37 Notwithstanding the provisions of this subdivision (f), no holder of Registerable Securities or underwriter shall be required to contribute any amount in excess of the amount by which (i) in the case of any such holder, the net proceeds received by such holder from the sale of Registerable Securities or (ii) in the case of an underwriter, the total price at which the Registerable Securities purchased by it and distributed to the public were offered to the public exceeds, in any such case, the amount of any damages that such holder or underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 13. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: Acquiring Person: With reference to the transactions referred to in clauses (a) through (d) of section 3.1, the continuing or surviving corporation of a consolidation or merger with the Company (if other than the Company), the transferee of substantially all of the properties of the Company, the corporation consolidating with or merging into the Company in a consolidation or merger in connection with which the Common Stock is changed into or exchanged for stock or other securities of any other Person or cash or any other property, or, in the case of a capital reorganization or reclassification, the Company. Acquisition Price: As applied to the Common Stock, (a) the Market Price on the date immediately preceding the date on which any transaction to which section 3 applies is consummated, or (b) if a purchase, tender or exchange offer is made by the Acquiring Person (or by any of its affiliates) to the holders of the Common Stock and such offer is accepted by the holders of more than 50% of the outstanding shares of Common Stock, the greater of (i) the price determined in accordance with the provisions of the foregoing clause (a) of this sentence and (ii) the Market Price on the date immediately preceding the acceptance of such offer by the holders of more than 50% of the outstanding shares of Common Stock. Additional Shares of Common Stock: All shares (including treasury shares) of Common Stock issued or sold (or, pursuant to section 2.3 or 2.4, deemed to be issued) by the Company after the date hereof, whether or not subsequently reacquired or retired by the Company, other than 34 38 (a) shares issued upon the exercise of the Warrants, (b) shares issued (including upon the exercise of options) 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 of the Company, (c) such additional number of shares as may become issuable upon the exercise of any of the securities referred to in the foregoing clauses (a) and (b) by reason of adjustments required pursuant to anti-dilution provisions applicable to such securities as in effect on the date hereof, but only if and to the extent that such adjustments are required as the result of the original issuance of the Warrants, (d) such additional number of shares as may become issuable upon the exercise of any of the securities referred to in the foregoing clauses (a) and (b) by reason of adjustments required pursuant to anti-dilution provisions applicable to such securities as in effect on the date hereof, in order to reflect any subdivision or combination of Common Stock, by reclassification or otherwise, or any dividend on Common Stock payable in Common Stock, (e) shares issued upon exercise of any warrants outstanding on the date hereof, and (f) shares issued pursuant to the terms of the Company's 7 1/2% Series A Cumulative Convertible Preferred Stock, including as dividends thereon or pursuant to the conversion thereof. Business Day: Any day other than a Saturday or a Sunday or a day on which commercial banking institutions in the City of New York are authorized by law to be closed. Any reference to "days" (unless Business Days are specified) shall mean calendar days. Commission: The Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. Common Stock: As defined in the introduction to this Warrant, such term to include any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such Common Stock, and all 35 39 other stock of any class or classes (however designated) of the Company the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference. Company: As defined in the introduction to this Warrant, such term to include any corporation which shall succeed to or assume the obligations of the Company hereunder in compliance with section 3. Convertible Securities: Any evidences of indebtedness, shares of stock (other than Common Stock) or other securities directly or indirectly convertible into or exchangeable for Additional Shares of Common Stock. Credit Agreement: That certain Credit Agreement, by and among Network Plus, Inc., Network Plus Corp., the lenders party thereto from time to time, Goldman Sachs Credit Partners L.P., as a joint lead arranger, book runner and as syndication agent, FleetBoston Robertson Stephens Inc., as a joint lead arranger, DLJ Bridge Finance, Inc., as documentation agent and Fleet National Bank, as administrative agent and as collateral agent, dated as of September 27, 2000. Current Market Price: On any date specified herein, the average daily Market Price during the period of the most recent 20 days, ending on such date, on which the national securities exchanges were open for trading, except that if no Common Stock is then