<PAGE>
Filed pursuant to Rule No. 424(b)(3)
File no. 333-3984
PROSPECTUS
JUNE 27, 1996 TCG
$1,373,606,000 ===
TELEPORT COMMUNICATIONS GROUP INC.
$300,000,000 9 7/8% SENIOR NOTES DUE 2006
$1,073,606,000 11 1/8% SENIOR DISCOUNT NOTES DUE 2007
---------------
The Senior Notes due 2006 (the "Senior Notes") and the Senior Discount Notes
due 2007 (the "Senior Discount Notes" and, together with the Senior Notes, the
"Notes") are being offered hereby (the "Notes Offerings") by Teleport
Communications Group Inc. ("TCG" or the "Company"). The Senior Discount Notes
will be issued to generate gross proceeds to the Company of approximately $625
million and will be issued at a price of $582.15 per $1,000 principal amount
at maturity, representing a yield to maturity of 11 1/8% (computed on a semi-
annual bond equivalent basis) calculated from July 2, 1996.
The Company has also filed a registration statement with respect to the
offering of 23,500,000 shares of Class A Common Stock of the Company (together
with the Company's Class B Common Stock, the "Common Stock"), with 18,800,000
shares being offered in the United States and Canada (the "U.S. Offering") and
4,700,000 shares being offered in a concurrent offering outside the United
States and Canada (the "International Offering" and together with the U.S.
Offering, the "Stock Offerings"), which Stock Offerings will be made by
separate prospectuses. The Notes Offerings and the Stock Offerings are
collectively referred to herein as the "Offerings." Consummation of the
Offerings is contingent on the acquisition by the Company of certain
partnership interests in Local Market Partnerships (as defined herein) it
manages and the consummation of certain other transactions. See "The
Reorganization."
The Senior Notes will bear interest at the rate of 9 7/8% per annum payable
in cash commencing January 1, 1997 and semiannually thereafter on January 1
and July 1 in each year. The Senior Notes will mature on July 1, 2006. Cash
interest on the Senior Discount Notes will not accrue prior to July 1, 2001;
provided however that at any time prior to July 1, 2001, the Company may elect
to commence the accrual of cash interest on an interest payment date, in which
case the outstanding principal amount at maturity of a Senior Discount Note
will be reduced to the Accreted Value of such Note as of such interest payment
date and cash interest will be payable on each interest payment date
thereafter. Commencing January 1, 2002, cash interest will be payable semi-
annually on January 1 and July 1 of each year. The Senior Discount Notes will
mature on July 1, 2007. See "Description of Notes--Terms of the Senior
Discount Notes" and "--Certain Definitions."
Senior Discount Notes aggregating up to $253 million in Accreted Value will
be subject to mandatory redemption at a redemption price of 101% of the
Accreted Value thereof as of the redemption date in the event that certain
state regulatory orders are not obtained within 270 days of the issuance date
of the Notes or the petitions for such orders are denied. Although the Company
has petitioned for such orders and expects to obtain them, there can be no
assurance that such approvals will be obtained. See "Risk Factors--Limitation
on Incurrence of Debt Under New York and New Jersey Regulatory Authorizations"
and "Description of Notes--Terms of the Senior Discount Notes--Special
Redemption."
Except as set forth below, the Notes will not be redeemable at the Company's
option prior to July 1, 2001. Thereafter, the Notes will be subject to
redemption, at the Company's option, in whole or in part, at the redemption
prices set forth herein, plus accrued and unpaid interest. In addition, at any
time prior to July 1, 1999, the Company may redeem up to one-third of the
Notes at a redemption price of 110% of the principal amount in the case of the
Senior Notes and at a redemption price of 110% of the Accreted Value in the
case of the Senior Discount Notes with the net proceeds of one public or a
private sale of certain capital stock of the Company. Upon the occurrence of a
Change of Control, the Company will be required to make an offer to purchase
all of the Notes at a purchase price equal to, in the case of the Senior
Discount Notes, 101% of the Accreted Value thereof (if prior to July 1, 2001)
or, in the case of the Senior Notes and (if on or after July 1, 2001) the
Senior Discount Notes, 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon.
The Senior Notes and the Senior Discount Notes will each be senior unsecured
obligations of the Company ranking pari passu in right of payment with each
other and with all other existing and future senior unsecured obligations of
the Company. As of March 31, 1996, after giving effect to the Reorganization
and the Offerings, the Company had approximately $925.0 million of senior debt
outstanding. Since the Company conducts a substantial amount of its business
through subsidiaries, the Notes will be effectively subordinated to all
existing and future indebtedness and other liabilities and commitments of the
Company's subsidiaries, including trade payables. Substantially all of such
subsidiary indebtedness is, and is expected to be, secured by the assets of
the Company's subsidiaries or stock of the Company's subsidiaries. As of March
31, 1996, after giving effect to the Reorganization and the Offerings, such
subsidiaries had approximately $189.4 million of total liabilities, including
approximately $62.5 million of indebtedness.
The Notes will not be listed on any securities exchange, and there can be no
assurance that there will be a secondary market therefor.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES OFFERED
HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SENIOR NOTE ..................... 100.000% 2.450% 97.550%
TOTAL ............................... $300,000,000 $ 7,350,000 $292,650,000
- --------------------------------------------------------------------------------
PER SENIOR DISCOUNT NOTE............. 58.215% 2.750% 56.614%
TOTAL................................ $624,999,733 $17,187,493 $607,812,240
</TABLE>
- -------------------------------------------------------------------------------
(1) Plus accretion or accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(3) Before deducting expenses of the Notes Offerings payable by the Company,
estimated at $1,967,000.
The Notes are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including their right to reject orders in whole or
in part. It is expected that delivery of the Notes will be made in New York,
New York on or about July 2, 1996, in book-entry form through the facilities
of the Depository Trust Company, against payment thereof in same day funds.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
MORGAN STANLEY & CO. INCORPORATED
CHASE SECURITIES INC.
TORONTO DOMINION SECURITIES (USA) INC.
<PAGE>
[MAP APPEARS HERE]
TCG's advanced Network Management Center operates twenty-four hours a day,
seven days a week, providing network monitoring, surveillance and diagnostic
support for TCG's local telecommunications services, including basic local
telephone services, enhanced switched services, dedicated services, high speed
data services and video channel transmission services.
----------------
WITH RESPECT TO SALES OF THE NOTES BEING OFFERED HEREBY TO CALIFORNIA
RESIDENTS, AS OF THE DATE OF THIS PROSPECTUS, SUCH NOTES MAY BE SOLD ONLY TO:
(1) "ACCREDITED INVESTORS" WITHIN THE MEANING OF REGULATION D UNDER THE
SECURITIES ACT OF 1933, (2) BANKS, SAVINGS AND LOAN ASSOCIATIONS, TRUST
COMPANIES, INSURANCE COMPANIES, INVESTMENT COMPANIES REGISTERED UNDER THE
INVESTMENT COMPANY ACT OF 1940, PENSION AND PROFIT-SHARING TRUSTS,
CORPORATIONS OR OTHER ENTITIES WHICH, TOGETHER WITH THE CORPORATION'S OR OTHER
ENTITY'S AFFILIATES WHICH ARE UNDER COMMON CONTROL, HAVE A NET WORTH ON A
CONSOLIDATED BASIS ACCORDING TO THEIR MOST RECENT REGULARLY PREPARED FINANCIAL
STATEMENTS (WHICH SHALL HAVE BEEN REVIEWED, BUT NOT NECESSARILY AUDITED, BY
OUTSIDE ACCOUNTANTS) OF NOT LESS THAN $14,000,000 AND SUBSIDIARIES OF THE
FOREGOING, (3) ANY PERSON (OTHER THAN A PERSON FORMED FOR THE SOLE PURPOSE OF
PURCHASING THE NOTES OFFERED HEREBY) WHO PURCHASES AT LEAST $1,000,000
AGGREGATE AMOUNT OF THE NOTES OFFERED HEREBY OR (4) ANY PERSON WHO (A) HAS AN
INCOME OF $65,000 AND A NET WORTH OF $250,000, OR (B) HAS A NET WORTH OF
$500,000 (IN EACH CASE, EXCLUDING HOME, HOME FURNISHINGS AND PERSONAL
AUTOMOBILES). EACH CALIFORNIA RESIDENT PURCHASING THE NOTES OFFERED HEREBY
WILL BE DEEMED TO REPRESENT BY SUCH PURCHASE THAT IT COMES WITHIN ONE OF THE
AFOREMENTIONED CATEGORIES AND THAT IT WILL NOT SELL OR OTHERWISE TRANSFER SUCH
NOTES TO A CALIFORNIA RESIDENT UNLESS THE TRANSFEREE COMES WITHIN ONE OF THE
AFOREMENTIONED CATEGORIES AND THAT IT WILL ADVISE THE TRANSFEREE OF THIS
CONDITION WHICH TRANSFEREE, BY BECOMING SUCH, WILL BE DEEMED TO BE BOUND BY
THE SAME RESTRICTIONS ON RESALE.
----------------
IN CONNECTION WITH THE NOTES OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE NOTES
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements (including the notes thereto)
appearing elsewhere in this Prospectus. Unless the context otherwise requires,
the information set forth in this Prospectus gives effect to the transactions
described herein under "The Reorganization," and "TCGI" refers to Teleport
Communications Group Inc. and its consolidated subsidiaries and "TCG" and the
"Company" refer to TCGI and its consolidated partnerships after giving effect
to such transactions. Unless otherwise indicated, the information set forth in
this Prospectus does not give effect to the exercise of the Underwriters' over-
allotment options in the Stock Offerings. See "Glossary" for definitions of
certain other terms used in this Prospectus.
THE COMPANY
Teleport Communications Group Inc., the first and largest competitive local
exchange carrier in the United States, offers a wide range of local
telecommunications services in major metropolitan markets nationwide. The
Company competes with incumbent local exchange carriers as "The Other Local
Phone Company" SM by providing high quality, integrated local
telecommunications services, primarily over fiber optic digital networks, to
meet the voice, data and video transmission needs of its customers. TCG's
customers are principally telecommunications-intensive businesses, long
distance carriers and resellers, and wireless communications companies. TCG
offers these customers technologically advanced local telecommunications
services, as well as superior customer service, flexible pricing and vendor and
route diversity.
For over 10 years, TCG has developed, operated and expanded its local
telecommunications networks. The Company currently operates high capacity
state-of-the-art digital networks in 48 metropolitan markets, including 17 of
the 20 largest metropolitan areas. The Company operates networks in
metropolitan New York/New Jersey, Los Angeles, Chicago, San Francisco, Boston,
Detroit, Baltimore/Washington, D.C., Dallas, Houston, Miami/Ft. Lauderdale,
Seattle, San Diego, St. Louis, Pittsburgh, Phoenix, Denver, Milwaukee,
Indianapolis, Hartford and Omaha, and is developing networks in Cleveland,
Portland (Oregon), Salt Lake City, Nashville, Chattanooga, Knoxville and
Birmingham. As of March 31, 1996, the Company's networks spanned over 5,500
route miles, contained over 257,000 fiber miles and served approximately 5,300
buildings.
TCG has grown rapidly over the last several years, expanding its existing
networks, developing new networks and increasing its service offerings. On a
pro forma basis, after giving effect to the Reorganization, the Company's
revenues were approximately $184.9 million for 1995, substantially all of which
were derived from the provision of local telecommunications services.
Total revenues from the local telecommunications market in the United States
were estimated to have been approximately $96 billion in 1995. In the past,
competitive access providers, including the Company, were limited to serving
only the dedicated services portion of this market, which was estimated to have
been approximately $5 billion in 1995, whereas the local switched services
portion of this market for business customers was estimated to have been
approximately $55 billion. The Company has expanded into the switched services
market in a number of states over the last five years by constructing switched
networks and obtaining the necessary regulatory authorizations and
interconnection arrangements. With the passage of the Telecommunications Act of
1996 (the "1996 Act"), the Company believes that it is well positioned to
address a significantly larger portion of the local telecommunications market
and to improve its operating margins in the switched and dedicated services
markets by expanding its networks, installing additional high capacity digital
switches and offering new products and services.
3
<PAGE>
TCG has benefited substantially from its relationships with the parents of
its four stockholders, TCI Communications, Inc. (together with its consolidated
subsidiaries, "TCI"), Cox Communications, Inc. (together with its consolidated
subsidiaries, "Cox"), Comcast Corporation (together with its consolidated
subsidiaries, "Comcast") and Continental Cablevision, Inc. (together with its
consolidated subsidiaries, "Continental") (collectively, the "Cable
Stockholders"), which are among the largest cable television companies in the
United States. Through such relationships, the Company has been able to utilize
rights-of-way, obtain fiber optic facilities and share the cost of building new
fiber optic networks, thereby allowing the Company to achieve significant
economies of scale and scope through capital efficiencies in extending its
existing networks in a rapid, efficient and cost-effective manner. As of March
31, 1996, after giving pro forma effect to the Reorganization, the Cable
Stockholders had invested approximately $770 million in the Company. See "The
Reorganization."
The Company believes that it has several advantages that enable it to compete
successfully in the new competitive local telecommunications marketplace,
including (i) extensive, technologically advanced networks located in major
metropolitan markets nationwide, (ii) strategic relationships with cable
television operators, (iii) state-of-the-art information systems and (iv) an
experienced management team with significant operational, technical, financial
and regulatory expertise in the local telecommunications industry.
BUSINESS STRATEGY
As a premier competitive local telecommunications carrier, the key elements
of the Company's business strategy are to:
. PROVIDE A WIDE RANGE OF LOCAL TELECOMMUNICATIONS SERVICES. The Company
provides a broad array of local telecommunications services to meet the
voice, data and video transmission needs of its customers, including basic
local exchange telephone services, enhanced switched services, dedicated
services, high speed switched data services and video channel transmission
services. In 1995, approximately 36% of the Company's revenues were
generated from switched services. The Company expects a growing portion of
its revenues to be derived from basic local exchange telephone services,
enhanced switched services and high speed switched data services as it
deploys digital switches in all of its markets. As of March 31, 1996, the
Company had 21 digital telephone switches and 27 asynchronous transfer mode
("ATM") switches in operation. On a pro forma basis, after giving effect to
the Reorganization, the Company's revenues from switched services, which
include local dial tone and local calling, grew by approximately 59% to
$63.9 million in 1995 from $40.2 million in 1994.
. FOCUS ON BUSINESS CUSTOMERS AND TELECOMMUNICATIONS CARRIERS. The Company's
networks serve large metropolitan markets, which have significant
concentrations of telecommunications-intensive businesses. The Company's
customers in these markets include financial services firms, media and
health care companies, long distance carriers and resellers, Internet
service providers, wireless communications companies and an increasing
number of small and medium-sized business customers. The national scope of
the Company's local networks allows it to offer high volume business
customers and long distance carriers uniformity of services, pricing,
quality standards and customer service. In addition, the Company has
arrangements with other telecommunications providers, including shared
tenant services providers, cable television companies and long distance
carriers, to resell TCG's services. Currently, certain major long distance
carriers are conducting trials of the resale of TCG's local exchange
services under such long distance carriers' brand names. In 1995,
approximately 62% of the Company's revenues were generated from business
customers and approximately 38% were generated from long distance carrier
customers.
. EXPAND GEOGRAPHIC REACH AND DENSITY OF EXISTING NETWORKS AND ENTER NEW
MARKETS. The Company plans to increase the geographic reach and density of
its existing networks by deploying additional fiber optic rings and
connecting additional customers to its networks. The Company anticipates
that making significant capital expenditures over the next several years to
expand its existing networks and to develop
4
<PAGE>
new networks will lead to significant increases in revenue opportunities.
As a facilities-based carrier, the Company utilizes a variety of means to
expand geographically, including rights-of-way, easements, poles, ducts and
conduits that are available from cable television operators, incumbent
local exchange carriers, railways and subways, electric, gas and water
utilities and municipal, state and federal street and highway authorities.
In the course of expanding its networks, the Company also has the ability
to reach TCG customers by reselling a portion of the telecommunications
services offered by certain incumbent local exchange carriers. However, the
Company believes that the extensive geographic reach and density of its
networks make it less reliant than other competitive local exchange
carriers on the networks of the incumbent local exchange carriers. In
addition, where appropriate, the Company has the ability to link customers
to its network through the use of microwave, including 38 GHz milliwave,
services. The Company plans to expand into additional metropolitan markets,
which the Company believes will further broaden its customer base and
enhance its ability to attract national business accounts for its services.
. BENEFIT SUBSTANTIALLY FROM RELATIONSHIPS WITH CABLE TELEVISION
OPERATORS. As of December 31, 1995, the cable television facilities of the
Cable Stockholders collectively passed approximately 47% of the country's
94 million homes passed by cable television facilities. Through its
relationships with cable television operators, the Company has been able to
utilize existing rights-of-way, obtain fiber optic facilities and share the
cost of building new fiber optic networks, thereby allowing the Company to
achieve significant economies of scale and scope through capital
efficiencies in extending its existing networks in a rapid, efficient and
cost-effective manner. The Company is currently engaged in technical trials
with certain cable television operators, including Cable Stockholders, for
the provision of residential telephony services over the cable television
operators' hybrid fiber-coaxial networks with TCG providing switching, call
processing, calling features and ancillary services. The Company believes
such trials will evolve into commercial offerings by cable companies and
that TCG may become a provider of switching, call processing and other
services to such cable companies.
. OFFER HIGH QUALITY NETWORKS AND SUPERIOR CUSTOMER SERVICE. TCG believes
that it offers cost and service quality advantages over the incumbent local
exchange carriers as a result of its integrated operations, customer
support, network monitoring and management systems and state-of-the-art
technology deployed in the Company's digital networks. TCG consults closely
with its customers to develop competitively priced telecommunications
services that are tailored to their particular needs. The Company's
centrally managed customer support operations are also designed to
facilitate the processing of orders for changes and upgrades in services.
TCG believes that it provides greater attention and responsiveness to its
customers than do the incumbent local exchange carriers.
. SPEARHEAD REGULATORY REFORM. As the first and largest competitive local
exchange carrier, TCG has been at the forefront of industry efforts for
over a decade to introduce competition to the local telecommunications
market. The Company has aggressively pursued the goal of making competitive
local exchange services economically, technically and operationally
feasible by working for legislative and regulatory reform and through
negotiations with incumbent local exchange carriers. The Company will
continue its regulatory reform activities in an effort to ensure that the
1996 Act is implemented and interpreted in a manner that promotes fair
competition for local exchange services.
. CAPITALIZE ON MANAGEMENT TEAM EXPERIENCE. TCG's management team is
comprised of executives who are recognized as leaders in the development of
the competitive local telecommunications industry. This management team has
extensive operational, technical, financial and regulatory expertise as
well as a proven track record in a rapidly changing marketplace.
The Company was incorporated in the State of Delaware in 1983. The Company's
principal executive offices are located at One Teleport Drive, Staten Island,
New York 10311-1011, and its telephone number is (718) 355-2000.
5
<PAGE>
THE REORGANIZATION
Teleport Communications Group Inc. or "TCGI" is the issuer of the Notes
offered hereby. Prior to the Offerings, the local telecommunications business
managed by TCGI has been owned by the Cable Stockholders (TCI (30%), Cox (30%),
Comcast (20%), and Continental (20%)). The business was operated through TCGI
and, beginning in 1992, TCG Partners, which is a New York general partnership
owned by the Cable Stockholders in the same percentages as TCGI and managed by
TCGI. TCG Partners was formed for tax purposes to invest, with TCGI, the Cable
Stockholders and other cable operators, in partnerships (the "Local Market
Partnerships") to develop and operate local telecommunications networks. The 14
Local Market Partnerships are managed by TCGI, and each Local Market
Partnership is owned by TCGI, TCG Partners, the Cable Stockholders which have
cable operations in the particular market and, in some cases, other cable
operators in the market. To simplify this complex ownership structure, TCGI and
the Cable Stockholders have agreed to consolidate the ownership of TCG Partners
and of the Local Market Partnerships as subsidiaries of TCGI. As part of this
process, certain of the other cable operators agreed to sell their interests in
Local Market Partnerships to TCGI directly or through a Cable Stockholder.
Ownership and Organization of the Business of TCG Prior to the Reorganization.
As of June 3, 1996, the ownership and organization of TCGI, TCG Partners and
the Local Market Partnerships was as set forth below:
[CHART OF CABLE STOCKHOLDERS]
Reorganization Transactions Prior To or In Connection With the Offerings.
In connection with the Offerings, TCGI and the Cable Stockholders have
entered into a reorganization agreement (the "Reorganization Agreement")
pursuant to which TCGI, TCG Partners and the Local Market Partnerships will be
reorganized (the "Reorganization"). The principal transactions comprising the
Reorganization that will occur prior to or in connection with the consummation
of the Offerings are:
. the acquisition by TCGI of TCG Partners in exchange for Class B Common Stock
issued to the Cable Stockholders,
6
<PAGE>
. the acquisition by TCGI of all of the interests in 12 of the 14 Local Market
Partnerships in exchange for Class B Common Stock issued to the Cable
Stockholders and Class A Common Stock issued to other cable operators,
. the contribution to TCGI of $269.0 million aggregate principal amount of
indebtedness, plus accrued interest from May 1995, owed by TCGI to the Cable
Stockholders (except that TCI will retain a $26 million subordinated note of
TCGI) in exchange for Class B Common Stock issued to the Cable Stockholders,
and
. in connection with Continental's recently announced proposed merger with U S
WEST, Inc., the redemption by TCGI of 7,807,881 shares (out of 25,761,330
shares) of Class B Common Stock owned by Continental (7,975,738 shares if the
over-allotment options of the Underwriters of the Stock Offerings are
exercised in full) at a price per share equal to the initial public offering
price of the Class A Common Stock offered in the Stock Offerings, less the
applicable underwriting discount and a pro rata portion of the registration
fees (representing an aggregate redemption price of $118.5 million ($121.0
million if the over-allotment options of the Underwriters of the Stock
Offerings are exercised in full)).
Consummation of the Offerings is contingent on the consummation of the above-
described transactions, except that the redemption of Continental's shares will
be consummated shortly after the Offerings with a portion of the net proceeds
thereof.
In consideration of the transfer by each of the Cable Stockholders of its
interests in TCG Partners and the Local Market Partnerships and the
contribution to TCGI of the indebtedness described above, the Company will
issue immediately prior to the Offerings 69,250,230 shares of Class B Common
Stock to the Cable Stockholders.
Immediately prior to the consummation of the Offerings, the ownership and
organization of TCGI, TCG Partners and the Local Market Partnerships will be as
set forth below:
[CHART OF CABLE STOCKHOLDERS]
7
<PAGE>
Upon consummation of the Offerings and the principal transactions comprising
the Reorganization that will occur prior thereto or in connection therewith,
the ownership and organization of TCGI, TCG Partners and the Local Market
Partnerships will be as set forth below:
[CHART OF PUBLIC AND CABLE STOCKHOLDERS]
Reorganization Transactions After the Offerings.
Pursuant to the Reorganization, TCG Partners and 12 of the 14 Local Market
Partnerships will become wholly owned subsidiaries of TCGI. In addition, TCI
has agreed to transfer its interests in TCG Seattle and TCG San Francisco to
the Company at the earliest time such transfers can be accomplished, which in
each case is January 1, 1997. Furthermore, TCI has entered into an agreement to
acquire the 22.9% and 22.2% minority partnership interests in TCG San Francisco
and TCG Seattle, respectively, held by Viacom Telecom, Inc., which interests
TCI will be required to transfer to TCGI upon acquisition. The issuance of
shares of Class B Common Stock to TCI assumes that, subsequent to the
Offerings, TCI will contribute its current partnership interests in TCG Seattle
and TCG San Francisco, and that TCI will acquire and contribute to TCGI the
partnership interests of Viacom Telecom, Inc. in TCG Seattle and TCG San
Francisco. In the event TCI does not subsequently acquire and contribute to
TCGI the partnership interests currently held by Viacom Telecom, Inc., TCI will
be required, at its option, to return shares of Class B Common Stock or to make
certain payments to TCGI. See "The Reorganization."
Alternatively, TCGI has entered into letters of intent with Viacom Telecom,
Inc. which (after giving effect to the Reorganization) would permit TCGI to
acquire all of the partnership interests in TCG Seattle and to increase its
partnership interest in TCG San Francisco to 95.8%, if TCI is unable to acquire
such interests. If a definitive agreement were entered into with Viacom
Telecom, Inc., TCGI's purchase price would be approximately $32.1 million and
$15.2 million for TCG San Francisco and TCG Seattle, respectively, calculated
8
<PAGE>
based on the product of 2.5 multiplied by the amount Viacom Telecom, Inc. had
invested in each of TCG San Francisco and TCG Seattle.
In addition, TCI will be issued 638,862 shares of Class A Common Stock in
consideration for the transfer to TCGI of the partnership interests which TCI
acquired from MicroNet, Inc. in TCG San Francisco. TCI also has an agreement to
acquire a 4.2% partnership interest in TCG San Francisco from InterMedia
Partners. TCI has informed TCGI that it expects to acquire such partnership
interest by the end of July 1996, subject to normal closing conditions and the
consent of local franchising authorities. If TCI acquires such partnership
interest, TCI is required to transfer it to TCGI in consideration of the
issuance to TCI of 372,666 shares of Class A Common Stock upon such transfer.
The Offerings will not be conditioned upon the acquisition by TCGI of the
remaining partnership interests in TCG San Francisco and TCG Seattle.
After giving effect to the Reorganization and the Offerings, TCI, Cox,
Comcast and Continental will own 37.1%, 29.7%, 19.5% and 13.7%, respectively,
of the Company's Class B Common Stock, representing 36.5%, 29.2%, 19.1% and
13.4%, respectively, of the combined voting power of the Company's Common
Stock, and the ownership and organization of TCGI, TCG Partners and the Local
Market Partnerships will be as set forth below:
[CHART OF PUBLIC AND CABLE STOCKHOLDERS]
See "Risk Factors--Limitations on Acquiring Certain Local Market
Partnerships," "Risk Factors--Control by Principal Stockholders; Conflicts of
Interest; Possible Competition" and "The Reorganization" for a more detailed
description of certain matters relating to the Reorganization.
9
<PAGE>
THE NOTES OFFERINGS
THE SENIOR NOTES
Maturity Date................. July 1, 2006.
Interest...................... 9 7/8% per annum, payable semi-annually in
arrears on January 1 and July 1, commencing
January 1, 1997 .
THE SENIOR DISCOUNT NOTES
Maturity Date................. July 1, 2007.
Yield and Interest............ 11 1/8% per annum (compounded on a semi-annual
bond equivalent basis) calculated from July 2,
1996. Cash interest will not accrue prior to
July 1, 2001; provided, however, that at any
time prior to July 1, 2001, the Company may
elect to commence the accrual of cash interest
on an interest payment date. Commencing January
1, 2002, cash interest will be payable semi-
annually on January 1 and July 1.
Issue Price................... $582.15 per $1,000 principal amount at maturity
of Senior Discount Notes.
Original Issue Discount....... Each Senior Discount Note is being offered at
an original issue discount for federal income
tax purposes. Thus, although cash interest is
not expected to accrue on the Senior Discount
Notes prior to July 1, 2001 and there are not
expected to be any periodic payments of
interest on the Senior Discount Notes prior to
January 1, 2002, original issue discount (i.e.,
the difference between the stated redemption
price at maturity and the issue price of such
Notes) will accrue from the issue date of such
Notes up to July 1, 2001 and will be includable
as interest income periodically in a holder's
gross income for federal income tax purposes in
advance of receipt of the cash payments to
which the income is attributable. See "Certain
Federal Income Tax Considerations--Original
Issue Discount."
Special Redemption............ Senior Discount Notes aggregating up to $253
million in Accreted Value will be subject to
mandatory redemption at a redemption price of
101% of the Accreted Value thereof as of the
redemption date in the event that certain state
regulatory orders are not obtained within 270
days of the issuance date of the Notes or the
petitions for such orders are denied. See "Risk
Factors--Limitations on Incurrence of Debt
Under New York and New Jersey Regulatory
Authorizations" and "Description of Notes--
Terms of the Senior Discount Notes--Special
Redemption."
ADDITIONAL TERMS OF NOTES
Optional Redemption........... Except as set forth below, the Notes will not
be redeemable at the Company's option prior to
July 1, 2001. Thereafter the Notes will be
subject to redemption at the option of the
Company, in whole or in part, at the redemption
prices set forth herein. In addition, at any
time prior to July 1, 1999, the Company may
redeem up to one-third of the Notes at a
redemption price of 110% of the principal
amount in the case of the Senior Notes and at a
redemption price of 110% of Accreted Value
thereof in the
10
<PAGE>
case of the Senior Discount Notes with the net
proceeds of (a) a Public Equity Offering for
gross proceeds of $150 million or more or (b) a
sale or series or related sales by the Company
of its Capital Stock (other than Disqualified
Stock) to Strategic Equity Investors for an
aggregate purchase price of $150 million or
more. See "Description of Notes--Optional
Redemption" and "--Certain Definitions."
Change of Control............. Upon the occurrence of a Change of Control, the
Company will be required to make an offer to
purchase all of the Notes at a purchase price
equal to, in the case of the Senior Discount
Notes, 101% of the Accreted Value thereof (if
prior to July 1, 2001) or, in the case of the
Senior Notes and (if on or after July 1, 2001)
the Senior Discount Notes, 101% of the
aggregate principal amount thereof, plus
accrued and unpaid interest thereon (if on or
after July 1, 2001). There can be no assurance
that the Company will have sufficient funds to
complete any such purchase. See "Description of
Notes-- Change of Control." The Revolving
Credit Agreement (as defined herein) also
provides for an event of default upon a change
of control as defined therein. See "Description
of Certain Indebtedness." The Revolving Credit
Agreement limits the ability of the Company to
distribute cash from TCG New York, Inc. to
purchase Notes upon a Change of Control. For
the definition of the term "Change of Control"
under the Notes, see "Description of Notes--
Certain Definitions."
Ranking....................... The Senior Notes and the Senior Discount Notes
will each rank senior in right of payment to
all subordinated indebtedness of the Company
and pari passu in right of payment with each
other and with all other senior indebtedness of
the Company. The Company is a holding company
that conducts a substantial amount of its
business through subsidiaries. The Notes will
be effectively subordinated to all current and
future indebtedness of the Company's
subsidiaries, including trade payables.
Substantially all of such subsidiary
indebtedness is, and is expected to be, secured
by the assets of the Company's subsidiaries or
stock of the Company's subsidiaries. As of
March 31, 1996, after giving effect to the
Reorganization and the Offerings, the Company
had approximately $925.0 million of senior debt
outstanding. As of March 31, 1996, after giving
effect to the Reorganization and the Offerings
and the use of proceeds thereof, the Company's
subsidiaries had approximately $189.4 million
of total liabilities, including approximately
$62.5 million of indebtedness, and TCG New York
Inc. had approximately $230 million of
availability under the Revolving Credit
Agreement. See "Description of Certain
Indebtedness."
Certain Covenants............. The Indentures relating to the Notes (the
"Indentures") will contain certain covenants
that will restrict, among other things, the
ability of the Company and its restricted
subsidiaries to incur certain indebtedness, to
pay dividends and make certain other restricted
payments, to create liens, to permit other
restrictions on
11
<PAGE>
dividend and other payments by restricted
subsidiaries of the Company, to issue and sell
capital stock of restricted subsidiaries to
guarantee certain indebtedness, to sell assets,
to enter into transactions with affiliates and
to merge, consolidate or transfer substantially
all of the assets of the Company. The covenants
require the Company to make an offer to
purchase specified amounts of Notes in the
event of certain asset sales. There can be no
assurance that the Company will have sufficient
funds to complete any purchase of Notes upon a
sale of assets of the Company. See "Description
of Notes--Certain Covenants--Limitation on
Asset Sales."
Use of Proceeds............... The net proceeds of the Notes Offerings,
together with the net proceeds of the Stock
Offerings, are estimated to be $1,253.2
million. The Company intends to use such
proceeds (i) to redeem up to 7,807,881
(7,975,738 shares if the over-allotment options
of the Underwriters of the Stock Offerings are
exercised in full) shares of the Company's
Class B Common Stock held by a subsidiary of
Continental for $118.5 million ($121.0 million
if the over-allotment options of the
Underwriters of the Stock Offerings are
exercised in full), representing a price per
share equal to the initial public offering
price of the Class A Common Stock being offered
pursuant to the Stock Offerings, less the
applicable underwriting discounts and a pro
rata portion of the registration fees, (ii) to
repay approximately $155.0 million of bank
indebtedness of a subsidiary of the Company,
which amounts may be reborrowed and (iii) to
expand and develop existing and new networks
and for other general corporate and working
capital purposes, which may include
acquisitions; provided, however, that in the
event of a Special Redemption Event (as defined
in the Indenture for the Senior Discount Notes)
with respect to certain regulatory
authorizations, up to approximately $256
million of the net proceeds of the Offerings
will be used to redeem a portion of the Senior
Discount Notes. See "Risk Factors--Limitation
on Incurrence of Debt Under New York and New
Jersey Regulatory Authorizations," "Description
of Notes--Terms of Senior Discount Notes--
Special Redemption" and "Use of Proceeds."
Concurrent Stock Offerings.... The Company has also filed a registration
statement with respect to the offering of
23,500,000 shares of Class A Common Stock. The
closing of the Notes Offerings is expected to
occur concurrently with the closing of the
Stock Offerings.
For additional information concerning the Notes, see "Description of Notes."
RISK FACTORS
Prospective purchasers of the Notes should consider all of the information
contained in this Prospectus before making an investment in the Notes. In
particular, prospective purchasers should consider the factors set forth herein
under "Risk Factors."
12
<PAGE>
SUMMARY COMBINED FINANCIAL AND OTHER OPERATING DATA
The following tables present summary combined financial data derived from the
audited historical financial statements of TCGI for 1991, and from the audited
historical financial statements of TCGI and TCG Partners for 1992. Historical
summary combined financial data set forth below for the years 1993, 1994 and
1995 have been derived from the combined audited historical financial
statements of TCGI and TCG Partners, which have been audited by Deloitte &
Touche llp, independent auditors, whose report thereon appears elsewhere in
this Prospectus. The following tables also present summary combined financial
data for the three months ended March 31, 1995 and March 31, 1996 derived from
the unaudited combined financial statements of TCGI and TCG Partners. In
addition, the following tables present summary combined financial data relating
to TCGI's and TCG Partners' unaudited results, as adjusted to give pro forma
effect to the Reorganization and the Offerings for the year 1995 and the three
months ended March 31, 1996 and as of March 31, 1996. In the opinion of
management, the unaudited combined financial statements have been prepared on
the same basis as the audited combined financial statements and include all
adjustments, which consist only of normal recurring adjustments, necessary for
a fair presentation of the financial position and the results of operations for
these periods. Operating results for the three months ended March 31, 1996 are
not necessarily indicative of the results that may be expected for the full
year.
The summary unaudited pro forma combined financial data do not purport to
represent what TCGI's and TCG Partners' combined results of operations or
financial condition would actually have been if the transactions that give rise
to the pro forma adjustments had occurred on the dates assumed. The following
information should be read in conjunction with "Pro Forma Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and TCGI's and TCG Partners' historical combined
financial statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------- ----------------------------------
PRO FORMA PRO FORMA
FOR THE FOR THE
REORGANIZATION REORGANIZATION
AND OFFERINGS AND OFFERINGS
1991 1992 1993 1994 1995 1995 1995 1996 1996
------- ------- -------- -------- -------- -------------- -------- -------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Telecommunications
services............ $47,380 $57,256 $ 82,374 $ 99,983 $134,652 $ 184,852 $ 29,855 $ 39,553 $ 58,122
Management and
royalty fees from
Local Market
Partnerships(1)..... -- -- 1,555 20,691 31,517 -- 6,937 10,882 --
------- ------- -------- -------- -------- --------- -------- -------- --------
Total revenues....... 47,380 57,256 83,929 120,674 166,169 184,852 36,792 50,435 58,122
Operating expenses.... 22,728 31,876 48,224 60,255 73,743 101,089 17,124 22,520 32,467
Selling, general and
administrative(2).... 12,782 16,569 40,275 56,306 69,850 83,172 16,070 20,197 24,677
Depreciation and
amortization......... 9,550 12,035 16,197 19,933 37,837 62,531 7,297 12,849 21,556
------- ------- -------- -------- -------- --------- -------- -------- --------
Operating profit
(loss)............... 2,320 (3,224) (20,767) (15,820) (15,261) (61,940) (3,699) (5,131) (20,578)
------- ------- -------- -------- -------- --------- -------- -------- --------
Interest:
Interest income...... 636 446 1,072 1,711 4,067 4,822 1,106 1,190 981
Interest expense..... (885) (1,508) (1,407) (5,079) (23,331) (112,359) (4,600) (8,148) (28,540)
------- ------- -------- -------- -------- --------- -------- -------- --------
Net interest
expense............. (249) (1,062) (335) (3,368) (19,264) (107,537) (3,494) (6,958) (27,559)
------- ------- -------- -------- -------- --------- -------- -------- --------
Minority interest(3).. (98) (142) 796 1,395 663 2,673 201 150 855
Equity in loss of
unconsolidated affiliates.. -- -- (2,114) (11,763) (19,541) (1,368) (4,211) (6,528) (332)
------- ------- -------- -------- -------- --------- -------- -------- --------
Income (loss) before
taxes................ 1,973 (4,428) (22,420) (29,556) (53,403) (168,172) (11,203) (18,467) (47,614)
Income tax benefit
(provision).......... 484 -- 4,149 (433) (401) (401) (335) (225) (225)
------- ------- -------- -------- -------- --------- -------- -------- --------
Net income (loss)..... $ 2,457 $(4,428) $(18,271) $(29,989) $(53,804) $(168,573) $(11,538) $(18,692) $(47,839)
======= ======= ======== ======== ======== ========= ======== ======== ========
OTHER DATA:
EBITDA(4)............. $11,870 $ 8,811 $ (4,570) $ 4,113 $ 22,576 $ 591 $ 3,598 $ 7,718 $ 978
Capital expenditures.. 32,047 47,505 155,184 143,276 154,807 281,600 50,793 31,153 54,044
Ratio of earnings to
fixed charges(5)..... 3.23 -- -- -- -- -- -- -- --
Pro forma net income
(loss) per share..... -- -- -- -- -- (1.20) -- -- (0.34)
Dividends per share... -- -- -- -- -- -- -- -- --
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------------------------------ --------------------------------
PRO FORMA
FOR THE REORGANIZATION
AND OFFERINGS
1991 1992 1993 1994 1995 1996 1996
-------- -------- ---------- ---------- ---------- -------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 4,208 $ 3,563 $ 31,716 $ 26,000 $ 11,862 $ 16,805 $1,019,721
Working capital......... (10,905) (12,507) (15,278) (32,719) (47,083) (42,015) 918,145
Fixed assets--at cost... 146,250 193,650 329,686 422,964 545,643 576,806 1,000,084
Total assets............ 136,727 171,583 365,202 486,983 614,793 658,906 1,988,727
Long-term debt
(including capital
lease obligations)..... 13,884 49,679 29,689 200,462 368,464 434,903 968,312
Minority interest(3).... 3,247 6,201 12,661 2,903 4,409 4,847 16,116
Stockholders' equity and
partners' capital
(deficit).............. 81,799 77,371 209,141 179,152 125,348 106,656 829,260
<CAPTION>
AS OF MARCH 31,
1996
----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA(6):
Metropolitan areas
served.................. 8 10 18 33 48 48
Route miles............. 400 891 1,952 3,902 5,428 5,542
Fiber miles............. 20,238 42,902 90,700 167,314 253,285 257,041
Voice grade circuits.... 513,520 659,810 1,101,317 1,759,058 2,870,837 3,037,676
Digital telephone
switches................ 2 2 4 6 21 21
ATM switches............ -- -- -- -- 14 27
Employees............... 229 316 725 1,125 1,499 1,559
</TABLE>
- --------
(1) Under the terms of various management services arrangements among TCGI and
its unconsolidated Local Market Partnerships and certain other affiliates,
TCGI provides operating and administrative support services to such
entities, for which it earns management fees. Upon consummation of the
Reorganization, these fees will no longer be reflected as revenues.
(2) Included in selling, general and administrative expenses are expenses
incurred for services provided to the Local Market Partnerships, in the
amounts of $1.4 million, $19.4 million, $29.6 million, $6.5 million and
$10.2 million for the years 1993, 1994 and 1995 and the three months ended
March 31, 1995 and March 31, 1996, respectively.
(3) Minority interest reflects Fidelity Communications Inc.'s equity interest
in Teleport Communications Boston for 1991, 1992, 1993 and 1994; a Cox
affiliate's interest in TCG San Diego for 1993 and 1994; and TCI and
Continental affiliates' interests in TCG St. Louis for 1994 and 1995 and
the three months ended March 31, 1995 and March 31, 1996. On a pro forma
basis, after giving effect to the Reorganization and the Offerings, the
minority interest reflects Viacom Telecom, Inc.'s equity interests of 22.2%
and 22.9% in TCG Seattle and TCG San Francisco, respectively, and
InterMedia Partners' equity interest of 4.2% in TCG San Francisco.
(4) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization, minority interest and equity in losses of
unconsolidated affiliates. It is a measure commonly used in the
telecommunications industry and is presented to assist in understanding the
Company's operating results. Additionally, certain covenants contained in
the Indentures are based on EBITDA. EBITDA is not intended to represent
cash flows for the period. See the Combined Statements of Cash Flows
contained elsewhere in this Prospectus.
(5) The ratio of earnings to fixed charges is computed by dividing pretax
income from operations before fixed charges (other than capitalized
interest) by fixed charges. Fixed charges consist of interest charges and
amortization of debt expense and discount or premium related to
indebtedness, whether expensed or capitalized and that portion of rental
expense the Company believes to be representative of interest. For the
years 1992, 1993, 1994 and 1995 and the three months ended March 31, 1995
and March 31, 1996, earnings were insufficient to cover fixed charges by
$4.4 million, $23.2 million, $31.0 million, $54.1 million, $11.4 million
and $18.6 million, respectively. On a pro forma basis, earnings would have
been insufficient to cover fixed charges by $170.8 million for 1995 and
$48.5 million for the three months ended March 31, 1996.
(6) Operating data in all periods reflect operations of TCGI, TCG Partners and
the Local Market Partnerships and are derived from unaudited non-financial
records which were prepared by the Company.
14
<PAGE>
RISK FACTORS
Prior to purchasing any of the Notes offered hereby, prospective investors
should consider carefully the following factors in addition to the other
information contained in this Prospectus.
NEGATIVE CASH FLOW AND OPERATING LOSSES
The capital expenditures of TCG associated with the acquisition,
installation, development and expansion of its existing and new
telecommunications networks are substantial, and a significant portion of
these expenditures generally are incurred before any revenues are realized.
These expenditures, together with associated initial operating expenses,
generally result in negative cash flow and operating losses until an adequate
customer base and revenue stream for these networks have been established. The
Company expects to incur net losses for the foreseeable future as it continues
to acquire, install, develop and expand its existing and new
telecommunications networks. There can be no assurance that an adequate
revenue base will be established in each of the Company's networks or that the
Company will achieve or sustain profitability or generate sufficient positive
cash flow to service its debt, including the Notes.
SIGNIFICANT CAPITAL REQUIREMENTS
The development and expansion of the Company's existing and new networks and
services will require significant additional capital expenditures. The Company
will continue to evaluate additional revenue opportunities in each of its
markets and, as additional opportunities develop, the Company plans to make
additional capital investments in its networks that are required to pursue
such opportunities. TCG has historically been funded by capital contributions
and advances from the Cable Stockholders. Upon completion of the
Reorganization, however, the Cable Stockholders will no longer have any
obligation to make additional equity investments in or loans to TCG. See "The
Reorganization."
The Company expects to meet its capital needs with the proceeds of the
Offerings and internally generated cash flow, together with the proceeds from
existing and future credit facilities and other borrowings, and the proceeds
from sales of additional debt and equity securities. TCG New York, Inc., a
wholly owned subsidiary of TCGI ("TCNY"), has a Credit Agreement (the
"Revolving Credit Agreement"), pursuant to which certain financial
institutions have agreed to lend to TCNY up to $250 million to be used in part
to fund the Company's expansion and development of its networks. The ability
of TCNY to make distributions to the Company and to borrow the undrawn portion
of the commitment under the Revolving Credit Agreement is subject to the
compliance by TCNY with the covenants contained therein.
The incurrence of long-term indebtedness by TCGI in an amount in excess of
$1 billion is subject to certain state regulatory approvals in New York and
New Jersey. The Company has filed petitions for orders from such state
regulatory authorities that will permit TCGI to expand TCGI's borrowing
authority to $2 billion. The Company expects that the proceeds of the
Offerings and internally generated cash flow will be sufficient to meet its
capital needs until such state regulatory approvals have been obtained. Senior
Discount Notes aggregating up to $253 million in Accreted Value will be
subject to mandatory redemption, on a pro rata basis, at a redemption price of
101% of the Accreted Value thereof as of the redemption date in the event that
such state regulatory approvals are not obtained within 270 days of the
issuance date of the Notes or the petitions for such approvals are denied. In
addition to the $1 billion long-term debt borrowing authorization at the TCGI
level, both the New York and New Jersey regulatory authorities permit TCNY to
borrow an additional $1 billion; provided, however, that the New York
regulatory authority has interpreted its authorization as permitting TCGI and
TCNY to incur long-term debt not to exceed $1.75 billion in the aggregate. See
"--Limitation on Incurrence of Debt Under New York and New Jersey Regulatory
Authorizations," "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Description
of Certain Indebtedness."
There can be no assurance that TCG will be successful in generating
sufficient cash flow or raising debt or equity capital in sufficient amounts
on terms acceptable to it. The failure to generate sufficient cash flow or to
raise sufficient funds may require the Company to delay or abandon some or all
of its development and expansion plans, which could have a material adverse
effect on TCG's growth, its ability to compete in the telecommunications
services industry and its ability to service its debt, including the Notes.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
15
<PAGE>
SUBSTANTIAL LEVERAGE; INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES
The Company will be highly leveraged after consummation of the Notes
Offerings. As of March 31, 1996, after giving pro forma effect to the
Reorganization and the application of the net proceeds from the Offerings, TCG
would have had approximately $968.3 million of consolidated total debt and
$829.3 million of consolidated stockholders' equity. The degree to which the
Company is leveraged could have a material adverse effect upon the Company.