listed or admitted to trading on any national securities exchange or quoted in the over-the-counter market, the Current Market Price shall be the Market Price on such date. Exchange Act: The Securities Exchange Act of 1934, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Initiating Holders: Any holder or holders of Registerable Securities holding at least 50% of the Registerable Securities (by number of shares at the time issued and outstanding), and initiating a request pursuant to section 12.1 for the registration of all or part of such holder's or holders' Registerable Securities. Institutional Holder: Any original purchaser of any Warrant, any insurance company, pension fund, mutual fund, investment company, bank, savings bank, savings and loan association, broker-dealer, investment adviser, investment 36 40 banking company, trust company or any finance or credit company, any portfolio or any investment fund managed by any of the foregoing, any other institutional investor and any nominee of any of the foregoing. Market Price: On any date specified herein, the amount per share of the Common Stock, equal to (a) the last sale price of such Common Stock, regular way, on such date or, if no such sale takes place on such date, the average of the closing bid and asked prices thereof on such date, in each case as officially reported on the principal national securities exchange on which such Common Stock is then listed or admitted to trading, or (b) if such Common Stock is not then listed or admitted to trading on any national securities exchange but is designated as a national market system security by the NASD, the last trading price of the Common Stock on such date, or (c) if there shall have been no trading on such date or if the Common Stock is not so designated, the average of the closing bid and asked prices of the Common Stock on such date as shown by the NASD automated quotation system, or (d) if such Common Stock is not then listed or admitted to trading on any national exchange or quoted in the over-the-counter market, the higher of (x) the book value thereof as determined by any firm of independent public accountants of recognized standing selected by the Board of Directors of the Company as of the last day of any month ending within 60 days preceding the date as of which the determination is to be made or (y) the fair value thereof determined in good faith by the Board of Directors of the Company as of a date which is within 18 days of the date as of which the determination is to be made. Market Value: Per share of common stock (or equivalent equity interests) of the Acquiring Person or its Parent on any date specified herein, (a) the average of the last sale prices, regular way, on the 20 consecutive business days immediately preceding such date or, if there shall have been no sale on any such day, the average of the closing bid and asked prices on such date, in each case as officially reported on the principal national securities exchange on which such common stock is at the time listed or admitted to trading, or (b) if such common stock is not then listed or admitted to trading on any national securities exchange, but is designated as a national market system security by the NASD, the last trading price of the common stock on such date, or if there shall have been no trading on such date or if the common stock is not so designated, the average of the reported closing bid and asked prices on such 20 days as shown by the NASD automated quotation system. NASD: The National Association of Securities Dealers, Inc. 37 41 Options: Rights, options or warrants to subscribe for, purchase or otherwise acquire either Additional Shares of Common Stock or Convertible Securities. Other Securities: Any stock (other than Common Stock) and other securities of the Company or any other Person (corporate or otherwise) which the holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to section 3 or otherwise. Parent: As to any Acquiring Person any corporation which (a) controls the Acquiring Person directly or indirectly through one or more intermediaries, (b) is required to include the Acquiring Person in the consolidated financial statements contained in such Parent's Annual Report on Form 10-K and (c) is not itself included in the consolidated financial statements of any other person (other than its consolidated subsidiaries). Person: A corporation, an association, a partnership, an organization, a business, an individual, a government or political subdivision thereof or a governmental agency. Purchaser: As defined in the introduction to this Warrant. Registerable Securities: (a) Any shares of Common Stock or Other Securities issued or issuable upon exercise of this Warrant and (b) any securities issued or issuable with respect to any securities referred to in the foregoing subdivision by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. As to any particular Registerable Securities, once issued such securities shall cease to be Registerable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force, (d) they shall have ceased to be outstanding or, 38 42 (e) such securities are eligible for sale pursuant to Rule 144(k) (or any successor provision) under the Securities Act. Registration Expenses: All expenses incident to the Company's