For example: (i) the Company's ability to obtain additional financing in the
future for capital expenditures, acquisitions, working capital or general
corporate or other purposes may be limited, (ii) a substantial portion of
TCG's cash flow from operations will be dedicated to the payment of the
principal of, and interest on, its debt and (iii) TCG's substantial leverage
may make it more vulnerable to economic downturns, limit its ability to
withstand competitive pressures and reduce its flexibility in responding to
changing business and economic conditions. In addition, a failure to comply
with the covenants and other provisions of its debt instruments could result
in events of default under such instruments, which could permit acceleration
of the debt under such instruments and in some cases acceleration of debt
under other instruments that contain cross-default or cross-acceleration
provisions.
After giving pro forma effect to the Reorganization, the Offerings and the
application of the net proceeds therefrom as if such transactions had occurred
at the beginning of the respective periods, the Company's earnings would have
been insufficient to cover its fixed charges by $170.8 million for the year
ended December 31, 1995 and $48.5 million for the three months ended March 31,
1996. Although TCG believes that it will be able to generate sufficient cash
flow from operations to meet its debt service obligations as they become due,
if it is unable to do so, it could face liquidity problems. In such
circumstances, the Company may be required to renegotiate the terms of the
instruments relating to its long-term debt or to refinance all or a portion of
its long-term debt. There can be no assurance, however, that TCG will be able
successfully to renegotiate such terms or refinance its indebtedness on terms
acceptable to it. If the Company were unable to refinance its indebtedness or
obtain new financing under these circumstances, TCG would have to consider
various other options such as the sale of certain assets to meet its required
debt service, the sale of additional equity, negotiations with its lenders to
restructure applicable indebtedness or other options available to it under
law.
HOLDING COMPANY STRUCTURE
TCG conducts a substantial amount of its business through its subsidiaries
and derives a substantial portion of its operating cash flow from its
subsidiaries. TCG intends to loan or contribute a portion of the net proceeds
from the Offerings to its subsidiaries. See "Use of Proceeds." The Notes are
not secured by any of the assets of the Company and will not initially be
guaranteed by any of the Company's subsidiaries (although under certain
circumstances the Company's subsidiaries may be required to guarantee the
Notes). See "Description of Notes--Certain Covenants--Limitation on Guarantees
of Indebtedness by Restricted Subsidiaries." The holders of any indebtedness,
and other creditors, of the Company's subsidiaries will be entitled to payment
of their indebtedness or other claims prior to the payment to the holders of
any general unsecured obligations of TCG, including the Notes. The Notes will
rank pari passu with any other unsecured obligations of the Company that are
not expressly subordinated to the Notes. TCG's ability to make interest and
principal payments when due to holders of the Notes is dependent upon the
receipt of sufficient funds from its subsidiaries and the receipt of
management fees, which may be limited by law or the terms of any debt
agreements to which the subsidiaries are a party. In addition, TCG intends to
borrow in the private debt markets through its subsidiaries. Since TCG's
subsidiaries do not generally guarantee the payment of principal or interest
on the Notes, the claims of holders of the Notes effectively will be
subordinated to the claims of creditors of such entities. Furthermore, TCG
contemplates that debt agreements that may be entered into between its
subsidiaries and financial institutions may prohibit the subsidiaries from
making dividend payments to TCG if an event of default exists under such debt
agreements or if the subsidiaries do not maintain specified financial ratios.
The Revolving Credit Agreement provides that TCNY is not permitted to pay
dividends to TCGI at any time prior to June 30, 1997, and may pay dividends to
TCGI thereafter only if (a) no default under the Revolving Credit Agreement
exists, (b) the ratio of the debt of TCNY to the product of two times its
operating cash flow for the prior two quarters is less than 5.0 to 1.0 and (c)
such dividend is not paid from the proceeds of any sale of assets. The
percentage of the Company's revenues and net income derived from TCNY was 65%
and 4%, respectively, for the year ended December 31, 1995 and 60% and 7%,
respectively, for the three months ended March 31, 1996.
16
<PAGE>
ORIGINAL ISSUE DISCOUNT CONSEQUENCES
The Senior Discount Notes will be issued with original issue discount within
the meaning of Section 1273(a) of the Internal Revenue Code of 1986, as
amended. Holders of obligations issued with original issue discount must
include such original issue discount in gross income for federal income tax
purposes as it accrues, in advance of the receipt of the cash attributable to
such income, under a method that takes into account the compounding of
interest. See "Certain Federal Income Tax Considerations."
RISKS OF EXPANSION
The Company's continued expansion and development of its networks will
depend on, among other things, the Company's ability to assess markets, design
fiber network backbone routes, install facilities, acquire rights-of-way and
building access, obtain any required governmental authorizations and permits
and implement interconnection with local exchange carriers, all in a timely
manner, at reasonable costs and on terms and conditions acceptable to TCG. The
Company's ability to manage this expansion effectively will require it to
continue to implement and improve its operational and financial systems and to
expand, train and manage its employee base. TCG's inability to expand its
existing networks or install new networks or manage effectively such expansion
and installation could have a material adverse effect upon the Company's
business strategy, financial condition and results of operations. In addition,
to the extent that the Company's expansion is carried out through
acquisitions, there can be no assurance that any desired acquisition could be
made in a timely manner on terms and conditions acceptable to the Company or
that any such acquisition could be successfully integrated into the Company's
operations.
Currently, TCG's services are predominantly local. However, TCG has examined
from time to time, and will continue to examine, opportunities to expand into
other related telecommunications services. If the Company were to expand into
new categories of telecommunications services, it could incur certain
additional risks in connection with such expansion, including technological
compatibility risks, legal and regulatory risks and possible adverse reaction
by some of its current customers.
LIMITATIONS ON ACQUIRING CERTAIN LOCAL MARKET PARTNERSHIPS
TCG Partners and 12 of the 14 Local Market Partnerships will become wholly
owned subsidiaries of TCGI. In addition, the Cable Stockholders have agreed to
transfer their interests in the remaining two Local Market Partnerships to the
Company at the earliest time such transfers can be accomplished. The remaining
interests held in TCG San Francisco are held by Viacom Telecom, Inc. (22.9%)
and InterMedia Partners (4.2%), and the remaining interest held in TCG Seattle
is held by Viacom Telecom, Inc. (22.2%). TCI has entered into agreements to
acquire, subject to the satisfaction of certain conditions, the partnership
interests held by such unaffiliated minority partners in TCG San Francisco and
TCG Seattle. Pursuant to the Reorganization Agreement, if TCI acquires such
interests, it is required to transfer them to TCG; if TCI determines that it
is unable to acquire such interests, it will notify TCG, and TCG shall pursue
the acquisition of such partnership interests. There can be no assurance that
TCI or TCG will be able to acquire such interests. See "The Reorganization."
DEPENDENCE UPON INTERCONNECTION WITH ILECS; SUBSTANTIAL COMPETITION
The Company operates in an increasingly competitive environment. Services
substantially similar to those offered by the Company are also offered by the
incumbent local exchange carriers ("ILECs") serving the metropolitan markets
currently served or intended to be served by the Company. ILECs have long-
standing relationships with their customers, have financial and technical
resources substantially greater than those of the Company, have the potential
to subsidize services of the type offered by the Company from service revenues
not subject to effective competition and benefit from federal and state laws
and regulations that, TCG believes, generally favor the ILECs over competitive
access providers ("CAPs") and competitive local exchange carriers ("CLECs").
Under certain circumstances, the FCC and state regulatory authorities provide
the ILECs with an ability to lower selectively the price of certain services
within the areas in which the Company operates. In addition, as a result of
the 1996 Act, ILECs are likely to obtain additional pricing flexibility with
regard to services that compete with those offered by the Company. Increased
price competition from ILECs could have a
17
<PAGE>
material adverse effect on the Company's financial condition and results of
operations. See "Business-- Competition;--Government Regulation." Also, under
the 1996 Act, ILECs formerly subject to restrictions on the provision of cable
television service and interLATA (interexchange) long distance services are no
longer restricted from entry into these businesses, subject to certain
requirements in the 1996 Act and rules and policies to be implemented by the
FCC and the states. The FCC may authorize a Regional Bell Operating Company
("RBOC") to provide interLATA services in a state when the RBOC enters into a
state utility commission-approved agreement with one or more facilities-based
competitors which provide business and residential local exchange service and
such agreements satisfy 14 specified interconnection requirements.
Alternatively, if no such facilities-based competitors achieve such
interconnection, the RBOC may obtain authority from the FCC to provide
interLATA services if the RBOC obtains state utility commission approval of a
statement of generally available terms and conditions of interconnection that
satisfies the requirements. When an RBOC obtains authority to provide
interLATA services, it will be able to offer customers local and long distance
telephone services. Given the market power the RBOCs currently possess in the
local exchange market, the ability to provide both local and long distance
services could make the RBOCs very strong competitors.
To the extent TCG interconnects with and uses the ILECs' networks to service
the Company's customers, TCG is dependent upon the technology and capabilities
of the ILECs to meet certain telecommunications needs of the Company's
customers and to maintain its service standards. TCG will become increasingly
dependent on interconnection with ILECs as switched services become a greater
percentage of the Company's business. TCG has experienced increasing
difficulties in obtaining high quality, reliable and reasonably priced service
from certain ILECs over the last 18 months, and the attractiveness of the
Company's services to customers may be impaired as a result. The 1996 Act
imposes interconnection obligations on ILECs, but there can be no assurance
that the Company will be able to obtain the services it requires at rates, and
on terms and conditions, that permit the Company to offer switched services at
rates that are both profitable and competitive.
In most of the metropolitan areas in which TCG operates, at least one (and
in many markets several) other CAPs or CLECs offer many of the same local
telecommunications services provided by the Company, generally at similar
prices. Potential and actual new market entrants in the local
telecommunications services business include other CAPs and CLECs, ILECs
entering new geographic markets, cable television companies, electric
utilities, long distance and international carriers, microwave carriers,
wireless telephone system operators and private networks built by large end
users, many of which may have financial, personnel and other resources
substantially greater than those of TCG. In addition, the current trend of
business combinations and alliances in the telecommunications industry,
including mergers between RBOCs, may create significant new competitors for
the Company.
The 1996 Act also will increase competition in the local telecommunications
business. The 1996 Act requires all local exchange providers, including new
entrants, to offer their services for resale and requires ILECs to offer their
network facilities on an unbundled basis. There can be no assurance that any
unbundled rates or facilities offered by ILECs to TCG will be economically
attractive or technically viable. See "Business--Government Regulation--
Telecommunications Act of 1996." These requirements facilitate entry by new
competitors without substantial capital risk or investment. See "Business--
Competition."
FEDERAL AND STATE REGULATION
The Company is subject to federal and state regulation. In most states, TCG
is subject to certification and tariff filing requirements with respect to
intrastate services. In some instances, the certificate obtained by the
Company in a particular state limits the services that it is permitted to
provide in that state. These current restrictions on the services that may be
provided by the Company should be eliminated as a result of the 1996 Act,
which prohibits states from imposing legal restrictions that effectively
prohibit the provision of any telecommunications service. States will,
however, under the 1996 Act, retain authority to impose on the Company and
other telecommunications carriers requirements to preserve universal service,
protect public safety, ensure quality of service and protect consumers. States
are also responsible under the 1996 Act for mediating and arbitrating
interconnection arrangements between CLECs and ILECs if the carriers fail to
agree on such arrangements.
18
<PAGE>
TCG is required to file tariffs for interstate services with the FCC,
although such tariff requirements are less restrictive than those imposed on
ILECs offering similar services. These tariffs must contain the rates, terms
and conditions under which service is generally available from TCG. Challenges
by third parties to the Company's tariff filings or related contractual
arrangements may cause TCG to incur substantial legal and administrative
expenses.
Under the 1996 Act, the Company will become subject to certain federal
regulatory obligations when it provides local exchange service in a market.
All local exchange carriers, including CLECs, must interconnect with other
carriers, make their services available for resale by other carriers, provide
nondiscriminatory access to rights-of-way, offer reciprocal compensation for
termination of traffic and provide dialing parity and telephone number
portability. In addition, the 1996 Act requires all telecommunications
carriers to ensure that their services are accessible to and usable by persons
with disabilities, and TCG and other CLECs may be required to contribute to a
universal service fund provided for in the 1996 Act but which has not yet been
established. Because the FCC has yet to adopt rules implementing the 1996 Act,
it is uncertain how burdensome these requirements will be for TCG.
The 1996 Act contains other provisions that may be subject to FCC rulemaking
and judicial interpretation, including a provision that limits the ability of
a cable television operator and its affiliates to acquire more than a 10%
financial interest or any management interest in a LEC which provides local
exchange service in such cable operator's franchise area. The Company
believes, based on an opinion from its FCC counsel, Dow, Lohnes & Albertson, a
Professional Limited Liability Company, that the 1996 Act does not limit the
acquisition of any of the interests contemplated to be acquired in the
Reorganization; however, there can be no assurance that the FCC or a court
would not reach a different determination as to one or more of such interests.
In addition, no assurance can be given that changes to current regulations
or the adoption of new regulations by the FCC or state regulatory authorities
or legislative initiatives would not have a material adverse effect on TCG.
See "Business--Government Regulation."
GOVERNMENTAL AND OTHER AUTHORIZATIONS
The development, expansion and maintenance of the Company's networks will
depend on, among other things, its ability to obtain rights-of-way and any
other required governmental authorizations and permits, all in a timely
manner, at reasonable costs and on satisfactory terms and conditions. In some
of the cities or municipalities where TCG provides network services, it may
pay license or franchise fees, usually based on a percentage of gross revenues
or a per foot right-of-way fee. The 1996 Act permits municipalities to charge
such fees only if they are nondiscriminatory, but there can be no assurance
that municipalities that presently favor a particular carrier, typically the
ILEC, will conform their practices to the requirements of the 1996 Act in a
timely manner or without a legal challenge. Furthermore, there can be no
assurance that certain cities or municipalities that do not now impose fees
will not seek to impose fees, nor can there be any assurance that, following
the expiration of existing franchises, fees will remain at their current
levels or that the franchises will be renewed. Some of the Company's franchise
agreements also provide for increases or renegotiation of fees at intervals
prior to the expiration thereof.
In addition, TCG currently leases, and plans in the future to enter into
facility arrangements for, significant numbers of optical fibers from cable
television operators. There can be no assurance that municipalities which
regulate such cable television operators will not seek to impose additional
franchise fees or otherwise charge such cable television operators (subject to
reimbursement by TCG) in connection with such leases. There can also be no
assurance that such cable television systems or the Company will be able to
obtain all necessary permits, licenses, conduit agreements or pole attachment
agreements from governmental authorities or private rights-of-way providers
necessary to effectuate such lease transactions. As a result, there can be no
assurance that TCG will be able to expand its existing networks or develop new
networks successfully, which would have a material adverse effect on the
Company's growth and financial condition.
If any of the Company's existing franchise, license or similar agreements
for a particular metropolitan area were terminated prior to their expiration
dates or not renewed and TCG were forced to remove its fiber or
19
<PAGE>
abandon its network in place, such termination would have a material adverse
effect on the Company's operations in that metropolitan area and could have a
material adverse effect on TCG.
LIMITATION ON INCURRENCE OF DEBT UNDER NEW YORK AND NEW JERSEY REGULATORY
AUTHORIZATIONS
The incurrence of long-term indebtedness by TCGI is subject to approval by
the New York Public Service Commission (the "NYPSC") and the New Jersey Board
of Public Utilities (the "NJBPU"). In orders issued in 1993, both the NYPSC
and NJBPU authorized TCGI to issue long-term debt in amounts not to exceed $1
billion. Additionally, in 1995, both the NYPSC and NJBPU authorized the
Company's subsidiary, TCG New York, Inc., to incur long-term debt in an amount
not to exceed an additional $1 billion; provided, however, that the NYPSC has
interpreted its authorization as permitting TCGI and TCNY to incur long-term
debt not to exceed $1.75 billion in the aggregate. The aggregate principal
amount of the Notes at maturity will be in excess of $1 billion, although the
accreted value of the Notes upon issuance will be $925 million.
The Company has received an opinion of its New Jersey regulatory counsel,
Smith, Don, Alampi, D'Argenio & Arturi, Englewood Cliffs, New Jersey, to the
effect that the proposed incurrence of indebtedness pursuant to the Notes
Offerings is authorized under the applicable statutes and rules governing the
authority of the NJBPU and that the Notes, once issued, will be valid and
enforceable to the extent governed by such statutes and rules. The Company has
filed a petition with the NJBPU to expand the borrowing authority of TCGI to
$2 billion, which the Company and its New Jersey regulatory counsel believe
will be approved in the ordinary course of business by the NJBPU.
The Company has received an opinion from its New York regulatory counsel,
Roland, Fogel, Koblenz & Carr, LLP, Albany, New York, to the effect that the
incurrence of indebtedness pursuant to the Notes Offerings is authorized under
the applicable statutes and rules governing the authority of the NYPSC and
that the Notes, once issued, will be valid and enforceable to the extent
governed by such statutes and rules. Such counsel's opinion is based in part
on an opinion from the Office of the General Counsel of the NYPSC. The Company
has submitted a request to the NYPSC for confirmation of the opinion of the
Office of General Counsel or, in the alternative, for authorization to incur
up to $2 billion in long-term debt, which the Company and its New York
regulatory counsel believe will be approved in the ordinary course of business
by the NYPSC.
While all past petitions by TCGI to the NYPSC and the NJBPU for
authorization to incur indebtedness have been approved routinely, there can be
no assurance that the Company's petitions before the NYPSC and the NJBPU will
be similarly approved. The Company will use its best efforts to obtain such
approval. In the event that (i) the Company fails to obtain confirmation from
the NYPSC of the opinion of its General Counsel or otherwise fails to obtain
approval for the issuance of the Notes, or fails to obtain authorization from
the NJBPU for the expansion of the borrowing authority of TCGI, within 270
days after the issuance date of the Notes or (ii) either the NYPSC or the
NJBPU has denied in a final order the petitions of TCGI referenced above, the
Company will redeem, on a pro rata basis, Senior Discount Notes with an
Accreted Value of up to approximately $253 million, representing an aggregate
principal amount of Senior Discount Notes equal to the amount by which the
aggregate principal amount at maturity of TCGI's long-term debt exceeds $1
billion. Although the Company will be required to redeem a portion of the
Senior Discount Notes in such event, there can be no assurance that the NYPSC
or the NJBPU will not take other action, including fines, injunctions or other
administrative or legal actions against the Company or actions with respect to
its authorizations to provide telecommunications services in New York and New
Jersey.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
The Company has substantial business relationships with a few large
customers, including the major long distance carriers. During 1995, the
Company's top 10 customers accounted for approximately 57% of TCG's total pro
forma revenues. AT&T Corp. ("AT&T") and Sprint Corporation ("Sprint") each
accounted for more than 10% of such revenues, although no customer accounted
for 15% or more of such revenues. A significant reduction in the level of
services TCG performs for any of these customers could have a material adverse
effect on the Company's results of operations or financial condition. Most of
the Company's customer arrangements
20
<PAGE>
are subject to termination on short notice and do not provide TCG with
guarantees that service quantities will be maintained at current levels, and
there can be no assurance that such arrangements will be continued at the same
service quantity levels. TCG believes that certain of the major long distance
carriers are pursuing alternatives to their current practices with regard to
obtaining local telecommunications services, including construction of their
own facilities. This type of activity could accelerate as a result of the 1996
Act, which limits the authority of states to impose legal restrictions that
have the effect of prohibiting a company, including an IXC, from providing any
telecommunications service. In addition, the 1996 Act requires ILECs to
unbundle their network facilities and to offer their services for resale by
other companies at wholesale discounts. Accordingly, long distance carriers
soon will be able to provide local service by reselling the facilities or
services of an ILEC, which may be more cost-effective for an IXC than using
the services of the Company or another CAP or CLEC. See "Business--Customers
and Marketing."
CONTROL BY PRINCIPAL STOCKHOLDERS; CONFLICTS OF INTEREST; POSSIBLE COMPETITION
Immediately following the completion of the Stock Offerings and after giving
effect to the Reorganization, the Cable Stockholders, who will hold all the
Class B Common Stock, representing approximately 98.2% of the combined voting
power of the Company's outstanding Common Stock, generally will have the
collective ability to control all matters requiring stockholder approval,
including the nomination and election of directors. The disproportionate
voting rights of the Class B Common Stock relative to the Class A Common Stock
may make TCG a less attractive target for a takeover than it otherwise might
be, or render more difficult or discourage a merger proposal, a tender offer
or a proxy contest, even if such actions were favored by a majority of the
holders of the Class A Common Stock. See "Principal Stockholders,"
"Description of Capital Stock" and "Certain Relationships and Related
Transactions--Amended Stockholders' Agreement."
All of the Cable Stockholders are in the telecommunications business and
may, now or in the future, provide services which are the same or similar to
those provided by TCG. No assurance can be given that the Cable Stockholders
will not compete with TCG in certain markets or in the provision of certain
telecommunications services. Continental has recently announced that it has
entered into an agreement pursuant to which it will merge with U S WEST, Inc.,
an ILEC and a competitor of the Company. Upon consummation of the Stock
Offerings, the directors designated by Continental will resign from the Board
of Directors of the Company. Although directors of TCG who are also directors,
officers or employees of the Cable Stockholders or any of their respective
affiliates have certain fiduciary obligations to TCG under Delaware law, such
directors and the Cable Stockholders, as the controlling stockholders of TCG,
are in positions that may create conflicts of interest with respect to certain
business opportunities available to and certain transactions involving the
Company. The Cable Stockholders have not adopted any special voting procedures
to deal with such conflicts of interest, and there can be no assurance that
any such conflict will be resolved in favor of TCG. In this regard, TCG's
Amended and Restated Certificate of Incorporation provides that TCG may not
provide certain (i) wireless communications services (other than products and
services delivered via point-to-point microwave and milliwave transmissions)
or (ii) telecommunications services to residences until, in each case, the
earlier of the date that is five years after the filing of the Amended and
Restated Certificate of Incorporation or the date on which the holders of
Class B Common Stock no longer represent at least 50% of the voting power of
the outstanding Common Stock of the Company, without the affirmative vote of
the holders of a majority of the Class B Common Stock, subject to certain
exceptions. See "Description of Capital Stock."
Affiliates of TCI, Cox and Comcast, which collectvely will designate a
majority of the directors of the Company, together with an affiliate of
Sprint, have formed Sprint Spectrum, a partnership created to provide certain
wireless telecommunications services. The investments by TCI, Cox and Comcast
in Sprint Spectrum and in the Company may encourage these companies to promote
arrangements between the Company and Sprint Spectrum. As recently as January
1996, TCI, Cox and Comcast expressed their intention to attempt to integrate
the business of the Company with the business of Sprint Spectrum. At present,
TCI, Cox and Comcast are not in any discussions with Sprint or Sprint Spectrum
with respect to the Company. However, the Company cannot predict whether TCI,
Cox and Comcast will attempt to achieve such an integration in the future or
whether they will be successful in doing so. The Company also cannot predict
the form that any such integration would take or its impact on the Company's
business.
21
<PAGE>
POTENTIAL ISSUANCE OF PREFERRED STOCK; POTENTIAL ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority, without any further vote
or action by the Company's stockholders, to issue up to 150,000,000 shares of
Preferred Stock in one or more series and to determine the designations,
powers, preferences and relative, participating, optional or other rights
thereof, including without limitation, the dividend rate (and whether
dividends are cumulative), conversion rights, voting rights, rights and terms
of redemption, redemption price and liquidation preference. Although the
Company has no current plans to issue any shares of Preferred Stock, the
rights of the holders of Common Stock would 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. Issuance of Preferred Stock could have the effect
of delaying, deterring or preventing a change in control of the Company,
including the imposition of various procedural and other requirements that
could make it more difficult for holders of Common Stock to effect certain
corporate actions, including the ability to replace incumbent directors and to
accomplish transactions opposed by the incumbent Board of Directors. See
"Certain Relationships and Related Transactions--Amended Stockholders'
Agreement" and "Description of Capital Stock."
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry has experienced and is expected to continue
to experience rapid and significant changes in technology. While TCG believes
that, for the foreseeable future, these changes will neither materially affect
the continued use of fiber optic cable or digital switches and transmission
equipment nor materially hinder the Company's ability to acquire necessary
technologies, the effect of technological changes on the Company's business
and operations cannot be predicted. Also, alternative technologies may develop
for the provision of services to customers. TCG may be required to select in
advance one technology over another; but it will be impossible to predict with
any certainty, at the time the Company is required to make its investment,
which technology will prove to be the most economic, efficient or capable of
attracting customer usage.
DEPENDENCE ON KEY PERSONNEL
The loss of the services of any of Robert Annunziata, John A. Scarpati,
Robert C. Atkinson, Alf T. Hansen or Stuart A. Mencher could have an adverse
impact on the Company. The Company has employment agreements with each of
Messrs. Annunziata, Scarpati, Atkinson, Hansen and Mencher. The Company does
not carry key man life insurance on any of such personnel. The Company
believes that the future success of TCG will depend in large part on its
continued ability to attract and retain highly skilled and qualified
personnel. See "Management."
ENVIRONMENTAL MATTERS
In connection with its management of The Teleport satellite earth station
complex in Staten Island, New York, TCG monitors electromagnetic radiation
levels in the vicinity of The Teleport facility on a quarterly basis. The
quarterly monitoring reports provided to TCG indicate that the type and level
of electromagnetic radiation being emitted into publicly accessible areas do
not violate any laws, rules or regulations of which TCG is aware. In addition,
the Company and its contractors are subject to various laws and regulations
governing hazardous or environmentally sensitive materials or conditions which
may occur in connection with the construction, installation, operation or
maintenance of the Company's facilities. There can be no assurance that
hazardous materials or conditions, including electromagnetic radiation emitted
from The Teleport satellite earth station complex or any of TCG's other
facilities, might not expose the Company to tort or other claims that could
have a material adverse effect on TCG.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Notes are new issues of securities, and there is currently no public
market for the Notes. TCG does not intend to apply for listing of the Notes on
any securities exchange or to seek their admission to trading in any automated
quotation system. TCG has been advised by the Underwriters that, following
completion of the initial offering of the Notes, the Underwriters presently
intend to make a market in the Notes, although they are under no obligation to
do so and may discontinue any market-making activities at any time without
notice. Accordingly, there can be no assurances as to whether an active public
market for the Notes will develop or, if a public market develops, as to the
liquidity of the trading market for the Notes. See "Underwriting."
22
<PAGE>
THE REORGANIZATION
Teleport Communications Group Inc. or "TCGI" is the issuer of the Notes
offered hereby. Prior to the Offerings, the local telecommunications business
managed by TCGI has been owned by the Cable Stockholders (TCI (30%), Cox
(30%), Comcast (20%), and Continental (20%)). The business was operated
through TCGI and, beginning in 1992, TCG Partners, which is a New York general
partnership owned by the Cable Stockholders in the same percentages as TCGI
and managed by TCGI. TCG Partners was formed for tax purposes to invest, with
TCGI, the Cable Stockholders and other cable operators, in Local Market
Partnerships to develop and operate local telecommunications networks in
various markets across the United States. The 14 Local Market Partnerships are
managed by TCGI, and each Local Market Partnership is owned by TCGI, TCGI
Partners, the Cable Stockholders which have cable operations in the particular
market and, in some cases, other cable operators in the market. To simplify
this complex ownership structure, TCGI and the Cable Stockholders have agreed
to consolidate the ownership of TCG Partners and of the Local Market
Partnerships as subsidiaries of TCGI. As part of this process, certain of the
other cable operators agreed to sell their interests in Local Market
Partnerships to TCGI directly or through a Cable Stockholder.
The following table sets forth for each Local Market Partnership the
ownership as of June 3, 1996, the ownership immediately prior to the
consummation of the Offerings and the ownership assuming consummation of the
Reorganization following the consummation of the Offerings:
<TABLE>
<CAPTION>
OWNERSHIP ASSUMING
LOCAL MARKET OWNERSHIP AS OF JUNE 3, OWNERSHIP IMMEDIATELY COMPLETE CONSUMMATION
PARTNERSHIP 1996 PRIOR TO OFFERINGS OF THE REORGANIZATION
- ------------------- -------------------------- --------------------- ---------------------
<S> <C> <C> <C>
TCG Chicago TCGI, Continental and TCI TCG TCG
TCG Connecticut TCG Partners, Comcast, Cox TCG TCG
and TCI
TCG Dallas TCGI, TCG Partners, and TCG TCG
TCI
TCG Detroit(a) TCG Partners, Booth TCG TCG
Telecable, Inc., Time
Warner Entertainment-
Advance Newhouse
Partnership, TCI, Comcast
and Continental
TCG Illinois TCG Partners, Continental TCG TCG
and TCI
TCG Los Angeles TCGI, TCG Partners, TCG TCG
Comcast, Continental, Cox
and TCI
TCG Omaha TCG Partners and Cox TCG TCG
TCG Phoenix TCG Partners, Cox and TCI TCG TCG
TCG Pittsburgh TCG Partners and TCI TCG TCG
TCG San Diego TCG Partners and Cox TCG TCG
TCG San TCGI, TCG Partners, TCG, InterMedia TCG
Francisco(b) InterMedia Partners, Partners, Viacom
Viacom Telecom, Inc. and Telecom, Inc. and
TCI TCI
TCG Seattle(b) TCGI, TCI and Viacom TCG, TCI and Viacom TCG
Telecom, Inc. Telecom, Inc.
TCG South Florida TCGI, TCG Partners, TCG TCG
Comcast, Continental and
TCI
TCG St. Louis TCG Partners, Continental TCG TCG
and TCI
</TABLE>
- --------
(a) The unaffiliated minority partners in TCG Detroit have agreed to transfer
their interests to TCGI upon consummation of the Stock Offerings.
(b) Certain transfers may require the consent of Viacom Telecom, Inc. and
InterMedia Partners. TCGI has entered into letters of intent with Viacom
Telecom, Inc. under which TCGI would be able to acquire, subject to
entering into definitive agreements, the 22.9% and 22.2% interests of
Viacom Telecom, Inc. in TCG San Francisco and TCG Seattle, respectively,
if TCI is unable to acquire such interests.
23
<PAGE>
Reorganization Transactions Prior To or In Connection With the Offerings.
In connection with the Offerings, the Company and the Cable Stockholders
have entered into the Reorganization Agreement, pursuant to which the
Reorganization will be effected. The principal transactions comprising the
Reorganization that will occur prior to or in connection with the consummation
of the Offerings are the following:
(i) Acquisition of TCG Partners. Prior to the consummation of the
Offerings, TCGI will acquire all of the partnership interests in TCG
Partners in exchange for Class B Common Stock issued to the Cable
Stockholders.
(ii) Acquisition of Additional Interests in Local Market Partnerships. On
or prior to the consummation of the Offerings, and in exchange for Class B
Common Stock issued to the Cable Stockholders and Class A Common Stock
issued to the other cable operators, TCGI will acquire all of the
partnership interests in the Local Market Partnerships other than TCG San
Francisco and TCG Seattle. Upon such acquisitions, these 12 Local Market
Partnerships will become wholly owned subsidiaries of TCGI.
The partnership interests held by the two partners in TCG Detroit that
are not affiliated with either TCG or the Cable Stockholders will be
acquired by TCG simultaneously with the closing of the Offerings in
consideration of the issuance to the current holders of such partnership
interests of Class A Common Stock with an aggregate value of $9.2 million.
The purchase price to be paid to such holders for their minority
partnership interests in TCG Detroit reflects a premium of approximately
$6.4 million over the aggregate book value of such partnership interests.
TCG has granted to such holders "piggy-back" registration rights with
respect to such Class A Common Stock.
On May 13, 1996, in connection with the Reorganization, TCGI purchased
the minority partnership interest of Hyperion Telecommunications, Inc. of
Florida in TCG South Florida for approximately $11.6 million, a purchase
price that reflected a premium of approximately $8.4 million over the book
value of such partnership interest.
(iii) Contribution of Indebtedness. As of March 31, 1996, the Company
owed the Cable Stockholders the aggregate principal amount of approximately
$269.0 million, plus accrued interest which, as of March 31, 1996 was $16.4
million, pursuant to the Loan Agreement, dated as of May 5, 1993, as
amended, among TCGI and its stockholders (the "Stockholder Loan
Agreement"). Prior to the consummation of the Offerings, the Cable
Stockholders will contribute to TCGI all amounts outstanding under the
Stockholder Loan Agreement (except that TCI will retain a subordinated note
of TCG in the amount of $26 million, bearing interest at the rate of 7.5%
per annum, with principal and interest payable at maturity five years from
the date of consummation of the Reorganization) and the Stockholder Loan
Agreement will be terminated.
(iv) Amendment and Restatement of Certificate of Incorporation. Prior to
the consummation of the Offerings, TCGI's certificate of incorporation will
be amended and restated to provide for, among other things, the increase of
its authorized share capitalization and the division of its authorized
common stock into two classes of Common Stock with different voting rights,
with each share of Class A Common Stock having one vote per share, each
share of Class B Common Stock having 10 votes per share and each share of
Class B Common Stock being convertible at any time into one share of Class
A Common Stock. The Cable Stockholders will initially be the only holders
of the Class B Common Stock and will have approximately 98.2% of the
combined voting power of the Company's outstanding Common Stock. See
"Principal Stockholders" and "Description of Capital Stock."
(v) Amended Stockholders' Agreement. Prior to the consummation of the
Offerings, the Cable Stockholders and TCGI will enter into an Amended and
Restated Stockholders' Agreement (the "Amended Stockholders' Agreement")
which will provide for, among other things, the corporate governance of the
Company, certain demand registration rights and certain stock transfer
restrictions. With respect to corporate governance, the Amended
Stockholders' Agreement will provide that at each annual meeting of the
24
<PAGE>
Company's stockholders at which directors are elected, the holders of the
Class B Common Stock will vote their shares in favor of nominees for
director to be designated as follows: (i) the holders of the Class B Common
Stock will designate 10 nominees (with the right of a holder of Class B
Common Stock to designate one or more nominees depending on the percentage
of the Class B Common Stock held by it), (ii) the Chief Executive Officer
of the Company will be designated as a nominee and (iii) the Board of
Directors with the unanimous consent of the holders of Class B Common Stock
that have the right to designate nominees for director shall designate two
individuals who are neither employed by nor affiliated with TCGI or any
holder of Class B Common Stock as nominees for director. Under the Amended
Stockholders' Agreement, a holder of Class B Common Stock generally must
hold, together with its affiliates, at least nine percent of the Class B
Common Stock in order to have the right to designate a director nominee.
The holders of the Class A Common Stock will not have the right, as a
class, under the Company's Amended and Restated Certificate of
Incorporation and the Amended Stockholders' Agreement to nominate any
individuals for election to the Board of Directors. The ability of
Continental (or its successor) to designate any directors after the earlier
of the consummation of its merger with U S WEST, Inc. or the Stock
Offerings will be limited in accordance with the terms of the Amended
Stockholders' Agreement. The Amended Stockholders' Agreement will terminate
when the aggregate voting power of the Class B Common Stock represents less
than 30% of the combined voting power of all outstanding Common Stock. See
"Certain Relationships and Related Transactions--Amended Stockholders'
Agreement."
(vi) Redemption of Class B Common Stock. Continental has recently
announced that it has entered into an agreement pursuant to which it will
merge with and into U S WEST, Inc. The Department of Justice has informed
the Company that it is in discussions with Continental, in connection with
its proposed merger with U S WEST, Inc., to require Continental to divest
its interest in the Company within a time frame to be agreed upon, but
which would not be earlier than June 30, 1997. TCGI has agreed to purchase
from the Continental subsidiary that is a stockholder of TCGI 7,807,881
shares (7,975,738 shares if the over-allotment options of the Underwriters
of the Stock Offerings are exercised in full) of Class B Common Stock at a
price per share equal to the initial public offering price of the Class A
Common Stock offered hereby, less the applicable underwriting discount and
a pro rata portion of the registration fees. Continental paid approximately
$60 million for the shares of Common Stock originally issued to it on May
5, 1993 (which will be converted into 14,000,070 shares of Class B Common
Stock as part of the Reorganization prior to the consummation of the
Offerings). As part of the Reorganization, as noted below, Continental will
also receive an additional 11,761,260 shares of Class B Common Stock in
consideration of (a) its contribution of $53.8 million in principal amount,
plus accrued interest thereon (approximately $3.3 million as of March 31,
1996), owed to it under the Stockholder Loan Agreement and (b) its transfer
to TCG of its partnership interests in TCG Partners and the Local Market
Partnerships in which its subsidiaries are partners. Continental has
contributed an aggregate amount of $68.1 million as capital of TCG Partners
and such Local Market Partnerships. After giving effect to the
Reorganization (except for the redemption of Continental's shares of Class
B Common Stock), Continental's investment for its 25,761,330 shares of
Class B Common Stock amounts to approximately $185.3 million.
The consummation of the Offerings is contingent on the consummation of the
above-described transactions.
In consideration of the transfers and contributions of their interests in
TCG Partners, the Local Market Partnerships and the amounts outstanding under
the Stockholder Loan Agreement, the Company will issue to Comcast,
Continental, Cox and TCI 11,621,988 shares of Class B Common Stock, 11,761,260
shares of Class B Common Stock, 18,045,594 shares of Class B Common Stock and
27,821,388 shares of Class B Common Stock, respectively. No allocation of a
particular number of shares of Class B Common Stock has been made to any
particular partnership interest or to indebtedness under the Stockholder Loan
Agreement. In addition, TCI will hold the $26 million subordinated note
described above.
Reorganization Transactions After the Offerings.
TCGI will acquire the Cable Stockholders' interests in TCG San Francisco and
TCG Seattle at the earliest time that such acquisitions can be accomplished
without minority partner consent or upon receipt of the consent
25
<PAGE>
of such minority partners. Accordingly, as soon as practicable after January
1, 1997 (which is the first date on which, under the partnership agreement of
TCG San Francisco, TCG can acquire the partnership interests of the Cable
Stockholders without the consent of Viacom Telecom, Inc. and InterMedia
Partners), the Company's interest in TCG San Francisco will increase from
35.0% to 72.9%; and as soon as practicable after January 1, 1997 (which is the
first date on which, under the partnership agreement of TCG Seattle, TCG can
acquire the partnership interests of the Cable Stockholders without the
consent of Viacom Telecom, Inc.), the Company's interest in TCG Seattle will
increase from 35.0% to 77.8%.
TCI has entered into agreements to acquire the partnership interests held by
the unaffiliated minority partners in TCG San Francisco (Viacom Telecom, Inc.
and InterMedia Partners) and TCG Seattle (Viacom Telecom, Inc.), subject to
certain conditions. TCI has not informed the Company of the price it has
agreed to pay for such partnership interests. Pursuant to the Reorganization
Agreement, if TCI acquires such interests, it will be required to transfer
them to TCG; if TCI determines that it is unable to acquire such interests, it
will notify TCG, and TCG shall pursue the acquisition of such partnership
interests. TCGI has entered into letters of intent with Viacom Telecom, Inc.
under which TCGI may be able to acquire the 22.9% and 22.2% interests of
Viacom Telecom, Inc. in TCG San Francisco and TCG Seattle, respectively, if
TCI is unable to acquire such interests. If a definitive agreement were
entered into, TCGI's purchase price would be calculated based on the product
of 2.5 multiplied by the amount Viacom Telecom, Inc. had invested in each of
TCG San Francisco and TCG Seattle, or approximately $32.1 million and $15.2
million, respectively.
The 27,821,388 shares of Class B Common Stock that will be issued to TCI are
based on the assumption that TCI will subsequently acquire the partnership
interests of Viacom Telecom, Inc. in TCG San Francisco and TCG Seattle and
transfer them to the Company. If TCI does not transfer such partnership
interests to the Company within two years of the initial closing date of the
Reorganization, then TCI must pay to the Company an amount equal to the lesser
of the amount paid by the Company to Viacom Telecom, Inc. (if the Company
acquires such partnership interests directly from Viacom Telecom, Inc.) or
approximately $32.1 million and $15.2 million for TCG San Francisco and TCG
Seattle, respectively (which amounts are the product of 2.5 multiplied by the
amount Viacom Telecom, Inc. has invested in each of TCG San Francisco and TCG
Seattle, plus interest on such amount at the rate of 7.5% per annum,
compounded quarterly). Such amount may be paid, at TCI's option, either in
cash, by the cancellation of all or a portion of the $26 million note TCI is
receiving, or in shares of Class B Common Stock valued at the market price for
the publicly traded shares of Class A Common Stock. If TCI elects to pay such
amount in shares of Class B Common Stock, it is entitled to a 15% discount on
the amount otherwise payable.
In addition, TCI will be issued 638,862 shares of Class A Common Stock upon
its transfer to TCGI of a partnership interest in TCG San Francisco it has
acquired from MicroNet, Inc., and will be issued 372,666 shares of Class A
Common Stock upon its transfer to TCGI of the partnership interest of
InterMedia Partners in TCG San Francisco, which TCI has informed TCG it
expects to acquire by the end of July 1996, subject to normal closing
conditions and the consent of local franchising authorities.
The Offerings will not be conditioned upon the acquisition by TCGI of the
remaining partnership interests in TCG Seattle and TCG San Francisco. After
giving effect to the Reorganization and the Offerings, TCI, Cox, Comcast and
Continental will own 37.1%, 29.7%, 19.5% and 13.7%, respectively, of the
Company's Class B Common Stock, representing 36.5%, 29.2%, 19.1% and 13.4%,
respectively, of the combined voting power of the Company's Common Stock.
26
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company of the Notes Offerings are approximately
$898.5 million after deducting the underwriting discount and estimated
expenses of the Notes Offerings. The net proceeds to the Company from the
Stock Offerings are approximately $354.7 million (approximately $408.2 million
if the Underwriters' over-allotment options are exercised in full) after
deducting the underwriting discount and estimated expenses of the Stock
Offerings.
TCG intends to use the net proceeds of the Offerings (i) to redeem 7,807,881
shares (7,975,738 shares if the over-allotment options of the Underwriters of
the Stock Offerings are exercised in full) of Class B Common Stock held by a
subsidiary of Continental for $118.5 million ($121.0 million if the over-
allotment options of the Underwriters of the Stock Offerings are exercised in
full), representing a price per share equal to the initial public offering
price of the Class A Common Stock being offered pursuant to the Stock
Offerings, less the applicable underwriting discount and a pro rata portion of
the registration fee, (ii) to repay approximately $155.0 million outstanding
under the Revolving Credit Agreement, which amount may be reborrowed and (iii)
the remaining approximately $979.7 million to expand and develop existing and
new networks and for general corporate and working capital purposes, which may
include acquisitions; provided, however, that in the event of a Special
Redemption Event (as defined in the Indenture for the Senior Discount Notes)
with respect to certain regulatory authorizations, up to approximately $256
million of the net proceeds of the Offerings will be used to redeem a portion
of the Senior Discount Notes. See "Risk Factors--Limitation on Incurrence of
Debt Under New York and New Jersey Regulatory Authorizations" and "Description
of Notes--Terms of Senior Discount Notes--Special Redemption." A significant
portion of such proceeds will be contributed or advanced to the Company's
subsidiaries which own and operate the networks in the local markets. Expected
capital expenditures for the expansion, development and acquisition of
networks include (i) the purchase and installation of switches, electronics,
fiber and other additional technologies in existing networks and in networks
to be constructed in new markets and (ii) the acquisition and expansion of
networks currently owned and operated by other companies. Expected
expenditures for general corporate and working capital purposes include (i)
expenditures with respect to the Company's management information system and
corporate service support infrastructure and (ii) operating and administrative
expenses with respect to new networks and debt service.
The Company's expansion into additional markets is expected to be
accomplished primarily by the development of new networks and also by the
acquisition of existing networks. Many factors will influence the Company's
determination as to the use of the net proceeds of the Offerings. The Company
has no specific plans for a significant portion of the net proceeds of the
Offerings. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
The Revolving Credit Agreement was entered into in May 1995, and the amounts
being repaid were used for expansion and development of the Company's networks
and for general corporate purposes. All loans outstanding under the Revolving
Credit Agreement must be paid in full no later than February 27, 2004. The
interest rate on the loans being repaid under the Revolving Credit Agreement
as of March 31, 1996 was approximately 6.3%. When needed by the Company, such
proceeds can be reborrowed under the Revolving Credit Agreement, subject to
satisfaction of customary conditions to borrowings. Toronto Dominion (Texas),
Inc. is the Administrative Agent under the Revolving Credit Agreement and The
Toronto-Dominion Bank is a lender under the Revolving Credit Agreement, and
each of them is an affiliate of Toronto Dominion Securities (USA) Inc., which
is one of the underwriters under the Notes Offerings. An amount equal to
approximately $14.0 million, plus interest accrued thereon, will be paid to
The Toronto-Dominion Bank from the proceeds of the Offerings as a payment on
the revolving credit facility. Chemical Bank is the Documentation Agent and a
lender under the Revolving Credit Agreement and is an affiliate of Chase
Securities Inc., which is one of the underwriters under the Offerings. An
amount equal to approximately $14.0 million, plus interest accrued thereon,
will be paid to Chemical Bank from the proceeds of the Offerings as a payment
on the revolving credit facility. See "Description of Certain Indebtedness"
and "Underwriting."
Pending the foregoing uses, the net proceeds of the Offerings will be
invested in short-term, interest bearing investment-grade securities.
27
<PAGE>
CAPITALIZATION
The following table sets forth the historical combined capitalization of the
Company as of March 31, 1996 and as adjusted to reflect the Reorganization and
the Offerings. This table should be read in conjunction with the Selected
Combined Financial Data, the Pro Forma Financial Information and the combined
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-----------------------------------------------
PRO FORMA FOR
PRO FORMA FOR THE REORGANIZATION
ACTUAL THE REORGANIZATION AND OFFERINGS
-------- ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents...... __16,805$ __36,000$ _1,019,721$
======== ======== ==========
Current portion of capital
lease obligations............. ___4,575$ __18,694$ ____18,694$
======== ======== ==========
Long-term debt:
Revolving Credit Agreement... _155,000$ _155,000$ _______-- $
Senior Notes due 2006........ -- -- 300,000
Senior Discount Notes due
2007........................ -- -- 625,000
Unamortized Notes issuance
costs....................... -- -- (26,504)
Subordinated debt to Cable
Stockholders................ 269,000 -- --
Long-term capital lease obli-
gations..................... 10,903 43,816 43,816
TCI Note..................... -- 26,000 26,000
-------- -------- ----------
Total long-term debt....... 434,903 224,816 968,312
-------- -------- ----------
Minority interest.............. 4,847 16,116 16,116
-------- -------- ----------
Stockholders' equity and part-
ners' capital (deficit):
Preferred Stock, $.01 par
value; no shares authorized
or outstanding; 150,000,000
shares authorized and no
shares outstanding on a pro
forma basis................. -- -- --
Common Stock, $1.00 par
value; 3,000 shares
authorized, 1,667 shares
issued and outstanding...... 2 -- --
Class A Common Stock, $.01
par value; 450,000,000
shares authorized, 1,215,125
and 24,715,125 shares issued
and outstanding on a pro
forma basis, respectively... -- 12 247
Class B Common Stock, $.01
par value; 300,000,000
shares authorized,
139,250,370 and 131,442,489
shares issued and outstand-
ing on a pro forma basis,
respectively................ -- 1,393 1,314
Additional paid-in capital... 195,388 768,591 1,123,131
Accumulated deficit.......... (76,290) (176,961) (176,961)
Partners' capital (deficit).. (12,444) -- --
-------- -------- ----------
106,656 593,035 947,731
Treasury stock, 7,807,881
shares of Class B Common
Stock, at cost.............. -- -- (118,471)
-------- -------- ----------
Total stockholders' equity
and partners' capital
(deficit)................. _106,656 _593,035 829,260
-------- -------- ----------
Total capitalization..... _546,406$ _833,967$ _1,813,688$
======== ======== ==========
</TABLE>
28
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The following tables present selected combined financial data derived from
the audited historical financial statements of TCGI for 1991, and from the
audited historical financial statements of TCGI and TCG Partners for 1992.
Historical annual selected combined financial data set forth below for the
years 1993, 1994 and 1995 have been derived from the combined audited
historical financial statements of TCGI and TCG Partners, which have been
audited by Deloitte & Touche llp, independent auditors, whose report thereon
appears elsewhere in this Prospectus. The following tables also present
selected combined financial data for the three months ended March 31, 1995 and
March 31, 1996 derived from the unaudited combined financial statements of
TCGI and TCG Partners. In the opinion of management, the unaudited combined
financial statements have been prepared on the same basis as the audited
combined financial statements and include all adjustments, which consist only
of normal recurring adjustments, necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the full year.
The following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
TCGI's and TCG Partners' historical combined financial statements and the
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
---------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- -------- -------- -------- -------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Telecommunications
services.............. $47,380 $57,256 $ 82,374 $ 99,983 $134,652 $ 29,855 $ 39,553
Management and royalty
fees from Local Market
Partnerships(1)....... -- -- 1,555 20,691 31,517 6,937 10,882
------- ------- -------- -------- -------- -------- --------
Total revenues......... 47,380 57,256 83,929 120,674 166,169 36,792 50,435
Operating expenses...... 22,728 31,876 48,224 60,255 73,743 17,124 22,520
Selling, general and ad-
ministrative(2)........ 12,782 16,569 40,275 56,306 69,850 16,070 20,197
Depreciation and amorti-
zation................. 9,550 12,035 16,197 19,933 37,837 7,297 12,849
------- ------- -------- -------- -------- -------- --------
Operating profit
(loss)................. 2,320 (3,224) (20,767) (15,820) (15,261) (3,699) (5,131)
------- ------- -------- -------- -------- -------- --------
Interest:
Interest income........ 636 446 1,072 1,711 4,067 1,106 1,190
Interest expense....... (885) (1,508) (1,407) (5,079) (23,331) (4,600) (8,148)
------- ------- -------- -------- -------- -------- --------
Net Interest expense... (249) (1,062) (335) (3,368) (19,264) (3,494) (6,958)
------- ------- -------- -------- -------- -------- --------
Minority interest(3).... (98) (142) 796 1,395 663 201 150
Equity in loss of uncon-
solidated affiliates... -- -- (2,114) (11,763) (19,541) (4,211) (6,528)
------- ------- -------- -------- -------- -------- --------
Income (loss) before
taxes.................. 1,973 (4,428) (22,420) (29,556) (53,403) (11,203) (18,467)
Income tax benefit (pro-
vision)................ 484 -- 4,149 (433) (401) (335) (225)
------- ------- -------- -------- -------- -------- --------
Net income (loss)....... $ 2,457 _(4,428)$$(18,271) _(29,989)$_(53,804)$$(11,538) $(18,692)
======= ======= ======== ======== ======== ======== ========
OTHER DATA:
EBITDA(4)............... $11,870 $ 8,811 __(4,570)$$ 4,113 $ 22,576 $ 3,598 $ 7,718
Capital expenditures.... 32,047 47,505 155,184 143,276 154,807 50,793 31,153
Ratio of earnings avail-
able to cover fixed
charges(5)............. 3.23 -- -- -- -- -- --
Pro forma net income
(loss) per share(6).... -- -- -- -- (1.20) -- (0.34)
Dividends per share..... -- -- -- -- -- -- --
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------- AS OF MARCH 31,
1991 1992 1993 1994 1995 1996
------- ------- -------- -------- -------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents.................. $ 4,208 $ 3,563 $ 31,716 $ 26,000 $ 11,862 $ 16,805
Working capital......... (10,905) (12,507) (15,278) (32,719) (47,083) (42,015)
Fixed assets--at cost... 146,250 193,650 329,686 422,964 545,653 576,806
Total assets............ 136,727 171,583 365,202 486,983 614,793 658,906
Long-term debt (includ-
ing capital lease
obligations)........... 13,884 49,679 29,689 200,462 368,464 434,903
Minority interest(3).... 3,247 6,201 12,661 2,903 4,409 4,847
Stockholders' equity and
partners' capital
(deficit).............. 81,799 77,371 209,141 179,152 125,348 106,656
</TABLE>
29
<PAGE>
- --------
Footnotes to Selected Combined Financial Data
(1) Under the terms of various management services arrangements among TCGI and
its unconsolidated Local Market Partnerships and certain other affiliates,
TCGI provides operating and administrative support services to such
entities, for which it earns management fees. Upon consummation of the
Reorganization, these fees will no longer be reflected as revenues.
(2) Included in selling, general and administrative expenses are expenses
incurred for services provided to the Local Market Partnerships, in the
amounts of $1.4 million, $19.4 million, $29.6 million, $6.5 million and
$10.2 million for the years 1993, 1994 and 1995 and the three months ended
March 31, 1995 and March 31, 1996, respectively.
(3) Minority interest reflects Fidelity Communications Inc.'s equity interest
in Teleport Communications Boston for 1991, 1992, 1993 and 1994; a Cox
affiliate's interest in TCG San Diego for 1993 and 1994; and TCI and
Continental affiliates' interests in TCG St. Louis for 1994 and 1995 and
the three months ended March 31, 1995 and March 31, 1996.
(4) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization, minority interest and equity in losses of
unconsolidated affiliates. It is a measure commonly used in the
telecommunications industry and is presented to assist in understanding
the Company's operating results. Additionally, certain covenants contained
in the Indentures are based on EBITDA. EBITDA is not intended to represent
cash flows for the period. See the Combined Statements of Cash Flows
contained elsewhere in this Prospectus.
(5) The ratio of earnings to fixed charges is computed by dividing pretax
income from operations before fixed charges (other than capitalized
interest) by fixed charges. Fixed charges consist of interest charges and
amortization of debt expense and discount or premium related to
indebtedness, whether expensed or capitalized and that portion of rental
expense the Company believes to be representative of interest. For the
years 1992, 1993, 1994 and 1995 and the three months ended March 31, 1995
and March 31, 1996, earnings were insufficient to cover fixed charges by
$4.4 million, $23.2 million, $31.0 million, $54.1 million, $11.4 million
and $18.6 million, respectively.
(6) The number of shares used in the computation of the pro forma net income
(loss) per share gives effect to the Reorganization and the use of
proceeds of the Offerings. See "Pro Forma Financial Information."
30
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following pro forma condensed consolidated balance sheet and statements
of operations are presented for the Company as of March 31, 1996 and for the
year ended December 31, 1995 and the three months ended March 31, 1996. Such
pro forma results reflect the effects of the Reorganization and the
application of the proceeds of and other transactions related to the Offerings
as if they had occurred at the end of the period for the condensed
consolidated balance sheet and at the beginning of the period for the
condensed consolidated statement of operations. Such pro forma adjustments
have been applied to the condensed combined historical data.
The condensed consolidated pro forma financial information is provided for
informational purposes only and does not purport to represent what the
financial position and results of operations would actually have been if such
transactions had in fact occurred as described above and are not intended to
project the Company's financial position or results of operations for any
future period.
The condensed consolidated pro forma financial information gives effect to
pro forma adjustments which are described in the accompanying notes. The
condensed consolidated pro forma financial information and accompanying notes
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and TCGI's and TCG Partners'
historical combined financial statements and the notes thereto included
elsewhere in this Prospectus.
31
<PAGE>
CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
MARCH 31, 1996
UNAUDITED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
COMBINED COMBINED LOCAL PRO FORMA FOR THE
TCGI AND MARKET REORGANIZATION FOR THE OFFERINGS REORGANIZATION
TCG PARTNERS PARTNERSHIPS(1) ADJUSTMENTS(2) REORGANIZATION ADJUSTMENTS(3) AND OFFERINGS
------------ --------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents................ $ 16,805 $ 19,195 $ 36,000 $983,721 $1,019,721
Accounts receivable,
net.................. 33,568 12,128 $ (2,468) 43,228 -- 43,228
Prepaid expenses and
other current
assets............... 6,139 5,078 -- 11,217 -- 11,217
-------- -------- --------- ---------- -------- ----------
Total current as-
sets............... 56,512 36,401 (2,468) 90,445 983,721 1,074,166
-------- -------- --------- ---------- -------- ----------
Fixed assets--at cost... 576,806 423,278 -- 1,000,084 -- 1,000,084
Less accumulated de-
preciation and amor-
tization............. (126,273) (39,729) -- (166,002) -- (166,002)
-------- -------- --------- ---------- -------- ----------
Fixed assets--net..... 450,533 383,549 -- 834,082 -- 834,082
-------- -------- --------- ---------- -------- ----------
Investment in
unconsolidated
affiliates............. 118,985 -- (102,502) 16,483 -- 16,483
-------- -------- --------- ---------- -------- ----------
Goodwill................ 26,649 41,071 (13,561) 54,159 -- 54,159
-------- -------- --------- ---------- -------- ----------
Other assets............ 6,227 3,610 -- 9,837 -- 9,837
-------- -------- --------- ---------- -------- ----------
Total assets............ $658,906 $464,631 $(118,531) $1,005,006 $983,721 $1,988,727
======== ======== ========= ========== ======== ==========
LIABILITIES AND STOCK-
HOLDERS'
EQUITY AND PARTNERS'
CAPITAL (DEFICIT)
Current liabilities..... $ 98,527 $ 60,377 $ (6,883) $ 152,021 $ 4,000 $ 156,021
Non-current liabilities:
Revolving Credit
Agreement............ 155,000 -- -- 155,000 (155,000) --
Senior Notes due
2006................. -- -- -- -- 300,000 300,000
Senior Discount Notes
due 2007 (6)......... -- -- -- -- 625,000 625,000
Unamortized Notes
issuance costs....... -- -- -- -- (26,504) (26,504)
Subordinated debt to
Cable Stockholders... 269,000 (269,000) -- -- --
Capital lease obliga-
tions................ 10,903 32,913 -- 43,816 -- 43,816
TCI Note.............. -- -- 26,000 26,000 -- 26,000
Minority interest..... 4,847 -- 11,269 16,116 -- 16,116
Other................. 13,973 5,045 -- 19,018 -- 19,018
-------- -------- --------- ---------- -------- ----------
Total liabilities... 552,250 98,335 (238,614) 411,971 747,496 1,159,467
Stockholders' equity
and partners' capital
(deficit)............. 106,656 366,296 120,083 593,035 354,696 947,731
Treasury stock,
7,807,881 shares of
Class B Common Stock,
at cost............... -- -- -- -- (118,471) (118,471)
-------- -------- --------- ---------- -------- ----------
Total stockholders' eq-
uity and partners'
capital (deficit)..... 106,656 366,296 120,083 593,035 236,225 829,260
-------- -------- --------- ---------- -------- ----------
Total liabilities and
stockholders' equity
and partners' capital
(deficit).............. $658,906 $464,631 $(118,531) $1,005,006 $983,721 $1,988,727
======== ======== ========= ========== ======== ==========
</TABLE>
See notes to condensed consolidated pro forma financial information.
32
<PAGE>
CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
UNAUDITED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED PRO FORMA
TCGI AND COMBINED LOCAL PRO FORMA FOR THE
TCG MARKET REORGANIZATION FOR THE OFFERINGS REORGANIZATION
PARTNERS PARTNERSHIPS(1) ADJUSTMENTS(2)(4) REORGANIZATION ADJUSTMENTS(3) AND OFFERINGS
-------- --------------- ----------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Telecommunications
services............. $134,652 $ 50,276 $ (76) $184,852 $184,852
Management and royalty
fees................. 31,517 -- (31,517) -- --
-------- -------- ------- ----------- --------- -----------
Total revenues...... 166,169 50,276 (31,593) 184,852 184,852
-------- -------- ------- ----------- --------- -----------
Expenses:
Operating............. 73,743 31,073 (3,727) 101,089 101,089
Selling, general and
administrative....... 69,850 41,195 (27,873) 83,172 83,172
Depreciation and amor-
tization............. 37,837 23,645 1,049 62,531 62,531
-------- -------- ------- ----------- --------- -----------
Total expenses...... 181,430 95,913 (30,551) 246,792 246,792
-------- -------- ------- ----------- --------- -----------
Operating loss.......... (15,261) (45,637) (1,042) (61,940) (61,940)
-------- -------- ------- ----------- --------- -----------
Interest income......... 4,067 2,393 (1,638) 4,822 4,822
Interest expense(6)..... (23,331) (5,622) 17,384 (11,569) $(100,790) (112,359)
-------- -------- ------- ----------- --------- -----------
(19,264) (3,229) 15,746 (6,747) (100,790) (107,537)
-------- -------- ------- ----------- --------- -----------
Loss before minority
interest, equity in
losses of
unconsolidated
affiliates and income
taxes.................. (34,525) (48,866) 14,704 (68,687) (100,790) (169,477)
Minority interest....... 663 -- 2,010 2,673 -- 2,673
Equity in losses of
unconsolidated
affiliates............. (19,541) -- 18,173 (1,368) -- (1,368)
-------- -------- ------- ----------- --------- -----------
Loss before taxes....... (53,403) (48,866) 34,887 (67,382) (100,790) (168,172)
Income tax provision.... (401) -- -- (401) -- (401)
-------- -------- ------- ----------- --------- -----------
Net loss................ $(53,804) $(48,866) $34,887 $(67,783) $(100,790) $(168,573)
======== ======== ======= =========== ========= ===========
Loss per share.......... $(0.48) $(1.20)
=========== ===========
Number of shares used
for
computation(5)......... 140,465,000 140,465,000
=========== ===========
</TABLE>
See notes to condensed consolidated pro forma financial information.
33
<PAGE>
CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
UNAUDITED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED PRO FORMA
TCGI AND COMBINED LOCAL PRO FORMA FOR THE
TCG MARKET REORGANIZATION FOR THE OFFERINGS REORGANIZATION
PARTNERS PARTNERSHIPS(1) ADJUSTMENTS(2)(4) REORGANIZATION ADJUSTMENTS(3) AND OFFERINGS
-------- --------------- ----------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Telecommunications
services.............. $ 39,553 $ 18,594 $ (25) $58,122 $58,122
Management and royalty
fees.................. 10,882 -- (10,882) -- --
-------- -------- ------- ----------- -------- -----------
Total revenues........ 50,435 18,594 (10,907) 58,122 58,122
-------- -------- ------- ----------- -------- -----------
Expenses:
Operating.............. 22,520 11,148 (1,201) 32,467 32,467
Selling, general and
administrative........ 20,197 14,187 (9,707) 24,677 24,677
Depreciation and
amortization.......... 12,849 8,432 275 21,556 21,556
-------- -------- ------- ----------- -------- -----------
Total expenses........ 55,566 33,767 (10,633) 78,700 78,700
-------- -------- ------- ----------- -------- -----------
Operating loss.......... (5,131) (15,173) (274) (20,578) (20,578)
-------- -------- ------- ----------- -------- -----------
Interest income......... 1,190 534 (743) 981 981
Interest expense(6)..... (8,148) (1,818) 4,477 (5,489) $(23,051) (28,540)
-------- -------- ------- ----------- -------- -----------
(6,958) (1,284) 3,734 (4,508) (23,051) (27,559)
-------- -------- ------- ----------- -------- -----------
Loss before minority
interest, equity in
losses of
unconsolidated
affiliates and income
taxes.................. (12,089) (16,457) 3,460 (25,086) (23,051) (48,137)
Minority interest....... 150 -- 705 855 -- 855
Equity in losses of
unconsolidated
affiliates............. (6,528) -- 6,196 (332) -- (332)
-------- -------- ------- ----------- -------- -----------
Loss before taxes....... (18,467) (16,457) 10,361 (24,563) (23,051) (47,614)
Income tax provision.... (225) -- -- (225) -- (225)
-------- -------- ------- ----------- -------- -----------
Net loss................ $(18,692) $(16,457) $10,361 $(24,788) $(23,051) $(47,839)
======== ======== ======= =========== ======== ===========
Loss per share.......... $(0.18) $(0.34)
=========== ===========
Number of shares used
for computation(5)..... 140,465,000 140,465,000
=========== ===========
</TABLE>
See notes to condensed consolidated pro forma financial information.
34
<PAGE>
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
(1) TCGI holds more than 50% of the partnership interests of TCG St. Louis
which, accordingly, is already consolidated with TCGI for financial
reporting and accounting purposes. Upon consummation of the
Reorganization, the remaining 13 Local Market Partnerships, which are
currently accounted for under the equity method, will become either wholly
owned or majority owned subsidiaries of TCG. As a result, the revenues,
expenses, assets and liabilities of these Local Market Partnerships will
be consolidated with those of TCGI for financial reporting and accounting
purposes.
(2) In connection with the Reorganization, the Cable Stockholders will
contribute to TCGI $269 million plus accrued interest ($16.4 million as of
March 31, 1996), which represents the amounts outstanding under the
Stockholder Loan Agreement (except that TCI will retain a subordinated
note of TCGI in the amount of $26.0 million, bearing interest at the rate
of 7.5% per annum, with principal and interest payable at maturity five
years from the date of consummation of the Reorganization) and the
Stockholder Loan Agreement will be terminated. Additionally, in
consideration of the transfers and contributions of their interests in TCG
Partners, the Local Market Partnerships and the amounts outstanding under
the Stockholder Loan Agreement, and for the recapitalization of their
shares of Common Stock, the Company will issue to Comcast, Continental,
Cox and TCI, collectively, 139,250,370 shares of Class B Common Stock.
Also in connection with the Reorganization, TCGI will acquire all of the
partnership interests in the Local Market Partnerships other than TCG San
Francisco and TCG Seattle. TCGI purchased the minority interest in TCG
South Florida of Hyperion Telecommunications, Inc. of Florida for $11.6
million, resulting in goodwill of $8.4 million being recorded.
Additionally, in consideration of the transfers of certain interests in TCG
San Francisco and TCG Detroit, TCGI will issue 1,215,125 shares of Class A
Common Stock, collectively, to various minority partners, resulting in
goodwill of $13.6 million being recorded. Excess credits, amounting to
$35.5 million, which represent the excess of the contributed capital, as
defined in the partnership agreements, over historical carrying value of
the net assets contributed by TCGI to various Local Market Partnerships,
have been eliminated.
Intercompany revenues, expenses, receivables and payables generated by
normal operations between and among the Local Market Partnerships and TCGI
were eliminated.
TCGI, as part of the Reorganization, would have incurred $1.0 million and
$0.3 million for the year ended December 31, 1995 and for the three months
ended March 31, 1996, respectively, of amortization expense, which relates
to the goodwill created upon the purchases of the minority interest of
Hyperion Telecommunications, Inc. of Florida in TCG South Florida and the
minority interests of various other partners in TCG San Francisco and TCG
Detroit.
Interest expense has been adjusted as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
DESCRIPTION 1995 1996
----------- ------------ ------------
(IN MILLIONS)
<S> <C> <C>
Elimination of interest expense on TCGI subor-
dinated debt owed to Cable Stockholders...... $17.8 $4.3
Increase of interest expense for the TCI
note......................................... (2.0) (.5)
Elimination of interest TCGI charged Local
Market Partnerships.......................... 1.6 .7
----- ----
Total adjustments........................... $17.4 $4.5
===== ====
</TABLE>
Adjustments were made to reflect the following remaining minority ownership
interests:
<TABLE>
<CAPTION>
LOCAL MARKET MINORITY
PARTNERSHIP OWNERSHIP INTERESTS
------------ -------------------
<C> <S>
22.9% Viacom Telecom, Inc.; 4.2% InterMedia
TCG San Francisco........... Partners
TCG Seattle................. 22.2% Viacom Telecom, Inc.
</TABLE>
35
<PAGE>
The net effect of the Reorganization and the Stock Offerings to pro forma
stockholders' equity is as follows:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------------------
PRO FORMA
PRO FORMA FOR THE
FOR THE REORGANIZATION
REORGANIZATION AND STOCK OFFERINGS
-------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Class A Common Stock, $.01 par value;
450,000,000 shares authorized, 1,215,125
and 24,715,125 shares issued and
outstanding on a pro forma basis,
respectively............................. $ 12 $ 247
Class B Common Stock, $.01 par value;
300,000,000 shares authorized,
139,250,370 and 131,442,489 shares issued
and outstanding on a pro forma basis,
respectively............................. 1,393 1,314
Additional paid-in capital................ 768,591 1,123,131
Accumulated deficit....................... (176,961) (176,961)
--------- ----------
593,035 947,731
Treasury stock, 7,807,881 shares of Class
B Common Stock, at cost.................. -- (118,471)
--------- ----------
Total stockholders' equity.................. $ 593,035 $ 829,260
========= ==========
</TABLE>
(3) Reflects the effects of the issuance of the Class A Common Stock and Notes
pursuant to the Offerings and the redemption of Class B Common Stock held
by Continental. Interest expense has been increased to reflect the
interest on the Senior Notes of 9 7/8% and accretion of the discount on
the Senior Discount Notes of 11 1/8% and decreased to reflect the
repayment of bank indebtedness of the Company under the Revolving Credit
Agreement. Interest expense adjustments related to the Offerings consist
of the following:
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
(IN MILLIONS)
<S> <C> <C>
Interest expense on the Senior Notes and the Senior
Discount Notes.................................... _101.1$ _25.1$
Amortization of Notes issuance costs............... 2.7 .7
Reversal of interest expense on Revolving Credit
Agreement......................................... (3.0) (2.7)
------ -----
_100.8$ _23.1$
====== =====
</TABLE>
(4) No provision has been made for taxes, principally due to the use of net
operating losses.
(5) The number of shares used in the computation of the loss per share gives
effect to the Reorganization and the use of proceeds of the Offerings.
(6) In the event of a Special Redemption Event (as defined in the Indenture
for the Senior Discount Notes) with respect to certain regulatory
authorizations, certain amounts of the net proceeds of the Offerings may
be used to redeem a portion of the Senior Discount Notes. See "Risk
Factors--Limitation on Incurrence of Debt Under New York and New Jersey
Regulatory Authorizations." In the event of such redemption, which has not
been reflected in the pro forma financial statements, interest expense for
the year ended December 31, 1995 and for the three months ended March 31,
1996 would be reduced accordingly.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
TCGI's and TCG Partners' historical combined audited financial statements and
the notes thereto and the pro forma financial information included elsewhere
in this Prospectus.
OVERVIEW
TCG, the first and largest competitive local exchange carrier in the United
States, offers a wide range of local telecommunications services in major
metropolitan markets nationwide. The Company competes with ILECs as "The Other
Local Phone Company"SM by providing high quality, integrated local
telecommunications services, primarily over fiber optic digital networks, to
meet the voice, data and video transmission needs of its customers. The
Company's initial business in New York City was limited to dedicated private
line service and management of the telecommunications infrastructure at The
Teleport office park and satellite earth station complex located in Staten
Island, New York. TCG subsequently expanded, and continues to expand, its
service offerings as justified by market demand and as permitted by regulatory
reform. Concurrently with the expansion of its service offerings, TCG has
expanded geographically by developing local telecommunications networks in 48
metropolitan markets throughout the United States.
The costs associated with the initial installation and expansion of each
network, including development, installation, certain organizational costs and
early operating expenses, are significant and result in negative cash flow for
that market until an adequate customer base and revenue stream have been
established. In addition to capital expenditures, TCG begins to incur direct
operating costs upon commencement of the installation phase of a network for
such items as salaries and office rent. The exact amounts and timing of these
expenditures and costs are subject to a variety of factors which may vary
greatly by geographic market. As network installation progresses, TCG incurs
rights-of-way costs, increased sales and marketing expenses (including sales
commissions) and, in certain markets, franchise fees and taxes paid to local
governments based on revenue. Although the Company's revenues have increased
substantially, the Company's expenses associated with the expansion and
development of its local telecommunications networks has exceeded such
revenues. The Company expects its net losses to grow as it continues to expand
its networks. However, generally, after the network infrastructure is
established, the Company can add customers and revenues with less additional
expense. After a customer is added and the volume of such customer's
communications traffic handled by TCG grows, incremental revenues can be added
with minimal additional expense, providing significant contributions to
EBITDA.
As of December 31, 1995, the Company's combined financial statements for
TCGI and TCG Partners reflect the consolidated financial results of the
Company's wholly owned subsidiaries located in Baltimore, Boston, Cleveland,
Denver, Houston, Indianapolis, Milwaukee, metropolitan New York/New Jersey,
Portland (Oregon), Providence, Salt Lake City and Washington, D.C., and the
Local Market Partnership in St. Louis in which the Company owns 60.8% of the
partnership interests. Additionally, the combined financial statements for
TCGI and TCG Partners for 1995 reflect the Company's equity in losses of 13
unconsolidated Local Market Partnerships, as well as the Company's equity in
losses of Eastern TeleLogic Corporation, in which the Company retains an
approximate 25% indirect interest. Management fees and royalty fees charged to
the Local Market Partnerships by TCGI are recorded as revenue in the combined
financial statements and, under generally accepted accounting principles, may
not be netted against expenses.
To develop and operate the Local Market Partnerships, TCG Partners, a New
York general partnership, was created in December 1992. The establishment of
the Company's Local Market Partnerships resulted in the deconsolidation,
beginning in 1993, of certain entities which formerly were wholly owned. Under
generally accepted accounting principles, such unconsolidated entities are
accounted for under the equity method, and, accordingly, resulted in the Local
Market Partnerships' revenues, expenses, assets and liabilities being excluded
from the combined amounts. This accounting treatment may affect the
comparability of amounts from year to year.
37
<PAGE>
The pro forma financial information presented in this Prospectus reflects
the acquisition of all interests in 12 Local Market Partnerships as part of
the Reorganization, including TCG St. Louis, which is consolidated for
financial reporting and accounting purposes, and the acquisition of a majority
of the interests of the remaining two Local Market Partnerships (TCG Seattle
and TCG San Francisco). Adjustments relating to the Reorganization include
adjustments for consolidating the remaining 13 Local Market Partnerships that
were previously accounted for under the equity method of accounting.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
Revenues
Total revenues increased to $50.4 million for the three months ended March
31, 1996 from $36.8 million for the three months ended March 31, 1995,
representing an increase of $13.6 million, or 37%. Telecommunications services
revenue increased to $39.6 million for the three months ended March 31, 1996
from $29.9 million for the three months ended March 31, 1995, an increase of
$9.7 million, or 32%. Revenue increases occurred in every revenue category,
most significantly in switched services. This increase in revenues is a result
of increased market penetration primarily in TCG's existing markets as well as
expansion into new markets.
Management and royalty fees from Local Market Partnerships increased to
$10.9 million for the three months ended March 31, 1996 from $6.9 million for
the three months ended March 31, 1995, an increase of $4.0 million, or 58%.
These fees are directly related to operating and administrative support
services provided by TCGI to unconsolidated Local Market Partnerships. The
increase in management fees revenue for the first quarter of 1996 compared to
the first quarter of 1995 is due to the continuing support provided to TCG's
unconsolidated Local Market Partnerships. Upon consummation of the
Reorganization, these fees will no longer be reflected as revenues. The impact
on revenues of not including the management fees received from the Company's
unconsolidated Local Market Partnerships would have been a decrease in total
revenues for the three months ended March 31, 1996 of $10.2 million, compared
to actual total revenues for such period.
On a pro forma basis, had telecommunications services revenue generated by
unconsolidated Local Market Partnerships been included for the combined
financial statements for TCGI and TCG Partners, total revenues would have
increased to $58.1 million for the three months ended March 31, 1996 from
$39.7 million for the three months ended March 31, 1995, reflecting an
increase of $18.4 million, or 46%. This revenue growth is a direct result of
increased market penetration of all telecommunications service offerings in
existing markets and the addition of new markets. On a pro forma basis,
annualized monthly recurring revenue increased to approximately $223.2 million
for March 1996 from $148.0 million for March 1995, an increase of $75.2
million, or 51%. Monthly recurring revenue represents monthly service charges
billable to telecommunications services customers for the month indicated, but
excluding non-recurring revenues for certain one-time services, such as
installation fees or equipment charges.
On a pro forma basis, switched revenue increased to $22.3 million for the
three months ended March 31, 1996 from $13.5 million for the three months
ended March 31, 1995, an increase of $8.8 million, or 65%. This increase is
primarily related to growth in switched services. Increased monthly line-
related revenue as well as sales growth in enhanced switched services products
to new customers have also contributed to overall switched services revenue
growth. On a pro forma basis, dedicated services revenue increased to $34.1
million for the three months ended March 31, 1996 from $25.2 million recorded
for the three months ended March 31, 1995, an increase of $8.9 million, or
35%.
Operating Expenses
Operating expenses increased to $22.5 million for the three months ended
March 31, 1996 from $17.1 million for the three months ended March 31, 1995,
an increase of $5.4 million, or 32%. This increase is directly related to the
costs associated with the expansion of TCG's networks throughout the country.
These expenses include costs associated specifically with network operations
including compensation costs for technical personnel, access, rights-of-way,
node, rent and maintenance expenses. On a pro forma basis, operating expenses
38
<PAGE>
increased to $32.5 million for the three months ended March 31, 1996 from
$22.7 million for the three months ended March 31, 1995, an increase of $9.8
million, or 43%. Operating expenses grew less than revenues, reflecting TCG's
operating leverage.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $20.2 million for
the three months ended March 31, 1996 from $16.1 million for the three months
ended March 31, 1995, an increase of $4.1 million, or 25%. This increase is
attributable to the costs required to maintain an infrastructure which
supports the continued expansion of the Company's networks, the introduction
of new services and the delivery of high levels of customer service. These
costs include compensation, occupancy, insurance, professional fees, and sales
and marketing expenses. On a pro forma basis, selling, general and
administrative expenses increased to $24.7 million for the three months ended
March 31, 1996 from $18.7 million recorded for the three months ended March
31, 1995, an increase of $6.0 million, or 32%.
EBITDA
EBITDA increased to $7.7 million for the three months ended March 31, 1996
from $3.6 million for the three months ended March 31, 1995, an increase of
$4.1 million, or 114%. This increase is primarily attributable to increases in
dedicated and switched services revenues as well as increased management fees
revenue from Local Market Partnerships for support services. Furthermore, TCG
has obtained increased efficiencies through greater automation and through
lower access costs. On a pro forma basis, EBITDA increased to $978,000 for the
three months ended March 31, 1996 from negative $1.7 million for the three
months ended March 31, 1995, an increase of $2.7 million. The Local Market
Partnerships, included in the pro forma financial data as a result of the
Reorganization, have negative EBITDA due to the start-up or rapid expansion of
the networks of such Local Market Partnerships.
Depreciation and Amortization Expense
Depreciation and amortization expense increased to $12.8 million for the
three months ended March 31, 1996 from $7.3 million for the three months ended
March 31, 1995, an increase of $5.5 million, or 75%. This increase is
primarily attributable to increased depreciation related to the expansion of
the local telecommunications networks throughout the country and to a change
in the estimated useful lives of certain electronic equipment, which was made
during 1995 in order to conform with industry standards. On a pro forma basis,
depreciation and amortization expense increased to $21.6 million for the three
months ended March 31, 1996 from $11.5 million for the three months ended
March 31, 1995, an increase of $10.1 million, or 88%.
Interest Income
Interest income increased to $1.2 million for the three months ended March
31, 1996 from $1.1 million for the three months ended March 31, 1995, an
increase of $0.1 million, or 9%.
Interest Expense
Interest expense increased to $8.1 million for the three months ended March
31, 1996 from $4.6 million for the three months ended March 31, 1995, an
increase of $3.5 million, or 76%. This resulted from borrowings under the
Revolving Credit Agreement and increased borrowings under the Stockholder Loan
Agreement, as well as increased capital lease obligations.
Equity in Loss of Unconsolidated Affiliates
Equity in loss of unconsolidated affiliates increased to $6.5 million for
the three months ended March 31, 1996 from $4.2 million for the three months
ended March 31, 1995, an increase of $2.3 million. This increase is directly
attributable to the development and operation of 13 Local Market Partnerships
and TCGI's equity share in the losses of ETC.
39
<PAGE>
Income Taxes
During the three months ended March 31, 1996 and March 31, 1995, TCGI
generated net operating losses and, accordingly, incurred a net tax benefit.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," such tax benefit was fully offset, each
quarter, by a valuation allowance. Each quarter's provision for income taxes,
which does not fluctuate substantially, resulted from state income taxes where
TCGI is required to file separate income tax returns.
TCG Partners is not subject to federal or state and local income taxes. The
distributive share of each partner in a Local Market Partnership of
partnership revenues, expenses and other items is computed on the basis of the
respective partner's capital interest in the partnership and is reported by
the partners in their respective federal or state and local income tax return.
Net Loss
The combined results of TCGI and TCG Partners reflected a net loss of $18.7
million for the three months ended March 31, 1996 compared to net loss of
$11.5 million for the three months ended March 31, 1995, an increase of $7.2
million, or 63%. This increase in net loss is attributable to the factors
discussed above. On a pro forma basis, the net loss increased to $47.8 million
for the three months ended March 31, 1996 from $11.1 million for the three
months ended March 31, 1995, an increase of $36.7 million.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues
Total revenues increased to $166.2 million for 1995 from $120.7 million for
1994, representing an increase of $45.5 million, or 38%. Telecommunications
services revenue increased to $134.7 million for 1995 from $100.0 million for
1994, an increase of $34.7 million, or 35%. Revenues increased in every
revenue category, most significantly in switched services. This increase
reflects increased sales of services in existing and new markets and growth of
TCG's customer base. Management and royalty fees from Local Market
Partnerships increased to $31.5 million for 1995, an increase of $10.8
million, or 52%, from $20.7 million for 1994. These fees are directly related
to operating and administrative support services provided by TCGI to
unconsolidated Local Market Partnerships. The increase in management fees
revenue in 1995 over 1994 is due to the increased support that was provided to
these unconsolidated Local Market Partnerships, specifically in developing
existing dedicated services businesses as well as in building new switched
businesses. Upon consummation of the Reorganization, these fees will no longer
be reflected as revenues. The impact on revenues of not including the
management fees received from the Company's unconsolidated Local Market
Partnerships would have been a decrease in total revenues for the year ended
December 31, 1995 of $29.6 million, compared to actual revenues for such
period.
On a pro forma basis, had telecommunication services revenue generated by
unconsolidated Local Market Partnerships been included in the combined
financial statements of TCGI and TCG Partners, total revenues would have
increased to $184.9 million for 1995 from $122.2 million for 1994, an increase
of $62.7 million, or 51%. This growth in revenues is a direct result of
increased market penetration of all telecommunications service offerings in
existing markets and the addition of new markets. On a pro forma basis,
annualized monthly recurring revenue increased to approximately $211.1 million
for December 1995 from $135.6 million for December 1994, an increase of $75.5
million, or 56%. Monthly recurring revenue represents monthly service charges
billable to telecommunications services customers for the month indicated, but
excluding non-recurring revenues for certain one-time services, such as
installation fees or equipment charges.
On a pro forma basis, switched revenue increased to $63.9 million for 1995
from $40.2 million for 1994, an increase of $23.7 million, or 59%. This
increase is due primarily to increases in switched, local and toll services
and IXC access usage volumes. Also contributing to this increase were
increased sales of additional enhanced switched service products to customers
in existing and new markets. On a pro forma basis, dedicated services revenue
increased to $116.5 million for 1995 from $78.8 million for 1994, an increase
of $37.7 million, or 48%.
40
<PAGE>
Operating Expenses
Operating expenses increased to $73.7 million for 1995 from $60.3 million
for 1994, an increase of $13.4 million, or 22%. This increase is primarily
attributable to costs associated with the expansion of networks throughout the
country, including technical personnel costs and access, rights-of-way, node,
rent and maintenance expenses. The increase in operating expenses is also
attributable to the access and maintenance expenses associated with the growth
of switched services in existing markets and the expansion into new markets.
On a pro forma basis, operating expenses increased to $101.1 million for 1995
from $74.0 million for 1994, an increase of $27.1 million, or 37%.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $69.9 million for
1995 from $56.3 million for 1994, an increase of $13.6 million, or 24%. This
increase is a result of the continued expansion of network infrastructure to
support continued expansion of the Company's networks, including costs
associated with servicing the increased number of both dedicated and switched
services customers. These costs include expenses related to compensation,
occupancy, insurance and professional fees. On a pro forma basis, selling,
general and administrative expenses increased to $83.2 million for 1995 from
$62.3 million for 1994, an increase of $20.9 million, or 34%.
EBITDA
EBITDA increased to $22.6 million for 1995 from $4.1 million for 1994, an
increase of $18.5 million. This increase is primarily attributable to
increases in dedicated and switched services revenues as well as increased
management fees revenue from the Local Market Partnerships for support
services. Additionally, TCG has reduced its operating and administrative
expenses, as a percentage of revenues, primarily by obtaining lower unit
access costs through negotiation of, and participation in regulatory
proceedings relating to, various interconnection and reciprocal agreements
with ILECs across the country, and by obtaining greater efficiencies through
automation. On a pro forma basis, EBITDA increased to $591,000 for 1995 from
negative $14.0 million for 1994, an increase of $14.6 million. The Local
Market Partnerships, included in the pro forma financial data as a result of
the Reorganization, have negative EBITDA because of the rapid expansion of the
networks of such Local Market Partnerships.
Depreciation and Amortization Expense
Depreciation and amortization expense increased to $37.8 million for 1995
from $19.9 million for 1994, an increase of $17.9 million, or 90%. This
increase is primarily attributable to increased depreciation associated with
the expansion of the local telecommunications networks throughout the country
and a change in estimated useful lives of certain equipment which was made
during 1995 in order to conform with industry standards. On a pro forma basis,
depreciation and amortization expense increased to $62.5 million for 1995 from
$29.4 million for 1994, an increase of $33.1 million, or 113%.
Interest Income
Interest income increased to $4.1 million for 1995 from $1.7 million in
1994, an increase of $2.4 million, or 141%, due to a greater average balance
in cash and cash equivalents.
Interest Expense
Interest expense increased to $23.3 million for 1995 from $5.1 million in
1994, an increase of $18.2 million, or 357%. This increase is primarily
attributable to the interest due Cable Stockholders under the Stockholder Loan
Agreement as well as interest under the Revolving Credit Agreement which was
entered into in May 1995. Also contributing to the increased interest expense
is an increase of $15.2 million in capital lease obligations under
arrangements entered into with various Cable Stockholders.
41
<PAGE>
Equity in Loss of Unconsolidated Affiliates
Equity in loss of unconsolidated affiliates increased to $19.5 million for
1995 from $11.8 million for 1994, an increase of $7.7 million. This increase
is directly attributable to the development and operation of twelve
unconsolidated Local Market Partnerships for 1993 and 1994 as well as the
recording of TCG's equity in losses of TCG San Diego during a portion of 1994
and TCGI's equity share in the losses of ETC.
Income Taxes
In 1995 and 1994, TCGI generated net operating losses and, accordingly,
incurred a net tax benefit. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," such tax
benefit was fully offset, each year, by a valuation allowance. Both the 1995
and 1994 provisions for income taxes, which do not fluctuate substantially
year to year, resulted from state income taxes where TCGI is required to file
separate state income tax returns.
As of December 31, 1995, TCGI had operating loss carryforwards for tax
purposes of approximately $105.3 million, expiring principally in 2009 through
2011.
TCG Partners is not subject to federal, state or local income taxes. The
distributive share of each partner in a Local Market Partnership of
partnership revenues, expenses and other items is computed on the basis of the
respective partner's capital interest in the partnership and is reported by
the partners in their respective federal or state income tax returns.
Net Loss
The combined results of TCGI and TCG Partners reflected a net loss of $53.8
million for 1995, from a net loss of $30.0 million for 1994, an increase of
$23.8 million, or 79%. This increase in net loss is attributable to the
factors discussed above. On a pro forma basis, the net loss increased to
$168.6 million for 1995 from $30.1 million for 1994, an increase of $138.5
million.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues
Total revenues increased to $120.7 million for 1994 from $83.9 million for
1993, an increase of $36.8 million, or 44%. The increase in revenue for 1994
is primarily attributable to the increased penetration of existing markets and
customers, initiation of new market operations and management fees earned from
the newly established Local Market Partnerships for support services rendered.
Growth of the switched services revenue base also contributed to the overall
increase in telecommunications revenues for 1994 over 1993.
Management and royalty fees from Local Market Partnerships increased to
$20.7 million for 1994 from $1.6 million for 1993, an increase of $19.1
million. These fees are directly related to operating and administrative
services provided by TCGI to unconsolidated Local Market Partnerships. In
November 1993, six Local Market Partnerships were formed among TCGI and TCG
Partners and various cable operators. Prior to November 1993, these
unconsolidated affiliates had been wholly owned by TCGI and TCG Partners and
revenues recorded by these affiliates were included in operating revenue.
These fees will be eliminated in consolidation after the Reorganization. The
impact on revenues of not including the management fees received from the
Company's unconsolidated Local Market Partnerships would have been a decrease
in total revenues for the year ended December 31, 1994 of $19.4 million,
compared to actual revenues for such period.
Operating Expenses
Operating expenses increased to $60.3 million for 1994 from $48.2 million
for 1993, an increase of $12.1 million, or 25%. This increase is primarily
attributable to the additional operational costs incurred to support increased
dedicated and switched sales volume and network expansion, including off-
network access services purchased from ILECs.
42
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $56.3 million for
1994 from $40.3 million for 1993, an increase of $16.0 million, or 40%. This
increase resulted from the change to equity accounting beginning in November
1993 and which was continued through 1994, upon the development and operation
of the various Local Market Partnerships as well as overall increases in
administrative expenses for wholly owned and majority owned subsidiaries and
partnerships.
EBITDA
EBITDA increased to $4.1 million for 1994, from negative EBITDA of $4.6
million for 1993, an increase of $8.7 million. This increase is partly
attributable to increased telecommunications services revenues generated by
consolidated subsidiaries and partnerships, as well as the recording of equity
in losses of certain Local Market Partnerships for 1994, compared to the
recording of net losses for these same networks for 1993.
Depreciation and Amortization Expense
Depreciation and amortization expense increased to $19.9 million for 1994
from $16.2 million for 1993, an increase of $3.7 million, or 23%. The
expansion of the New York, Boston and Houston networks accounts for a
substantial portion of this increase. Also contributing to this increase is
the amortization of goodwill associated with the 1994 acquisition of the
remaining interest in Teleport Communications Boston.
Interest Income
Interest income increased to $1.7 million for 1994 from $1.1 million in
1993, an increase of $0.6 million, or 55%, due to a greater average balance in
cash and cash equivalents.
Interest Expense
Interest expense increased to $5.1 million for 1994 from $1.4 million in
1993, an increase of $3.7 million, or 264%. This increase is directly
attributable to the indebtedness incurred pursuant to the Stockholder Loan
Agreement in 1994 which was required in order to finance TCG's expansion
effort.
Equity in Loss of Unconsolidated Affiliates
Equity in loss of unconsolidated affiliates increased to $11.8 million for
1994 from $2.1 million for 1993, an increase of $9.7 million. This increase is
directly attributable to the formation of seven unconsolidated Local Market
Partnerships in 1993 and the formation of five unconsolidated Local Market
Partnerships in 1994.
Income Taxes
In 1994 and 1993, TCGI generated net operating losses and, accordingly,
incurred a net tax benefit. In accordance with SFAS No. 109, "Accounting for
Income Taxes," such benefit was partially offset in 1993 and fully offset in
1994 by a valuation allowance. The 1994 provision for income taxes resulted
from state income taxes where subsidiaries of TCG are required to file
separate state income tax returns.
Net Loss
The combined results of TCGI and TCG Partners reflected a net loss of $30.0
million for 1994, from a net loss of $18.3 million for 1993, an increase of
$11.7 million, or 64%. This increase in net loss is attributable to the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, TCGI and TCG Partners had total combined assets of
$658.9 million, an increase of $522.2 million from $136.7 million as of
December 31, 1991. An additional $346.1 million of assets were accumulated
through the Local Market Partnerships with various cable television operators.