performance of or compliance with section 12, including, without limitation, all registration, filing and NASD fees, all fees and expenses of complying with securities or blue sky laws, all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and disbursements of counsel for the Company and of its independent public accountants, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, the reasonable fees and disbursements of one counsel retained by holder or holders and accountants retained by the holder or holders of more than 50% of the Registerable Securities being registered, premiums and other costs of policies of insurance against liabilities arising out of the public offering of the Registerable Securities being registered and any fees and disbursements of underwriters customarily paid by issuers or sellers of securities, but excluding underwriting discounts and commissions and transfer taxes and fees and expenses of counsel for any holder except as set forth above, if any, provided that, in any case where Registration Expenses are not to be borne by the Company, such expenses shall not include salaries of Company personnel or general overhead expenses of the Company, auditing fees, premiums or other expenses relating to liability insurance required by underwriters of the Company or other expenses for the preparation of financial statements or other data normally prepared by the Company in the ordinary course of its business or which the Company would have incurred in any event. Restricted Securities: (a) any Warrants bearing the applicable legend set forth in section 9.2, (b) any shares of Common Stock (or Other Securities) issued upon the exercise of Warrants which are evidenced by a certificate or certificates bearing the applicable legend set forth in such section, (c) any shares of Common Stock (or Other Securities) issued subsequent to the exercise of any of the Warrants as a dividend or other distribution with respect to, or resulting from a subdivision of the outstanding shares of Common Stock (or Other Securities) into a greater number of shares by reclassification, stock splits or otherwise, or in exchange for or in replacement of the Common Stock (or Other Securities) issued upon such exercise, which are evidenced by a certificate or certificates bearing the applicable legend set forth in such section, and (d) unless the context otherwise requires, any shares of Common Stock (or Other Securities) issuable upon the exercise of Warrants, which, when so issued, will be evidenced by a certificate or certificates bearing the applicable legend set forth in such section. 39 43 Securities Act: The Securities Act of 1933, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Transfer: Any sale, assignment, pledge or other disposition of any security, or of any interest therein, which could constitute a "sale" as that term is defined in section 2(3) of the Securities Act. Voting Securities: Stock of any class or classes (or equivalent interests), if the holders of the stock of such class or classes (or equivalent interests) are ordinarily, in the absence of contingencies, entitled to vote for the election of the directors (or persons performing similar functions) of such business entity, even though the right so to vote has been suspended by the happening of such a contingency. Warrant Price: As defined in section 2.1. Warrants: The common stock purchase warrants issued in connection with this warrant agreement. Weighted Average Warrant Price: As to any holder of Restricted Securities, the price determined by dividing (a) the sum of the aggregate consideration previously paid by such holder upon the exercise of Warrants plus the consideration payable upon the exercise of all Warrants held by such holder by (b) the sum of (i) the aggregate number of shares previously received by such holder upon the exercise of Warrants plus (ii) the number of shares which would be received by such holder upon the exercise of all Warrants held by such holder, based upon the Warrant Price in effect on the effective date of the registration statement in respect of which the Weighted Average Warrant Price is being determined. 14. Remedies. Each party hereto stipulates that the remedies at law of the holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate and that, to the fullest extent permitted by law, such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 15. No Rights or Liabilities as Stockholder. Nothing contained in this Warrant shall be construed as conferring upon the holder hereof any rights 40 44 as a stockholder of the Company or as imposing any obligation on such holder to purchase any securities or as imposing any liabilities on such holder as a stockholder of the Company, whether such obligation or liabilities are asserted by the Company or by creditors of the Company. 16. Notices. All notices and other communications under this Warrant shall be in writing and shall be delivered, or mailed by registered or certified mail, return receipt requested, by a nationally recognized overnight courier, postage prepaid, addressed (a) if to any holder of any Warrant, at the registered address of such holder as set forth in the register kept at the principal office of the Company, or (b) if to the Company, to the attention of its President at its principal office, provided that the exercise of any Warrant shall be effective in the manner provided in section 1. 