This growth has been funded by the Cable Stockholders and through $120.0
million of equity contributions to TCG, $30.0 million of
43
<PAGE>
equity contributions to TCG Partners and aggregate principal of $269.0 million
(plus accrued interest which, as of March 31, 1996, was $16.4 million)
borrowed by TCG under the Stockholder Loan Agreement. In addition, such growth
has been funded, since May 1995, through $155.0 million under the Revolving
Credit Agreement and $296.5 million of direct investment in the Local Market
Partnerships by the Cable Stockholders and other cable television operators as
of March 31, 1996. In the aggregate, after giving pro forma effect to the
Reorganization, the Cable Stockholders had invested approximately $770 million
in the Company, which includes approximately $75 million of paid-in capital at
the time of their original investment.
The Company has historically raised a significant amount of equity capital
through the creation of Local Market Partnerships with the Cable Stockholders
and other cable television operators. Through the Local Market Partnerships,
the participating cable television operators were encouraged to combine their
resources to build a local telecommunications infrastructure under the
direction of the Company. Such local market focus enabled the Company to
efficiently establish and expand its networks.
The Company has incurred significant net operating losses resulting from the
development and operation of new networks. TCG expects that such losses will
continue to increase as TCG emphasizes the development, construction and
expansion of its networks and builds its customer base and that while cash
provided by operations may be sufficient to fund modest incremental growth it
will not be sufficient to fund the extensive expansion and development of
networks as currently planned.
Net cash provided by financing activities for the three months ended March
31, 1996 was $67.2 million and for the year ended December 31, 1995 was $157.7
million comprised primarily of borrowings under the Revolving Credit Agreement
and the Stockholder Loan Agreement. Net cash provided by financing activities
for 1994 and 1993 was $171.6 million and $129.8 million, respectively. Net
cash provided by (used in) operating activities was $(1.7) million for the
three months ended March 31, 1996 and $36.1 million, $87.8 million and $45.4
million for 1995, 1994 and 1993, respectively. Net cash used for investing
activities was $60.6 million for the three months ended March 31, 1996 and
$208.0 million, $265.0 million and $147.1 million for 1995, 1994 and 1993,
respectively. As of March 31, 1996, cash and cash equivalents were $16.8
million and undrawn availability under the Revolving Credit Agreement was
$74.6 million.
TCGI and TCG Partners made capital expenditures of $31.2 million for the
three months ended March 31, 1996 and $154.8 million, $143.3 million and
$155.2 million in 1995, 1994 and 1993, respectively. Additional capital
expenditures made by the Local Market Partnerships aggregated $22.9 million
for the three months ended March 31, 1996 and $126.8 million, $131.1 million
and $32.6 million for 1995, 1994 and 1993, respectively. The Company
anticipates that capital expenditures will be approximately $400 million to
$425 million in the aggregate in 1996 and $450 million to $475 million in the
aggregate in 1997, primarily for the expansion, development and construction
of its networks, the acquisition and deployment of switches and expansion of
operating support systems. Actual capital expenditures will depend on numerous
factors beyond TCG's control or ability to predict, including the nature of
future expansion and acquisition opportunities, economic conditions, customer
demand, competition, regulatory developments and the availability of funding.
In May 1995, TCGI entered into a $250 million Revolving Credit Agreement. In
December 1995, the obligations under the Revolving Credit Agreement were
assumed by TCNY, a wholly owned subsidiary of TCGI. TCNY is permitted to loan
funds drawn under the Revolving Credit Agreement to TCGI and TCG Partners. The
Revolving Credit Agreement is secured by the pledge of the common stock and
partnership interests of the subsidiaries of TCNY. Interest on borrowings
under the Revolving Credit Agreement is at varying rates. The Revolving Credit
Agreement matures on February 27, 2004 and is subject to a quarterly reduction
of commitment commencing January 1, 1999. The availability of credit under the
Revolving Credit Agreement is subject to the maintenance of certain financial
ratios. The Company expects to repay all or a portion of the credit facility
under the Revolving Credit Agreement with the proceeds of the Offerings and to
utilize the credit facility under the Revolving Credit Agreement, as
necessary, to fund short-term financing requirements from time to time, as
well as having the availability under the Revolving Credit Agreement to fund
the continued growth of the New York network and for general corporate
purposes. Amounts borrowed by TCNY under the Revolving Credit Agreement may be
lent to TCGI for general corporate purposes, so long as such indebtedness is
evidenced by
44
<PAGE>
promissory notes executed by TCGI in favor of TCNY, and such promissory notes
are pledged to the lenders under the Revolving Credit Agreement. See
"Description of Certain Indebtedness."
The Company believes that the net proceeds from the Offerings and the amount
of credit available under the Revolving Credit Agreement will be adequate for
its 1996 and 1997 funding requirements. However, the Company's financing
strategy is to remain financially flexible to market opportunities which are
consistent with the Company's long-range growth plans.
The incurrence of long-term indebtedness by TCGI in an amount in excess of
$1 billion is subject to certain state regulatory approvals in New York and
New Jersey. The Company has filed petitions for orders from such state
regulatory authorities that will permit TCGI to expand TCGI's borrowing
authority to $2 billion. The Company expects that the proceeds of the
Offerings and internally generated cash flow will be sufficient to meet its
capital needs until such state regulatory approvals have been obtained. Senior
Discount Notes aggregating up to $253 million in Accreted Value will be
subject to mandatory redemption at a redemption price of 101% of the Accreted
Value thereof as of the redemption date in the event that such state
regulatory approvals are not obtained within 270 days of the issuance date of
the Notes or the petitions for such approvals are denied. In addition to the
$1 billion long-term debt borrowing authorization at the TCGI level, both the
New York and New Jersey regulatory authorities permit TCNY to borrow an
additional $1 billion; provided, however, that the New York regulatory
authority has interpreted its authorization as permitting TCGI and TCNY to
incur long-term debt not to exceed $1.75 billion in the aggregate. See "Risk
Factors--Limitation on Incurrence of Debt Under New York and New Jersey
Regulatory Authorizations" and "Description of Notes--Terms of Senior Discount
Notes--Special Redemption."
The Company from time to time evaluates acquisitions and investments in
light of the Company's long range plans. The Company may have future
opportunities with certain of its Cable Stockholders to invest in additional
markets as a minority partner or shareholder as well as opportunities as a
managing partner or controlling shareholder in new or existing
telecommunications ventures which are consistent with the Company's business
plans. See "Certain Relationships and Related Transactions" for a discussion
of such opportunities, including certain contractual arrangements relating to
a potential acquisition by the Company of interests in Eastern TeleLogic
Corporation. The Company expects to continue to build on its existing
relationships with cable television providers and other strategic customers,
suppliers and telecommunications carriers. Such acquisitions, investments
and/or strategic arrangements, if available, could use a material portion of
the Company's financial resources following the Offerings and may accelerate
the need for raising additional capital in the future.
Earnings before fixed charges were insufficient to cover fixed charges for
the three months ended March 31, 1996 and 1995 by $18.6 million and $11.4
million respectively, and for 1995, 1994 and 1993 by $54.1 million, $31.0
million and $23.2 million, respectively. On a pro forma basis, the Company's
earnings would have been insufficient to cover fixed charges for the three
months ended March 31, 1996 by $48.5 million and by $170.8 million for 1995.
For a period of time, the Company may have excess liquidity as a result of
the Offerings. The Company expects to invest such excess funds in short-term,
interest bearing investment-grade securities until such funds are used to fund
the capital investments and operating needs of the Company's business.
EFFECTS OF NEWLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." This statement is effective for fiscal years
beginning after December 15, 1995. Management has evaluated the effect on its
financial condition and results of operations from the adoption of this
statement and does not believe an impairment of the long-lived assets has
occurred.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation," which requires adoption of the disclosure provisions no later
than fiscal years beginning after December 15, 1995 and
45
<PAGE>
adoption of the measurement and recognition provisions for non-employee
transactions no later than after December 15, 1995. The new standard defines a
fair value method of accounting for the issuance of stock options and other
equity instruments. Under the fair value method, compensation cost is measured
at the grant date based on the fair value of the award and is recognized over
the service period, which is usually the vesting period. Pursuant to SFAS No.
123, companies are encouraged, but not required, to adopt the fair value
method of accounting for employee stock-based transactions. Companies are also
permitted to continue to account for such transactions under Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," but would be required to disclose in a note to the financial
statements pro forma net income and per share amounts as if the Company had
applied the new method of accounting. SFAS No. 123 also requires increased
disclosures for stock-based compensation arrangements regardless of the method
chosen to measure and recognize compensation for employee stock-based
arrangements. TCG has elected to continue to account for such transactions
under APB No. 25. TCG has determined that if SFAS No. 123 had been adopted,
its impact on the combined statement of operations for the year ended December
31, 1995 would be insignificant.
EFFECTS OF INFLATION
Inflation has not had a significant effect on the Company's operations.
46
<PAGE>
THE LOCAL TELECOMMUNICATIONS SERVICES INDUSTRY
INDUSTRY HISTORY
On January 1, 1984, AT&T (then referred to as the "Bell System") divested
itself of the Bell Operating Companies (the "BOCs"), which were transferred to
seven holding companies (the Regional Bell Operating Companies). Following
this divestiture (the "Divestiture"), each BOC continued to conduct local
telephone and other telecommunications business in geographically defined
areas, referred to as "Local Access and Transport Areas" or "LATAs".
Prior to the Divestiture, the BOCs and "independent" local exchange
telephone companies not affiliated with the Bell System had government-
regulated monopolies for most local telephone services. The Divestiture
encouraged the growth of competition for long distance services and terminal
equipment by prohibiting the BOCs from entering these markets, but the BOCs
retained monopoly control over the market for local telephone services.
Competition in the long distance market accelerated dramatically and, by the
end of 1995, AT&T's long distance competitors had captured approximately 40%
of the interstate long distance market.
The Divestiture did not directly provide for competition in local markets.
After the Divestiture, however, a number of factors served to promote
competition in some local telecommunications market segments, including (i)
increasing customer desire for an alternative to the ILEC monopoly,
particularly among business customers, prompted in part by competition in the
long distance market, (ii) technological advances in the transmission of data
and video requiring greater capacity and reliability levels than copper-based
ILEC networks were able to accommodate, (iii) a monopoly position and rate of
return-based pricing structure which provided little incentive for the ILECs
to upgrade their networks or meet specialized customer needs, (iv) the
development of fiber optics and digital electronic technology, which combined
the ability to economically build a high-capacity digital network with the
ability to transmit voice, data and video signals at high speeds and (v) the
significant "access charges" that long distance carriers were required to pay
to the ILECs to originate and terminate long distance telephone calls on the
ILECs' networks.
The first competitors in the local market were designated as "competitive
access providers" or "CAPs" by the FCC because they provided special access
services (e.g., dedicated lines for local access links to long distance
networks). With the establishment of its New York City network in 1985, TCG
was the first CAP to offer a competitive service in a local market. Initially,
CAPs provided special access (dedicated access lines) by installing fiber
optic facilities connecting long distance carriers' "points of presence" (or
"POPs") within a metropolitan area and, in some cases, connecting end users
(primarily large businesses) to long distance carriers' POPs. CAPs also
provided private line services connecting multiple locations of a single end
user within a local market area with dedicated fiber optic lines. CAPs such as
TCG used the technological advantage and substantial capacity and economies of
scale inherent in fiber optic technology to offer customers service that
initially was generally less expensive and of higher quality than could be
obtained from the ILECs, due in part to the ILECs' more antiquated copper-
based facilities and higher overhead costs. In addition, CAPs generally
offered shorter installation and repair intervals and improved reliability in
comparison to the ILECs. In recent years, the ILECs steadily have been
increasing the amount of fiber used in their networks, thereby decreasing the
competitive advantage held by the CAPs in the special access and private line
markets.
As CAPs proliferated during the latter part of the 1980's, federal and some
state regulators issued rulings which permitted and sometimes encouraged local
competition and opened some local market segments to new entrants. These
rulings allowed CAPs to offer a number of new services, including, in certain
states, certain switched services (but not basic local exchange telephone
service). Beginning in 1994, a few states permitted CAPs to become
"competitive local exchange carriers" or "CLECs", and thus to begin providing
local exchange services, primarily to business customers. By the time the 1996
Act was adopted, approximately half the states had removed legal prohibitions
on the provision of competitive local exchange service. Legal and regulatory
restrictions in the remaining states will be significantly reduced by the 1996
Act.
While many companies have been organized over the last decade to provide CAP
or CLEC services, only a few have grown to significant size. These large CAPs
and CLECs operate in multiple local markets and have
47
<PAGE>
acquired a number of smaller CAPs. Recently, new CAPs or CLECs have been
created, primarily to serve small markets.
THE LOCAL TELECOMMUNICATIONS SERVICES MARKET
The national market for telecommunications services can be divided into two
basic segments: local services and long distance services. The Company
estimates, based on FCC data, that local telecommunications services accounted
for revenues of approximately $96 billion in 1995 and long distance services
generated revenues of approximately $70 billion. Revenues for both local and
long distance services include revenues received for local access charges
assessed by LECs to IXCs, which represent approximately 40% of long distance
revenues.
The various local telecommunications services are: (i) local services,
estimated to be approximately $55 billion, which generally include basic local
exchange services, (ii) dedicated services, estimated to be approximately $5
billion, which include private line and special access services, (iii) IXC
switched access services, estimated to be approximately $22 billion, which
consist of charges received by local exchange carriers from long distance
carriers and (iv) toll services, estimated to be approximately $13 billion,
which include intraLATA long distance calls. The Company estimates that the
local switched services market for business customers is approximately $55
billion, or approximately 62% of the aggregate of local services revenue, IXC
switched access services revenue and toll services revenue. The following
chart illustrates the estimated revenues derived in 1995 from each of these
service categories:
1995 ESTIMATED LOCAL TELECOMMUNICATIONS REVENUE (*)
[GRAPHIC CHART]
-------------------------------------------------------
(*) COMPANY ESTIMATES BASED ON 1988-1994 FCC STATISTICS
CAPs initially entered the local telecommunications market by providing
dedicated services (special access or private line) only to customers directly
connected to the CAP network. A series of state public utility commission
decisions beginning in 1989 and FCC decisions beginning in 1991 requiring
expanded interconnection (or "colocation") permitted CAPs to interconnect
their networks with the largest ILECs' networks. This expanded interconnection
gave CAPs the option to access customers by either leasing facilities from an
ILEC through a colocation arrangement or installing extensions to the CAP's
own network, depending on the relative cost and other factors. The FCC
initiated an investigation of the ILECs' rates for colocation, which
investigation is still pending, and until that investigation has been
concluded there can be no assurances that expanded interconnection will have a
material effect on the Company's results of operations. If the FCC's
48
<PAGE>
investigation concludes favorably to the Company, TCG anticipates that these
expanded interconnection opportunities will create new business and service
opportunities for the Company and enhance the continued expansion of its
networks and customer base. Conversely, the FCC has stated that colocation
customers might be required to make limited additional payments to certain
ILECs in the event the FCC finds their originally proposed colocation rates
were appropriate. The Company does not believe that there would be any
significant potential financial impact on the Company from such a requirement
and, accordingly, the Company has not accrued for the possibility of such
retroactive payments. Additionally, future rates for colocation will be
established pursuant to the interconnection negotiations under the 1996 Act.
See "Business--Government Regulation."
In addition to the FCC's actions and proposals, an increasing number of
states have encouraged competition in various aspects of the intrastate local
telecommunications market. The intrastate local market consists of intrastate
access services, basic local exchange services and local private line special
access services. While the majority of state initiatives were originally
limited to intrastate private line and special access services, many states
are in the process of changing their statutes or regulations to permit
competition for switched services, including basic local exchange telephone
services. Those states that have not made these changes will be required to do
so under the 1996 Act. Entry into the market for switched local
telecommunications services expands significantly the size of the market that
can be served by CLECs such as TCG. As the Company captures customers' local
exchange business, it will also increase its revenues from switched access
charges collected from IXCs to reach these end users.
The 1996 Act further increases the opportunities available to CLECs by
requiring the ILECs to offer various network elements such as switching,
transport and loops (i.e., the facilities connecting a customer's premises and
a LEC central office) on an unbundled basis. ILECs also are required to offer
their retail services at wholesale rates for resale by other companies. In
conjunction with the removal of certain legal barriers to facilities-based
competitive local services, these unbundling and resale requirements will
provide the Company with the technical capability to provide any local
telephone service to any customer, regardless of where the customer is located
relative to the Company's network. As with expanded interconnection, however,
the pricing of these unbundled network elements and services will determine
whether service can be provided by TCG to off-network customers at rates that
are both competitive and profitable. In addition, competitors other than TCG,
including the major IXCs, will be able to take advantage of the unbundling and
resale requirements imposed on the ILECs under the 1996 Act, thereby
facilitating entry of competitors that have not invested in local distribution
facilities. See "Risk Factors--Dependence Upon Interconnection with ILECs;
Substantial Competition."
49
<PAGE>
BUSINESS
THE COMPANY
Teleport Communications Group Inc., the first and largest competitive local
exchange carrier in the United States, offers a wide range of local
telecommunications services in major metropolitan markets nationwide. The
Company competes with incumbent local exchange carriers as "The Other Local
Phone Company"SM by providing high quality, integrated local
telecommunications services, primarily over fiber optic digital networks, to
meet the voice, data, and video transmission needs of its customers. TCG's
customers are principally telecommunications-intensive businesses, long
distance carriers and resellers, and wireless communications companies. TCG
offers these customers technologically advanced local telecommunications
services, as well as superior customer service, flexible pricing and vendor
and route diversity.
For over 10 years, TCG has developed, operated and expanded its local
telecommunications networks. The Company currently operates high capacity
state-of-the-art digital networks in 48 metropolitan markets, including 17 of
the 20 largest metropolitan areas. The Company operates networks in
metropolitan New York/New Jersey, Los Angeles, Chicago, San Francisco, Boston,
Detroit, Baltimore/Washington, D.C., Dallas, Houston, Miami/Ft. Lauderdale,
Seattle, San Diego, St. Louis, Pittsburgh, Phoenix, Denver, Milwaukee,
Indianapolis, Hartford and Omaha, and is developing networks in Cleveland,
Portland (Oregon), Salt Lake City, Nashville, Chattanooga, Knoxville and
Birmingham. As of March 31, 1996, the Company's networks spanned over 5,500
route miles, contained over 257,000 fiber miles and served approximately 5,300
buildings.
TCG has grown rapidly over the last several years, expanding its existing
networks, developing new networks and increasing its service offerings. On a
pro forma basis, after giving effect to the Reorganization, the Company's
revenues were approximately $184.9 million for 1995, substantially all of
which were derived from the provision of local telecommunications services.
Total revenues from the local telecommunications market in the United States
were estimated to have been approximately $96 billion in 1995. In the past,
competitive access providers, including the Company, were limited to serving
only the dedicated services portion of this market, which was estimated to
have been approximately $5 billion in 1995, whereas the local switched
services portion of this market for business customers was estimated to have
been approximately $55 billion. The Company has expanded into the switched
services market in a number of states over the last five years by constructing
switched networks and obtaining the necessary regulatory authorizations and
interconnection arrangements. With the passage of the 1996 Act, the Company
believes that it is well positioned to address a significantly larger portion
of the local telecommunications market and to improve its operating margins in
the switched and dedicated services markets by expanding its networks,
installing additional high capacity digital switches and offering new products
and services.
TCG has benefited substantially from its relationships with the Cable
Stockholders, which are among the largest cable television companies in the
United States. Through such relationships, the Company has been able to
utilize rights-of-way, obtain fiber optic facilities and share the cost of
building new fiber optic networks, thereby allowing the Company to achieve
significant economies of scale and scope through capital efficiencies in
extending its existing networks in a rapid, efficient and cost-effective
manner. As of March 31, 1996, after giving pro forma effect to the
Reorganization, the Cable Stockholders had invested approximately $770 million
in the Company. See "The Reorganization."
The Company believes that it has several advantages that enable it to
compete successfully in the new competitive local telecommunications
marketplace, including (i) extensive, technologically advanced networks
located in major metropolitan markets nationwide, (ii) strategic relationships
with cable television operators, (iii) state-of-the-art information systems
and (iv) an experienced management team with significant operational,
technical, financial and regulatory expertise in the local telecommunications
industry.
50
<PAGE>
BUSINESS STRATEGY
As a premier competitive local telecommunications carrier, the key elements
of the Company's business strategy are to:
. PROVIDE A WIDE RANGE OF LOCAL TELECOMMUNICATIONS SERVICES. The Company
provides a broad array of local telecommunications services to meet the
voice, data and video transmission needs of its customers, including basic
local exchange telephone services, enhanced switched services, dedicated
services, high speed switched data services and video channel transmission
services. In 1995, approximately 36% of the Company's revenues were
generated from switched services. The Company expects a growing portion of
its revenues to be derived from basic local exchange telephone services,
enhanced switched services and high speed switched data services as it
deploys digital switches in all of its markets. As of March 31, 1996, the
Company had 21 digital telephone switches and 27 ATM switches in operation.
On a pro forma basis, after giving effect to the Reorganization, the
Company's revenues from switched services, which include local dial tone
and local calling, grew by approximately 59% to $63.9 million in 1995 from
$40.2 million in 1994.
. FOCUS ON BUSINESS CUSTOMERS AND TELECOMMUNICATIONS CARRIERS. The Company's
networks serve large metropolitan markets, which have significant
concentrations of telecommunications-intensive businesses. The Company's
customers in these markets include financial services firms, media and
health care companies, long distance carriers and resellers, Internet
service providers, wireless communications companies and an increasing
number of small and medium-sized business customers. The national scope of
the Company's local networks allows it to offer high volume business
customers and long distance carriers uniformity of services, pricing,
quality standards and customer service. In addition, the Company has
arrangements with other telecommunications providers, including shared
tenant services providers, cable television companies and long distance
carriers, to resell TCG's services. Currently, certain major long distance
carriers are conducting trials of the resale of TCG's local exchange
services under such long distance carriers' brand names. In 1995,
approximately 62% of the Company's 1995 revenues were generated from
business customers and approximately 38% were generated from long distance
carrier customers.
. EXPAND GEOGRAPHIC REACH AND DENSITY OF EXISTING NETWORKS AND ENTER NEW
MARKETS. The Company plans to increase the geographic reach and density of
its existing networks by deploying additional fiber optic rings and
connecting additional customers to its networks. The Company anticipates
that making significant capital expenditures over the next several years to
expand its existing networks and to develop new networks will lead to
significant increases in revenue opportunities. As a facilities-based
carrier, the Company utilizes a variety of means to expand geographically,
including rights-of-way, easements, poles, ducts and conduits that are
available from cable television operators, incumbent local exchange
carriers, railways and subways, electric, gas and water utilities and
municipal, state and federal street and highway authorities. In the course
of expanding its networks, the Company also has the ability to reach TCG
customers by reselling a portion of the facilities of incumbent local
exchange carriers. However, the Company believes that the extensive
geographic reach and density of its networks make it less reliant than
other competitive local exchange carriers on the networks of the incumbent
local exchange carriers. In addition, where appropriate, the Company has
the ability to link customers to its network through the use of microwave,
including 38 GHz milliwave, services. The Company plans to expand into
additional metropolitan markets, which the Company believes will further
broaden its customer base and enhance its ability to attract national
business accounts for its services.
. BENEFIT SUBSTANTIALLY FROM RELATIONSHIPS WITH CABLE TELEVISION
OPERATORS. As of December 31, 1995, the cable television facilities of the
Cable Stockholders collectively passed approximately 47% of the country's
94 million homes passed by cable television facilities. Through its
relationships with cable television operators, the Company has been able to
utilize existing rights-of-way, obtain fiber optic facilities and share the
cost of building new fiber optic networks, thereby allowing the Company to
achieve significant
51
<PAGE>
economies of scale and scope through capital efficiencies in extending its
existing networks in a rapid, efficient and cost-effective manner. The
Company is currently engaged in technical trials with certain cable
television operators, including Cable Stockholders, for the provision of
residential telephony services over the cable television operators' hybrid
fiber-coaxial networks with TCG providing switching, call processing,
calling features and ancillary services. The Company believes such trials
will evolve into commercial offerings by cable companies and that TCG may
become a provider of switching, call processing and other services to such
cable companies.
. OFFER HIGH QUALITY NETWORKS AND SUPERIOR CUSTOMER SERVICE. TCG believes that
it offers cost and service quality advantages over the incumbent local
exchange carriers as a result of its integrated operations, customer
support, network monitoring and management systems and the state-of-the-art
technology deployed in the Company's digital networks. TCG consults closely
with its customers to develop competitively priced telecommunications
services that are tailored to their particular needs. The Company's
centrally managed customer support operations are also designed to
facilitate the processing of orders for changes and upgrades in services.
TCG believes that it provides greater attention and responsiveness to its
customers than do the incumbent local exchange carriers.
. SPEARHEAD REGULATORY REFORM. As the first and largest competitive local
exchange carrier, TCG has been at the forefront of industry efforts for over
a decade to introduce competition to the local telecommunications market.
The Company has aggressively pursued the goal of making competitive local
exchange services economically, technically and operationally feasible by
working for legislative and regulatory reform and through negotiations with
incumbent local exchange carriers. The Company will continue its regulatory
reform activities in an effort to ensure that the 1996 Act is implemented
and interpreted in a manner that promotes fair competition for local
exchange services.
. CAPITALIZE ON MANAGEMENT TEAM EXPERIENCE. TCG's management team is comprised
of executives who are recognized as leaders in the development of the
competitive local telecommunications industry. This management team has
extensive operational, technical, financial and regulatory expertise as well
as a proven track record in a rapidly changing marketplace.
THE COMPANY'S SERVICES
The Company provides its customers with a wide array of local
telecommunications services, including basic local exchange telephone services,
enhanced switched services, dedicated services, high-speed switched data
services and video channel transmission services. Switched voice services
offered by the Company use primarily high-capacity digital switches to route
voice transmissions anywhere on the public switched telephone network. TCG's
dedicated services, which include private line and special access services, use
high-capacity digital circuits to carry voice, data and video transmissions
from point-to-point in multiple configurations. The Company provides its media
industry customers with point-to-point, broadcast-quality video channels for
video transmissions between two or more locations, including video link
services to all the major television networks as well as to other programmers.
The Company also provides private network management and systems integration
services for businesses that require combinations of various dedicated and
switched telecommunications services.
Switched Services
The Company's switched services provide customers with local dial tone and
local calling capabilities and connections to their interexchange carriers. The
Company's switched services include the following:
TCG Centrex(R) service gives voice and data customers a choice for analog,
digital voice-only and ISDN telephone lines to customers' desktops. With
TCG Centrex(R), TCG owns, houses, manages and maintains the switch. TCG
Centrex(R) allows customers to retain control over network configurations.
Lines can be added, deleted and moved as needed. Business customers can
utilize TCG as their primary Centrex provider, as a supplement to the
ILEC's Centrex service, or as an addition to a fully-utilized PBX.
52
<PAGE>
TeleXpress(R) service is utilized by PBX users to provide access to the
local, regional and long distance telephone networks. PBX customers may use
either the Company's telephone numbers or their ILEC-assigned telephone
numbers. Customer access to the Company's local exchange services is
accomplished by a DS-1 digital connection or analog trunks between the
customer's PBX port and the Company's switching centers.
Extended Area Service (EAS) provides customers with a competitive
alternative to ILEC service for intraLATA toll calls. It is a customized,
high-quality local calling plan available to TCG Centrex(R) and
TeleXpress(R) customers and PBX users. TCG works with customers to devise
cost-saving EAS programs based on actual usage and calling patterns.
Local Telephone Service is basic local exchange service which can be
tailored to a customer's particular calling requirements. Local telephone
service includes operator and directory assistance services, as well as an
optional intraLATA toll plan.
TCG Pay Phone Services provides full public pay telephone service to public
customers and dial tone services and access lines to other public pay
telephone providers. TCG is the primary provider of public pay phone
service for all properties of The Port Authority of New York and New
Jersey, including Kennedy, La Guardia and Newark airports.
Switched Access Services provide interexchange carriers with a switched
connection to their customers for the origination and termination of long
distance telephone calls.
Integrated Services Digital Network (ISDN) Services provide TCG's customers
with multiple voice and data communication services over a single
telecommunications line. The Company's ISDN services allow customers to
perform multiple functions such as simultaneous voice and computer links,
and enable the Company to offer customers value-added features. High speed
ISDN applications include desk top video conferencing, LAN-to-LAN
connection and Internet access.
Dedicated Services
The Company's dedicated services, which include special access and digital
private line services, use high-capacity digital circuits to carry voice, data
and video transmissions from point-to-point in flexible configurations
involving different standardized transmission speeds and circuit capacities,
including:
DS-O A dedicated service that accommodates business communications with
digital data transmission through a voice grade equivalent circuit with a
capacity of up to 64 kbps. This service offers a private line digital
channel for connecting telephones, fax machines, personal computers and
other telecommunications equipment. Multiple DS-O services are offered in a
variety of combinations, depending on the particular application and can
also provide voice grade analog connections.
DS-1 A high speed digital channel that typically links customer locations
to long distance carriers or other customer locations. Used for multiple
voice or data transmissions, access to the Internet and interconnection of
LANs, DS-1 services accommodate digital data transmission capacity of up to
1.544 mbps, the equivalent of 24 voice grade circuits.
European-Standard DS-1(E-1) The Company was the first U.S.-based local
carrier to offer this dedicated high capacity service, which allows
customers to accommodate their international traffic with a digital data
transmission capacity of up to 2.048 mbps, which is equivalent to 30 voice
grade equivalent circuits. This dedicated service offers international
business customers the flexibility to connect their United States locations
to international circuits that operate at the high capacity European
standard transmission speed.
DS-3 With digital data transmission capacity of up to 44.736 mbps, this
dedicated service provides a very high capacity digital channel, which is
equivalent to 28 DS-1 circuits or 672 voice grade equivalent circuits.
53
<PAGE>
This is a digital service used by long distance carriers for central office
connections and by some large corporate users to link multiple sites. It is
also used for data services applications.
TCG OmniLink A standard Optical Carrier (OC) service for those customers
requiring enhanced network survivability, advanced network architectures
and centralized network monitoring and management capabilities. With TCG
OmniLink, customers enjoy the benefit of dedicated private local OC3 or
OC12 SONET rings between various customer-designated sites and the
Company's nodes.
Data Services
The Company offers its customers a broad array of data services that enable
customers to create their own internal computer networks and access external
computer networks and the Internet. In 1992, TCG introduced its LANLINK native
speed LAN inter-networking data service which is used to connect workstations
and personal computer users on one or more LANs. LANLINK provides users with
transmission capacity for 10 mbps Ethernet, 4 and 16 mbps Token Ring and 100
mbps FDDI LAN interconnections. Native speed services avoid the bottleneck
problems that are frequently encountered with customary DS-1 connections by
providing the customer with a circuit that matches the transmission speeds of
its LAN. LANLINK provides dedicated circuits, guaranteed transmission capacity
and guaranteed bandwidth for virtually all LAN applications. Users can share
files and databases as if they were all working on the same computer, or
within the same LAN.
As companies and communications become more sophisticated, there is an
increased need for customer access to superior traffic management of sensitive
data, video and voice transmission within a single metropolitan area, or
between various company operations. The Company's switched data services offer
sophisticated switching technology over the Company's SONET/ATM backbone and
provide high standards in reliability and flexibility while enabling users to
reduce the costs associated with interconnecting various geographically
dispersed and architecturally diverse information systems. The Company's ATM
platform supports evolving high-speed applications, such as multimedia,
desktop video conferencing and medical imaging. TCG offers native connections
to both end users as well as interexchange data carriers. Customer connections
are provided for "early adopters" who interface directly with ATM connections,
as well as Ethernet, Token Ring, FDDI and Frame Relay architectures.
Additionally, the Company's services allow users to interconnect both high
speed and low speed LAN environments. Customers also benefit from flexible
billing, as well as detailed usage reports.
Video Services
TCG provides analog video link services to its media industry customers,
including all of the major television networks as well as to many cable
services and independent programmers. The Company's video services include
offering a broadcast quality, analog channel which can be provided on a point-
to-point or point-to-multipoint basis.
CUSTOMERS AND MARKETING
The Company's customers are principally telecommunications-intensive
businesses, long distance carriers and resellers, and wireless communications
companies. In 1985, the Company's customers were primarily long distance
carriers. While the Company's carrier business has continued to grow, in 1995
end user customers accounted for approximately 62% of the Company's revenues.
During 1995, the Company's top 10 customers accounted for approximately 57% of
TCG's total pro forma revenues. AT&T and Sprint each accounted for more than
10% of such revenues, and no customer accounted for 15% or more of such
revenues. See "Risk Factors--Dependence on Significant Customers."
Marketing itself as "The Other Local Phone Company,"SM the Company has
sought to establish "TCG(R)" as a recognized brand name for its services and
products. The Company's marketing emphasizes its state-of-the-art digital
networks, flexibly priced products and services, responsive customer service
orientation and integrated operations, customer support and network monitoring
and management systems. For large telecommunications-intensive businesses that
depend on accurate and reliable telecommunications, the Company promotes the
operational and strategic security achieved through vendor diversity. The
Company's centrally managed
54
<PAGE>
customer support operations are designed to facilitate the processing of
orders for changes and upgrades in TCG customer services. The Company seeks to
be among the first to introduce new telecommunications products and service,
thereby increasing usage among existing TCG customers and attracting new
customers to the Company's networks.
The Company generally offers its services in accordance with applicable
tariffs filed with the FCC (for interstate services) and the state public
utility commissions (for intrastate services). As a non-dominant carrier, TCG
does not have to cost-justify its rates and frequently enters into customer
and service specific arrangements. The services offered by TCG are typically
priced at a modest discount to the prices of the ILECs.
With a direct sales force in each of its markets, TCG targets the large
telecommunications-intensive businesses concentrated in the major metropolitan
markets served by its networks. The Company's customers in these markets
include financial services firms, media and health care companies, education
and governmental institutions and an increasing number of small and medium-
sized business customers. In addition, TCG markets its services through sales
agents, landlords, advertisements, trade journals, media relations, direct
mail and participation in trade conferences.
TCG also targets long distance carriers and resellers, Internet service
providers and wireless telephone companies through its national sales
organization. The Company has master services agreements (which generally set
forth technical standards, ordering processes, pricing methodologies and
service grade requirements, but do not guarantee any specified level of
business for TCG) with a significant number of the long distance carriers,
including eight of the largest. AT&T considers TCG a preferred national
supplier of dedicated and switched access services. By providing long distance
companies a local connection to their customers, the Company enables them to
avoid complete dependence on the ILECs for access and to obtain a high
quality, reliable local connection at a savings over the ILECs' charges. The
national scope of the Company's local networks allows it to offer high volume
business customers and long distance carriers uniformity of services, pricing,
quality standards and customer service. In addition, the Company has
arrangements with other telecommunications providers, including shared tenant
services providers, cable television companies and long distance carriers, to
resell TCG's services. TCG is currently engaged in technical trials pursuant
to which certain long distance carriers are reselling TCG local exchange
service and intraLATA toll service bundled with their long distance service.
These trials began in the second half of 1995, and as of March 31, 1996,
served a limited number of end-user customers. Because of the limited scope
and preliminary nature of these trials, the Company is unable to determine at
this time whether these services will be expanded. The Company believes that
it has been and will continue to be one of the largest providers of
competitive local access services for long distance carriers.
THE NETWORKS
The Company uses the latest technologies and network architectures to
develop a highly reliable infrastructure for delivering high-speed, quality
digital transmissions of voice, data and video telecommunications. The basic
transmission platform consists primarily of optical fiber equipped with high
capacity SONET equipment deployed in self-healing rings. These SONET rings
give TCG the capability of routing customer traffic simultaneously in both
directions around the ring thereby eliminating loss of service in the event of
a cable cut. The Company extends SONET rings or point to point links from
rings to each customer's premises over its own fiber optic cable, unbundled
facilities obtained from ILECs, microwave (including 38 GHz milliwave)
transmission facilities and other technologies. TCG also installs diverse
building entry points where a customer's security needs require such
redundancy. TCG then places necessary customer-dedicated or shared electronic
equipment at a location near or in the customer's premises to terminate the
link.
TCG serves its customers from one or more nodes or hubs strategically
positioned throughout its networks. The node houses the transmission and
switching equipment needed to interconnect customers with each other, the
interexchange carriers and other local exchange networks. Redundant
electronics, with automatic switching to the backup equipment in the event of
failure, protects against signal deterioration or outages. Continuous
monitoring of system components focuses on proactively avoiding problems
rather than just reacting upon failure.
55
<PAGE>
TCG adds switched, dedicated and data services to its basic fiber optic
transmission platform by installing sophisticated digital electronics at its
network nodes and at customer locations. TCG's advanced ISDN capable digital
telephone switches are connected to multiple ILEC and long distance carrier
switches to provide TCG's customers access to every telephone in the local
market as well as across the country and around the world. Similarly, TCG
provides ATM switched and LAN multiplexers at the customer's premises and in
its nodes to provide high speed LAN interconnection services.
The Company's strategy for adding customers is designed to maximize the
speed and impact of its marketing efforts while maintaining attractive rates
of return on capital invested to connect customers directly to its networks.
To initially serve a new customer, for example, TCG may use various
transitional links, such as reselling a portion of the ILEC's network and,
where appropriate, using alternative transmission services such as microwave,
including 38 GHz milliwave, transmission. Once the new customer's
communications volume and product needs are identified, the Company may build
its own fiber optic connection between the customer's premises and its network
to accommodate (i) the customer's needs and (ii) the Company's efforts to
maximize return on network investment.
In February 1996, the Company acquired a minority investment in BizTel
Communications, Inc., which, through a wholly owned subsidiary, BizTel, Inc.
("BizTel"), holds FCC licenses to provide telecommunications services
utilizing 38 GHz digital milliwave transmission in 156 geographic areas, which
have a population of approximately 175 million people, and including more than
80 of the largest 100 metropolitan markets and all markets where TCG operates.
BizTel also has 102 licenses pending FCC approval in geographic areas which
have a population of an additional 44 million people. The 38 GHz milliwave
facilities can be used by TCG to economically connect customers to the
Company's networks, to provide network redundancy, diverse routing or quick
temporary installations and to provide stand-alone facilities where the
Company does not have networks. In connection with such acquisition, TCG
entered into two agreements with BizTel regarding the use, construction and
maintenance of certain transmission facilities operated by BizTel. These
agreements are not material to the Company's business or operations taken as a
whole.
In determining which new markets to enter, the Company carefully analyzes
the potential customer base and competitive conditions within the market. The
Company is planning on building new facilities, entering into fiber leases and
other arrangements with cable television companies and other carriers,
acquiring existing telecommunications providers and exploiting new
technologies that have the potential to enhance network expansion (such as the
use of microwave radio facilities). The Company also seeks to utilize
relationships with the Cable Stockholders or other cable television operators
who have an existing presence in the market and with which the Company may be
able to develop a fiber optic network rapidly and efficiently. As a
facilities-based carrier, the Company utilizes a variety of means to expand
geographically, including rights-of-way, easements, poles, ducts and conduits
that are available from cable television operators, incumbent local exchange
carriers, railways and subways, electric, gas and water utilities and
municipal, state and federal street and highway authorities. TCG plans to
continue making selected acquisitions of existing local telecommunications
networks in markets in which it has existing local telecommunications
operations or which are geographically proximate to such markets, as well as
in markets that are otherwise attractive to TCG. See "Risk Factors--
Governmental and Other Authorizations."
56
<PAGE>
The following chart sets forth information regarding each of the Company's
active or currently planned local telecommunications networks as of March
31, 1996:
<TABLE>
<CAPTION>
DATE OF SERVICES
METROPOLITAN FIRST -----------------------
AREA METROPOLITAN MARKET(A) REVENUE DEDICATED SWITCHED DATA
------------ ---------------------- ----------- --------- -------- ----
<C> <S> <C> <C> <C> <C> <C>
New York/New Jersey.......... Bergen-Passaic Nassau-Suffolk 7/85 X X X
Jersey City New York
Middlesex-Somerset- Newark
Hunterdon Trenton
Boston....................... Boston Lawrence 5/89 X X X
Brockton Worcester
San Francisco(b)............. Oakland 4/90 X X X
San Francisco
San Jose
Chicago...................... Chicago 5/90 X X X
Gary
Los Angeles.................. Los Angeles-Long Beach 10/90 X X X
Orange County
Houston...................... Houston 5/91 X X X
Dallas....................... Dallas 6/91 X X X
Fort Worth-Arlington
Omaha........................ Omaha 1/93 X X
Seattle(b)................... Bellingham 1/93 X X
Seattle-Bellevue-Everett
Tacoma
San Diego.................... San Diego 2/93 X X X
Milwaukee.................... Kenosha 8/93 X X
Milwaukee-Waukesha
Racine
Detroit(b)................... Detroit 11/93 X X
Miami/Ft. Lauderdale......... Fort Lauderdale 12/93 X X
Miami
W. Palm Beach-Boca Raton
Phoenix...................... Phoenix-Mesa 3/94 X X
Hartford..................... Bridgeport New London-Norwich 3/94 X X X
Danbury New Haven-Meriden
Hartford Waterbury
St. Louis.................... St. Louis 3/94 X X
Indianapolis................. Indianapolis 10/94 X
Baltimore/Washington, D.C. .. Baltimore 10/94 X X
Washington, D.C.
Pittsburgh................... Pittsburgh 1/95 X X X
Denver....................... Boulder-Longmont 8/95 X X
Denver
Providence................... Providence-Fall River-Warwick 9/95 X
Cleveland.................... Cleveland-Lorain-Elyria in progress
Portland (Oregon)............ Portland-Vancouver in progress
Salt Lake City............... Salt Lake City-Ogden in progress
Birmingham................... Birmingham in progress
Chattanooga.................. Chattanooga in progress
Knoxville.................... Knoxville in progress
Nashville.................... Nashville in progress
</TABLE>
--------
(a) Consists of primary metropolitan statistical areas, metropolitan
statistical areas and New England consolidated metropolitan areas, as
defined by the U.S. Census Bureau.
(b) Local Market Partnerships with minority partners that are not affiliated
with either the Company or the Cable Stockholders.
57
<PAGE>
Information Systems Infrastructure
TCG uses state-of-the-art technology in its information systems
infrastructure. TCG also uses an integrated, nationwide client server platform
and coherent relational databases to increase employee productivity, link
itself electronically to its customers and develop real time data and
information. The architecture also enables TCG to rapidly and continually re-
engineer its processes and procedures to lower its costs and to respond
rapidly to changing industry conditions. The Company's information systems
deliver the necessary data at the network, regional or corporate level, and
also by customer and vendor. The Company's information systems enable the
delivery of superior customer service, real time support of network
operations, and on-line financial reporting. Using the latest open system
standards and architecture, TCG is positioned to either purchase or develop
its own information support systems as the situation demands.
Network Monitoring and Management
All elements of TCG's digital networks are integrated onto a single platform
and monitored on an end-to-end basis by TCG's Network Management Center
("NMC"). The NMC monitors and manages all of TCG's networks seven days a week,
24-hours a day and provides real-time alarm, status and performance
information for each circuit and piece of equipment in TCG's networks around
the country. The NMC also affords improved disaster recovery to customers
through remote circuit provisioning and cross-connect features.
Advanced Technology Integration Center
The Company's Advanced Technology Integration Center is a comprehensive
telecommunications technology, applications and services development
laboratory, equipped with state-of-the-art systems and equipment, including
those used by TCG in the operation of its local digital networks. The center
is designed to provide a self-contained testing and integration environment,
fully compatible with the Company's digital networks, for the purposes of (i)
verifying the technical and operational integrity of new equipment prior to
installation in the networks, (ii) developing new services and applications,
(iii) providing a realistic training environment for technicians, engineers
and others and (iv) providing a network simulation environment to assist in
fault isolation and recovery.
COMPETITION
The Company faces substantial competition in each of the metropolitan areas
it serves or plans to serve from entities that offer services similar to those
offered by TCG, including ILECs such as Ameritech, Bell Atlantic, BellSouth,
NYNEX, Pacific Telesis Group, SBC Communications, U S WEST, Inc. and GTE. The
Company believes that ILECs generally benefit from their long-standing
relationships with customers, substantial technical and financial resources
and federal and state regulations that could provide them with increased
pricing flexibility as competition increases. In addition, in most of the
metropolitan areas in which the Company currently operates, at least one, and
sometimes several, other CAPs or CLECs offer substantially similar services at
substantially similar prices to those of the Company. Other CLECs, CAPs, cable
television companies, electric utilities, long distance carriers, microwave
carriers, wireless telephone system operators and private networks built by
large end users may offer services similar to those offered by the Company.
The Company believes that the 1996 Act will provide increased business
opportunities by opening all local markets to competition and requiring ILECs
to provide increased direct interconnection. However, under the 1996 Act, the
FCC and some state regulatory authorities may provide ILECs with increased
flexibility to reprice their services as competition develops and as ILECs
allow competitors to interconnect to their networks. In addition, some new
entrants in the local market may price certain services to particular
customers or for particular routes below the prices charged by the Company for
services to those customers or for those routes, just as the Company may
itself underprice those new entrants for other services, customers or routes.
If the ILECs and other competitors lower their rates and can sustain
significantly lower prices over time, this may adversely affect revenues of
TCG if it is required by market pressure to price at or below the ILECs'
prices. If regulatory decisions permit the ILECs to charge CAPs/CLECs
substantial fees for interconnection to the ILECs'
58
<PAGE>
networks or afford ILECs other regulatory relief, such decisions could also
have a material adverse effect on the Company. However, the Company believes
that the negative effects of the 1996 Act may be more than offset by (i) the
increased revenues available as a result of being able to address the entire
local exchange market, (ii) mutual reciprocal compensation with the ILEC that
results in TCG terminating its local exchange traffic on the ILEC's network at
little or no net cost to TCG, (iii) obtaining access to off-network customers
through more reasonably priced expanded interconnection with ILEC networks and
(iv) a shift by IXCs to purchase access services from CAPs/CLECs instead of
ILECs. There can be no assurance, however, that these anticipated results will
offset completely the effects of increased competition as a result of the 1996
Act.
In addition, historically, the Company has been able to build new networks
and expand existing networks in a more timely and economical manner than most
CAP or CLEC competitors through strategic arrangements such as leasing fiber
optic cable from cable operators that already possess rights-of-way and have
facilities in place. The Company intends to use its experience and presence in
the telecommunications industry to further develop and expand its existing
telecommunications infrastructure.
GOVERNMENT REGULATION
Nationally, the recent trend has been for federal and state legislators and
regulators to permit and promote additional competition in the local
telecommunications industry, which the Company believes should contribute to
an increase in the market opportunities for TCG. Because these developments
require numerous implementation actions by individual federal and state
regulatory commissions, and are subject to particular legal, political and
economic conditions, it is not possible to predict the pace at which such
liberalization will occur.
Telecommunications Act of 1996
On February 8, 1996, President Clinton signed the Telecommunications Act of
1996, the most comprehensive reform of the nation's telecommunications laws
since the Communications Act of 1934 (the "Communications Act"). The Company
believes that the 1996 Act will result in substantial changes in the
marketplace that should be largely favorable for TCG.
The 1996 Act prohibits state and local governments from enforcing any law,
rule or legal requirement that prohibits or has the effect of prohibiting any
person from providing any interstate or intrastate telecommunications service.
This provision of the 1996 Act should enable TCG to provide a full range of
local telecommunications services in any state. States retain jurisdiction
under the 1996 Act to adopt regulations necessary to preserve universal
service, protect public safety and welfare, ensure the continued quality of
telecommunications services and safeguard the rights of consumers. States are
also responsible for mediating and arbitrating CLEC-ILEC interconnection
arrangements if voluntary agreements are not reached. Therefore, the degree of
state regulation of local telecommunications services may be substantial.
The 1996 Act imposes a number of access and interconnection requirements on
all local exchange providers, including CLECs, with additional requirements
imposed on ILECs. The 1996 Act requires CLECs and ILECs to first attempt to
resolve interconnection issues through negotiation for at least 135 days.
During these negotiations, the parties may submit disputes to state regulators
for mediation and, after the negotiation period has expired, the parties may
submit outstanding disputes to state regulators for arbitration. On February
8, 1996, TCG requested that the BOCs commence negotiations with respect to
interconnection negotiations. If the negotiations fail, TCG may request state
regulators to arbitrate between June 22, 1996 and July 17, 1996.
The 1996 Act provides a detailed list of items which are subject to these
interconnection negotiations, as well as a detailed set of duties for all
affected carriers. All local exchange carriers, including CLECs, have a duty
to (i) not unreasonably limit the resale of their services, (ii) provide
number portability if technically feasible, (iii) provide dialing parity to
competing providers, (iv) provide access to poles, ducts and conduits and (v)
establish reciprocal compensation arrangements for the transport and
termination of telecommunications. In addition to those general duties of all
LECs, ILECs have additional duties to (i) interconnect at any technically
59
<PAGE>
feasible point and provide service equal in quality to that provided to their
customers or the ILEC itself, (ii) provide unbundled access to network
elements at any technically feasible point, (iii) offer retail services at
wholesale prices for the use of competitors, (iv) provide reasonable public
notice of changes in the network or the information necessary to use the
network and (v) provide for physical colocation. The 1996 Act further imposes
various pricing guidelines for the provision of certain of these services. The
ILECs have a statutory duty to negotiate in good faith regarding these
arrangements, and the RBOCs, in particular, must successfully achieve
agreements, leading to the development of facilities based competition for
business and residential users, in order to enter the long distance markets
within their regions. To the extent that the Company cannot reach a successful
negotiated conclusion to these issues, it will be forced to engage in
arbitration before the state public utility commissions which, with respect to
the RBOCs, under the 1996 Act must be completed no later than November 8,
1996. However, because negotiated agreements are also subject to state public
utility commission approval, which must be completed within 90 days, the
likely effective date of negotiated agreements and arbitrated agreements will
be similar. The Company does not have sufficient information to predict the
likely results of such arbitrations, whether such arbitrations are likely to
provide superior agreements for the Company compared to those achievable
through negotiation, or what effect these arbitrated agreements might have on
the Company's business prospects. Moreover, the Company has previously
experienced numerous disputes with ILECs regarding interconnection issues, but
expects that the influence of the 1996 Act will be to reduce the degree of
such disputes. Finally, because the Company is presently operating in
virtually all of the states in which it holds CLEC authority pursuant to
interim interconnection arrangements or interim state public utility
commission interconnection rules and policies, which will be replaced in the
future by the agreements negotiated pursuant to the 1996 Act, the Company can
continue to operate as a CLEC during the pendency of these negotiations and
arbitrations.
As noted above, the Company, in those states in which it is a CLEC, is
subject to five obligations under the 1996 Act. Specifically, the Company must
(i) not unreasonably limit the resale of its services, (ii) provide number
portability if technically feasible, (iii) provide dialing parity to competing
providers, (iv) provide access to poles, ducts and conduits and (v) establish
reciprocal compensation arrangements for the transport and termination of
telecommunications. In those states in which it is a CLEC, the Company does
not restrict the resale of its services, engages in reciprocal compensation
arrangements, and provides dialing parity, satisfying three of the five
requirements. The Company generally leases poles, ducts and conduits, and
therefore owns few such rights of way subject to the requirement to make them
available to other carriers. Finally, while the Company has not been requested
to provide interim number portability, it believes that its switches are
currently capable of providing interim number portability so that this
capability can be provided at little or no cost.
The 1996 Act establishes procedures under which a BOC can provide interLATA
services within its telephone service area if it enters into a state-approved
interconnection agreement with one or more companies which provide local
exchange service to business and residential customers predominantly over such
companies' own facilities. The ability of the BOCs to provide interLATA
services will enable them to provide customers with a full range of local and
long distance telecommunications services. The provision of interLATA services
by BOCs may reduce the market share of the major long distance carriers, which
are among the Company's largest customers, but the Company believes it will
also encourage IXCs to use the Company's and other CLECs' services instead of
BOC services wherever possible. When BOCs provide long distance service
outside their telephone service area they will be potential customers for TCG
and other CAPs and CLECs.
The 1996 Act requires the FCC to establish an explicit mechanism for
subsidizing service to rural areas, low-income customers, schools and
libraries. Although the details will be determined by the FCC, all carriers
will be required to contribute, and carriers that serve eligible customers
will be able to receive subsidies. This subsidy mechanism may provide an
additional source of revenue to those ILECs and CLECs willing and able to
provide service to markets that traditionally have been considered less
desirable, either because of the high cost of providing service or the limited
revenues that might be available.
The 1996 Act contains other provisions that may be subject to FCC rulemaking
and judicial interpretation, including a provision that limits the ability of
a cable television operator and its affiliates to acquire more than a
60
<PAGE>
10% financial interest or any management interest in a LEC which provides
local exchange service in such cable operator's franchise area. The Company
believes, based on an opinion from its FCC counsel, Dow, Lohnes & Albertson, a
Professional Limited Liability Company, that the 1996 Act does not limit the
acquisition of any of the interests contemplated to be acquired in the
Reorganization; however, there can be no assurance that the FCC or a court
would not reach a different determination as to the acquisition of one or more
of such interests.
Federal Regulation
Through a series of regulatory proceedings, the FCC has established
different levels of regulation for "dominant carriers" and "nondominant
carriers." For domestic interstate telecommunications purposes, only the ILECs
are classified as dominant carriers, and all other carriers are classified as
nondominant carriers. As a nondominant carrier, the Company is required to
file tariffs and periodic reports with the FCC concerning the Company's
interstate circuits and deployment of network facilities. The FCC has proposed
eliminating this reporting requirement for interexchange carriers, and another
CAP has filed a petition with the FCC asking that it permit CAPs to dispense
with filing of FCC tariffs, at the option of the carrier. The FCC has not as
yet taken any substantive action on the petition, and the Company has no
information as to when the FCC is likely to act, and whether, even if the
petition is granted, such "permissive detariffing" will be extended to embrace
CLECs as well as CAPs. If the petition is granted and does extend to the
Company's interstate services and CLEC operations, it will improve the
Company's ability to adjust interstate prices and will reduce its interstate
regulatory compliance costs. The petition does not, however, impact the
Company's state public utility commission tariff requirements. Whether or not
it is subject to a tariff filing requirement, TCG must offer its interstate
services on a nondiscriminatory basis, at just and reasonable rates and is
subject to the complaint provisions of the Communications Act. For its current
offering of interstate services as a nondominant carrier, TCG is not subject
to rate of return or price cap regulation by the FCC and may install and
operate digital facilities for the transmission of interstate communications
without prior FCC authorization. Under the 1996 Act, TCG may become subject to
additional federal regulatory obligations when it provides local exchange
service in a market, such as the access and interconnection requirements that
are imposed on all local exchange providers. See "--Telecommunications Act of
1996."
State Regulation
Most state public utility commissions require carriers that wish to provide
local and other jurisdictionally intrastate common carrier services to be
authorized to provide such services. The Company's operating subsidiaries and
affiliates are authorized as common carriers in California, Colorado,
Connecticut, Florida, Illinois, Indiana, Maryland, Massachusetts, Michigan,
Missouri, Nebraska, New Jersey, New York, Ohio, Pennsylvania, Rhode Island,
Texas, Washington and Wisconsin. The authority held by the Company's
subsidiaries and affiliates varies in the scope of the intrastate services
permitted, ranging from certifications in, for example, California, Florida,
Illinois, New York, Pennsylvania, Texas and Washington, which permit the
provision or resale of all dedicated and switched services, including basic
local exchange services, to the certificates in Ohio and Rhode Island, for
example, which only permit the provision of intrastate private line services.
TCG works continuously to expand its intrastate service authority to cover
additional jurisdictions and additional services, a process which the Company
believes will be simpler following the recent enactment of the 1996 Act, which
prohibits states from imposing any legal requirement that has the effect of
prohibiting any company from providing any telecommunications service. TCG has
filed or expects to file applications for authority to provide local exchange
service in all of its markets in which it does not have such authority. TCG
typically is not subject to price regulation or to rate of return regulation
for its intrastate services. In most states, TCG is required to file tariffs
setting forth the terms, conditions and prices for intrastate services. In
some jurisdictions, the Company's tariff can list a rate range or set prices
on an individual customer basis. The Company may be subject to additional
regulatory burdens in some states, such as quality of service requirements and
universal service contributions.
The incurrence of long-term indebtedness by TCGI is subject to approval by
the NYPSC and the NJBPU. In orders issued in 1993, both the NYPSC and NJBPU
authorized TCGI to incur long-term debt in amounts not to exceed $1 billion.
Additionally, in 1995, both the NYPSC and NJBPU authorized the Company's
subsidiary, TCNY, to incur long-term debt in an amount not to exceed an
additional $1 billion; provided, however, that the NYPSC has interpreted its
authorization as permitting TCGI and TCNY to incur long-term debt not to
exceed $1.75 billion in the aggregate. The Company has filed petitions with
the NJBPU to expand the borrowing authority of TCGI to $2 billion. The Company
has submitted a request to the NYPSC for confirmation of an
61
<PAGE>
opinion of the Office of the General Counsel of the NYPSC that the incurrence
of indebtedness pursuant to the Notes Offerings is authorized and that the
Notes, once issued, will be valid and enforceable or, in the alternative, for
authorization to incur up to $2 billion in long-term debt. While all past
petitions by TCGI to the NYPSC and NJBPU for authorization to incur
indebtedness have been approved routinely, there can be no assurance that the
Company's petitions before the NYPSC and the NJBPU will be similarly approved.
See "Risk Factors--Limitation on Incurrence of Debt Under New York and New
Jersey Regulatory Authorizations."
Local Government Authorizations
The Company may be required to obtain from municipal authorities street
opening and construction permits and other rights of way to install and expand
its digital networks in certain cities. In some cities, the Company's
affiliates or subcontractors may already possess the requisite authorizations
to construct or expand the Company's networks.
In some of the metropolitan areas where TCG provides network services, the
Company pays license or franchise fees based on a percent of gross revenues.
There can be no assurance that municipalities that do not currently impose
fees will not seek to impose fees in the future, nor is there any assurance
that, following the expiration of existing franchises, fees will remain at
their current levels. Under the 1996 Act, municipalities are required to
impose such fees on a nondiscriminatory basis. There can be no assurance,
however, that municipalities that currently favor the ILECs will conform their
practices in a timely manner or without legal challenges by the Company or
another CAP or CLEC.
If any of the Company's existing franchise or license agreements for a
particular metropolitan area were terminated prior to its expiration date and
TCG were forced to remove its fiber optic cables from the streets or abandon
its network in place, even with compensation, such termination could have a
material adverse effect on the Company's operation in that metropolitan area
and could have a material adverse effect on the Company.
Teleport Communications, a wholly owned subsidiary of TCNY, and the City of
New York entered into a Franchise Agreement, dated as of May 2, 1994 (the "New
York Franchise"), pursuant to which the City of New York granted to Teleport
Communications the non-exclusive right for a term of fifteen years to provide
Telecommunications Services (as defined in the New York Franchise) in the City
of New York. In addition to other payments specifically required by the New
York Franchise, the New York Franchise requires that Teleport Communications
pay to the City of New York as an annual franchise fee an amount based on a
percentage of Teleport Communications' gross revenues. The Company is
restricted under the terms of the New York Franchise from providing cable
service or mobile telecommunications services in the City of New York.
EMPLOYEES
As of March 31, 1996, the Company employed 1,559 full-time employees, none
of whom was represented by a union or covered by a collective bargaining
agreement. TCG believes that its relations with its employees are good. In
connection with the construction and maintenance of its digital networks and
the conduct of its other business operations, the Company uses third party
contractors, some of whose employees may be represented by unions or
collective bargaining agreements. TCG believes that its success will depend in
part on its ability to attract and retain highly qualified employees.
PROPERTIES
The Company leases network hub sites and other facility locations and sales
and administrative offices in each of the cities in which it operates
networks. During the years 1994 and 1995, rental expense for such facilities
and offices totaled $12.5 million and $16.4 million, respectively. The Company
owns no material real estate. Management believes that its properties, taken
as a whole, are in good operating condition and are suitable and adequate for
the Company's business operations. The Company currently leases approximately
200,000 square feet of space at The Teleport complex in Staten Island, New
York, where its corporate headquarters are located.
LEGAL PROCEEDINGS
The Company is a party to various claims and legal proceedings arising in
the ordinary course of business. The Company does not believe that such claims
or proceedings, individually or in the aggregate, will have a material adverse
effect on the Company's financial condition or results of operations.
62
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS
The executive officers of the Company and their respective ages and
positions are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert Annunziata....... 48 Chairman, President, Chief Executive Officer and
Chief Operating Officer
Robert C. Atkinson...... 45 Senior Vice President, Legal, Regulatory and
External Affairs
Joel D. Gross........... 41 Senior Vice President, Corporate Development
Alf T. Hansen........... 53 Senior Vice President, National Operations
J. Curt Hockemeier...... 47 Senior Vice President, Affiliate Services
Marvin L. Lindsey....... 55 Senior Vice President, Engineering and MIS
Stuart A. Mencher....... 57 Senior Vice President, National Sales and Marketing
John A. Scarpati........ 45 Senior Vice President and Chief Financial Officer
Kenneth A. Shulman...... 42 Senior Vice President, Technology
Maria Terranova-Evans... 40 Vice President and Controller
Wayne G. Fox............ 40 Vice President and Treasurer
John W. Thomson......... 48 Vice President and Secretary
W. Terrell Wingfield, 43 Vice President and General Counsel
Jr. ...................
</TABLE>
Robert Annunziata has been Chairman of the Board of the Company since 1990
and President and Chief Executive Officer since 1985. Prior to that, Mr.
Annunziata had been Senior Vice President and Chief Operating Officer since
1983. He has been a director of the Company since 1984. He has 29 years of
experience in the telecommunications industry, including 17 years in a variety
of operations and marketing positions with AT&T. He has served as President of
the World Teleport Association ("WTA") from 1987 to 1991 and remains a WTA
director. He currently serves on the New York State Governor's Advisory Board
on Telecommunications and the New York City Mayor's Alliance for International
Business.
Robert C. Atkinson has been Senior Vice President--Legal, Regulatory and
External Affairs since February 1990. Prior to that, he had been Vice
President--Regulatory and External Affairs since 1985. Prior to joining the
Company, Mr. Atkinson held various business development, regulatory and
government relations positions at ITT World Communications, Inc., Satellite
Business Systems, GTE Sprint and RCA Global Communications, Inc. He was a
founder and first President of the Association for Local Telecommunications
Services ("ALTS"), the CAP/CLEC trade association.
Joel D. Gross has been Senior Vice President--Corporate Development since
February 1993. Prior to that, he had been Vice President and Senior Securities
Analyst--Telecommunications for Donaldson, Lufkin & Jenrette Securities
Corporation since 1987 and Vice President and Senior Securities Analyst--
Telecommunications for Dean Witter since 1985. Prior to that, Mr. Gross worked
in a variety of management positions at AT&T.
Alf T. Hansen has been Senior Vice President--National Operations since
February 1993. Prior to that, he had been Vice President--National Operations
since March, 1990 and Vice President--Engineering and Operations since March
1989. Prior to joining the Company, Mr. Hansen worked at AT&T for 22 years in
various managerial positions.
J. Curt Hockemeier has been Senior Vice President--Affiliate Services since
January 1993. Prior to that, he had been Vice President and General Manager of
Cox Cable Oklahoma City since 1983.
Marvin L. Lindsey has been Senior Vice President--Engineering and MIS since
December 1993. Prior to that, he had been an independent telecommunications
consultant for various large international telecommunications companies since
July 1991. Mr. Lindsey was Service Vice President of AT&T's Business
63
<PAGE>
Communications organization from April 1987 to July 1991 and worked more than
28 years in various technical and operations positions with AT&T.
Stuart A. Mencher has been Senior Vice President--National Sales and
Marketing since February 1994. Prior to that, he had been Senior Vice
President--New York Operations since February 1993 and Vice President and
General Manager of TCNY since June 1992. From June 1991 until May 1992, Mr.
Mencher worked as an independent consultant in the international
telecommunications industry. From March 1987 to January 1990, Mr. Mencher
served as a Senior Vice President of MCI Telecommunications Corp., primarily
responsible for sales and marketing, and, from February 1990 to May 1991, he
served as Senior Vice President of the U.S. Distribution Division of
Motorola/Codex Corp. Prior to joining MCI, Mr. Mencher served in a variety of
senior sales and marketing management positions with AT&T Information Systems
following almost sixteen years of sales and marketing management experience
with IBM's Data Processing Division.
John A. Scarpati has been Senior Vice President and Chief Financial Officer
since March 1990. Mr. Scarpati has held various executive officer positions
since joining TCG in August 1984, including Vice President, Chief Financial
Officer, Treasurer and Controller. Mr. Scarpati is a director of Comcast CAP
of Philadelphia, Inc. He was a director of the Company in 1991. He is also a
Certified Public Accountant.
Kenneth A. Shulman has been Senior Vice President--Technology since August
1995. Prior to that, he had been Vice President of Applied Research and
Development since February 1994, Vice President of Technology and Network
Planning since October 1991, Director, Engineering and Technology since June
1990 and Director, Research and Technology since November 1989. Prior to
joining the Company in 1987, Mr. Shulman held positions as Director--Systems
Engineering at MCI International, as District Manager--Integrated Network
Evolution Planning at Bell Communications Research and as Supervisor--
Switching Systems Engineering at Bell Laboratories. Mr. Shulman is a director
of BizTel Communications, Inc.
Maria Terranova-Evans has been Vice President and Controller since February
1992. Mrs. Evans has held various managerial and executive financial positions
since joining TCG in September 1984 including accounting Manager, Controller,
and accounting Director/Controller. She is also a Certified Public Accountant.
Wayne G. Fox has been Vice President and Treasurer since June 1995. Prior to
that, he had been Vice President--Corporate Ventures since January 1993 and
Managing Director of Corporate Ventures since November 1992. Mr. Fox was a
director of the Company from April 1991 to November 1992. Prior to joining the
Company, he had been a Vice President and Director in the Mergers &
Acquisitions Group for Merrill Lynch Capital Markets. Mr. Fox is a director of
BizTel Communications, Inc.
John W. Thomson has been Vice President and Secretary since June 1984. Mr.
Thomson also served as General Counsel of TCG from June 1984 until February
1996, and as Senior Counsel for Merrill Lynch & Co., Inc. from 1981 to 1988.
W. Terrell Wingfield, Jr. has been Vice President and General Counsel since
March 1996. From March 1994 to February 1996, Mr. Wingfield served as Regional
Vice President--Central Region Operations, and from January 1993 to March 1994
as Counsel--Affiliate Services. Prior to that, Mr. Wingfield had been Senior
Counsel of Cox Enterprises, Inc. since 1989.
Messrs. Annunziata, Scarpati, Atkinson, Mencher and Hansen have entered into
employment agreements with the Company which are described below. See "--
Employment Agreements." The employment agreements with Messrs. Annunziata,
Scarpati, and Atkinson expire on December 31, 1998 and the employment
agreements with Messrs. Mencher and Hansen expire on December 31, 1999.
Messrs. Gross, Lindsey, Hockemeier and Shulman serve as officers pursuant to
employment agreements they have entered into with the Company. Mr. Gross'
agreement expires on June 30, 1998, and the agreements of Messrs. Lindsey,
Hockemeier and Shulman expire on June 30, 1999. All other executive officers
of the Company serve at the pleasure of the Board of Directors. Officers of
the Company are elected annually by the Board of Directors and hold office
until their successors are elected and qualified.
64
<PAGE>
DIRECTORS
The following persons (except for James Bruce Llewellyn and C.B. Rogers,
Jr.) are the directors of TCG. Following the execution of the Amended
Stockholders' Agreement and upon the consummation of the Offerings, the
Company anticipates that Messrs. Llewellyn and Rogers will be elected to the
Company's Board of Directors as independent directors.
Robert Annunziata has been Chairman of the Board since 1990 and a director
since 1984. See "--Executive Officers" for a description of Mr. Annunziata's
employment experience.
Brendan R. Clouston, age 43, has been a director since April 1996. Prior to
that time, he was a director of TCG from November 1992 to October 1995. Mr.
Clouston has been Executive Vice President of TCI since January 1994 and
President and Chief Executive Officer of TCI Communications, Inc. ("TCIC")
since October 1994. Prior to that, he had been Executive Vice President and
Chief Operating Officer of TCIC since March 1992 and Senior Vice President of
TCIC since December 1991. From 1987 through 1991, Mr. Clouston served in
various executive positions with United Artists Entertainment Company and its
predecessor United Artists Communications, Inc., most recently as Executive
Vice President and Chief Financial Officer. He is a director of C-Span, the
National Cable Television Association and TeleWest International.
Ronald H. Cooper, age 39, has been a director since February 1996. Mr.
Cooper has been Executive Vice President of Continental since 1995. Prior to
that, he had been Senior Vice President of Continental's Southern California
management region since 1988. He is a director of the New England Cable News
Channel.
John R. Dillon, age 54, has been a director since December 1991. Mr. Dillon
has been Senior Vice President and Chief Financial Officer of Cox Enterprises,
Inc. since 1990. He is also a director of Cox, Cox Enterprises, Inc. and the
Georgia Center for Advanced Telecommunications Technology.
Gerald W. Gaines, age 40, has been a director since November 1994. Mr.
Gaines has been Senior Vice President of Telephony Services for TCI since
1994. Prior to that, he had been President of GCG Inc., a management services
firm servicing the telecommunications industry, since 1991.
Nancy Hawthorne, age 45, has been a director since May 1993. Ms. Hawthorne
has been Senior Vice President and Chief Financial Officer of Continental
since 1992. Prior to December 1993, she had also been Treasurer for
Continental. Prior to December 1992, she was a Senior Vice President and the
Treasurer of Continental. She is a director of Optus Vision, Perini
Corporation and the New England Zenith Fund.
James O. Robbins, age 53, has been a director since April 1996. Mr. Robbins
has served as Chief Executive Officer of Cox since May 1994. Prior to that,
Mr. Robbins had been President of Cox since 1985. Mr. Robbins has been a
director of Cox since May 1994. Mr. Robbins is a member of the Executive
Committee of the National Cable Television Association.
Brian L. Roberts, age 36, has been a director since April 1996. Mr. Roberts
has been President of Comcast since 1990 and a director of Comcast since 1987.
He is also a director of Turner Broadcasting System, Inc., Comcast UK Cable
Partners Limited, Cablevision Investment of Detroit, Inc. and Storer
Communications, Inc. He is chairman as well as a member of the Executive
Committee of the National Cable Television Association.
Larry E. Romrell, age 56, has been a director since April 1996. Prior to
that time, he was a director of TCG from November 1992 to October 1995. Mr.
Romrell has been Executive Vice President of TCI since January 1994 and
President of TCI Technology Ventures since September 1994. Prior to that, he
had been Senior Vice President of TCIC from 1991 to October 1994. Mr. Romrell
previously held various executive positions with WestMarc Communications,
Inc., a subsidiary of TCI.
Lawrence S. Smith, age 48, has been a director since May 1993. Mr. Smith has
been Executive Vice President of Comcast since January 1996. Prior to that, he
had been Senior Vice President of Accounting and Administration for Comcast
for more than five years. Mr. Smith is a director of Comcast UK Cable Partners
Limited.
65
<PAGE>
David M. Woodrow, age 50, has been a director since November 1992. Mr.
Woodrow has been Senior Vice President of Broadband Services for Cox since
1994. Prior to that, he had been Senior Vice President of Operations for Cox
since 1989. He is a director of the Telecommunications Subcommittee of
CableLabs.
James Bruce Llewellyn, age 68, has been the Chairman of the Board of the
Philadelphia Coca-Cola Bottling Company since 1988. Prior to 1988, he was the
principal stockholder and chairman of the ABC television network affiliate in
Buffalo, New York and partner in the Washington, D.C. law firm of Dickstein,
Shapiro & Morin. He serves on the Board of Directors of Chase Manhattan
Corporation, Coors Brewing Company, Essence Communications, Inc. and Black
Shopping Network, Inc. From 1989 to 1994, he also served as the Chairman of
Garden State Cablevision, Inc.
C.B. Rogers, Jr., age 66, has been Chairman of Equifax, Inc. since 1992. He
was Chief Executive Officer of Equifax, Inc. from 1989 to January 1996. He is
Chairman of the Board of Directors and the Executive Committee of Equifax,
Inc. Mr. Rogers is a former Senior Vice President of International Business
Machines Corporation where he was employed for 33 years before joining
Equifax, Inc. in 1987. He also serves on the Board of Directors of Sears,
Roebuck & Co., Briggs & Stratton Corporation, Dean Witter Reynolds, Inc. and
Dean Witter, Discover & Co.
BOARD COMPOSITION
Directors are elected annually. The Amended Stockholders' Agreement provides
that the Board of Directors shall consist of 13 directors and that at each
annual meeting of the Company's stockholders at which directors are elected,
the holders of the Class B Common Stock (all of which is currently held by the
Cable Stockholders) will vote their shares in favor of nominees for director
to be designated as follows: (i) the holders of Class B Common Stock will
designate 10 nominees (with the right of a holder of Class B Common Stock to
designate one or more nominees depending on the percentage of the Class B
Common Stock held by it), (ii) the Board of Directors will designate the Chief
Executive Officer of the Company as a nominee and (iii) the Board of Directors
with the unanimous approval of the holders of Class B Common Stock that have
the right to designate nominees for director shall designate by unanimous
consent two individuals who are neither employed by nor affiliated with TCG or
any holder of Class B Common Stock as nominees for director. The holders of
the Class A Common Stock will not have the right, as a class, under the
Company's Amended and Restated Certificate of Incorporation or the Amended
Stockholders' Agreement to nominate any individuals for election to the Board
of Directors. Under the Amended Stockholders' Agreement, a holder of Class B
Common Stock generally is entitled to designate one director nominee for each
9% of the outstanding shares of Class B Common Stock held by it and its
affiliates. Pursuant to the Amended Stockholders' Agreement, subject to
certain exceptions, upon the consummation of the Stock Offerings, Continental
loses the right to designate any director nominees, and the right to designate
such director nominees will be reallocated among the other holders of Class B
Common Stock with each of Cox and TCI being entitled to designate an
additional director.
It is currently anticipated that directors who are officers of the Company
or of any of the holders of Class B Common Stock will receive no compensation
for their services as directors. Each director who is not an officer of the
Company or of any of the holders of Class B Common Stock is entitled to
receive an annual retainer of $25,000 (to be paid 50% in cash and 50% in Class
A Common Stock) and an additional $1,000 plus reasonable expenses for
attending each meeting of the Board of Directors. Each such director is also
entitled to be paid $1,000 annually for each committee of the Board of
Directors for which such director serves as chairman.
Messrs. Dillon, Robbins and Woodrow are designees of Cox. Messrs. Clouston,
Gaines and Romrell are designees of TCI. Messrs. Roberts and Smith are
designees of Comcast. Mr. Cooper and Ms. Hawthorne are designees of
Continental. Upon consummation of the Stock Offerings, each of Mr. Cooper and
Ms. Hawthorne will resign from the Board of Directors, and each of Cox and TCI
will designate an additional director. See "Certain Relationships and Related
Transactions--Amended Stockholders' Agreement."
66
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of TCG has established the Compensation and Benefits
Committee (the "Compensation Committee") to address and make recommendations
with respect to the compensation of executive officers and the establishment
of compensation and benefit plans. Messrs. Cooper, Dillon, Gaines and Smith
currently constitute the Compensation Committee.
AUDIT COMMITTEE
The Board of Directors has established an Audit Committee to meet with and
consider suggestions from members of management and of the Company's internal
audit staff, as well as with the Company's independent accountants, concerning
the financial operations of the Company. The Audit Committee also has the
responsibility to review audited financial statements of the Company and
consider and recommend the employment of, and approve the fee arrangements
with, independent accountants for both audit functions and for advisory and
other consulting services. Messrs. Dillon, Gaines, Hawthorne and Smith are the
members of the Audit Committee.
EXECUTIVE COMPENSATION
The following table shows compensation paid to, deferred or accrued for the
benefit of the Company's President, Chief Executive Officer and Chief
Operating Officer and each of the four remaining most highly compensated
executive officers (the "Named Executive Officers") for all services rendered
to TCG during the fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND ALL OTHER
PRINCIPAL COMPENSA-
POSITION(A) YEAR SALARY(B) BONUS TION (C)
----------- ---- -------------------- ---------
<S> <C> <C> <C> <C>
Robert Annunziata....................... 1995 $240,000 $185,580 $27,879
President, Chief Executive Officer and
Chief Operating Officer
John A. Scarpati........................ 1995 159,931 115,020 20,088
Senior Vice President and Chief
Financial Officer
Robert C. Atkinson...................... 1995 156,711 90,455 13,549
Senior Vice President
Alf T. Hansen........................... 1995 148,462 95,250 13,168
Senior Vice President
Stuart A. Mencher....................... 1995 146,284 96,200 10,337
Senior Vice President
</TABLE>
- --------
(a) As of the effective date of the Stock Offerings: (i) Mr. Annunziata will
be granted Par Options for 121,036 shares of Class A Common Stock and
Premium Options for 30,259 shares of Class A Common Stock; (ii) Mr.
Scarpati will be granted Par Options for 64,149 shares of Class A Common
Stock and Premium Options for 16,037 shares of Class A Common Stock; (iii)
Mr. Atkinson will be granted Par Options for 44,380 shares of Class A
Common Stock and Premium Options for 11,095 shares of Class A Common
Stock; (iv) Mr. Hansen will be granted Par Options for 34,294 shares of
Class A Common Stock and Premium Options for 8,573 shares of Class A
Common Stock; and (v) Mr. Mencher will be granted Par Options for 32,276
shares of Class A Common Stock and Premium Options for 8,069 shares of
Class A Common Stock. See "1993 Stock Option Plan" and "--Aggregated
Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values."
(b) Includes amounts deferred under the Teleport Communications Group Inc.
Retirement Savings Plan (the "Savings Plan") and Make-Up Plan of Teleport
Communications Group Inc. for the Retirement Savings Plan (the "Make-Up
Plan").
67
<PAGE>
(c) Includes amounts contributed by TCG to the Savings Plan, the Make-Up Plan
and the Basic and Supplemental Group Life Insurance Plans for each Named
Executive Officer as follows:
<TABLE>
<CAPTION>
SAVINGS MAKE-UP GROUP LIFE
PLAN PLAN PLAN
------- -------- ----------
<S> <C> <C> <C>
Mr. Annunziata................................... $ 6,750 $ 19,507 $ 1,622
Mr. Scarpati..................................... 8,063 11,521 504
Mr. Atkinson..................................... 5,438 7,651 460
Mr. Hansen....................................... 5,438 6,676 1,054
Mr. Mencher...................................... 4,125 4,900 1,312
</TABLE>
1993 STOCK OPTION PLAN
TCG established the Teleport Communications Group Inc. 1993 Stock Option
Plan (the "Option Plan") effective September 26, 1993. The Option Plan
provides for the issuance of incentive stock options ("ISOs") and non-
qualified stock options ("NQSOs") to key employees and consultants of TCG.
Under the Option Plan, an aggregate of 5,383,350 shares of Common Stock were
available for issuance, and as of December 31, 1995, 2,845,290 shares remained
available for additional grants. The Option Plan has been amended to increase
the number of shares available under the Option Plan to 7% of the aggregate
number of shares of Class A Common Stock and Class B Common Stock outstanding,
determined on a fully diluted basis as of the effective date of the Stock
Offerings. TCG intends to register the shares reserved under the Option Plan
with the SEC. The Option Plan provides for an adjustment of the number of
shares available for grant as options in the event of a stock split, stock
dividend, combination of shares, spin-off, spin-out or other similar change,
exchange or reclassification of the Common Stock at the discretion of the
Compensation Committee which administers the Option Plan. The Compensation
Committee has determined that the shares to be made available through the
options are shares of Class A Common Stock, and the Option Plan has been
amended accordingly. No individual may receive options (ISOs and NQSOs) for
more than 1,008,000 shares.
The Compensation Committee will be composed of two or more disinterested
members of the Company's Board of Directors (i.e., directors who have not
received an award of securities under the Option Plan during the year prior to
their appointment to the Compensation Committee). The Compensation Committee
currently consists of Messrs. Cooper, Dillon, Gaines and Smith.
The Compensation Committee has the discretion to determine which eligible
individuals will receive options, the number of shares to be covered by the
options, the exercise date of the options, whether the options should be ISOs
or NQSOs, and the terms and conditions of the options. The individuals
eligible for awards are key employees and consultants of TCG. The exercise
price of any option may not be less than the fair market value of the stock on
the date the option is granted. At the time an ISO is granted, the fair market
value of the Common Stock for which the ISO will vest in any year may not
exceed $100,000. Options awarded under the Option Plan generally are not
assignable or transferable except by the laws of descent and distribution. The
specific terms of any option awarded under the Stock Option Plan will be
reflected in a stock option agreement executed by TCG and the optionee. The
Compensation Committee has the discretion to amend an option to accelerate the
date upon which the option may be exercised. The Compensation Committee may
permit the exercise price to be paid in cash, through delivery of other shares
of Common Stock, by delivering irrevocable instructions to a financial
institution to deliver promptly to TCG the portion of sale or loan proceeds
sufficient to pay the exercise price, or through an election to have shares of
Common Stock withheld from the shares otherwise to be received by the
optionee.
Once vested, an option may remain exercisable until the earliest of: (i) 10
years from the date of grant, (ii) 30 days from the date on which the optionee
ceases to be employed by TCG or (iii) if the optionee's employment ceases by
reason of his or her death, disability, or retirement (under the terms of the
Savings Plan), the earlier of 10 years from the date of grant or one year
after the death, disability or retirement. If the optionee is terminated
without Cause or for Good Reason, after a Change in Control, all of his or her
options shall immediately vest and become exercisable for one year following
the Change in Control, but in no event beyond ten years from the
68
<PAGE>
date the option was granted. A "Change in Control" occurs if there is a direct
or indirect transfer of 50% or more of the legal or beneficial ownership of
the Common Stock, in one or more transactions, to any entity other than to any
of the Cable Stockholders or to any of their controlled subsidiaries. Cause
means the willful and continued failure by the optionee to substantially
perform his or her duties with TCG or the willful engaging by the optionee in
conduct that is materially injurious to TCG. "Good Reason" means a reduction
in compensation, a relocation of optionee's place of employment of more than
fifty miles or a reduction in the optionee's benefits. Optionees who are
subject to Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), must hold any options granted to them under the Option Plan
for at least six months from the date of the award. Only employees of TCG may
receive ISOs.
The Option Plan may be amended, suspended or terminated by the Board of
Directors of TCG in whole or in part at any time; provided that no such
amendment, suspension or termination of the Option Plan may adversely affect
the rights of or obligations to the optionees without such optionees' consent.
The Board of Directors of TCG also must obtain stockholder approval for any
change in the Option Plan that would materially increase the cost of the
Option Plan, materially increase the number of shares which may be issued
under the Option Plan or materially modify the requirements as to eligibility
for participation under the Option Plan.
The grant of an option under the Option Plan will not have any immediate
effect on the federal income tax liability of TCG or the optionee. If the
Compensation Committee grants an optionee a NQSO, then the optionee will
recognize ordinary income at the time he or she exercises the NQSO equal to
the difference between the fair market value of the Common Stock and the
exercise price paid by the optionee, and TCG will receive a deduction for the
same amount.
If the Compensation Committee grants an optionee an ISO then the optionee
generally will not recognize any taxable income at the time he or she
exercises the ISO but will recognize income only at the time he or she sells
the Common Stock acquired by exercise of the ISO. The optionee will recognize
income equal to the difference between the exercise price paid by the optionee
and the amount received for sale of the Common Stock, and such income
generally will be eligible for capital gain treatment. TCG generally is not
entitled to an income tax deduction for the grant of an ISO or as a result of
either the optionee's exercise of an ISO or the optionee's sale of the Common
Stock acquired through exercise of an ISO. However, if the optionee sells the
Common Stock within two years of the date of the grant to him or her of the
ISO or within one year of the date of the transfer to him or her of the Common
Stock following exercise of the ISO, the option is treated for federal income
tax purposes as if it were a NQSO: the income recognized by the optionee will
not be eligible for capital gain treatment and TCG will be entitled to a
federal income tax deduction equal to the amount of income recognized by the
optionee.
The Option Plan provides for put and call rights with respect to any Common
Stock acquired under the Option Plan so long as the Common Stock of TCG is not
listed on a national exchange or quoted on Nasdaq. An optionee has the right
to put the Common Stock he or she acquired under the Option Plan during the 60
days following the earlier of (i) his or her termination of employment or (ii)
the date the optionee has exercised all of his or her options (and met any
applicable holding period necessary to receive ISO treatment). TCG has the
right to call the Common Stock an optionee has acquired under the Option Plan,
upon thirty days' prior notice. The per share price paid for the Common Stock
under the put and call rights is based upon the appraised value of TCG as of
the preceding December 31.
The Compensation Committee has determined to grant certain executives and
employees awards of options to acquire an aggregate of 1,815,984 shares of
Class A Common Stock under the Option Plan as of the effective date of the
Stock Offerings in the form of (i) 10-year options for shares of Class A
Common Stock of the Company having an exercise price per share equal to the
price per share of the Class A Common Stock offered hereby (the "Stock
Offerings Price") (the "Par Options"); and (ii) 10-year options for shares of
Class A Common Stock having an exercise price per share equal to 135% of the
Stock Offerings Price per share (the "Premium Options").
69
<PAGE>
1992 UNIT APPRECIATION PLAN
TCG established the Teleport Communications Group Inc. 1992 Unit
Appreciation Plan (the "1992 UAP") effective January 1, 1992. The 1992 UAP
provides for the issuance to key employees of TCG and its affiliates of
incentive deferred compensation in the form of interests in the appreciation
in the fair market value of the Common Stock (a "Unit"). Each Unit has a value
equal to the fair market value of a share of Common Stock multiplied by 8.40
(as adjusted for dilutive events).
Under the 1992 UAP, Units were awarded to 26 employees of TCG. The awards
are subject to a five-year vesting schedule under which any employee who
terminated prior to December 31, 1994 would forfeit the entire award, any
employee who terminated between December 31, 1994 and December 30, 1995 would
be 60% vested, any employee who terminates between December 31, 1995 and
December 30, 1996 will be 80% vested and any employee who terminates on or
after December 31, 1996 will be fully vested in his or her Units.
Nevertheless, an employee who retires at normal retirement age would be fully
vested, an employee who retires at early retirement age would be 20% vested
for each full year elapsed since January 1, 1992 and any employee terminated
for Cause would forfeit all Units. Cause has the same meaning as in the Option
Plan. In the event an employee's employment is terminated without Cause or is
terminated for Good Reason following a Change in Control, the employee's
rights to his or her Units will immediately vest in full, and the employee
shall receive payment of his benefits within thirty days of the termination.
Good Reason has the same meaning as in the Option Plan. Change in Control
means the direct or indirect transfer of 50% or more of the legal or
beneficial ownership of TCG stock, in one or more transactions, to any entity
other than to Cox Enterprises, Inc. or TCI.
The value of the benefit to the employee under the 1992 UAP is equal to the
appreciation in the value of the Unit from January 1, 1992 until the earlier
of December 31, 1996, or the date the employee's employment with TCG
terminates. However, for those for whom the value of their Units is being
measured as of December 31, 1996, the value of their Units shall be the
greater of the value determined as described in the preceding sentence or the
average of the values on December 31, 1995 and December 31, 1996. The initial
base price of each Unit as of January 1, 1992 was $30.00, and the 1992 UAP
limits the amount of the appreciation to 200% of this value, or $60 for all
employees except Mr. Annunziata. Pursuant to Mr. Annunziata's employment
agreement, there is no limit on the appreciation he may receive under the 1992
UAP. See "--Employment Agreements." Benefits under the 1992 UAP are payable as
soon as practicable following the valuation of the Units, but not later than
March 31 following the end of the appreciation period. The Compensation
Committee has the discretion to pay benefits in cash or a combination of cash
and Common Stock. In the event TCG terminates the Plan, all Units will become
immediately 100% vested.
1993 UNIT APPRECIATION PLAN
TCG established the Teleport Communications Group Inc. 1993 Unit
Appreciation Plan (the "1993 UAP") effective January 1, 1993. The 1993 UAP
provides for the issuance to key employees of TCG and its affiliates of
incentive deferred compensation in the form of interests in the appreciation
in the fair market value of the Common Stock. The terms of the 1993 UAP are
substantially identical to the terms of the 1992 UAP, except that the initial
base price for each Unit as of January 1, 1993 is $34.85, the maximum benefit
per Unit is $69.70, and the vesting schedule and the maximum appreciation
period for a Unit is set forward one year. Under the 1993 UAP, Units were
awarded to 18 employees of TCG.
70
<PAGE>
The following table sets forth information as of December 31, 1995
concerning the value of stock option and UAP awards held by (i) each Named
Executive Officer, (ii) all executive officers as a group and (iii) all non-
executive officer employees as a group and concerning the value of stock
options awarded to the foregoing in 1996. No stock option or UAP awards were
made to any director who is not an executive officer. No stock options were
exercised by any Named Executive Officer in 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY- END(#)(A) FY-END($)(B)(C)
------------------------- -------------------------
NAME PLAN EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Robert Annunziata....... 1996 Par Options -- 121,036 -- $1,161,946
President, Chief 1996 Premium Options -- 30,259 -- 249,818
Executive Officer and 1993 Options 111,654 167,482 $ 961,072 1,441,610
Chief Operating Officer 1992 UAP 20,000 5,000 2,004,600 501,150
John A. Scarpati........ 1996 Par Options -- 64,149 -- $ 615,830
Senior Vice President 1996 Premium Options -- 16,037 -- 132,401
and Chief Financial 1993 Options 39,877 59,815 $ 343,240 514,861
Officer 1992 UAP 9,600 2,400 576,000 144,000
Robert C. Atkinson...... 1996 Par Options -- 44,380 -- $ 426,048
Senior Vice President 1996 Premium Options -- 11,095 -- 91,600
1993 Options 31,901 47,852 $ 274,592 411,889
1992 UAP 8,800 2,200 528,000 132,000
Alf T. Hansen........... 1996 Par Options -- 34,294 -- $ 329,222
Senior Vice President 1996 Premium Options -- 8,573 -- 70,779
1993 Options 27,116 40,674 $ 233,403 350,105
1992 UAP 5,200 1,300 312,000 78,000
Stuart A. Mencher....... 1996 Par Options -- 32,276 -- $ 309,850
Senior Vice President 1996 Premium Options -- 8,069 -- 66,618
1993 Options 20,736 31,104 $ 178,485 267,728
1992 UAP 5,200 1,300 312,000 78,000
Executive Officer 1996 Par Options -- 441,782 -- $4,241,107
Group.................. 1996 Premium Options -- 110,446 -- 911,842
1995 Options -- 5,782 -- 7,425
1994 Options -- 7,975 -- 40,815
1993 Options 302,264 588,977 $2,586,763 5,047,161
1993 UAP 2,820 1,880 196,554 131,036
1992 UAP 71,680 17,920 5,105,400 1,276,350
Non-Executive Officer
Employee Group......... 1996 Par Options(d) -- 1,030,613 -- $9,893,885
1996 Premium Options(d) -- 233,143 -- 1,924,828
1996 Options -- 25,122 -- 241,171
1995 Options -- 245,560 -- 315,334
1994 Options -- 268,967 -- 1,376,499
1993 Options -- 1,118,537 -- 9,594,144
1993 UAP 11,400 7,600 $ 794,580 529,720
1992 UAP 39,680 9,920 2,380,800 595,200
</TABLE>
- --------
(a) SARs reported in the above table represent Units under the 1992 and 1993
UAP Plans. Each such Unit represents 8.4 shares of Class A Common Stock
subject to the limits described in "--1992 Unit Appreciation Plan" and "--
1993 Unit Appreciation Plan." For the 1992 and 1993 UAP Plans,
exercisable/ unexercisable means vested/unvested. All options granted,
except 1996 options to the President and all Senior Vice Presidents become
exercisable over a five-year period, with 20% of the option award becoming
exercisable as of each anniversary of the date of grant. 1996 options
granted to the President and all Senior Vice Presidents become exercisable
over a five-year period, with 40% of the options becoming exercisable
71
<PAGE>
as of the second anniversary of the date of grant and an additional 20%
becoming exercisable as of each anniversary thereafter. All options granted
to employees at the Vice President level and below become exercisable over a
five-year period, with 60% becoming exercisable as of the third anniversary
of the date of grant and an additional 20% becoming exercisable on the
fourth and fifth anniversary of the date of grant. All UAP awards vest over
a five-year period, with 20% of the award becoming vested as of each
anniversary of the date of grant.