17. Amendments. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. Notwithstanding the foregoing, any term of Section 12 of this Warrant may be amended or waived upon the written consent of the Company and the holders of Company Warrants (as defined below) representing at least a majority of the number of shares of Common Stock then subject to the outstanding Company Warrants; provided that any such amendment or waiver must apply to all Company Warrants then outstanding. "COMPANY WARRANTS" shall mean this Warrant and all other warrants in the series of warrants issued by the Company in connection with the Credit Agreement, all dated the date hereof and of like tenor (other than the number of shares of Common Stock issuable upon exercise thereof), including any warrants issued upon partial exercise or transfer thereof. 18. Expiration. The right to exercise this Warrant shall expire at 5.00 p.m., New York City time, on September 27, 2003. Notwithstanding anything to the contrary set forth herein all rights to registration hereunder shall expire at 5:00 p.m. on September 27, 2005. 19. Descriptive Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. 20. GOVERNING LAW. THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF THE STATE OF DELAWARE, WITHOUT 41 45 REGARD TO PRINCIPLES OF CONFLICT OF LAWS. 21. Judicial Proceedings; Waiver of Jury. Any judicial proceeding brought against the Company with respect to this Warrant may be brought in any court of competent jurisdiction in the State of New York or of the United States of America for the Southern District of New York and, by execution and delivery of this Warrant, each of the Company and holder (a) accepts, generally and unconditionally, the nonexclusive jurisdiction of such courts and any related appellate court, and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Warrant, subject to any rights of appeal, and (b) irrevocably waives any objection the Company may now or hereafter have as to the venue of any such suit, action or proceeding brought in such a court or that such court is an inconvenient forum. The Company hereby waives personal service of process and consents, that service of process upon it may be made by certified or registered mail, return receipt requested, at its address specified or determined in accordance with the provisions of section 16, and service so made shall be deemed completed on the third Business Day after such service is deposited in the mail or, if earlier, when delivered. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of any holder of any Warrant to bring proceedings against the Company in the courts of any other jurisdiction. THE COMPANY HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY, OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS WARRANT OR THE RELATIONSHIP ESTABLISHED HEREUNDER. NETWORK PLUS CORP. By:_____________________________ Title: 42 46 FORM OF SUBSCRIPTION [To be executed only upon exercise of Warrant] To: [NAME OF ISSUER] The undersigned registered holder of the within Warrant hereby irrevocably exercises such Warrant for, and purchases thereunder, ______* shares of Common Stock of [NAME OF ISSUER] and herewith makes payment of $ therefor, and requests that the certificates for such shares be issued in the name of, and - ---------- * Insert here the number of shares called for on the face of this Warrant (or, in the case of a partial exercise, the portion thereof as to which this Warrant is being exercised), in either case without making any adjustment for Additional Shares of Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of this Warrant, may be delivered upon exercise. In the case of partial exercise, a new Warrant or Warrants will be issued and delivered, representing the unexercised portion of the Warrant, to the holder surrendering the Warrant. 43 47 delivered to , whose address is . Dated: _______________________________________________ (Signature must conform in all respects to name of holder as specified on the face of Warrant) _______________________________________________ (Street Address) _______________________________________________ (City)(State)(Zip Code) 44 48 FORM OF ASSIGNMENT [To be executed only upon transfer of Warrant] For value received, the undersigned registered holder of the within Warrant hereby sells, assigns and transfers unto the right represented by such Warrant to purchase shares of [Common Stock] of [NAME OF ISSUER] to which such Warrant relates, and appoints Attorney to make such transfer on the books of [NAME OF ISSUER] maintained for such purpose, with full power of substitution in the premises. Dated: _______________________________________________ (Signature must conform in all respects to name of holder as specified on the face of Warrant) _______________________________________________ (Street Address) _______________________________________________ (City)(State)(Zip Code) Signed in the presence of: 45 EX-10.15 6 b38201npex10-15.txt PROMISSORY NOTE OF ROBERT T. HALE, JR. 1 EXHIBIT 10.15 PROMISSORY NOTE $1,875,000.00 Quincy, Massachusetts September 2, 1998 FOR VALUE RECEIVED, on or before July 31, 2003 (the "Maturity Date"), Network Plus