(b) There were two tranches of options awarded in 1993 with exercise prices of
$6.90 and $7.84, respectively. The exercise prices per share for 1994 and
1995 options are $10.39 and $14.22, respectively. The base prices per Unit
for 1992 and 1993 UAP awards are $30.00 and $34.85 respectively. All UAP
awards, other than those granted to Mr. Annunziata, are limited to an
appreciation of 200% of the base price of the award. As of December 31,
1995, the fair market value per share of Common Stock, as determined by an
independent appraiser, was $15.50. The value of unexercised options awarded
in 1993, 1994 and 1995 were determined by multiplying the number of shares
underlying such options by the difference between the fair market value per
share of Common Stock as of December 31, 1995 and the exercise price per
share under the option.
(c) Par Options will have an exercise price per share equal to the Stock
Offerings price per share of Class A Common Stock offered hereby (the
"Stock Offerings Price"), and Premium Options will have an exercise price
per share equal to 135% of the Stock Offerings Price. Other options issued
in 1996, but prior to the Stock Offerings, have an exercise price equal to
the Stock Offerings price. The values of all options reflected in the table
as granted in 1996 are determined in accordance with the Black Scholes
model of valuing stock options.
(d) Individual 1996 option awards have not been finally determined for the non-
executive officer employee group. The Compensation Committee has determined
to grant 1996 Par Options for 1,472,395 shares and 1996 Premium Options for
343,589 shares to all executive officers and other employees in the
aggregate, and has determined to grant 1996 Par Options for 441,782 shares
and 1996 Premium Options for 110,446 shares to the executive officer group.
EMPLOYEE STOCK PURCHASE PLAN
TCG has adopted the Teleport Communications Group Inc. Employee Stock
Purchase Plan ("the Stock Purchase Plan"), effective as of the effective date
of the Stock Offerings. The Stock Purchase Plan is administered by a committee
designated by the Board of Directors (the "ESP Committee"). Each eligible
employee will be given an option to purchase up to a number of shares of Class
A Common Stock equal to 10% of his or her compensation plus bonus paid for the
calendar year preceding the year the option is awarded, divided by the purchase
price per share under the option. The Board of Directors has authorized the
issuance under the Stock Purchase Plan of a maximum number of shares of Class A
Common Stock equal to the maximum number of shares for which all eligible
employees as of the Stock Offerings could elect to be granted options for the
first offering period. Options relating to 745,000 shares of Class A Common
Stock will be available for issuance under the Stock Purchase Plan. TCG intends
to register the shares reserved under the Stock Purchase Plan with the SEC.
Options granted under the Stock Purchase Plan will expire 12 months after the
grant date. In no case may an employee receive an option which would permit him
or her to purchase more than $25,000 of shares, valued as of the grant date,
for each calendar year in which the option is outstanding. Eligible employees
are those individuals employed by TCG as of the grant date. The price of the
shares offered to employees under the Stock Purchase Plan will be 85% of the
fair market value of the Class A Common Stock on the grant date. Several
payment options are available under the Stock Purchase Plan (i) employees may
authorize TCG to withhold from their pay each payroll period during the
12 months succeeding the grant date, an amount to be applied toward the
purchase of shares, (ii) employees may provide TCG with a lump sum cash payment
five days prior to the exercise date, (iii) employees may elect a cashless
exercise whereby they agree to sell immediately upon exercise, through
irrevocable broker instructions provided to TCG, such portion of their option
shares as is necessary to
72
<PAGE>
satisfy the exercise price and to promptly remit such sale proceeds to TCG and
(iv) subject to the consent of the ESP Committee, employees may direct TCG to
withhold from their option shares such shares as are necessary to satisfy the
exercise price.
Generally, the employee does not recognize taxable income, and TCG is not
entitled to an income tax deduction, on the grant or exercise of an option
under the Stock Purchase Plan. If the employee sells the shares acquired upon
exercise of his or her option at least one year after the date he or she
exercised the option and at least two years after the date the option was
granted to him or her, then the discount between the fair market value of the
shares on the date of grant and the exercise price will be recognized as
ordinary income and the appreciation over the fair market value as of the date
of grant will be treated as a capital gain. TCG will be entitled to an income
tax deduction corresponding to the amount of ordinary income recognized by the
employee. If the employee sells the shares acquired upon the exercise of his
or her option at any time within (i) one year after the date of exercise of
the option, or (ii) two years after the date the option was granted, then the
employee will recognize ordinary income in an amount equal to the excess, if
any, of (x) the lesser of the sale price or the fair market value on the date
of exercise, over (y) the exercise price of the option. TCG will generally be
entitled to a deduction in an amount equal to the amount of ordinary income
recognized by the employee.
The Stock Purchase Plan may be amended, suspended or terminated by the Board
of Directors at any time, provided no such amendment, suspension or
termination of the Stock Purchase Plan may adversely affect the rights of or
obligations to the participants without such participants' consent, and any
such amendment, suspension or termination will be subject to the approval of
TCG stockholders to the extent required by any federal or state law or
regulation of any stock exchange.
1996 EQUITY INCENTIVE PLAN
TCG has established the Teleport Communications Group Inc. 1996 Equity
Incentive Plan (the "Equity Incentive Plan"), effective as of the effective
date of the Stock Offerings, to provide opportunities for select employees of
TCG to participate in the appreciation in the value of TCG after the initial
public offering. It is anticipated that the Board of Directors will authorize
the issuance of up to 637,792 shares of Class A Common Stock under the Equity
Incentive Plan. TCG intends to register such shares with the SEC. The Equity
Incentive Plan is administered by the Compensation Committee which has the
full and discretionary power to award shares under the Equity Incentive Plan.
Under the Equity Incentive Plan, each employee who has an award under the
1992 UAP or the 1993 UAP, whether or not he has elected to defer receipt of
the payment of benefits thereunder pursuant to the Deferred Compensation Plan
(as defined herein), and who is currently employed by TCG as of the effective
date of the Stock Offerings has the right to waive his interest in all or any
portion of his benefit in the 1992 UAP or 1993 UAP. In exchange therefor, the
employee will be granted such number of shares under the Equity Incentive Plan
that are equal to the value of the portion of the employee's benefit so waived
(determined as of the effective date of the Stock Offerings) multiplied by
120%, and divided by the initial public offering price per share of Class A
Common Stock. No employee may receive more than 54,000 shares under the Equity
Incentive Plan. A share under the Equity Incentive Plan is equivalent in value
to one share of Class A Common Stock. Thus, the value of the benefit payable
under the Equity Incentive Plan will increase with any appreciation of Class A
Common Stock. Messrs. Scarpati, Atkinson and Hansen intend to waive 25%, 85%
and 100% of their UAP benefits, respectively, in exchange for shares under the
Equity Incentive Plan. Mr. Mencher has not yet indicated the amount of his UAP
benefits, if any, which he may waive; his election is not due until July 1,
1996. Mr. Annunziata is not eligible to participate in the Equity Incentive
Plan.
Shares under the Equity Incentive Plan granted in exchange for 1992 UAP
benefits are subject to a two-year vesting schedule, with 70% of the shares
becoming vested as of the first anniversary of the Stock Offerings and the
remaining 30% becoming vested as of the second anniversary of the Stock
Offerings. Shares granted in exchange for the 1993 UAP benefits are subject to
a three-year vesting schedule, with 70% of the shares becoming vested as of
the second anniversary of the Stock Offerings and the remaining 30% becoming
vested as
73
<PAGE>
of the third anniversary of the Stock Offerings. A participant shall become
100% vested in his shares in the event of death, total disability or a Change
in Control. Change in Control has the same meaning as in the Option Plan. In
the event a participant's employment is terminated for Cause, his interest in
each and every share awarded under the Equity Incentive Plan shall be
forfeited. Termination for Cause has the same meaning under the Equity
Incentive Plan as it does under the 1992 UAP and 1993 UAP.
Shares under the Equity Incentive Plan will be paid to a participant either
in one lump sum cash payment or in shares of Class A Common Stock, as
determined in the discretion of the Compensation Committee, on the payment
date elected by the participant at the time he elects to participate in the
Equity Incentive Plan. In general, the payment date elected may be the last
business day of any calendar quarter during the period commencing June 30,
1998 and ending June 30, 2001.
RETIREMENT SAVINGS PLAN
TCG established the Savings Plan, a defined contribution plan which includes
a qualified cash or deferred arrangement under Section 401(k) of the Code,
effective January 1, 1992. Employees of TCG who have completed one year of
employment are eligible to participate in the Savings Plan, subject to certain
exceptions. An employee participating in the Savings Plan may elect to defer
and have contributed to the Savings Plan an amount up to 15% of such
employee's eligible compensation, on a pre-tax basis. The Savings Plan
provides for TCG to contribute a matching contribution to a participating
employee's account under the Savings Plan in an amount equal to 50% of the
amount of eligible compensation deferred and contributed to the employee's
account, up to 6% of such employee's eligible compensation, provided that the
maximum amount of such contribution shall not exceed $1,500 per participant
per year. In addition, the Savings Plan also provides for TCG to contribute to
each participating employee's account under the Savings Plan an amount equal
to a certain percentage of such participant's eligible compensation, which
percentage, limited to a maximum of 8%, is based on the employee's years of
employment with TCG and annual salary. Such contributions are allocated solely
to participating employees who have attained age twenty-one. TCG contributions
pursuant to the Savings Plan are subject to a five-year vesting schedule,
based upon each participating employee's years of employment with TCG.
Matching contributions vest at the rate of 20% per year of service such that
an employee's account will be fully (100%) vested after five years of service.
Other contributions made by TCG are subject to a five-year cliff vesting
schedule, with 0% vested for an employee with less than five years of service
and 100% vested for an employee with five or more years of service.
MAKE-UP PLAN FOR THE RETIREMENT SAVINGS PLAN
TCG established the Make-Up Plan, effective January 1, 1993. The President
of TCG and Senior Vice Presidents and Vice Presidents who are eligible to make
pre-tax salary deferrals to the Savings Plan are eligible for the Make-Up
Plan. The Make-Up Plan is an unfunded, non-qualified deferred compensation
plan which provides benefits to participants equal to those which would have
been provided under the Savings Plan but for the imposition of certain limits
under the Code and under the terms of the Savings Plan. For all participants,
the Make-Up Plan provides an additional matching contribution equal to the
amount which would have been contributed under the Savings Plan for such
participants, but for the $1,500 cap on matching contributions under the
Savings Plan. Senior Vice Presidents and the President of TCG are also
eligible for additional employer contributions under the Make-Up Plan equal to
the amount of employer contributions which would have been contributed to the
Savings Plan on their behalf, but for the limitation imposed by the Code on
compensation which may be taken into account in determining employer
contributions under the Savings Plan.
DEFERRED COMPENSATION PLAN
TCG established the Deferred Compensation Plan of Teleport Communications
Group Inc. (the "Deferred Compensation Plan"), effective as of January 1,
1996, to allow employees with UAP awards the opportunity to defer the payment
of such awards to a date later than that provided under the terms of the
awards. During each January, beginning with January 1996, with respect to any
UAP award that will become payable in the succeeding calendar year, a UAP
participant may elect to defer the payment of any portion of such UAP award,
74
<PAGE>
in increments of 25%, for a period of one to five years or until his
termination of employment; provided, however, that the Deferred Compensation
Plan's Administrative Committee must approve any deferral beyond five years.
Notwithstanding any election made by a participant, all amounts under the
Deferred Compensation Plan shall be paid as of the participant's termination
of employment. Payments under the Deferred Compensation Plan will be paid in a
lump sum.
The portion of any UAP award deferred under the Deferred Compensation Plan
will be contributed to a grantor trust established by TCG and shall be
invested thereunder in the same funds and in the same proportion that
contributions to the participant's account under the Savings Plan are
invested. The assets of the trust remain general assets of TCG, and the rights
of a participant in the Deferred Compensation Plan to the assets of the trust
are no greater than the rights of any other general unsecured creditor of TCG.
EMPLOYMENT AGREEMENTS
Robert Annunziata has entered into an employment agreement with TCG, dated
as of December 18, 1992 and as amended. The agreement provides that Mr.
Annunziata will be employed as Chairman of the Board of Directors, President
and Chief Executive Officer of TCG. The agreement establishes a base salary to
be paid to Mr. Annunziata each year which is subject to annual adjustment by
the Compensation Committee and increased at least 6% per year. For 1995, Mr.
Annunziata's base salary was $240,000. In addition, he is entitled to annual
bonuses in the range of 0% to 90% of his base salary, subject to the
attainment of certain performance objectives. The amount of the bonus is
determined at the discretion of the Compensation Committee. If the annual
goals set by the Compensation Committee are achieved, the target bonus is 60%
of Mr. Annunziata's base salary. Pursuant to the agreement, Mr. Annunziata
received 25,000 units under the Company's 1992 UAP. Mr. Annunziata would be
entitled to receive an award of comparable or greater economic opportunity
under any future unit appreciation plan adopted by TCG. In connection with
awards under the 1992 UAP, the agreement provides that the maximum
appreciation of 200% per Unit does not apply to Units awarded to him. In the
event of a direct or indirect transfer of 50% or more of the beneficial
ownership of the capital stock of TCG in one or more transactions to any
entity other than any of the Cable Stockholders and their respective
controlled subsidiaries (a "Change in Control"), all Units granted to Mr.
Annunziata under the 1992 UAP will fully vest and become payable. If TCG
terminates Mr. Annunziata's employment without Cause or if Mr. Annunziata
terminates his employment for Good Reason or within six months of a Change in
Control, then Mr. Annunziata is entitled to receive: (i) the continued payment
of his base salary, plus an annual bonus equal to no less than 50% of his base
salary, for a period of 30 months, (ii) immediate and full vesting of all
forms of deferred, contingent long-term compensation, including all UAP
awards, (iii) the greater of the options vested under the terms of his stock
option award as of the termination date or options for 89,722 shares of Common
Stock in the event of resignation for Good Reason or, in the event of
termination without Cause, of options for 167,481 shares of Common Stock and
(iv) the continuance of all benefits and perquisites for 30 months, or if
earlier, until the date Mr. Annunziata commences other employment providing
comparable benefits. Mr. Annunziata may be terminated for Cause if he
materially breaches his employment agreement by acting or willfully failing to
act with results that are materially and demonstrably injurious to the
business of TCG. Mr. Annunziata may terminate his employment for Good Reason
if (i) without his prior written consent, there is a material reduction in his
functions, duties and responsibilities as Chief Executive Officer, (ii)
without his consent, his office is relocated outside the Northeast Corridor or
(iii) there is a material breach of his employment agreement by TCG. If Mr.
Annunziata's employment agreement terminates for any reason he (or his estate)
will have the right to put any stock of TCG that was paid to him under any UAP
within 30 days after such termination at the appraised value of such stock
under such UAP. Mr. Annunziata has agreed not to compete with TCG for the term
of his employment with TCG and for an additional period of two years
thereafter in the local telecommunications business.
Each of the other Named Executive Officers also has entered into an
employment agreement with TCG, dated as of July 12, 1994. The terms of each of
these four agreements are substantially identical. The terms of the employment
agreements of Messrs. Scarpati and Atkinson expire on December 31, 1998, and
the employment agreements of Messrs. Hansen and Mencher expire on December 31,
1999. Each agreement
75
<PAGE>
specifies the base salary to be received by the executive, and provides for
annual adjustment of the base salary by the CEO, with the approval of the
Compensation Committee, provided that the annual increase must be at least 5%.
The following base salaries were provided for 1995: Mr. Scarpati--$159,931,
Mr. Atkinson--$156,711, Mr. Mencher--$146,284 and Mr. Hansen--$148,462. In
addition, each executive is entitled to annual bonuses in the range of 0% to
60% of his base salary, subject to the attainment of certain performance
objectives established by the CEO with the approval of the Compensation
Committee. The amount of the bonus is determined at the discretion of the
Compensation Committee. If the annual goals set by the Compensation Committee
are achieved, the target bonus must be at least 40% of the executive's base
salary. If TCG terminates the executive's employment without Cause or if,
following a Change in Control, the executive gives TCG at least six months
notice that he is terminating employment, then the executive is entitled to
receive (i) annual payments equal to his base salary, plus an annual bonus
equal to no less than 30% of his base salary, plus benefits, through the end
of the term of the agreement, but for no less than six months and (ii)
continued employment service credit, for the remaining term of the employment
agreement, for purposes of vesting under all forms of deferred compensation
and long-term incentive plans. The executive may be terminated for Cause if he
materially breaches his employment agreement by acting or willfully failing to
act with results that are materially and demonstrably injurious to the
business of TCG. With certain exceptions, a Change in Control is deemed to
occur if there is a direct or indirect transfer of 50% or more of the legal or
beneficial ownership of stock of TCG, in one or more transactions, to any
entity other than to any of the Cable Stockholders or any of their controlled
subsidiaries. Each agreement provides that during the six-month period
following his termination for any reason, the executive shall have the right
to require TCG to purchase from him any stock of TCG that he owns, at the then
appraised value or, if he terminates on or after July 1 of any year, at the
appraised value as of the following December 31. Each executive has agreed not
to compete with TCG during the term of his employment or while he is receiving
the severance benefits described above.
76
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Recapitalization. Pursuant to the Reorganization Agreement, TCG and the
Cable Stockholders will effect the Reorganization, consisting of (i) the
acquisition by TCG of TCG Partners, (ii) the acquisition by TCG of additional
interests in the Local Market Partnerships, (iii) the contribution to TCG of
certain indebtedness owed by TCGI to the Cable Stockholders, (iv) the
amendment and restatement of the Certificate of Incorporation of TCGI, (v) the
amendment and restatement of the existing Stockholders' Agreement among TCGI
and its stockholders and (vi) redemption by the Company of 7,807,881 shares
(7,975,738 shares if the over-allotment options of the Underwriters of the
Stock Offerings are exercised in full) of Class B Common Stock held by a
subsidiary of Continental. See "The Reorganization."
Amended Stockholders' Agreement. In connection with the Reorganization, TCG
and the Cable Stockholders will enter into the Amended Stockholders'
Agreement. See "The Reorganization." The following summary description of the
Amended Stockholders' Agreement does not purport to be complete and is
qualified in its entirety by reference to the text of the Amended
Stockholders' Agreement, which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. Furthermore, there can be no
assurance that the Cable Stockholders will not cause the Amended Stockholders'
Agreement to be amended, modified or terminated or cause TCG to waive any
provision of the Amended Stockholders' Agreement.
The Amended Stockholders' Agreement provides that at each annual meeting of
the Company's stockholders at which directors are elected, the holders of the
Class B Common Stock will vote their shares in favor of nominees for director
to be designated as follows: (i) the holders of Class B Common Stock will
designate ten nominees (with the right of a holder of Class B Common Stock to
designate one or more nominees depending on the percentage of the Class B
Common Stock held by it), (ii) the Board of Directors of the Company will
designate by unanimous consent the Chief Executive Officer of the Company as a
nominee and (iii) the Board of Directors with the unanimous approval of the
holders of Class B Common Stock that have the right to designate nominees for
director shall designate two individuals who are neither employed by nor
affiliated with TCG or any holder of Class B Common Stock as nominees for
director. Under the Amended Stockholders' Agreement, a holder of Class B
Common Stock generally is entitled to designate one director nominee for each
9% of the outstanding shares of Class B Common Stock held by it and its
affiliates. The holders of the Class A Common Stock will not have the right,
as a class, under the Company's Amended and Restated Certificate of
Incorporation or the Amended Stockholders' Agreement to nominate any
individuals for election to the Board of Directors. The ability of Continental
Teleport (or its successor) to designate any directors after the earlier of
the consummation of its merger with U S WEST, Inc. or of the Stock Offerings
is limited in accordance with the terms of the Amended Stockholders'
Agreement. If Continental Teleport is not permitted to designate one or more
directors pursuant to certain contingencies described in the Amended
Stockholders' Agreement, the ability of the other holders of Class B Common
Stock to designate directors would be subject to adjustment in accordance with
the terms of the Amended Stockholders' Agreement.
The Amended Stockholders' Agreement prohibits any transfer of Class B Common
Stock held by the parties thereto, unless expressly permitted under the terms
thereof. Parties to the Amended Stockholders' Agreement have certain rights of
first offer and rights of first refusal thereunder with respect to proposed
sales of the Class B Common Stock.
Each holder of Class B Common Stock has the right to sell all or a part of
its Class B Common Stock upon receiving a bona fide offer from an unaffiliated
third party, subject to giving notice to the other holders of Class B Common
Stock who have designated at least one director, which notice shall contain an
offer to sell such stock to such other holders of Class B Common Stock on the
terms and conditions set forth in the offer from the third party. Subject to
certain limitations, the non-selling holders of Class B Common Stock have the
right to purchase pro rata all, but not less than all, of the Class B Common
Stock offered. If the non-selling holders of Class B Common Stock do not
purchase all of the Class B Common Stock offered, the offering holders of
Class B Common Stock may sell the Class B Common Stock to the third party on
the terms contained in the offer made to the other holders of Class B Common
Stock. However, unless the amount of Class B Common Stock is
77
<PAGE>
sufficient to entitle the transferee to designate a nominee for director under
the Amended Stockholders' Agreement (i.e., the total percentage of Class B
Common Stock that would be held by the transferee and certain of its
affiliates is at least nine percent) and the transferee agrees to become a
party to the Amended Stockholders' Agreement, any Class B Common Stock
included in the stock being sold must be converted to Class A Common Stock.
If any party desires to convert Class B Common Stock to Class A Common
Stock, it must first offer that stock to the other holders of Class B Common
Stock who have designated at least one director. If such other holders do not
elect to buy such stock, then such stock can be converted to Class A Common
Stock and sold by the selling stockholder free of restrictions under the
Amended Stockholders' Agreement. See "Description of Capital Stock."
The parties to the Amended Stockholders' Agreement will have demand
registration rights on the following terms: (i) no demand may be made for the
first six months after the Offerings, (ii) such parties collectively will have
the right to make one demand per year (with any such party having the right to
make such demand), (iii) the amount which can be sold pursuant to any demand
may be limited if the managing underwriter selected by the Company with the
approval of the party to the Amended Stockholders' Agreement that has included
the largest number of shares in the registration advises the Company that
marketing factors require a limitation of the number of shares to be
underwritten and (iv) if the amount determined pursuant to clause (iii) is
less than the aggregate amount which such parties want to sell in such
offering, each such party will have the right to sell its pro rata portion of
the maximum amount; provided, however, that during the period ending 42 months
after the date of the Offerings, if Continental is subject to a regulatory
requirement as a result of its merger with U S WEST, Inc. to reduce or
eliminate its investment in the Company, Continental will have a priority
claim in specified percentages on the amount specified in clause (iii) above
and the balance will be split proportionately among the other stockholders
which are a party to the Amended Stockholders' Agreement. The parties to the
Amended Stockholders' Agreement participating in the registration must
reimburse the Company for its out-of-pocket expenses incurred in connection
with any such demand registration.
The Amended Stockholders' Agreement will terminate when the aggregate voting
power of the Class B Common Stock represents less than 30% of the aggregate
voting power of all outstanding Common Stock.
Eastern TeleLogic Corporation and Comcast. In connection with the May 1993
issuance of TCG's stock to Comcast and Continental, TCG purchased from
Comcast, for approximately $6.5 million, 49% of the issued and outstanding
stock of Comcast CAP of Philadelphia, Inc. ("Comcast CAP"), which owns 51% of
the outstanding stock of Eastern TeleLogic Corporation ("ETC") on a fully-
diluted basis. ETC is a competitive access provider in the Philadelphia
metropolitan area. In connection with its purchase of stock of Comcast CAP,
TCG entered into a stockholders' agreement with Comcast Corporation and
Comcast CAP providing for, among other things, the corporate governance of
Comcast CAP, stock transfer restrictions, rights of first refusal and
preemptive rights.
Commencing on October 1, 1996, the minority shareholders of ETC will have
the right to require ETC to buy their shares, which right will be exercisable
during each 90-day period commencing on October 1 of each year. Similarly,
commencing on October 1, 1997, ETC will have the right to require the minority
shareholders of ETC to sell their shares to ETC, which right will be
exercisable during the 90-day period commencing on October 1 of each year. If
ETC does not make the required payment after the exercise of any put or call
right, the minority shareholders have the right to force a sale of the stock
or assets of ETC and may gain voting control of ETC. The purchase price to be
paid by ETC to the minority shareholders of ETC for the purchase of their
shares in ETC upon the exercise of the put or call right, which price would be
based on the fair market value of such shares, on a fully-diluted basis, as
determined by agreement among the parties or, in the absence of such
agreement, by the determination of independent investment banking firms.
In April 1996, TCG and Comcast entered into an agreement pursuant to which
TCG agreed that, upon exercise of put rights by the minority shareholders of
ETC, or in the event of any other sale (which must be approved by TCG) by the
minority shareholders of ETC to Comcast, TCG would acquire, on terms and for a
price yet to be negotiated (which must be approved by TCG), all of the direct
and indirect interests in ETC not
78
<PAGE>
currently owned by TCG. Any agreement between Comcast CAP or Comcast and the
minority shareholders of ETC regarding the acquisition of their shares must be
on terms and conditions acceptable to TCG. At the present time, Comcast has
not requested that TCG approve any agreement to purchase the interests of the
minority shareholders of ETC. In addition, since neither the put nor the call
periods have commenced under the ETC stockholders agreement, the valuation
mechanisms under that agreement have not been invoked. As a result, the
Company cannot predict what value would be determined for purposes of making
any put or call payments. While the Company cannot predict whether it will
acquire such interests or the price of such interests, the Company estimates
that the cost of acquiring all of the interests in ETC not currently owned by
it would exceed $100 million. In addition, in its agreement with Comcast, TCG
agreed to provide to Comcast, after acquisition of the ETC interests described
above, certain services on customary terms in the Philadelphia area, and
Comcast agreed to utilize exclusively TCG's wireline telecommunications
services in the Philadelphia area, subject to certain qualifications.
Operator Managed Ventures Services Agreements with Cox. Pursuant to the
terms of three Operator Managed Ventures Services Agreements between TCG and
certain affiliates of Cox, TCG has options to acquire up to a 35% interest in
the competitive access businesses conducted by such affiliates of Cox in New
Orleans, Oklahoma City and the Hampton Roads, Virginia area, respectively. To
the extent the Cox competitive access provider has derived revenue from any
contract entered into by TCG as a result of sales efforts engaged in by TCG on
behalf of such Cox operations, the purchase price shall be the ratio of the
annual TCG generated revenue to total annual revenue of the Cox operation
multiplied by the book value of the assets of the Cox operation. If such ratio
is less than 35%, TCG may purchase the balance, up to 35%, of that Cox
operation for the fair market value (as determined in accordance with the
Operator Managed Ventures Services Agreements) of the operation. There is no
cap or maximum purchase price under the terms of the Operator Managed Ventures
Services Agreements. The Company expects the fair market value of such Cox
operations to exceed the book value of the assets, so the maximum purchase
price TCG would pay for 35% of such operations is 35% of the fair market
value. If the formula required payment in excess of 35% of fair market value,
the Company would not exercise its option. Since the option to acquire the
Hampton Roads operation does not mature until November 1996, and the options
to acquire the New Orleans and Oklahoma City operations do not mature until
1999, the Company cannot predict whether it will acquire such interests or the
price of such interests, but would estimate that the maximum purchase price of
35% of the fair market value of such Cox operations today would not exceed $20
million.
TCG also provides management services to certain affiliates of Cox under
these agreements, including billing services, network monitoring and accounts
receivable functions. Under the terms of the agreements, TCG retains 8% of the
collected revenues from Cox customers as a royalty fee. Royalty fees recorded
from Cox were approximately $98,000, $27,000 and $0 for 1995, 1994 and 1993,
respectively, and are included in management and royalty fees in the
statements of operations. Included in accounts receivable-trade are
approximately $262,000 and $99,000 at December 31, 1995 and 1994,
respectively, for amounts owed by Cox customers.
Fidelity. In 1987, a subsidiary of TCG and a subsidiary of FMR Corp. created
a joint venture, Teleport Communications Boston. Pursuant to a series of
transactions consummated in October 1994, TCG acquired from a subsidiary of
FMR Corp. the 50% partnership interest in Teleport Communications Boston that
it did not own. As part of the transaction, TCG reimbursed the FMR Corp.
subsidiary for approximately $7 million of capital contributions paid by that
subsidiary to Teleport Communications Boston. The purchase price for the
partnership interest was $30.5 million which was paid by TCG's purchase of
stock of Continental valued at $30.5 million, and the delivery of that stock
to the FMR Corp. subsidiary. The purchase price for the purchase of the
Continental stock was paid by TCG's delivery to Continental of a promissory
note in the amount of $30.5 million, bearing interest at the rate of 7 5/16%
per annum. The entire principal amount of the promissory note, plus accrued
interest in the amount of $105,320, was paid in November 1994. The promissory
note was cancelled upon such payment, and no amounts of principal or interest
remain outstanding thereunder. As a result of those transactions, Teleport
Communications Boston became a wholly owned subsidiary of TCG.
Residential Telephony Trials. At the request of certain cable television
operators, including Cable Stockholders, TCG is participating in residential
telephony trials in Arlington Heights, Illinois, Hartford, Connecticut and the
San Francisco Bay area. Although there are no agreements in effect, TCG
expects to be
79
<PAGE>
fully reimbursed for its costs incurred in connection with these trials. At
March 31, 1996, the amount due to TCG for reimbursement was $644,100, and is
included in miscellaneous accounts receivable.
Sales of Fiber Optic Cable. In 1994, TCG entered into agreements with
providers of fiber optic cable that contained discounts for certain volumes of
purchases. The agreements permitted TCG to purchase cable on behalf of
affiliates, including minority partners in the local market partnerships, and
to apply those purchases toward the volume discounts. In 1995, TCG purchased
cable on behalf of certain of the Cable Stockholders which it then sold to
them at cost. At March 31, 1996, the amount receivable from the owners was
approximately $3.4 million. TCG has purchased cable on behalf of unaffiliated
parties as well.
CAP Assets. In connection with the formation of the Local Market
Partnerships in Chicago, Dallas, Pittsburgh and Seattle, TCI has contributed
to the capital of such Local Market Partnerships certain businesses it owned
which provided local telecommunications services in the service area of such
Local Market Partnerships, in exchange for partnership interests in such Local
Market Partnerships. None of such businesses had a value in excess of $20.0
million, and each was valued based on the cost thereof. The agreed value of
the assets TCI contributed to TCG Chicago was approximately $4 million, for
which it received a 7.4% partnership interest (in addition to the 26.6%
interest it received for cash). The agreed value of the assets TCI contributed
to TCG Dallas was approximately $3.3 million, for which it received a 14.3%
partnership interest (in addition to the 40.8% interest it received for cash).
The agreed value of the assets TCI contributed to TCG Pittsburgh was
approximately $19 million, for which it received a 60% partnership interest.
The agreed value of the assets TCI contributed to TCG Seattle was
approximately $3.3 million, for which it received a 10.8% partnership interest
(in addition to the 32.0% interest it received for cash).
Facilities Arrangements. Affiliates of the Cable Stockholders have entered
into two types of arrangements with Local Market Partnerships and TCG pursuant
to which fiber optic and cable transmission facilities are made available to
them. Pursuant to the terms of one type of such arrangements, providing an
indefeasible right of use, the compensation payable by a Local Market
Partnership and TCG is based on the affiliate's cost of construction of such
facilities, generally payable over five years. For the year ended December 31,
1995, payments, representing principal plus interest, made to TCI, Cox,
Continental and Comcast pursuant to facilities lease arrangements with Local
Market Partnerships and TCG were approximately $8.3 million, $3.2 million,
$2.4 million and $394,000, respectively. For the year ending December 31,
1996, the approximate annual payments representing both principal and interest
expected to be made to TCI, Cox, Continental and Comcast pursuant to such
arrangements with the Local Market Partnerships and TCG are $10.3 million,
$4.8 million, $2.9 million and $1.9 million, respectively. Under the terms of
the other type of such arrangements, the Local Market Partnership or TCG
agrees to provide, install and maintain all customer premise and nodal
electronics equipment and provide 24-hour electronics maintenance and
monitoring with respect to the cable transmission service. The compensation
payable by such Local Market Partnership or TCG is based on a percentage of
the total monthly recurring amount which such Local Market Partnership or TCG
bills to its customers which are served through such affiliate's cable
transmission service. For the year ended December 31, 1995, the approximate
payments made to TCI and Continental pursuant to such arrangements with the
Local Market Partnerships and TCG were $414,000 and $597,000, respectively.
The Company believes that the terms of these arrangements are favorable to the
Company and were negotiated on an arm's-length basis.
The Company believes that the terms, taken as a whole, of the transactions
described under the headings "Eastern TeleLogic Corporation and Comcast,"
"Operator Managed Ventures Services Agreements with Cox," "Fidelity,"
"Residential Telephony Trials," "Sales of Fiber Optic Cable," "CAP Assets" and
"Facilities Arrangements," were no less favorable to the Company than could
have been obtained from unaffiliated parties.
80
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides information, as of March 31, 1996, and as
adjusted to reflect the Reorganization, the purchase by the Company of
7,807,881 shares of Class B Common Stock held by Continental and the sale of
23,500,000 shares of Class A Common Stock by TCG in the Stock Offerings, with
respect to the beneficial ownership of the Company's Common Stock by (i) each
person known by TCG to be the beneficial owner of more than 5% of any class of
the Company's voting securities, (ii) the Named Executive Officers and (iii)
all directors and executive officers as a group. Except as otherwise
indicated, the address of each holder is the same as the Company. Each holder
has sole voting and investment power with respect to all shares of stock
listed as owned by such person.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK PERCENT OF VOTE
------------- --------------- OF ALL CLASSES
NUMBER OF NUMBER OF OF COMMON
NAME SHARES % SHARES % STOCK
---- --------- --- ---------- ---- ---------------
<S> <C> <C> <C> <C> <C> <C>
Cox(1)(6).................. -- -- 39,087,594 29.7% 29.2%
TCI(2)(6).................. 638,862 2.6% 48,779,388 37.1% 36.5%
Comcast(3)(6).............. -- -- 25,622,058 19.5% 19.1%
Continental(4)(6).......... -- -- 17,953,449 13.7% 13.4%
Robert Annunziata(7)....... 111,654 * -- -- *
John A. Scarpati(7)........ 39,877 * -- -- *
Robert C. Atkinson(7)...... 31,901 * -- -- *
Alf T. Hansen(7)........... 27,116 * -- -- *
Stuart A. Mencher(7)....... 20,736 * -- -- *
All directors and executive
officers as a group
(13 persons, including
those named above)(5)(7).. 302,264 1.2% -- -- *
</TABLE>
- --------
* Less than 1%.
(1) Owned by Cox Teleport Partners, Inc., a wholly owned subsidiary of Cox, a
subsidiary of Cox Enterprises, Inc. The business address for Cox Teleport
Partners, Inc. and Cox Enterprises, Inc. is 1400 Lake Hearn Drive,
Atlanta, Georgia 30319.
(2) Owned by TCI Teleport, Inc., a wholly owned subsidiary of TCI. The
business address of TCI Teleport, Inc. and TCI is 5619 DTC Parkway,
Englewood, Colorado 80111-3000.
(3) Owned by Comcast Teleport, Inc., a wholly owned subsidiary of Comcast. The
business address of Comcast Teleport, Inc. and Comcast is 1500 Market
Street, Philadelphia, Pennsylvania 19102.
(4) Owned by Continental Teleport, Inc., a wholly owned subsidiary of
Continental. The business address of Continental Teleport, Inc. and
Continental is The Pilot House, Lewis Wharf, Boston, Massachusetts 02110.
(5) Except for the directors and executive officers named above, none of the
other directors of the Company beneficially own any shares of Class A
Common Stock or Class B Common Stock.
(6) Solely as a result of the agreement of the Cable Stockholders to vote in
favor of the others' director nominees under the Amended Stockholders'
Agreement, the Cable Stockholders may be deemed to share beneficial
ownership of the shares beneficially owned by each of them. See "Certain
Relationships and Related Transactions."
(7) Represents shares of Class A Common Stock beneficially owned by the
officer through vested rights to options issued under the 1993 Stock
Option Plan.
81
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
On May 22, 1995, the Company entered into a Loan Agreement (the "Revolving
Credit Agreement") with Toronto Dominion (Texas), Inc., as administrative
agent, Chemical Bank, as documentation agent, and the Banks (as defined in the
Revolving Credit Agreement) to finance capital expenditures and working
capital needs of the Company's subsidiaries and of the Local Market
Partnerships and to repay debt of the Company and its subsidiaries to the
Cable Stockholders. On December 19, 1995, pursuant to an Assumption Agreement,
all the rights and obligations of the Company pursuant to the Revolving Credit
Agreement were assumed by TCG New York, Inc. ("TCNY"), a wholly owned
subsidiary of TCGI, and the Company was released from any and all obligations
of TCNY under the Revolving Credit Agreement; provided, however, that TCG is
obligated to repay to TCNY an amount equal to the portion of the proceeds of
the loans which are provided to TCG or its other subsidiaries, and notes
evidencing such obligation must be collaterally assigned to the Banks as
security for the obligations of TCNY under the Revolving Credit Agreement.
The initial amount available to TCNY under the Revolving Credit Agreement
was $250 million; however, the available amount will be reduced according to a
prearranged progressive schedule until maturity at February 27, 2004. As of
March 31, 1996, $155 million was outstanding and TCNY had $74.6 million in
available capacity under the Revolving Credit Agreement.
At the option of TCNY, advances bear interest at a rate based on (i) the
Base Rate, which is the higher of (a) the Prime Rate of The Toronto-Dominion
Bank or (b) the Federal Funds Rate or (ii) the LIBOR. The interest rate on the
Revolving Credit Agreement as of March 31, 1996 was approximately 6.3%.
Interest on Base Rate advances is payable every calendar quarter. Interest on
LIBOR advances is payable at least every three months, or more frequently, at
the option of TCNY. In addition, TCNY must pay a commitment fee equal to
0.375% per annum on the unused commitment amount. The advances are guaranteed
by the subsidiaries of TCNY and secured by all the indebtedness of the
subsidiaries of TCNY to TCNY, the capital stock of the subsidiaries of TCNY
and the partnership interests of two of the subsidiaries of TCNY in Teleport
Communications New York, itself a subsidiary of TCNY and by the collateral
assignment of any notes evidencing loans made by TCNY to TCG or other
subsidiaries of TCG.
The Revolving Credit Agreement contains a number of covenants that restrict
TCNY and its subsidiaries from, among other things and except as specifically
provided in the Revolving Credit Agreement, incurring other indebtedness,
creating liens on their assets, liquidating, entering into merger or
consolidation transactions, disposing of assets outside the ordinary course of
business, providing guarantees, making certain investments and acquisitions,
entering into transactions with affiliates other than on an arms' length
basis, having unfunded ERISA Affiliates (as defined in the Revolving Credit
Agreement) and allowing the subsidiaries of TCNY to enter into transactions
limiting their ability to pay dividends to TCNY. The Revolving Credit
Agreement provides that TCNY is not permitted to pay dividends to TCGI at any
time prior to June 30, 1997, and may pay dividends to TCGI thereafter only if
(a) no default under the Revolving Credit Agreement exists, (b) the ratio of
the debt of TCNY to the product of two times its operating cash flow for the
prior two quarters is less than 5.0 to 1.0 and (c) such dividend is not paid
from the proceeds of any sale of assets. Amounts borrowed by TCNY under the
Revolving Credit Agreement may be lent to TCGI for general corporate purposes,
so long as such indebtedness is evidenced by promissory notes executed by TCGI
in favor of TCNY, and such promissory notes are pledged to the lenders under
the Revolving Credit Agreement. Finally, TCNY and its subsidiaries are
required to maintain certain levels of cash flow.
The Revolving Credit Agreement also contains customary events of default,
including, but not limited to, cross-default to other indebtedness of TCNY or
its subsidiaries, cross-acceleration to the indebtedness of TCG under the
Notes, certain decisions by the FCC, the loss of a Material License (as
defined in the Revolving Credit Agreement) and a Change of Control of TCNY
(which is defined as a change in the ownership of the stock of TCNY that
results in less than 50.1% of all voting rights relating to TCNY's capital
stock being owned, directly or indirectly, by one or more of the Cable
Stockholders, any of the Cable Stockholders and Sprint Corporation
82
<PAGE>
or any person owned by Sprint Corporation and any of the Cable Stockholders).
The occurrence of a payment default under, or the acceleration of, any
indebtedness for borrowed money of TCGI in excess of $50 million (including
the Notes) would be an event of default under the Revolving Credit Agreement.
The occurrence of an event of default would allow Toronto Dominion (Texas),
Inc., Chemical Bank and the Banks to accelerate the maturity of the
outstanding advances, call the guarantee of the subsidiaries of TCNY and
foreclose on the collateral.
Toronto Dominion (Texas), Inc. is the Administrative Agent under the
Revolving Credit Agreement and The Toronto-Dominion Bank is a lender under the
Revolving Credit Agreement, and each of them is an affiliate of Toronto
Dominion Securities (USA) Inc., which is one of the underwriters under the
Notes Offerings. An amount equal to approximately $14.0 million, plus interest
accrued thereon, will be paid to The Toronto-Dominion Bank from the proceeds
of the Offerings as a payment on the revolving credit facility. Chemical Bank
is the Documentation Agent and a lender under the Revolving Credit Agreement
and is an affiliate of Chase Securities Inc., which is one of the underwriters
under the Notes Offerings. An amount equal to approximately $14.0 million,
plus interest accrued thereon, will be paid to Chemical Bank from the proceeds
of the Offerings as a payment on the revolving credit facility. See
"Underwriting."
83
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Senior Notes will be issued pursuant to an Indenture (the "Senior Notes
Indenture") between the Company and United States Trust Company of New York,
as trustee (in such capacity, the "Senior Notes Trustee"). The Senior Discount
Notes will be issued pursuant to an Indenture (the "Senior Discount Notes
Indenture") between the Company and United States Trust Company of New York,
as trustee (in such capacity, the "Senior Discount Notes Trustee"). Any
references herein to a "Trustee" means the Senior Notes Trustee or the Senior
Discount Notes Trustee, as the context requires. The form and terms of the
Notes include those stated in the Indentures and those made part of the
Indentures by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Notes are subject to all such terms, and holders
of the Notes are referred to the Indentures and the Trust Indenture Act for a
statement thereof. The following summary of certain provisions of the
Indentures does not purport to be complete and is qualified in its entirety by
reference to the Indentures, including the definitions therein of certain
terms used below. The proposed forms of the Indentures have been filed as
exhibits to the Registration Statement of which this Prospectus is a part. The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions."
The Notes will be unsecured obligations of the Company, ranking pari passu
in right of payment with all senior unsecured Indebtedness of the Company. On
a pro forma basis, after giving effect to the Reorganization, the Stock
Offerings and the sale of the Notes and the application of the net proceeds
therefrom (including the reduction of Indebtedness outstanding under the
Revolving Credit Agreement), at March 31, 1996, the Company would have had
approximately $968.3 million of Indebtedness outstanding (including $26
million of unsecured Indebtedness that will be subordinated to the Notes).
A significant portion of the operations of the Company is conducted through
its subsidiaries and, therefore, the Company is dependent upon the cash flow
of its subsidiaries to meet its obligations, including its obligations under
the Notes. As a result, the Notes will be effectively subordinated to all
existing and future indebtedness and other liabilities and commitments of such
subsidiaries, including borrowings under the Revolving Credit Agreement. On a
pro forma basis, after giving effect to the Reorganization, the Stock
Offerings and the sale of the Notes and the application of the net proceeds
therefrom, at March 31, 1996, the subsidiaries of the Company would have had
approximately $189.4 million of total liabilities, including $62.5 million of
Indebtedness, and additional availability under the Revolving Credit Agreement
of $230 million.
TERMS OF THE SENIOR NOTES
The Senior Notes will be issued in an aggregate principal amount of $300
million and will mature on July 1, 2006. The Senior Notes will bear interest
at the rate of 9 7/8% per annum from July 2, 1996 or from the most recent
interest payment date to which interest has been paid or duly provided for,
payable in cash on January 1, 1997 and semiannually thereafter on July 1 and
January 1 in each year until the principal thereof is paid or duly provided
for, to holders of record on the immediately preceding June 15 and December
15, respectively. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
The Senior Notes will be payable as to principal, premium, if any, and
interest at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company,
payment of interest may be made by check mailed to the holders of certificated
Senior Notes at their respective addresses set forth in the register of
holders of such Notes. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. The Senior Notes will be issued in registered
form, without coupons, and in denominations of $1,000 and integral multiples
thereof.
84
<PAGE>
Optional Redemption
Except as set forth below, the Senior Notes are not redeemable at the
Company's option prior to July 1, 2001. Thereafter, the Senior Notes will be
subject to redemption at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount thereof) set forth below plus
accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on July 1 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................................... 104.938%
2002........................................................... 103.292%
2003........................................................... 101.646%
2004 and thereafter............................................ 100.000%
</TABLE>
In addition, in the event of the first to occur after the Issuance Date and
prior to July 1, 1999 of (a) a Public Equity Offering for gross proceeds of
$150 million or more or (b) a sale or series of related sales by the Company
of its Capital Stock (other than Disqualified Stock) to one or more Strategic
Equity Investors for an aggregate purchase price of $150 million or more, the
Company may, at its option, within 60 days thereof, use up to 33% of the net
proceeds of such equity offering or sales to redeem up to one-third of the
aggregate principal amount of the Senior Notes originally issued at a
redemption price of 110% of the principal amount of the Senior Notes so
redeemed; provided that at least one-half of the aggregate principal amount of
such Senior Notes originally issued remains outstanding after such redemption.
Any such redemption may be effected only once and must be effected upon not
less than 30 nor more than 60 days' notice given within 30 days following such
Public Equity Offering or the most recent sale to a Strategic Equity Investor,
as the case may be. The Company will deliver to the Trustee a resolution of
its Board of Directors evidencing its election to redeem any Senior Notes,
along with an officers' certificate and an opinion of counsel stating that all
conditions precedent thereto have been complied with.
TERMS OF THE SENIOR DISCOUNT NOTES
The Senior Discount Notes will be issued at a discount to their principal
amount to generate aggregate gross proceeds to the Company of approximately
$625 million and will mature on July 1, 2007. The Senior Discount Notes will
accrete at a rate of 11 1/8%, compounded semiannually, to an aggregate
principal amount of $1,073,606,000 by July 1, 2001. Interest will not accrue
on the Senior Discount Notes prior to July 1, 2001. Thereafter, interest on
the Senior Discount Notes will accrue at the rate of 11 1/8% per annum and
will be payable in cash semiannually on January 1 and July 1 (each an
"Interest Payment Date"), commencing on January 1, 2002, to holders of record
on the immediately preceding December 15 and June 15, respectively; provided,
however, that at any time prior to July 1, 2001, the Company may elect to
commence the accrual of cash interest on an Interest Payment Date (from and
after such interest payment date), in which case the outstanding principal
amount at Stated Maturity of each Senior Discount Note will on such Interest
Payment Date be reduced to the Accreted Value of such Note as of such Interest
Payment Date and cash interest shall be payable with respect to such Note on
each Interest Payment Date thereafter. Except as otherwise described in this
paragraph, interest on the Senior Discount Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from July 1, 2001. Interest and Accreted Value will be computed on the basis
of a 360-day year comprised of twelve 30-day months.
The Senior Discount Notes will be payable as to principal, premium, if any,
and interest at the office or agency of the Company maintained for such
purpose within the City and State of New York or, at the option of the
Company, payment of interest may be made by check mailed to the holders of
certificated Senior Discount Notes at their respective addresses set forth in
the register of holders of such Notes. Until otherwise designated by the
Company, the Company's office or agency in New York will be the office of the
Trustee maintained for such purpose. The Senior Discount Notes will be issued
in registered form, without coupons, and in denominations of $1,000 and
integral multiples thereof.
85
<PAGE>
Special Redemption
Senior Discount Notes aggregating up to $253 million in Accreted Value will
be subject to mandatory redemption at a redemption price of 101% of the
Accreted Value thereof as of the redemption date in the event that either (a)
within 270 days after the Issuance Date the Company has not received both
confirmation of the NYPSC of the opinion of its General Counsel or otherwise
received approval from the NYPSC of the issuance of the Notes and the approval
from the NJBPU to incur up to $2 billion of long-term debt or (b) either the
NYPSC or the NJBPU issues a final order denying the petition of the Company to
increase its borrowing authority to permit the issuance of the Notes and the
$26 million subordinated note of TCG to TCI (each event described in clause
(a) and (b), a "Special Redemption Event"). The redemption date (the "Special
Redemption Date") will be five Business Days after the occurrence of a Special
Redemption Event.
Upon occurrence of a Special Redemption Event, the Trustee shall mail a
notice to each holder of Senior Discount Notes stating, among other things,
that a Special Redemption Event has occurred, the amount of Senior Discount
Notes to be redeemed on the Special Redemption Date and the portion of such
holder's Senior Discount Notes that must be surrendered to the Paying Agent.
Optional Redemption
Except as set forth below, the Senior Discount Notes are not redeemable at
the Company's option prior to July 1, 2001. Thereafter, the Senior Discount
Notes will be subject to redemption at the option of the Company, in whole or
in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount thereof
(subject to possible reduction as set forth above)) set forth below plus
accrued and unpaid interest thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on July 1 of the years
indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001........................................................... 105.563%
2002........................................................... 103.708%
2003........................................................... 101.854%
2004 and thereafter............................................ 100.000%
</TABLE>
In addition, in the event of the first to occur after the Issuance Date and
prior to July 1, 1999 of (a) a Public Equity Offering for gross proceeds of
$150 million or more or (b) a sale or series of related sales by the Company
of its Capital Stock (other than Disqualified Stock) to one or more Strategic
Equity Investors for an aggregate purchase price of $150 million or more, the
Company may, at its option, within 60 days thereof, use up to 67% of the net
proceeds of such equity offering or sales to redeem up to one-third of the
aggregate principal amount of the Senior Discount Notes originally issued at a
redemption price of 110% of the Accreted Value as of the redemption date of
the Senior Discount Notes so redeemed; provided that at least one-half of the
aggregate principal amount of such Senior Discount Notes originally issued
remains outstanding after such redemption. Any such redemption may be effected
only once and must be effected upon not less than 30 nor more than 60 days'
notice given within 30 days following such Public Equity Offering or the most
recent sale to a Strategic Equity Investor, as the case may be. The Company
will deliver to the Trustee a resolution of its Board of Directors evidencing
its election to redeem any Senior Discount Notes, along with an officers'
certificate and an opinion of counsel stating that all conditions precedent
thereto have been complied with.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 in principal amount or an integral multiple thereof) of such holder's
Notes pursuant to the offer described below (the "Change of Control Offer") at
a purchase price (the "Purchase Price") equal to (a) in the case of the Senior
Notes, 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to such Change of Control Payment Date, or (b) in case of the Senior
Discount Notes, (i) 101% of the Accreted Value thereof on any Change of
Control Payment Date (as defined
86
<PAGE>
below) occurring prior to July 1, 2001, plus any accrued and unpaid interest
not otherwise included in the Accreted Value to such Change of Control Payment
Date or (ii) 101% of the principal amount thereof (subject to possible
reduction as set forth under "--Principal, Maturity and Interest") on any
Change of Control Payment Date occurring on or after July 1, 2001, in each
case in accordance with the procedures set forth in the applicable Indenture.
Within 30 days following any Change of Control, the Company will mail a
notice to each holder stating: (1) that the Change of Control Offer is being
made pursuant to the provisions of the applicable Indenture described herein
under "--Change of Control" and that all Notes duly and timely tendered will
be accepted for payment; (2) the Purchase Price and the purchase date (the
"Change of Control Payment Date"), which date shall be no earlier than 30 days
nor later than 60 days from the date such notice is mailed; (3) that any Notes
not tendered will continue to accrete and/or accrue interest, as the case may
be; (4) that, unless the Company defaults in the payment of the Purchase
Price, all Notes accepted for payment pursuant to the Change of Control Offer
shall cease to accrete and/or accrue interest, as the case may be, after the
Change of Control Payment Date; (5) that holders electing to have any Notes
purchased pursuant to a Change of Control Offer will be required to surrender
the Notes, with the form entitled "Option of Holder to Elect Purchase" on the
reverse of the Notes completed, to the Paying Agent at the address specified
in the notice prior to the close of business on the third Business Day
preceding the Change of Control Payment Date; (6) that holders will be
entitled to withdraw their election if the Paying Agent receives, not later
than the close of business on the second Business Day preceding the Change of
Control Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the holder, the principal amount of Notes delivered
for purchase, and a statement that such holder is withdrawing his election to
have such Notes purchased; (7) that holders whose Notes are being purchased
only in part will be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered, which unpurchased portion must
be equal to $1,000 in principal amount or an integral multiple thereof; (8)
the instructions that the holders of Notes must follow in order to tender
their Notes; and (9) the circumstances and relevant facts regarding such
Change of Control.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes in connection with a Change of Control.
The holders' right to require, subject to certain conditions, the Company to
repurchase its Notes upon a Change of Control may deter a third party from
acquiring the Company in a transaction that constitutes a Change of Control.
If a Change of Control Offer is made, there can be no assurance that the
Company will have sufficient funds to pay the Purchase Price for all of the
Notes that might be delivered by holders seeking to accept the Change of
Control Offer. In the event that a Change of Control Offer occurs at a time
when the Company does not have sufficient funds available to repurchase the
Notes or at a time when the Company is prohibited from repurchasing the Notes
under the terms of other Indebtedness (and the Company is unable either to
obtain the consent of holders of such other Indebtedness or to repay such
other Indebtedness), an Event of Default would occur under the Indentures.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of the
holders of Notes to require the Company to repurchase such Notes as a result
of a sale, lease, transfer, conveyance or other disposition of less than all
of the assets of the Company and its subsidiaries to another Person may be
uncertain.
The Revolving Credit Agreement also provides for an event of default upon a
change of control as defined therein. See "Description of Certain
Indebtedness." The Revolving Credit Agreement limits the ability of the
Company to distribute cash from TCG New York, Inc. to purchase Notes upon a
Change of Control.
87
<PAGE>
SELECTION AND NOTICE
If less than all of the Senior Notes or the Senior Discount Notes, as the
case may be, are to be redeemed at any time, a selection of Notes for
redemption will be made by the relevant Trustee on a pro rata basis, subject
to the requirements of any national securities exchange on which such Notes
are listed, provided that no Note of $1,000 or less shall be redeemed in part.
Except with respect to a Special Redemption for which notice shall be mailed
upon occurrence of a Special Redemption Event, notice of redemption shall be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the holder thereof upon
cancellation of the original Note. On and after the redemption date, with
respect to the Notes or portions thereof called for redemption, discount will
cease to accrete or interest will cease to accrue, as the case may be.
CERTAIN COVENANTS
Limitation on Incurrence of Indebtedness
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable
with respect to (collectively, "incur") any Indebtedness (including, without
limitation, Acquired Indebtedness) other than Permitted Indebtedness, unless,
in the case of Indebtedness of the Company exclusively, (a) no Default or
Event of Default shall have occurred and be continuing at the time of the
proposed incurrence thereof or would occur as a result of such proposed
incurrence and (b) after giving effect to such incurrence on a pro forma basis
(i) with respect to such proposed incurrence of Indebtedness on or prior to
January 1, 2001, the Company's Indebtedness to Adjusted Total Equity Ratio
would not exceed 1.0 to 1.0, and (ii) with respect to such proposed incurrence
of Indebtedness thereafter, the Company's Indebtedness to EBITDA Ratio would
not equal or exceed 5.0 to 1.0.
Limitation on Restricted Payments
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, make any
Restricted Payment unless, at the time of such Restricted Payment and after
giving pro forma effect thereto:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the aggregate amount of all Restricted Payments subsequent to the
Issuance Date would not exceed the greater of:
(1) the sum of, without duplication :
(w) cumulative EBITDA of the Company and its Restricted
Subsidiaries less 1.4 times cumulative Consolidated Interest
Expense, in each case for the period (treated as one accounting
period) beginning on the first day of the Company's fiscal quarter
in which the Issuance Date occurs, and ending on the last day of the
Company's fiscal quarter immediately preceding such proposed
Restricted Payment; plus
(x) 100% of the net cash proceeds received by the Company from any
Person from the issuance and sale subsequent to the Issuance Date of
Equity Interests of the Company or of debt securities of the Company
that have been converted into such Equity Interests (other than
Equity Interests (or convertible debt securities) sold to a
Restricted Subsidiary and other than Disqualified Stock or debt
securities that have been converted into Disqualified Stock); minus
88
<PAGE>
(y) 100% of all Investments made pursuant to clause (d) of the
definition of "Permitted Investments" less any such amounts invested
in Local Market Partnerships that become Restricted Subsidiaries
prior to the first anniversary of the Issuance Date; minus
(z) the amount of any Investments in Joint Ventures pursuant to
clause (e)(ii) of the definition of "Permitted Investments" less the
Fair Market Value of the Company's interest in any Joint Ventures
that become Restricted Subsidiaries but not in excess of the amount
of any such Investments in such Joint Ventures pursuant to such
clause (e)(ii); and
(2) $10 million; and
(c) the Company would have been permitted to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
test set forth in clause (b) of the covenant entitled "Limitation on
Incurrence of Indebtedness."
The foregoing provisions of this covenant will not prohibit (i) the payment
of any dividend (or similar distribution with respect to Equity Interests)
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indentures; (ii) the redemption, purchase, retirement or other acquisition of
any Equity Interests of the Company or any Restricted Subsidiary in exchange
for, or out of the proceeds of the substantially concurrent sale (other than
to a Restricted Subsidiary) of, other Equity Interests (other than any
Disqualified Stock) of the Company; (iii) the redemption, purchase, retirement
or other acquisition of any Equity Interests of a Restricted Subsidiary in
exchange for, or out of the proceeds of the substantially concurrent sale
(other than to another Restricted Subsidiary) of, other Equity Interests
(other than Disqualified Stock) of such Restricted Subsidiary, (iv) the
redemption, purchase, defeasance, acquisition or retirement of Indebtedness
that is subordinated to the Notes (including premium, if any, and accrued and
unpaid interest, fees and expenses) in exchange for, or out of the proceeds of
the substantially concurrent sale (other than to a Restricted Subsidiary) of,
(A) Equity Interests (other than Disqualified Stock) of the Company or
(B) Refinancing Indebtedness permitted to be incurred under the covenant
entitled "Limitation on Incurrence of Indebtedness"; (v) any purchase,
redemption, retirement or acquisition, from minority partners in Local Market
Partnerships existing on the Issuance Date, of any Capital Stock of such Local
Market Partnership at the time or after it becomes a Restricted Subsidiary;
(vi) any distribution in respect of partners' income tax liability and any
other distribution that is required to be made pursuant to the terms of any
partnership agreement or similar operating agreement in effect as of the
Issuance Date governing any Local Market Partnership existing as of the
Issuance Date or, to the extent that it is pro rata or required under law, any
distribution that is required to be made pursuant to the terms of any other
similar partnership or similar operating agreement entered into after the
Issuance Date; (vii) the purchase, redemption, retirement or acquisition by
the Company of shares of Capital Stock of the Company from Continental
Teleport, Inc. pursuant to the Reorganization Agreement as described under
"Use of Proceeds"; (viii) the purchase, redemption or other acquisition or
retirement for value of Capital Stock, or options, warrants or rights to
purchase or acquire shares of Capital Stock, of the Company or any Restricted
Subsidiary, or similar securities, held by officers or employees or former
officers or employees of the Company or its Restricted Subsidiaries (or their
estates or beneficiaries under their estates), upon death, disability,
retirement or termination of employment in an aggregate amount not to exceed
$2 million per year; and (ix) Permitted Investments provided that no default
described in clauses (i) or (ii) of the first paragraph under "Events of
Default and Remedies" shall have occurred and are continuing at the time such
Permitted Investments are made or shall occur as a consequence thereof.
For purposes of this covenant, if a particular Restricted Payment involves a
non-cash payment, including a distribution of assets, then the amount of such
Restricted Payment shall be deemed to be an amount equal to the sum of the
cash portion of such Restricted Payment, if any, plus an amount equal to the
Fair Market Value of the non-cash portion of such Restricted Payment.
Not later than the date of making any Restricted Payment (other than those
described under clauses (v), (vi), (vii) or (viii) of the second preceding
paragraph), the Company shall deliver to the Trustee an Officers'
89
<PAGE>
Certificate stating that such Restricted Payment is permitted and setting
forth the basis upon which the calculations required by clause (b), to the
extent applicable, of the covenant entitled "Limitation on Restricted
Payments" were computed, which calculations may be based upon the Company's
latest available financial statements.
Limitation on Liens
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or otherwise suffer to exist any Lien (other than Permitted Liens) on
any property or asset now owned or hereafter acquired, of the Company or any
such Restricted Subsidiary, unless (a) in the case of any Lien securing
Indebtedness that is expressly subordinated in right of payment to the Notes,
the Notes are secured by a Lien on such property or assets that is senior in
priority to such Lien for so long as such Indebtedness shall be so secured and
(b) in the case of any other Lien, the Notes are equally and ratably secured
with the obligation or liability secured by such Lien for so long as such
obligation or liability shall be so secured.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (a) pay dividends,
in cash or otherwise, or make any other distributions on its Capital Stock or
with respect to any other interest or participation in, or measured by, its
profits owned by, or pay any Indebtedness owed to, the Company or any of its
Restricted Subsidiaries or (b) make loans or advances to the Company or any of
its Restricted Subsidiaries or (c) transfer any of its properties or assets to
the Company or any of its Restricted Subsidiaries, except, in each case, for
such encumbrances or restrictions existing under or by reason of (i) the
Revolving Credit Agreement, provided that any such encumbrances or
restrictions, taken as a whole, are no more restrictive than those contained
in the Revolving Credit Agreement as in effect on the Issuance Date, (ii)
applicable law, (iii) any instrument governing Indebtedness or Capital Stock
of a Person acquired by the Company or any of its Restricted Subsidiaries as
in effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties
or assets of any Person, other than the Person, or the property or assets of
the Person, so acquired, (iv) customary nonassignment provisions in leases,
rights-of-way agreements and other agreements entered into in the ordinary
course of business and consistent with past practices, (v) with respect to
clause (c) above, purchase money obligations for property acquired in the
ordinary course of business, (vi) Refinancing Indebtedness permitted to be
incurred under the covenant entitled "Limitation on Incurrence of
Indebtedness," provided that the restrictions contained in the agreements
governing such Refinancing Indebtedness are no more restrictive than those
contained in the agreements governing the Indebtedness being refinanced, (vii)
any other Indebtedness permitted to be incurred by a Restricted Subsidiary
under the covenant entitled "Limitation on Incurrence of Indebtedness,"
provided that the restrictions contained in the agreements governing such
Indebtedness are similar to those contained in the Revolving Credit Agreement
as in effect on the Issuance Date, (viii) provisions of the partnership
agreement or other operating agreement in effect as of the Issuance Date
governing any Local Market Partnership existing as of the Issuance Date, and
(ix) any agreement effecting the renewal, refundings, refinancing or extension
of any Indebtedness referred to in the preceding clause (iii), provided that
the restrictions contained in the agreements governing such new Indebtedness
are no more restrictive than those contained in the agreements governing the
Indebtedness being extended, renewed, refinanced or replaced. For a
description of certain restrictions in the Revolving Credit Agreement relevant
to this covenant, see "Description of Certain Indebtedness."
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Indentures will provide that the Company (a) will not permit any
Restricted Subsidiary to issue any Capital Stock (other than to the Company or
a Wholly Owned Restricted Subsidiary) and (b) will not permit any
90
<PAGE>
Person (other than the Company or a Restricted Subsidiary) to own any Capital
Stock of any Restricted Subsidiary; provided, however, that this covenant will
not prohibit (i) the sale or other disposition of all, but not less than all,
of the issued and outstanding Capital Stock of any Restricted Subsidiary owned
by the Company or any Restricted Subsidiary in compliance with the other
provisions of the Indentures, (ii) the ownership by directors of director's
qualifying shares or the ownership by foreign nationals of Capital Stock of
any Restricted Subsidiary, to the extent mandated by applicable law, (iii) the
ownership of Capital Stock of a Restricted Subsidiary issued and outstanding
either (A) as of the Issuance Date (including minority partnership interests
in Local Market Partnerships existing on the Issuance Date) or (B) prior to
the time that such Person becomes a Restricted Subsidiary so long as such
Capital Stock was not issued in contemplation of such Person's becoming a
Restricted Subsidiary of the Company or otherwise being acquired by the
Company or (iv) the issue or sale of Capital Stock of a Restricted Subsidiary
in a transaction not prohibited by the covenant entitled "Limitation on Asset
Sales," provided that such Restricted Subsidiary would remain a Restricted
Subsidiary after such transaction.
Limitation on Guarantees of Indebtedness by Restricted Subsidiaries
The Indentures will provide that the Company will not permit any Restricted
Subsidiary, directly or indirectly, to Guarantee, assume or in any other
manner become liable for the payment of any Indebtedness of the Company unless
(i) (A) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the relevant Indenture providing for a Guarantee of
payment of the Senior Notes or Senior Discount Notes, as the case may be,
Notes by such Restricted Subsidiary and (B) with respect to any Guarantee of
subordinated Indebtedness of the Company by a Restricted Subsidiary, any such
Guarantee shall be subordinated to such Restricted Subsidiary's Guarantee with
respect to the relevant Notes at least to the same extent as such subordinated
Indebtedness is subordinated to the Notes and (ii) such Restricted Subsidiary
waives and will not in any manner whatsoever claim or take the benefit or
advantage of, any rights of reimbursement, indemnity or subrogation or any
other rights against the Company or any other Restricted Subsidiary as a
result of any payment by such Restricted Subsidiary under its Guarantee until
the relevant Notes have been paid in full. The incurrence by a Restricted
Subsidiary as a primary obligor of any Indebtedness that is guaranteed by the
Company will not be deemed a Guarantee of the Company's Indebtedness for
purposes of this covenant.
Notwithstanding the foregoing, any Guarantee of the relevant Notes or waiver
of rights created pursuant to the provisions described in the foregoing
paragraph will provide by their terms that they will be automatically and
unconditionally released and discharged upon the release by the holders of the
Indebtedness of the Company described in the preceding paragraph of their
Guarantee by such Restricted Subsidiary (including any deemed release upon
payment in full of all obligations under such Indebtedness, except by or as a
result of payment under such Guarantee), at a time when (A) no other
Indebtedness of the Company has been Guaranteed by such Restricted Subsidiary
or (B) the holders of all such other Indebtedness which is Guaranteed by such
Restricted
Subsidiary also release their Guarantee by such Restricted Subsidiary
(including any deemed release upon payment in full of all obligations under
such Indebtedness, except by or as a result of payment under such Guarantee).
Limitation on Asset Sales
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, cause, make or suffer to exist any
Asset Sale unless (a) the Company (or the applicable Restricted Subsidiary, as
the case may be) receives consideration at the time of such Asset Sale at
least equal to the Fair Market Value of the assets or property sold or
otherwise disposed of and (b) at least 75% of the consideration therefor
received by the Company or such Restricted Subsidiary is in the form of
Eligible Cash Equivalents (or, if less than 75%, the remainder of such
consideration consists of Telecommunications Assets).
Within 365 days after any Asset Sale, the Company (or the applicable
Restricted Subsidiary, as the case may be) may apply (but shall not be
required to apply) the Net Proceeds from such Asset Sale (a) to permanently
reduce outstanding Indebtedness of the Company that is pari passu in right of
payment with the Notes or
91
<PAGE>
Indebtedness of any Restricted Subsidiary or (b) to invest or reinvest in
properties and assets that will be used in the Telecommunications Business.
Any Net Proceeds from any Asset Sale that are not used, invested or reinvested
at the end of such 365-day period as provided in the preceding sentence
constitute "Excess Proceeds." Pending final application of any Net Proceeds of
an Asset Sale, such Net Proceeds may only be invested in Eligible Cash
Equivalents or applied to pay Obligations under the Revolving Credit
Agreement. When the aggregate amount of Excess Proceeds exceeds $10 million,
the Company will be required to make an offer (an "Asset Sale Offer") to all
holders of the Notes to purchase on a pro rata basis the maximum principal
amount of Notes that may be purchased out of such Excess Proceeds at an offer
price in cash in an amount equal to (a) in the case of the Senior Notes, 100%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date fixed for the closing of such offer, or (b) in the case of the Senior
Discount Notes, 100% of the Accreted Value on the date fixed for closing of
such offer (if such date is prior to July 1, 2001) plus any accrued and unpaid
interest not otherwise included in the Accreted Value on such date, or 100% of
the principal amount thereof (subject to possible reduction as set forth under
"--Principal, Maturity and Interest") plus accrued and unpaid interest, if
any, to the date fixed for the closing of such offer (if such date is on or
after July 1, 2001) in accordance with the procedures set forth in the
Indentures. To the extent that the aggregate Accreted Value or principal
amount, as the case may be, of the Notes tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds remaining after the consummation of any
required Asset Sale Offer to the holders of the Notes, the Company may use any
remaining Excess Proceeds for general corporate purposes not otherwise
prohibited by the Indentures. If the aggregate Accreted Value or principal
amount, as the case may be, of the Notes surrendered by holders thereof
exceeds the amount of Excess Proceeds, then the Trustee will select the Notes
to be purchased on the basis set forth under "--Selection and Notice" above.
Upon completion of any required Asset Sale Offer to the holders of the Notes,
the amount of Excess Proceeds will be reset at zero. The provisions of this
covenant shall not apply to any transaction that is permitted under the
provisions of the covenant described under "Limitation on Merger,
Consolidation or Sale of Assets" and to certain transactions that are not
"Asset Sales," including certain Restricted Payments. See "--Certain
Definitions" for the definition of Asset Sale.
Limitation on Transactions with Stockholders and Affiliates
The Indentures will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, render any
services to or receive any services from, conduct any business or enter into
or permit to exist any transaction or series of related transactions within
any twelve-month period (including, but not limited to, the purchase, sale,
exchange, lease, transfer or other disposition of any of its properties or
assets) or enter into any contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary (each of the foregoing,
an "Affiliate Transaction"), unless (a) such Affiliate Transaction is fair to
the Company or the relevant Restricted Subsidiary and on terms that are no
less favorable, taken as a whole, to the Company or the relevant Restricted
Subsidiary than those that could have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person (or, in the event that there are no comparable transactions involving
unrelated Persons to apply for comparative purposes, is otherwise on terms
that, taken as a whole, the Company has determined to be fair to the Company
or the relevant Restricted Subsidiary) and (b) the Company delivers to the
Trustee with respect to any Affiliate Transaction involving an aggregate
consideration in excess of $15 million, either (i) a resolution of the Board
of Directors set forth in an Officers' Certificate certifying that each such
Affiliate Transaction complies with clause (a) above and which Board
Resolution shall have been approved by a majority of the directors on the
Board of Directors who are disinterested with respect to such transaction or
(ii) a written opinion from a nationally recognized investment banking firm
that each such Affiliate Transaction complies with clause (a) above (without
regard to the parenthetical clause thereof).
Notwithstanding the foregoing provisions, the following shall not be deemed
to be Affiliate Transactions: (A) any transaction (1) in the ordinary course
of business between the Company or any Restricted Subsidiary and any Affiliate
thereof engaged in the Telecommunications Business or (2) with respect to the
lease or sharing or other use of cable or fiber lines, equipment, transmission
capacity, rights-of-way or other access rights,
92
<PAGE>
between the Company or any Restricted Subsidiary and any other Person,
provided, however, in either case, that such transaction is on terms that are
no less favorable, taken as a whole, to the Company or the relevant Restricted
Subsidiary than those that could have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person (or, in the event that there are no comparable transactions involving
unrelated Persons to apply for comparative purposes, is otherwise on terms
that, taken as a whole, the Company has determined to be fair to the Company
or the relevant Restricted Subsidiary); (B) any transaction between the
Company and any Wholly Owned Restricted Subsidiary or between any Wholly Owned
Restricted Subsidiaries; (C) any employment agreement entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of
business and consistent with the past practice of the Company or such
Restricted Subsidiary (including ordinary course transactions with officers or
directors with respect to compensation, bonus, employee benefit and severance
arrangements, and payments under indemnification arrangements existing as of
the Issuance Date or as may be permitted by law with any officer or director);
(D) transactions permitted by the provisions of the Indentures described above
under "Limitation on Restricted Payments"; (E) transactions undertaken
pursuant to contractual obligations in place as of the Issuance Date; (F)
purchases of goods and services, any service trials, market testing and new
product arrangements entered into in the ordinary course of business and on
terms consistent with past practice; and (G) all transactions necessary to
effect the Reorganization.
Limitation on Merger, Consolidation or Sale of Assets
The Indentures will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving Person), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another Person unless (i) the Company is the surviving corporation or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation, partnership or
limited liability company organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the Person formed
by or surviving any such consolidation or merger (if other than the Company)
or to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the obligations of the Company,
pursuant to a supplemental indenture in a form reasonably satisfactory to the
Trustee, under the Notes and the Indentures and, in the case of such surviving
Person that is a partnership, at least one subsidiary of such Person which
shall be a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia shall also assume the
Obligations of the Company under the Notes as a co-obligor with such surviving
Person; (iii) immediately before and after giving effect to such transaction
or series of transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions), no Default or Event
of Default shall have occurred and be continuing or would result therefrom;
and (iv) immediately after giving effect to any such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions) as if such transaction
or series of transactions had occurred on the first day of the determination
period, the Company (or the surviving entity if the Company is not the
continuing obligor under the Notes) would be permitted to incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant entitled "Limitation on Incurrence of Indebtedness."
REPORTS TO HOLDERS
The Company shall deliver to the Trustee and to the holders, within 30 days
after it files them with the Commission, copies of its annual and quarterly
reports which the Company is required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act. Notwithstanding that the Company may
not be required to remain subject to the reporting requirements of Section 13
or 15(d) of the Exchange Act or otherwise report on an annual and quarterly
basis on forms provided for such annual and quarterly reporting pursuant to
rules and regulations promulgated by the Commission, the Indentures will
require the Company to continue to file with the Commission and provide to the
Trustee and to the holders annual audited financial
93
<PAGE>
statements and quarterly unaudited financial statements, along in each case
with a "Management's Discussion and Analysis of Results of Operations and
Financial Condition," all in the form the Company would be required to file
were it subject to the Exchange Act reporting requirements. The Company shall
not be obligated to file any such reports with the Commission if the
Commission does not permit such filings.
EVENTS OF DEFAULT AND REMEDIES
The Indentures will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
Senior Notes or the Senior Discount Notes, as the case may be; (ii) default in
the payment when due of principal of or premium, if any, on the Senior Notes
or the Senior Discount Notes, as the case may be; (iii) failure by the Company
to comply with the provisions described under "--Change of Control" and in the
covenant entitled "Limitation on Asset Sales"; (iv) failure by the Company for
60 days after notice by the Trustee or the holders of 25% of the aggregate
principal amount of the outstanding Senior Notes or the Senior Discount Notes,
as the case may be, to comply with any covenants and agreements contained in
the relevant Indenture or Notes (other than a default in the performance, or
breach, of a covenant or agreement which is specifically dealt with in (i),
(ii) or (iii) above); (v) default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of
its Restricted Subsidiaries), whether such Indebtedness or guarantee now
exists, or is created after the Issuance Date, which default (a) is caused by
a failure to pay when due at stated maturity principal or interest on such
Indebtedness within the grace period (including any extension thereof granted
by the holders of such Indebtedness) provided in such Indebtedness (a "Payment
Default") or (b) results in the acceleration of such Indebtedness prior to its
express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $12 million or more; (vi) failure by
the Company or any Restricted Subsidiary to pay final judgments aggregating in
excess of $12 million (net of any amount as to which a reputable insurance
company has accepted liability), which judgments are not stayed or bonded
within 60 days after their entry; (vii) any Guarantee by a Guarantor of the
Senior Notes or the Senior Discount Notes, as the case may be, being held in
any judicial proceeding to be unenforceable or invalid, provided any other
Guarantee by such Guarantor giving rise to such obligation to Guarantee such
Notes is not held unenforceable, or failure of any Guarantee of the Senior
Notes or the Senior Discount Notes, as the case may be, to be in full force
and effect, or the assertion that such Guarantee is invalid or unenforceable
by any such Guarantor; and (viii) certain events of bankruptcy or insolvency
with respect to the Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in aggregate principal amount of the outstanding Senior Notes
or the Senior Discount Notes, as the case may be, may declare all such Notes
to be due and payable immediately. Notwithstanding the foregoing, in the case
of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company or any Significant Subsidiary, all
outstanding Notes will become due and payable without further action or
notice. Holders of the Senior Notes or the Senior Discount Notes, as the case
may be, may not enforce the relevant Indenture or Notes except as provided in
such Indenture. Subject to certain limitations, holders of a majority in
aggregate principal amount of the then outstanding Senior Notes or the Senior
Discount Notes, as the case may be, may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from holders of the Senior Notes
or the Senior Discount Notes, as the case may be, notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal, premium, if any, or interest) if it determines that
withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the outstanding
Senior Notes or Senior Discount Notes, as the case may be, by notice to the
Trustee may on behalf of the holders of all of such Notes waive any existing
Default or Event of Default and its consequences (including rescind any
acceleration of the Notes) under the relevant Indenture except a continuing
Default or Event of Default in the payment of interest or premium, if
94
<PAGE>
any, on or the principal of, such Notes or as a result of a failure to comply
with the provisions described under "--Change of Control" and in the covenant
entitled "Limitation on Asset Sales".
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, agent, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes or the Indentures or for any claim based on, in respect of, or
by reason of, such obligations or their creation. Each holder of the Notes by
accepting a Note irrevocably waives and releases all such liability. The
waiver and release are part of the consideration for the issuance of the
Notes. Such waiver may not be effective to waive liabilities under the Federal
securities laws and it is the view of the Commission that such a waiver is
against public policy.
SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
Obligations discharged with respect to the outstanding Senior Notes or Senior
Discount Notes, as the case may be ("Legal Defeasance"), except for (i) the
rights of holders of outstanding Notes to receive payments solely from the
funds held in trust in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due, (ii) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the relevant Indenture. In addition, the
Company may, at its option and at any time, elect to have the obligations of
the Company released with respect to certain covenants that are described in
an Indenture ("Covenant Defeasance") and thereafter any omission to comply
with such obligations shall not constitute a Default or Event of Default with
respect to the relevant Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment of such Notes, bankruptcy and
insolvency events) described under "--Events of Default" will no longer
constitute Events of Default with respect to such Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the relevant Notes, cash in U.S. dollars, non-callable U.S.
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest on
the relevant outstanding Notes on the stated maturity or on the applicable
redemption date, as the case may be, of such principal or installment of
principal of, premium, if any, or interest on such outstanding Notes; (ii) in
the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably satisfactory to the
Trustee confirming that (A) the Company has received from, or there has been
published by, the Internal Revenue Service or (B) since June, 1996, there has
been a change in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel shall confirm that, the
holders of the relevant outstanding Notes will not recognize income, gain or
loss for federal income tax purposes solely as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance,
the Company shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that the holders
of the relevant outstanding Notes will not recognize income, gain or loss for
federal income tax purposes solely as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Covenant Defeasance
had not occurred; (iv) no Default or Event of Default under the relevant Notes
from bankruptcy or insolvency events have occurred, at any time in the period
ending on the 91st day after the date of deposit; (v)
95
<PAGE>
such Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the relevant Indenture or any
other material agreement or instrument to which the Company is a party or by
which the Company is bound; (vi) the Company shall have delivered to the
Trustee an opinion of counsel to the effect that after the 91st day following
the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditor's rights generally; (vii) the Company shall have delivered to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the holders of the relevant Notes over
the other creditors of the Company with the intent of defeating, hindering,
delaying or defrauding creditors of the Company or others; and (viii) the
Company shall have delivered to the Trustee an Officers' Certificate and an
opinion of counsel, each stating that all conditions precedent provided for or
relating to the Legal Defeasance or the Covenant Defeasance have been complied
with.
CONCERNING THE TRUSTEE
The Trust Indenture Act contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise, which provisions are incorporated
by reference in the Indentures. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The holders of a majority in aggregate principal amount of the outstanding
Senior Notes or Senior Discount Notes, as the case may be, will have the right
to direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee, subject to certain exceptions.
The Indentures will provide that in case an Event of Default shall occur
(which shall not be cured), the Trustee will be required, in the exercise of
its power, to use the degree of care and skill of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the relevant
Indenture at the request of any holder of Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indentures or
the Notes may be amended or supplemented with the consent of the holders of at
least a majority in aggregate principal amount of the relevant outstanding
Notes (including consents obtained in connection with a tender offer or
exchange offer for such Notes), and any existing default or compliance with
any provision of the relevant Indenture or such Notes may be waived with the
consent of the holders of a majority in aggregate principal amount of the
outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for such Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any of the Senior Notes or Senior Discount Notes, as the case
may be, held by a non-consenting holder of such Notes) (i) reduce the
principal amount of such Notes whose holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or premium on or change the
fixed maturity of any such Note or alter the provisions with respect to the
redemption of such Notes (other than provisions described above under "--
Change of Control" and the covenant entitled "Limitation on Asset Sales"),
(iii) reduce the rate of or change the time for payment of interest on any
such Note, (iv) waive a default in the payment of principal or premium, if
any, or interest on any such Note (except a rescission of acceleration of such
Notes by the holders of at least a majority in aggregate principal amount of
such Notes and a waiver of the payment default that resulted from such
acceleration), (v) make the principal of, or premium, if any, or interest on,
any such Note payable in money other than that stated in such Notes, (vi) make
any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of holders of Notes to receive payments of principal or
premium, if any, of interest on the Notes, (vii) waive a redemption payment
with respect to any such Note or (viii) make any change in the foregoing
amendment and waiver provisions.
96
<PAGE>
Notwithstanding the foregoing, without the consent of any holder of Senior
Notes or Senior Discount Notes, as the case may be, the Company and the
Trustee may amend or supplement the relevant Indenture or the relevant Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to holders of the Notes in the case of
a merger, consolidation or sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of the Company's properties or
assets, to make any change that would provide any additional rights or
benefits to the holders of the Notes or that does not materially and adversely
affect the legal rights under the Indenture of any such holder, or to comply
with requirements of the Commission in order to maintain the qualification of
the Indenture under the Trust Indenture Act.
The holders of a majority in aggregate principal amount of the Senior Notes
or the Senior Discount Notes, as the case may be, may waive in advance
compliance with the restrictive covenants and provisions of the respective
Indentures described under "--Certain Covenants," "--Reports to Holders" and
"--Change of Control," as well as certain other covenants of the Company in
the Indentures, except for the covenant requiring payment of principal,
premium and interest and the provision permitting such waiver.
GLOBAL SECURITIES
Upon issuance, all Senior Notes will be represented by one or more global
securities and all Senior Discount Notes will be represented by one or more
global securities (each, a "Global Security"). Each Global Security will be
deposited with, or on behalf of, the Depository Trust Company (the
"Depositary") and registered in the name of a nominee of the Depositary. Notes
will not be exchangeable for certificated notes; provided that (i) if the
Depositary is at any time unwilling or unable to continue as Depositary and a
successor depositary is not appointed by the Company within 90 days or (ii) if
an Event of Default has occurred and is continuing with respect to the Senior
Notes or the Senior Discount Notes and holders of more than 25% in aggregate
principal amount of such Notes at the time outstanding represented by the
Global Security advise the Trustee that the continuation of a book-entry
system through the Depositary (or a successor thereto) with respect to such
Notes is no longer required, the Company will issue certificated notes in
exchange for the Global Security representing the Senior Notes or the Senior
Discount Notes, as the case may be. In addition, the Company may at any time
and in its sole discretion determine not to have the Senior Notes or the
Senior Discount Notes represented by a Global Security and, in such event,
will issue certificated notes in exchange therefor.
Upon the issuance of a Global Security, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts
of the Senior Notes or the Senior Discount Notes, as the case may be,
represented by the Global Security to the accounts of institutions that have
accounts with the Depositary ("Participants"). The accounts to be credited
shall be designated by the Underwriters. Ownership of beneficial interests in
a Global Security will be limited to Participants or Persons that may hold
interests through Participants. Ownership of beneficial interests in a Global
Security will be shown on, and the transfer of that ownership will be effected
only through, records maintained by the Depositary with respect to
Participants' interests or by the Participants or by Persons that hold through
Participants with respect to beneficial owners' interests. The laws of some
states require that certain purchasers of securities take physical delivery of
such securities in definitive form. Such ownership limits and such laws may
impair the ability to transfer beneficial interests in a Global Security.
Principal and interest payments on Senior Notes or Senior Discount Notes, as
the case may be, registered in the name of the Depositary or its nominee will
be made to the Depositary or its nominee, as the case may be, as the
registered owner of the Global Security representing such Notes. The Company
also expects that the Depositary, upon receipt of any payment of principal or
interest in respect of a Global Security, will immediately credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global
Security as shown on the records of the Depositary. The Company also expects
that payments by Participants to owners of beneficial interests in a Global
Security held through such Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name,"
and will be the responsibility
97
<PAGE>
of such Participants. None of the Company, the Trustee, any paying agent or
any registrar for the Senior Notes or the Senior Discount Notes will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global
Security or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
The Depository Trust Company, New York, New York, ("DTC") will be the
initial Depositary with respect to the Notes. DTC has advised the Company that
it is a limited-purpose trust company organized under the laws of the State of
New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934. DTC was created to hold securities of its Participants
and to facilitate the clearance and settlement of securities transactions
among its Participants in such securities through electronic book-entry
changes in accounts of the Participants, thereby eliminating the need for
physical movement of securities certificates. DTC's Participants include
securities brokers and dealers (including the Underwriters), banks, trust
companies, clearing corporations and certain other organizations, some of whom
(and/or their representatives) own DTC. Access to DTC's book-entry system is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly. Persons who are not Participants may
beneficially own securities held by DTC only through Participants.
LIMITATIONS ON RIGHTS OF BENEFICIAL OWNERS
As long as the Depositary, or its nominee, is the holder of a Global
Security, the Depositary or its nominee, as the case may be, will be
considered the sole owner or holder of the Notes represented by such Global
Security for all purposes under the relevant Indenture or such Global
Security. Except as set forth above, owners of beneficial interests in a
Global Security will not be entitled to have Notes represented by such Global
Security registered in their names, will not receive or be entitled to receive
physical delivery of Senior Notes or Senior Discount Notes, as the case may
be, in definitive form and will not be considered the owners or holders
thereof under the Indenture governing such Notes or under such Global
Security. Accordingly, each person owning a beneficial interest in such Global
Security must rely on the procedures of the Depositary and, if such person is
not a Participant, on the procedures of the Participant through which such
person directly or indirectly owns its interest, to exercise any rights of a
holder under the relevant Indenture or such Global Security.
DTC has informed the Company that under existing DTC policies and industry
practices, if the Company requests any action of holders, or if any owner of a
beneficial interest in such Global Security desires to give any notice or take
any action that a holder is entitled to give or take under the relevant
Indenture or the relevant Global Security, DTC would authorize and cooperate
with each Participant to whose account any portion of the Senior Notes or the
Senior Discount Notes, as the case may be, represented by such Global Security
is credited on DTC's books and records to give such notice or take such
action. Any person owning a beneficial interest in such Global Security that
is not a Participant must rely on any contractual arrangements it has
directly, or indirectly through its immediate financial intermediary, with a
Participant to give such notice or take such action.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indentures. Reference
is made to the relevant Indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
"Accreted Value" means with respect to any Senior Discount Note, as of any
specified date on or prior to July 1, 2001, the amount provided below for each
$1,000 principal amount of Notes:
98
<PAGE>
(i) if the specified date occurs on one of the following dates (each a
"Semiannual Accrual Date"), the Accreted Value will equal the amount set forth
below for such Semiannual Accrual Date:
<TABLE>
<CAPTION>
ACCRETED
SEMIANNUAL ACCRUAL DATE VALUE
----------------------- --------
<S> <C>
January 1, 1997................................................. $ 614
July 1, 1997.................................................... $ 649
January 1, 1998................................................. $ 685
July 1, 1998.................................................... $ 723
January 1, 1999................................................. $ 763
July 1, 1999.................................................... $ 805
January 1, 2000................................................. $ 850
July 1, 2000.................................................... $ 897
January 1, 2001................................................. $ 947
July 1, 2001.................................................... $1,000
</TABLE>
(ii) if the specified date occurs before the first Semiannual Accrual Date,
the Accreted Value will equal the sum of (a) $582.15 and (b) an amount equal
to the product of (1) the Accreted Value for the first Semiannual Accrual Date
less $582.15 multiplied by (2) a fraction, the numerator of which is the
number of days from the Issuance Date to the specified date, using a 360-day
year of twelve 30-day months, and the denominator of which is the number of
days from the Issuance Date to the first Semiannual Accrual Date, using a 360-
day year of twelve 30-day months; or
(iii) if the specified date occurs between two Semiannual Accrual Dates, the
Accreted Value will equal the sum of (a) the Accreted Value for the Semiannual
Accrual Date immediately preceding such specified date and (b) an amount equal
to the product of (1) the Accreted Value for the immediately following
Semiannual Accrual Date less the Accreted Value for the immediately preceding
Semiannual Accrual Date multiplied by (2) a fraction, the numerator of which
is the number of days from the immediately preceding Semiannual Accrual Date
to the specified date, using a 360-day year of twelve 30-day months, and the
denominator of which is 180.
"Acquired Indebtedness" means (a) Indebtedness of any other Person existing
at the time such other Person merged with or into or became a Restricted
Subsidiary, including Indebtedness incurred in connection with or in
contemplation of such other Person merging with or into or becoming a
Restricted Subsidiary, (b) Indebtedness of any other Person assumed by the
Company or a Restricted Subsidiary in connection with the acquisition of
assets from such other Person, and (c) Indebtedness secured by a Lien
encumbering any asset acquired by the Company or a Restricted Subsidiary.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise.
"Asset Sale" means (a) any sale, lease, transfer, conveyance or other
disposition of any assets (including by way of a sale-leaseback) other than
the sale or transfer of inventory or goods (including equipment) held for sale
in the ordinary course of business (provided that the sale, lease, transfer,
conveyance or other disposition of all or substantially all of the assets of
the Company shall not be deemed to be an "Asset Sale" and shall be governed by
the provisions of the relevant Indenture described under "--Change of Control"
or the covenant entitled "Limitation on Merger, Consolidation or Sale of
Assets") or (b) any issuance, sale, lease, transfer, conveyance or other
disposition of any Equity Interests of any of the Company's Restricted
Subsidiaries (other than director's qualifying shares) to any Person.
Notwithstanding the foregoing, none of the following shall be deemed to be an
Asset Sale: (i) a swap or other exchange of cable, fiber line or other
equipment or transmission capacity or of networks or systems between the
Company or any Restricted Subsidiary and any other Person which is an exchange
at Fair Market Value, (ii) an issuance and sale of Equity Interests by a
Restricted Subsidiary to the Company or to another Restricted Subsidiary
including any such issuance in connection with
99
<PAGE>
the contribution to such Restricted Subsidiary of Telecommunications Assets,
(iii) any Asset Sale or Asset Sales which, in any calendar year, involve
assets with an aggregate Fair Market Value not in excess of $5 million, (iv)
any lease of cable, fiber optic or transmission capacity, any lease of
equipment or equipment space, any grant of indefeasible rights-of-use or
rights-of-access or similar rights and grants of nominal title to assets by
the Company or a Restricted Subsidiary entered into in the ordinary course and
consistent with past practices; (v) any sale or other disposition of any or
all of the capital stock or assets of an Unrestricted Subsidiary; and (vi) any
sale, transfer or conveyance of Eligible Cash Equivalents or Permitted
Temporary Investments. Additionally, the contribution of Telecommunications
Assets to an Unrestricted Subsidiary whereby the Company or a Restricted
Subsidiary receives an equity interest in such Unrestricted Subsidiary shall
be deemed not to be an Asset Sale and will be deemed to be a Restricted
Payment and be governed by the covenant entitled "Limitation on Restricted
Payments."