Corp., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of Robert T. Hale, Jr. (the "Lender") the principal sum of One Million Eight Hundred Seventy Five Thousand Dollars ($1,875,000.00), in immediately available funds at the principal offices of the Borrower located at 234 Copeland Street, Quincy, Massachusetts 02169 (or such other place as Lender may designate), together with interest on the outstanding principal amount at the rate set forth herein. The outstanding principal amount hereunder shall accrue interest at a per annum rate equal to the "Prime Rate". The Borrower may prepay the outstanding principal amount at any time prior to the Maturity Date without premium or penalty. As used herein, "Prime Rate" shall refer to shall mean a rate per annum equal to the rate of interest published in The Wall Street Journal, National edition as the "prime rate", changing when and as such prime rate changes. Interest shall be payable hereunder on the Maturity Date. Interest shall be computed on the basis of a three hundred sixty-five (365) day year and actual days elapsed. Upon default or after maturity or after judgment has been rendered on this Note, the principal shall bear interest at a rate per annum equal to the Prime Rate plus two percent (2.0%) per annum. In addition to, and not in limitation of, the foregoing, during the continuance of a default hereunder, to the extent permitted by law, overdue interest, fees (including reasonable attorney's fees and the commitment fee) and other charges payable hereunder shall bear interest from and including the due date hereof until paid at a rate per annum equal to the Prime Rate plus two percent (2.0%) per annum. Such rate shall be in effect until all the obligations of the Borrower to the Lender are paid in full. In no event shall any interest be at a rate in excess of the maximum rate permitted by law. At the option of the holder, this Note shall become immediately due and payable upon the occurrence and during the continuance at any time of any of the following events of default (each an "Event of Default"): (1) default in the payment or performance of this or any other liability or obligation of the maker, including the payment of any installment hereunder, or of any endorser or guarantor of any obligation or liability of the maker, to the holder; (2) the liquidation, or the appointment of a receiver for the maker or its property as a whole; (3) the institution by the maker of any proceedings under the United States Bankruptcy Code or any other federal or state law in which the maker is alleged to be insolvent or unable to pay his debts as they mature or the making by the undersigned of an assignment or trust mortgage for the benefit of creditors; or (4)(a) the institution against the maker of any proceedings under the United States Bankruptcy Code or of any other federal or state law in which the maker is alleged to be insolvent or unable to pay his debts as they mature, and (b) the failure of the maker to cause such proceedings to be dismissed or stayed within 30 days; whereupon the holder shall have then, or at any time thereafter, all of the rights and remedies afforded by applicable law. Any expenses incurred in connection with the enforcement or collection of the amounts owing hereunder or the Lender's rights hereunder, including reasonable attorney's fees, shall be paid by the Borrower. 2 This Note and the rights as described herein are not assignable in whole or in part by the Borrower, and are personal to the Borrower and may not be relied upon by any other party. No delay or omission on the part of the holder in exercising any right hereunder shall operate as a waiver of such right or of any other right of such holder, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. The maker and every indorser or guarantor of this Note regardless of the time, order or place of signing waives presentment, demand, protest and notices of every kind and assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of collateral, and to the addition or release of any other party or person primarily or secondarily liable. None of the terms or provisions of this Note may be excluded, modified, or amended except by a written instrument duly executed on behalf of the holder expressly referring hereto and setting forth the provision so excluded, modified or amended. ALL RIGHTS AND OBLIGATIONS HEREUNDER SHALL BE GOVERNED BY THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND THIS NOTE SHALL BE DEEMED TO BE UNDER SEAL. 3 EXECUTED as of this 2nd day of September, 1998 as an instrument under seal. NETWORK PLUS CORP. By: /s/ James J. Crowley -------------------------------- Name: James J. Crowley Title: Executive Vice President and Chief Operating Officer AGREED: /s/ Robert T. Hale, Jr. - ------------------------ Robert T. Hale, Jr. EX-21 7 b38201npex21.txt SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT NETWORK PLUS, INC., A MASSACHUSETTS CORPORATION EX-23 8 b38201npex23.txt CONSENT OF PRICEWATERHOUSECOOPERS 1 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-48442 and 333-56104) and Form S-8 (No. 333-81931, 333-81933 and 333-81935) of Network Plus Corp. of our reports dated March 30, 2001 relating to the financial statements and financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----