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be so required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means, with respect to any specified Person, any and all
shares, interests, participations, rights or other equivalents (however
designated) of capital stock, including, without limitation, partnership
interests of such Person.
"Change of Control" means (a) the sale, lease, transfer, conveyance or other
disposition of all or substantially all of the assets of the Company to any
"person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of
the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing
of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act)
other than Permitted Holders (except in connection with a liquidation or
dissolution of the Company that does not constitute a Change of Control under
clause (b) below), (b) the approval by the requisite stockholders of the
Company of a plan of liquidation or statutory dissolution (which shall not be
construed to include a plan of merger or consolidation) of the Company, unless
Permitted Holders "beneficially own" (as defined in Rule 13d-3 under the
Exchange Act) at least the same percentage of voting power after the
consummation of such plan as before or otherwise retain the right or ability,
by voting power, to control the Person that acquires the proceeds of such
liquidation or dissolution, (c) any "person" or "group" (within the meaning of
Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision
to either of the foregoing, including any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of Rule 13d-
5(b)(1) under the Exchange Act), other than Permitted Holders, becomes the
"beneficial owner" (as so defined) of more than 35% of the total voting power
of all classes of the voting stock of the Company and/or warrants or options
to acquire such voting stock, calculated on a fully diluted basis, provided
that Permitted Holders "beneficially own" (as so defined) in the aggregate a
percentage of such voting stock or warrants having a lesser percentage of
voting power than such other "person" or "group" and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the Company's Board of Directors, or (d) during any
period of two consecutive years, individuals who at the beginning of such
period constituted the Company's Board of Directors (together with any new
directors whose election or appointment by such board or whose nomination for
election by the stockholders of the Company was approved by a vote of the
Permitted Holders or a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Company's Board of Directors then in office.
"Common Stock" means, with respect to the Company, the Class A Common Stock,
the Class B Common Stock or any similar common stock of the Company.
"Consolidated Interest Expense" means, with respect to the Company and its
Restricted Subsidiaries, for any period, the amount of interest in respect of
Indebtedness (including amortization of original issue discount, amortization
of debt issuance costs, and non-cash interest payments on any Indebtedness and
the interest portion of any deferred payment obligation and after taking into
account the effect of elections made under any Interest
100
<PAGE>
Rate Agreement, however denominated, with respect to such Indebtedness), the
net costs associated with Interest Rate Agreements, preferred stock dividends
of the Company (and of its Restricted Subsidiaries if paid to a Person other
than the Company or its Restricted Subsidiaries) and the interest component of
rentals in respect of any Capital Lease Obligation paid, in each case whether
accrued or scheduled to be paid or accrued by the Company and its Restricted
Subsidiaries during such period to the extent such amounts were deducted in
computing Consolidated Net Income, determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company for any period,
the aggregate net income of the Company and its Restricted Subsidiaries for
such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the net income of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of dividends or distributions
paid to the Company or a Restricted Subsidiary, (ii) the net income of any
Person acquired in a pooling of interests transaction for any period prior to
the date of such acquisition shall be excluded, (iii) the cumulative effect of
a change in accounting principles shall be excluded, (iv) all items classified
as extraordinary gains or losses of the Company or a Restricted Subsidiary for
such period shall be excluded, (v) the net income of any Restricted Subsidiary
shall be included only to the extent that the declaration or payment of
dividends or similar distributions by such Restricted Subsidiary of such net
income is not at the time prohibited by the operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to such Restricted Subsidiary, and (vi)
with respect to a non-Wholly Owned Restricted Subsidiary, any aggregate net
income (or loss) in excess of the Company's or such Restricted Subsidiary's
pro rata share of such non-Wholly Owned Restricted Subsidiary's net income (or
loss) shall be excluded.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
date on which the relevant Notes mature.
"EBITDA" means, with respect to the Company and its Restricted Subsidiaries,
for any period, an amount equal to (A) the sum of (i) Consolidated Net Income
for such period (exclusive of any gain or loss realized in such period upon an
Asset Sale or upon transactions that are excluded from the definition of Asset
Sale pursuant to clauses (v) and (vi) of such definition and that involve
securities), plus (ii) the provision for taxes for such period based on income
or profits to the extent such income or profits were included in computing
Consolidated Net Income and any provision for taxes utilized in computing net
loss under clause (i) hereof, plus (iii) Consolidated Interest Expense for
such period, plus (iv) depreciation for such period on a consolidated basis to
the extent deducted in calculating Consolidated Net Income, plus (v)
amortization of intangibles for such period on a consolidated basis to the
extent deducted in calculating Consolidated Net Income, plus (vi) any other
non-cash item reducing Consolidated Net Income for such period, plus (vii) any
premium or penalty paid in connection with repurchasing, redeeming, retiring,
defeasing or acquiring any Indebtedness prior to maturity to the extent
deducted in calculating Consolidated Net Income, minus (B) all non-cash items
increasing Consolidated Net Income for such period, determined in accordance
with GAAP consistently applied.
"Eligible Cash Equivalents" means (i) United States dollars, (ii) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than one year and one day from the date of acquisition, (iii)
certificates of deposit and Eurodollar time deposits with maturities of one
year or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each case
with any commercial bank(s) domiciled in the United States or in any member of
the OECD having capital and surplus in excess of $500 million and a Keefe Bank
Watch Rating of "B" or better, (iv) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
clauses (ii) and (iii) entered into with any financial institution meeting the
qualifications specified in clause (iii) above, (v) commercial paper rated no
lower than P-2 or the equivalent thereof by Moody's Investors Service, Inc. or
no lower than A-2 or the equivalent thereof by Standard & Poor's Ratings Group
or corporate notes, bonds or medium term notes rated no lower than A-2 or the
equivalent thereof by Moody's Investors Service, Inc. or no lower than A or
the equivalent
101
<PAGE>
thereof by Standard & Poor's Ratings Group, and in each case maturing within
one year and one day after the date of acquisition, (vi) direct obligations
issued by any state of the United States or any political subdivision of any
such state or political instrumentality thereof maturing, or subject to tender
at the option of the holder thereof, within ninety (90) days after the date of
acquisition, having a rating of A from Standard & Poor's Ratings Group or A-2
from Moody's Investors Service, Inc., (vii) asset-backed securities with a
Weighted Average Life to Maturity equal to or less than one year and one day
from the time of acquisition and rated no lower than Aaa or the equivalent
thereof by Moody's Investors Service, Inc. or AAA or the equivalent thereof by
Standard & Poor's Ratings Group; (viii) variable rate securities with a reset
date equal to or less than 91 days from the time of acquisition, maturing
within two years and rated no lower than A-2 or the equivalent thereof by
Moody's Investors Service, Inc. or no lower than A or the equivalent thereof
by Standard & Poor's Ratings Group; and (ix) investments in money market funds
substantially all of whose assets comprise securities of the types described
in clauses (i) through (viii).
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any Indebtedness that is
convertible into, or exchangeable for, Capital Stock, except to the extent
such Indebtedness has been so converted or exchanged).
"Exchange Rate Contract" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combinations thereof, the principal purpose of
which is to provide protection against fluctuations in currency exchange
rates. An Exchange Rate Contract may also include an Interest Rate Agreement.
"Existing Indebtedness" means Indebtedness of the Company and its Restricted
Subsidiaries in existence on the Issuance Date, including Indebtedness
incurred under the Revolving Credit Agreement as in effect on the Issuance
Date, until such amounts are repaid.
"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length transaction, for cash, between a
willing seller and a willing buyer, neither of whom is under pressure or
compulsion to complete the transaction. Fair Market Value shall be determined
(i) for an amount not in excess of $15 million, by the Chief Financial Officer
of the Company, or (ii) for an amount of $15 million or more, by the Board of
Directors of the Company acting in good faith and shall be evidenced by a
Board Resolution, and in either case shall be set forth in an Officers'
Certificate delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting
profession, which may be in effect from time to time and are applied on a
consistent basis.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor" means any Restricted Subsidiary which is a guarantor of the
relevant Notes, including any Person that is required after the Issuance Date
to execute a guarantee of such Notes pursuant to the covenant entitled
"Limitations on Guarantees of Indebtedness by Restricted Subsidiaries" until a
successor replaces such party pursuant to the applicable provisions of the
relevant Indenture and, thereafter shall mean such successor.
"Indebtedness" means, with respect to any Person, without duplication, (i)
any indebtedness of such Person, whether or not contingent, in respect of
borrowed money or evidenced by bonds, notes, debentures or similar instruments
or letters of credit (or reimbursement agreements in respect thereof) or
banker's acceptances or the balance deferred and unpaid of the purchase price
of any property (including pursuant to capital leases and Sale-Leaseback
Transactions) or representing any hedging obligations under an Exchange Rate
Contract or an Interest Rate Agreement, except any such balance that
constitutes an accrued expense or trade payable or customer deposit received
in the ordinary course of business, if and to the extent any of the foregoing
indebtedness (other than obligations under an Exchange Rate Contract or an
Interest Rate Agreement) would appear as a liability upon a balance sheet of
such Person prepared in accordance with GAAP, (ii) Indebtedness
102
<PAGE>
of others secured by a Lien on any asset of such Person (whether or not such
Indebtedness is assumed by such Person), but, if such indebtedness is
otherwise non-recourse to such Person, only to the extent of the lesser of
(x) the Fair Market Value of such asset at the time of determination and (y)
the amount of such Indebtedness, (iii) to the extent not otherwise included,
the Guarantee of items defined in clauses (i) and (ii) above and (iv) the
maximum fixed redemption or repurchase price of Disqualified Stock of such
Person at the time of determination. For purposes of the preceding sentence,
(1) the maximum fixed repurchase price of Disqualified Stock that does not
have a fixed repurchase price shall be calculated in accordance with the terms
of such Disqualified Stock as if such Disqualified Stock were repurchased on
any date on which Indebtedness shall be required to be determined pursuant to
the Indenture; provided, however, that if such Disqualified Stock is not then
permitted to be repurchased, the repurchase price shall be the book value of
such Disqualified Stock, and (2) the amount outstanding at any time of any
Indebtedness issued with original issue discount is the accreted value of such
Indebtedness.
"Indebtedness to Adjusted Total Equity Ratio" means as of the date of
determination the ratio of (i) the aggregate amount of Indebtedness of the
Company and its Restricted Subsidiaries on a consolidated basis as at the date
of determination to (ii) the sum of (a) the total equity investments in the
Company as of July 2, 1996 adjusted to give effect to the Stock Offerings and
the repurchase of 7,975,738 shares of Class B Common Stock from Continental,
provided that any issuance of Equity Interests pursuant to the Reorganization
shall be included only to the extent actually issued and shall be treated as
if issued on or prior to the Issuance Date regardless of the date such Equity
Interests were actually issued (after giving effect to the Reorganization on a
pro forma basis, total equity investments is expected to be $1,057.0 million
including the over-allotment option), (b) two times the aggregate net cash
proceeds to the Company from the issuance of any Equity Interests (other than
Disqualified Stock) subsequent to the Issuance Date, (c) two times the
aggregate net cash proceeds to the Company from the sales of Disqualified
Stock of the Company or debt securities of the Company convertible into Equity
Interests of the Company, in either case upon conversion thereof into Equity
Interests (other than Disqualified Stock) of the Company subsequent to the
Issuance Date; provided, however, that, for purposes of calculation of the
Indebtedness to Adjusted Total Equity Ratio the net cash proceeds from the
sale of Capital Stock of the Company, including Capital Stock issued upon the
conversion of convertible Indebtedness, described in clause (b) or (c) above,
shall not be included if such proceeds have been utilized to make a (x)
Restricted Payment, (y) a Permitted Investment under clause (d) of the
definition of Permitted Investment (provided that such amounts shall be
included to the extent of such amounts invested in Local Market Partnerships
that become Restricted Subsidiaries prior to the first anniversary of the
Issuance Date) or (z) a Permitted Investment pursuant to clause (e)(ii) of the
definition of Permitted Investments (provided that such amounts shall be
included to the extent of the Fair Market Value of the Company's interest in
any Joint Ventures that become Restricted Subsidiaries but not in excess of
the amount of any such Investments in such Joint Ventures pursuant to such
clause (e)(ii)).
"Indebtedness to EBITDA Ratio" means, as at any date of determination, the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis as at the date of
determination to (ii) the aggregate amount of EBITDA of the Company and its
Restricted Subsidiaries for the four preceding fiscal quarters for which
financial information is available immediately prior to the date of
determination; provided that any Indebtedness incurred or retired by the
Company or any of its Restricted Subsidiaries during the fiscal quarter in
which the determination date occurs shall be calculated as if such
Indebtedness was so incurred or retired on the first day of such four fiscal
quarter period; and provided further that (x) if the transaction giving rise
to the need to calculate the Indebtedness to EBITDA Ratio would have the
effect of increasing or decreasing Indebtedness or EBITDA in the future,
Indebtedness or EBITDA shall be calculated on a pro forma basis as if such
transaction had occurred on the first day of such four fiscal quarter period
preceding the date of determination, and (y) if during such four fiscal
quarter period, the Company or any of its Restricted Subsidiaries shall have
engaged in any Asset Sale, EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive), or increased by an amount equal to
the EBITDA (if negative), directly attributable to the assets which are the
subject of such Asset Sale and any related retirement of Indebtedness as if
such Asset Sale and related retirement of Indebtedness had occurred on the
first day of such period and (z) if during such four fiscal quarter period the
Company or any of its Restricted Subsidiaries shall
103
<PAGE>
have acquired any material assets out of the ordinary course of business,
EBITDA shall be calculated on a pro forma basis as if such asset acquisition
and related financing had occurred on the first day of such period.
"Interest Rate Agreement" means, for any Person, any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement or
other similar agreement the principal purpose of which is to protect the party
indicated therein against fluctuations in interest rates.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans
(including Guarantees, advances or capital contributions (excluding
commission, travel and similar advances and loans, in each case, made to
officers and employees) made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or
other securities and all other items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. Investments
shall exclude accounts receivable and other extensions of trade credit on
commercially reasonable terms in accordance with the Company's normal trade
practice. In addition, the Fair Market Value of the net assets of any
Restricted Subsidiary at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary shall be deemed to be an "Investment"
made by the Company in such Unrestricted Subsidiary at such time.
"Issuance Date" means the date on which the Notes are first authenticated
and issued.
"Joint Venture" means any Person engaged in the Telecommunications Business
in which the Company or any Restricted Subsidiary owns an Equity Interest and
which may be an Unrestricted Subsidiary.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale, net of (a)
the direct costs relating to such Asset Sale (including, without limitation,
legal, title, recording, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof, (b)
taxes paid or payable as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements), (c)
amounts required to be applied to the repayment of Indebtedness secured by a
Lien on the asset or assets that are the subject of such Asset Sale or in
order to obtain a consent necessary to effect such Asset Sale and (d) any
reserve for adjustment or indemnification in respect of the sale price of such
asset or assets (provided that any such reserves shall be added back to Net
Proceeds upon the release of such reserves) and required distributions to
holders of minority interests. Furthermore, the amount of (i) any liabilities
(as shown on the Company's or such Restricted Subsidiary's most recent balance
sheet or in the notes thereto) of the Company or any Restricted Subsidiary
that are assumed by the transferee of any assets sold in an Asset Sale and
(ii) any notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are immediately converted by
the Company or such Restricted Subsidiary into Eligible Cash Equivalents,
shall be deemed to be Eligible Cash Equivalents (to the extent of the Eligible
Cash Equivalents received in such conversion) for purposes of clause (b) of
the covenant entitled "Limitation on Asset Sales."
"Non-Recourse Indebtedness" means Indebtedness or that portion of
Indebtedness (a) as to which none of the Company or any Restricted Subsidiary:
(i) provides credit support (including any undertaking, agreement or
instrument which would constitute Indebtedness); (ii) is directly or
indirectly liable; or (iii) constitutes the lender, and (b) no default with
respect to which (including any rights which the holders thereof may have to
take enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior
to its stated maturity.
104
<PAGE>
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Holders" means Comcast Corporation, a Pennsylvania corporation,
Continental Cablevision Inc., a Delaware corporation, Cox Communications,
Inc., a Delaware corporation, Tele-Communications, Inc., a Delaware
corporation, U S WEST, Inc., a Delaware corporation, any successor (by merger,
consolidation, transfer or otherwise) (i) to all or substantially all of the
business or assets of any of the foregoing or (ii) to cable television systems
of any of the foregoing with at least five million cable television households
passed, and any Person at least 51% of the Capital Stock of which is owned,
directly or indirectly, by one or any group of the foregoing Permitted
Holders.
"Permitted Indebtedness" means: (1) for Indebtedness of either the Company
or any Restricted Subsidiary (a) Telecommunications Assets Indebtedness, (b)
Indebtedness owed by the Company to any Restricted Subsidiary (but only so
long as such Indebtedness is held by such Restricted Subsidiary) and
Indebtedness owed by a Restricted Subsidiary to the Company or any other
Restricted Subsidiary (but only so long as such Indebtedness is held by the
Company or such other Restricted Subsidiary); (c) Indebtedness under any
Exchange Rate Contract or Interest Rate Agreements, provided that the
obligations under such agreements are related to payment obligations on
Existing Indebtedness or Refinancing Indebtedness of the Company or a
Restricted Subsidiary, as applicable, or Indebtedness permitted to be incurred
pursuant to the covenant entitled "Limitation on Incurrence of Indebtedness";
(d) letters of credit or performance bonds or performance guarantees incurred
in the ordinary course of business and consistent with industry practice; (e)
Existing Indebtedness; (f) Indebtedness issued in exchange for or the proceeds
of which are used to extend, refinance, renew, replace or refund outstanding
Indebtedness that is incurred or outstanding pursuant to clauses (a), (e), (h)
or this clause (f) of this definition or clause (b) of the covenant entitled
"Limitation on Incurrence of Indebtedness" (the "Refinancing Indebtedness");
provided, however, that (i) the principal amount of, and any premium payable
in respect of, such Refinancing Indebtedness shall not exceed the principal
amount of Indebtedness so extended, refinanced, renewed, replaced or refunded
(plus the amount of reasonable expenses incurred in connection therewith);
(ii) the Refinancing Indebtedness shall have a (A) Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
and (B) a stated maturity no earlier than the stated maturity of, the
Indebtedness being extended, refinanced, renewed, replaced or refunded; (iii)
the Refinancing Indebtedness shall rank in right of payment to the relevant
Notes on terms no less favorable to the holders of such Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced or refunded; and (iv) the Company shall incur
Refinancing Indebtedness only to refinance Indebtedness of the Company or of a
Restricted Subsidiary and a Restricted Subsidiary shall incur Refinancing
Indebtedness only to refinance Indebtedness of such Restricted Subsidiary or
any other Restricted Subsidiary; (g) Indebtedness represented by performance
bonds, surety or appeal bonds, or similar obligations incurred in the ordinary
course of business; (h) Indebtedness incurred in connection with a prepayment
or redemption of the Notes pursuant to a Change of Control, provided that such
Indebtedness is Indebtedness of the Company and the principal amount of such
Indebtedness does not exceed 101% of the principal amount of the Notes prepaid
or redeemed (plus the amount of reasonable expenses incurred in connection
therewith) and that such Indebtedness has (A) a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
and (B) a stated maturity no earlier than the Stated Maturity of, the relevant
Notes; (i) ordinary course Capital Lease Obligations or purchase money debt
for plant or equipment secured by a Lien on property acquired, constructed or
developed by the Company or any Restricted Subsidiary in an aggregate amount
not to exceed $20 million outstanding at any time; (j) Indebtedness or
Guarantee of Indebtedness under the Revolving Credit Agreement in an aggregate
amount not to exceed $400 million outstanding at any time; and (k) additional
Indebtedness in an aggregate principal amount not to exceed $50 million at any
one time outstanding; and (2) for Indebtedness of the Company, Indebtedness
evidenced by the Notes.
"Permitted Investments" means (a) any Investments in the Company or in a
Restricted Subsidiary (including through a purchase of Equity Interests in
such Restricted Subsidiary from another Person), provided that any purchase of
Equity Interests in a Restricted Subsidiary from any Person other than another
Restricted
105
<PAGE>
Subsidiary shall be a Permitted Investment only if such Restricted Subsidiary
is engaged in the Telecommunications Business; (b) any Investments in Eligible
Cash Equivalents; (c) Investments by the Company or any Restricted Subsidiary
in a Person (including through a purchase of Equity Interests in such Person
from another Person), if as a result of such Investment (i) such person
becomes a Restricted Subsidiary that is engaged in the Telecommunications
Business or (ii) such person is merged or consolidated with or into, or
transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Restricted Subsidiary that is engaged in the
Telecommunications Business; (d) Investments up to an aggregate of $150
million in Local Market Partnerships existing at the Issuance Date, which
Investments are used to fund a Telecommunications Business, provided that no
such Investment in a Local Market Partnership pursuant to this clause (d) may
be made after the first anniversary of the Issuance Date; (e) Investments
after the Issuance Date in Joint Ventures in an aggregate amount not to exceed
the sum of (i) (1) for any Joint Venture, $200 million and (2) for Joint
Ventures in which the Company or any Restricted Subsidiary owns a 35% or
greater share of Equity Interests and is the managing partner, $200 million
plus any amount not invested pursuant to the preceding clause (1), plus (ii)
for any Joint Venture, the net cash proceeds received by the Company from any
Person from the issuance and sale subsequent to the Issuance Date of Equity
Interests of the Company or of debt securities of the Company that have been
converted into such Equity Interests (other than Equity Interests (or
convertible debt securities) sold to a Restricted Subsidiary and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock) subsequent to the Issuance Date, plus (iii) for any Joint
Venture, the Fair Market Value of the Company's interest in any Joint Ventures
that become Restricted Subsidiaries but not in excess of the amount of any
such Investments in such Joint Ventures pursuant to clause (e)(ii), provided,
that amounts added pursuant to this clause (iii) out of Investments originally
made pursuant to subclause (i)(2) of this clause (e) shall not be used for
Investments in Joint Ventures not described in such subclause (i)(2); (f)
loans and advances to employees made in the ordinary course of business and
consistent with past practice in an aggregate amount not to exceed $1 million
outstanding at any time; (g) bonds, notes, debentures, partnership or joint
venture interests, stock or other securities received as a result of Asset
Sales permitted under the covenant described in "Limitation on Asset Sales";
(h) any Investments in Permitted Temporary Investments of the proceeds from
the issuance of the Notes and from the Stock Offering; (i) any Investments in
prepaid expenses, negotiable instruments held for collection and lease,
utility and workers' compensation, performance and other similar deposits; and
(j) any Exchange Rate Contract or Interest Rate Contract.
"Permitted Liens" means (a) Liens in favor of the Company; (b) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Restricted Subsidiary; provided that such
Liens were not granted in contemplation of such merger or consolidation and do
not secure any property or assets of the Company or any of its Restricted
Subsidiaries other than the property or assets subject to the Liens prior to
such merger or consolidation; (c) liens imposed by law, including restrictions
on transfer of governmental licenses, permits and authorizations and
carriers', warehousemen's, landlords' and mechanics' liens and other similar
liens arising in the ordinary course of business which secure payment of
obligations not more than 60 days past due or are being contested in good
faith and by appropriate proceedings; (d) Liens existing on the Issuance Date;
(e) Liens for taxes, assessments or governmental charges or claims that are
not yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded; provided that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (f) easements, rights of way, restrictions
and other similar easements, licenses, restrictions on the use of properties
or minor imperfections of title, or other incidental Liens not incurred in
connection with the borrowing of money or the obtaining of advances or credit,
that in the aggregate, are not material in amount, and do not in any case
materially detract from the properties subject thereto or interfere with the
ordinary course of the business of the Company or its Restricted Subsidiaries;
(g) Liens securing Indebtedness incurred under the Revolving Credit Agreement;
(h) Liens securing Telecommunications Assets Indebtedness; (i) Liens of
utility companies and other Persons pursuant to pole attachment agreements or
other easement agreements, and restrictions on the transfer of rights under
franchises, pole attachment agreements or other easements, and any
encumbrances created in favor of franchising authorities and customers by
provisions or franchises on plant and equipment located in the areas covered
thereby; (j) Liens under capitalized leases or
106
<PAGE>
purchase money security interests relating to Indebtedness permitted to be
incurred under the "Limitation of Incurrence of Indebtedness" covenant; (k)
Liens incurred to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature incurred
in the ordinary course of business; (l) any Lien to secure obligations under
workmen's compensation laws or similar legislation including unemployment
insurance or social security laws; (m) Liens in the form of a pledge of
Capital Stock of a Restricted Subsidiary to secure Indebtedness of such
Restricted Subsidiary that is otherwise permitted to be incurred pursuant to
the covenant entitled "Limitation on Incurrence of Indebtedness"; (n) Liens
arising as a result of any grant of indefeasable rights-of-use or rights-of-
access or similar rights and grants of nominal title to assets entered into in
the ordinary course and consistent with past practice; and (o) Liens securing
Refinancing Indebtedness, provided that the Indebtedness being refinanced is
secured and such Liens encumber no additional assets than those pursuant to
the Indebtedness being refinanced.
"Permitted Temporary Investments" means (a) all Eligible Cash Equivalents,
except that each use of the term "one year" in such definition is changed to
"two years" and (b) debt securities issued by any Person which has outstanding
pari passu debt securities with an investment grade rating by Standard &
Poor's Ratings Group or Moody's Investors Service, Inc. and that mature within
two years and one day after the date of acquisition.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, trust, unincorporated organization or government or
any agency or political subdivision thereof.
"Public Equity Offering" means an underwritten public offering (other than
the Stock Offering) by the Company after the Issuance Date of Common Stock of
the Company pursuant to a registration statement filed pursuant to the
Securities Act of 1933, as amended.
"Reorganization" means all of the transactions that are described in this
Prospectus under the caption "The Reorganization" as constituting the
"Reorganization" which are to be effected pursuant to the Reorganization
Agreement.
"Reorganization Agreement" means the Reorganization Agreement, dated as of
April 18, 1996, among the Company, TCI Communications, Inc., Cox
Communications, Inc., Comcast Corporation and Continental Cablevision, Inc.
"Restricted Payment" means (a) any dividend or any distribution on any
Equity Interests (other than dividends or distributions in additional Equity
Interests (other than Disqualified Stock) of the Company or a Restricted
Subsidiary or dividends or distributions payable to the Company or any Wholly
Owned Restricted Subsidiary); (b) any purchase, redemption, acquisition or
retirement for value of any Equity Interests of the Company or any Restricted
Subsidiary or other Affiliate of the Company (other than any such Equity
Interests owned by the Company or any Wholly Owned Restricted Subsidiary) that
is not a Permitted Investment; (c) any defeasance, purchase, redemption,
acquisition or retirement for value prior to final maturity of any
Indebtedness that is subordinated in right of payment (whether pursuant to its
terms or by operation of law) to the Notes or the guarantees thereof by the
Guarantors; and (d) any Investment that is not a Permitted Investment.
"Restricted Subsidiary" means any Subsidiary of the Company which is not an
Unrestricted Subsidiary.
"Revolving Credit Agreement" means the Loan Agreement dated as of May 22,
1995, as amended, among TCG New York Inc., the Banks, as defined in the Loan
Agreement, Toronto Dominion (Texas), Inc., and Chemical Bank, as such
agreement may be amended, modified, supplemented, refunded, refinanced or
replaced from time to time.
"Sale-Leaseback Transaction" means any direct or indirect arrangement, or
series of related arrangements, with any Person (other than the Company or a
Restricted Subsidiary) or to which any Person (other than the Company or a
Restricted Subsidiary) is a party, providing for the leasing to the Company or
to a Restricted Subsidiary of any property for an aggregate term exceeding
three years, whether owned by the Company or by
107
<PAGE>
any Subsidiary of the Company at the Issue Date or later acquired, which has
been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such property.
"Significant Subsidiary" means any Restricted Subsidiary which is a
"significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under
the Securities Act of 1933, as amended.
"Stated Maturity," when used with respect to a Note or any installment of
interest thereon, means the date specified in such Note as the final date on
which the principal of such Note or such installment of interest is due and
payable.
"Strategic Equity Investor" means a corporation or entity with an equity
market capitalization, a net asset value or annual revenues of at least $2
billion that owns and operates businesses in the telecommunications,
information systems, entertainment, cable or similar or related industries.
"Subsidiary" means, with respect to a specified Person, any corporation,
association or other business entity of which 50% or more of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by any
Person or one or more of the other Subsidiaries of that Person or a
combination thereof.
"Telecommunications Assets" means, with respect to any Person, any asset
that is utilized by such Person, directly or indirectly, for the design,
development, construction, installation, integration, operation, management or
provision of telecommunications systems and/or services, including without
limitation, any businesses or services in which the Company is currently
engaged and including any computer systems used in a Telecommunications
Business. Telecommunications Assets shall include stock, joint venture or
partnership interests where substantially all of the assets of the entity
being acquired consist of Telecommunications Assets.
"Telecommunications Assets Indebtedness" means Indebtedness incurred
(including in the case of discount or paid in kind Indebtedness any accretion
on such Indebtedness or notes payable in respect of such Indebtedness) by the
Company or a Restricted Subsidiary to finance the construction, expansion,
development or acquisition of Telecommunications Assets or the acquisition of
the Capital Stock of a Restricted Subsidiary substantially all the assets of
which are Telecommunications Assets, provided that the net cash proceeds from
the issuance of such Indebtedness do not exceed, as of the date of incurrence
of such Indebtedness, 100 percent of the lesser of cost or Fair Market Value
of such Telecommunications Assets so constructed or acquired; provided
further, however, that if an acquired Restricted Subsidiary has outstanding
previously incurred Indebtedness, such previously incurred Indebtedness will
also constitute Telecommunications Assets Indebtedness if such previously
incurred Indebtedness was not incurred in contemplation of such acquisition
and all such Indebtedness is Non-Recourse Indebtedness, except to the acquired
Restricted Subsidiary.
"Telecommunications Business" means the design, development, construction,
acquisition, installation, integration, management or provision of
telecommunications systems and/or services, including, without limitation, any
business or services in which the Company or any of its Restricted
Subsidiaries is engaged at the Issuance Date.
"Unrestricted Subsidiary" means any Subsidiary of the Company that is
designated by the Board of Directors of the Company as an Unrestricted
Subsidiary pursuant to a Board Resolution; but, in each case, only to the
extent that such Subsidiary (a) has no Indebtedness other than Non-Recourse
Indebtedness and (b) has not guaranteed any Indebtedness of the Company or any
of its Restricted Subsidiaries. Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing with the Trustee a certified copy
of the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant entitled "Limitation on
Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail
to meet the foregoing requirements as an Unrestricted
108
<PAGE>
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the
covenant entitled "Limitation on Incurrence of Indebtedness," the Company
shall be in default of such covenant). The Board of Directors of the Company
may at any time designate any Unrestricted Subsidiary as a Restricted
Subsidiary and such designation shall only be permitted if (i) the incurrence
of the Indebtedness of such Subsidiary is permitted under the covenant
entitled "Limitation on Incurrence of Indebtedness," and (ii) no Default or
Event of Default would be in existence following such designation. For so long
as any Subsidiary is an Unrestricted Subsidiary, all Subsidiaries of such
Unrestricted Subsidiary shall also be deemed to be Unrestricted Subsidiaries
and shall be required to meet the tests and comply with the restrictions set
forth above.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (x) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (y) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means, at any time, a Restricted
Subsidiary all of the Capital Stock of which (except directors' qualifying
shares) is at the time owned directly or indirectly by the Company.
109
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Prior to the consummation of the Offerings, TCG will amend its Amended and
Restated Certificate of Incorporation to change its authorized capital stock
to 900 million shares, including 450 million shares of Class A Common Stock,
$.01 par value per share, 300 million shares of Class B Common Stock, $.01 par
value per share, and 150 million shares of preferred stock, $.01 par value per
share (the "Preferred Stock"). Upon completion of the Stock Offerings, there
will be no preferred stock outstanding and Cox Teleport Partners, TCI
Teleport, Comcast Teleport and Continental Teleport will own of record all of
the outstanding shares of Class B Common Stock. See "Principal Stockholders."
The following summary description relating to the capital stock of the
Company does not purport to be complete. The rights of the holders of TCG's
capital stock will be set forth in TCG's Amended and Restated Certificate of
Incorporation, as so amended in accordance with the preceding paragraph, as
well as the Amended and Restated Stockholders' Agreement, the forms of both of
which are filed as exhibits to the Registration Statement of which this
Prospectus forms a part. The summary set forth below is qualified by reference
to such exhibits and to the applicable provisions of the Delaware General
Corporation Law (the "DGCL").
COMMON STOCK
The preferences and relative rights of the Class A Common Stock and Class B
Common Stock are substantially identical in all respects, except for voting
rights and conversion rights.
Voting Rights. Each share of Class A Common Stock entitles the holder to one
vote and each share of Class B Common Stock entitles the holder to 10 votes on
each matter to be voted upon by the holders of the Common Stock. The holders
of the shares of Class A Common Stock and Class B Common Stock vote as one
class on all matters to be voted on by stockholders, including, without
limitation, the election of directors and any proposed amendment to the
Amended and Restated Certificate of Incorporation of TCG that would increase
the authorized number of shares of Common Stock or any class thereof or any
other class or series of stock or decrease the number of authorized shares of
any class or series of stock (but not below the number thereof then
outstanding), except as required by the DGCL and except that, for a period of
five years from the date of the filing of TCG's Amended and Restated
Certificate of Incorporation, so long as the holders of Class B Common Stock
represent at least 50% of the voting power of the outstanding Common Stock,
the approval of the holders of a majority of the Class B Common Stock is
required for the Company to provide (i) wireless communications services that
use radio spectrum for cellular, personal communications service (PCS),
enhanced specialized mobile radio (ESMR), paging, mobile telecommunications
and any other voice or data wireless services whether fixed or mobile;
provided, however, that the Company may provide any brand telecommunications
products and services delivered via point-to-point microwave transmissions;
and (ii) telecommunications services to residences; provided, however, that
the Company may provide telecommunications services to residences to the
extent required by a regulatory authority having jurisdiction over the
Company's business, including requirements of the Company's local exchange
carrier certificates and common carrier obligations, if any, or in any
geographic area in which such services are offered as of July 1, 1996, but
only to the extent of the services then so offered.
Neither the holders of Class A Common Stock nor the holders of Class B
Common Stock have cumulative voting rights. For a discussion of the effects of
the disproportionate voting rights of the Class A Common Stock and Class B
Common Stock, see "Risk Factors--Control by Principal Stockholders; Conflicts
of Interest; Possible Competition."
Dividends. Each share of Common Stock is entitled to receive dividends from
funds legally available therefor if, as and when declared by the Board of
Directors of TCG. Class A Common Stock and Class B Common Stock share equally,
on a share-for-share basis, in any dividends declared by the Board of
Directors. If at any time a distribution of the Class A Common Stock or Class
B Common Stock is to be paid in shares of Class A Common Stock, Class B Common
Stock or any other securities of the Company or any other person,
110
<PAGE>
such dividends may be declared and paid only as follows: (1) a share
distribution consisting of Class A Common Stock to holders of Class A Common
Stock and Class B Common Stock, on an equal per share basis; or to holders of
Class A Common Stock only, but in such event there shall also be a
simultaneous share distribution to holders of Class B Common Stock consisting
of shares of Class B Common Stock on an equal per share basis; (2) a share
distribution consisting of Class B Common Stock to holders of Class B Common
Stock and Class A Common Stock, on an equal per share basis; or to holders of
Class B Common Stock only, but in such event there shall also be a
simultaneous share distribution to holders of Class A Common Stock consisting
of shares of Class A Common Stock on an equal per share basis; and (3) a share
distribution of shares of any class of securities of the Company or of any
other person other than the Common Stock, either on the basis of a
distribution of identical securities, on an equal per share basis to the
holders of Class A Common Stock and Class B Common Stock, or on the basis of a
distribution of one class of securities to the holders of Class A Common Stock
and another class of securities to holders of Class B Common Stock, provided
that the securities so distributed do not differ in any respect other than
relative voting rights and related differences in designations, conversion and
share distribution provisions, with the holders of Class B Common Stock
receiving the class having the higher relative voting rights, provided that if
the securities so distributed constitute capital stock of a subsidiary of the
Company, such rights shall not differ to a greater extent than the
corresponding differences in voting rights, designations, conversion and
distribution provisions between Class A Common Stock and Class B Common Stock.
If the Company shall in any manner subdivide or combine the outstanding shares
of Class A Common Stock or Class B Common Stock, the outstanding shares of the
other class of Common Stock shall be proportionally subdivided or combined in
the same manner and on the same basis as the outstanding shares of Class A
Common Stock or Class B Common Stock, as the case may be, that have been
subdivided or combined.
Conversion. Under the Amended and Restated Certificate of Incorporation,
each share of Class B Common Stock is convertible at any time and from time to
time at the option of the holder thereof into one share of Class A Common
Stock. The Class A Common Stock has no conversion rights.
Other. Stockholders of TCG have no preemptive or other rights to subscribe
for additional shares. All holders of Common Stock, regardless of class, are
entitled to share equally on a share-for-share basis in any assets available
for distribution to stockholders on liquidation, dissolution or winding up of
TCG. No shares of the Common Stock are subject to redemption or a sinking
fund. All outstanding shares are, and all shares offered by this Prospectus
will be, when sold, validly issued, fully paid and nonassessable. TCG may not
subdivide or combine shares of Common Stock without at the same time
proportionally subdividing or combining shares of the other classes.
PREFERRED STOCK
The Company's Board of Directors is authorized to provide for the issuance
of Preferred Stock in one or more series and to fix the designations,
preferences, powers and relative, participating, optional and other rights,
qualifications, limitations and restrictions thereof, including the dividend
rate, conversion rights, voting rights, redemption price and liquidation
preference and to fix the number of shares to be included in any such series.
Any Preferred Stock so issued may rank senior to the Common Stock with respect
to the payment of dividends or amounts upon liquidation, dissolution or
winding up, or both. In addition, any such shares of Preferred Stock may have
class or series voting rights.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the DGCL prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which such
stockholder became an interested stockholder, unless (i) prior to such date,
the board of directors of the corporation approved such business combination
or the transaction which resulted in such stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in such
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the outstanding
111
<PAGE>
voting stock of the corporation or (iii) on or after such date the business
combination is approved by the board of directors of the corporation and
approved at a meeting (and not by written consent) by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder. The term "business combination" is broadly defined to
include mergers, asset sales, other transfers, loans, guaranties and other
transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. Each of Cox Teleport Partners, Inc., TCI Teleport,
Inc., Comcast Teleport, Inc. and Continental Teleport, Inc., has been an
"interested stockholder" of TCG for a period in excess of three years.
Corporations, pursuant to a provision in their certificate of incorporation,
may choose not to be governed by Section 203 of the DGCL. The Amended and
Restated Certificate of Incorporation of TCG does not contain such a
provision; thus, TCG is governed by Section 203 of the DGCL.
112
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of material United States federal income tax
consequences of the purchase, ownership and disposition of the Notes, but does
not purport to be a complete analysis of all potential tax effects. This
summary is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed regulations thereunder, published rulings and
court decisions, all as in effect and existing on the date hereof and all of
which are subject to change at any time, which change may be retroactive. This
summary applies only to those persons who are the initial Holders of Notes,
who acquired the Notes for cash and who hold Notes as capital assets and does
not address the tax consequences to taxpayers who are subject to special rules
(such as financial institutions, tax-exempt organizations, insurance companies
and, except as discussed below under "Foreign Holders," persons who are not
citizens or residents of the United States, domestic corporations or estates
or trusts that are subject to United States federal income taxation on income
without regard to its source) or aspects of federal income taxation that may
be relevant to a prospective investor based upon such investor's particular
tax situation. Accordingly, purchasers of Notes should consult their own tax
advisors with respect to the particular consequences to them of the purchase,
ownership and disposition of the Notes, including the applicability of any
state, local or foreign tax laws to which they may be subject, as well as with
respect to the possible effects of changes in federal and other tax laws.
The Company has received an opinion from Dow, Lohnes & Albertson, a
Professional Limited Liability Company, counsel to the Company, that, based on
the assumptions and subject to the qualifications set forth therein, the
information in the following discussion represents their opinion of the
material United States federal income tax consequences of the purchase,
ownership and disposition of the Senior Notes and the Senior Discount Notes by
Holders who acquire the Notes in their original issuance, as a capital asset,
for a purchase price equal to the issue price of the Senior Discount Notes or
the stated principal amount of the Senior Notes. The opinion is based on
currently applicable authorities, which are subject to change, and on the
facts and circumstances existing on the date of the opinion. Such counsel has
relied upon representations by the Company and its officers with respect to
factual matters for purposes of such opinion. The opinion is not binding on
the Internal Revenue Service or on the courts, and no ruling will be requested
from the Internal Revenue Service on any issues described below. There can be
no assurance that the Internal Revenue Service will not take a different
position concerning the matters discussed below and that such positions of the
Internal Revenue Service would not be sustained.
SENIOR DISCOUNT NOTES--ORIGINAL ISSUE DISCOUNT
Because the Senior Discount Notes are being issued at a discount from their
"stated redemption price at maturity," the Senior Discount Notes will have
original issue discount ("OID") for federal income tax purposes. For federal
income tax purposes, OID on a Senior Discount Note will be the excess of the
stated redemption price at maturity of the Note over its issue price. The
issue price of the Senior Discount Notes will be the first price to the public
(excluding bond houses and brokers) at which a substantial amount of the
Senior Discount Notes is sold. For purposes of this discussion, it is assumed
that all initial Holders will purchase their Senior Discount Notes at the
issue price. The stated redemption price at maturity of a Senior Discount Note
will be the sum of all payments to be made on such Note, including all stated
interest payments, other than payments of "qualified stated interest."
Qualified stated interest is stated interest that is unconditionally payable
at least annually at a single fixed rate that appropriately takes into account
the length of the interval between payments. Because there will be no required
payment of interest on the Senior Discount Notes until January 1, 2002, none
of the interest payments on the Senior Discount Notes, under the stated
payment schedule, will constitute qualified stated interest. Therefore, each
Senior Discount Note will bear OID in an amount equal to the excess of (i) the
sum of its principal amount and all stated interest payments over (ii) its
issue price.
A Holder will be required to include OID in income periodically over the
term of a Senior Discount Note before receipt of the cash or other payment
attributable to such income, regardless of the Holder's method of tax
accounting. The amount of OID required to be included in a Holder's income for
any taxable year is the sum of the daily portions of OID with respect to the
Senior Discount Note for each day during the taxable year or portion of a
taxable year on which such Holder holds the Note. The daily portion is
determined by allocating to each
113
<PAGE>
day of any accrual period within a taxable year a pro rata portion of an
amount equal to the adjusted issue price of the Senior Discount Note at the
beginning of the accrual period multiplied by the yield to maturity of the
Note. For purposes of computing OID, the Company will use six-month accrual
periods that end on the days in the calendar year corresponding to the
maturity date of the Senior Discount Notes and the date six months prior to
such maturity date, with the exception of an initial short accrual period. The
adjusted issue price of a Senior Discount Note at the beginning of any accrual
period is the issue price of the Note increased by the amount of OID
previously includible in the gross income of the Holder, and decreased by any
payments previously made on the Note. The yield to maturity is the discount
rate that, when used in computing the present value of all payments of
principal and interest to be made on the Senior Discount Note, produces an
amount equal to the issue price of the Note. Under these rules, under the
stated payment schedule, Holders of Senior Discount Notes will have to include
in gross income increasingly greater amounts of OID in each successive accrual
period. A Holder's tax basis in a Senior Discount Note will be increased by
the amount of any OID includible in the Holder's income under the rules
discussed above and decreased by the amount of any payment (including payments
of stated interest) with respect to the Note.
The Company may elect to commence the accrual of cash interest on any
Interest Payment Date prior to July 1, 2001, in which case cash interest is
payable on each Interest Payment Date thereafter. Under the OID rules, solely
for purposes of determining the amount of OID that is includible in income by
a holder of a note, it is presumed that the issuer will exercise an option to
pay cash interest early if such exercise will lower the yield-to-maturity of
the note. The Company has determined that the exercise of its option to pay
interest early would not lower the yield-to-maturity of the Senior Discount
Notes. On these facts, the Company would not be presumed to exercise its
option to pay interest early. However, if, contrary to such presumption, the
Company exercises such option, then solely for purposes of the accrual of OID,
the yield and maturity of the Senior Discount Notes will be redetermined by
treating the Senior Discount Notes as reissued on such date for an amount
equal to the adjusted issue price on such date.
EFFECT OF MANDATORY AND OPTIONAL REDEMPTION ON OID
The Company may redeem the Senior Discount Notes, in whole or in part, at
any time on or after July 1, 2001, at redemption prices specified elsewhere
herein plus accrued interest to the date of redemption. The Treasury
Regulations contain rules for determining the "maturity date" and the stated
redemption price at maturity of an instrument that may be redeemed prior to
its stated maturity date at the option of the issuer. Under the OID rules,
solely for purposes of the accrual of OID, it is assumed that the issuer will
exercise any option to redeem a debt instrument if such exercise will lower
the yield-to-maturity of the debt instrument. The Company has determined that
the exercise of its right to redeem the Senior Discount Notes prior to their
stated maturity under these rules would not lower the yield-to-maturity of the
Senior Discount Notes. On these facts, the Company would not be presumed to
exercise its right to redeem the Senior Discount Notes prior to their stated
maturity under these rules.
In the event of certain registered offerings or sales of capital stock prior
to July 1, 1999, the Company at its option may redeem up to one-third of the
Senior Discount Notes then outstanding at redemption prices specified
elsewhere herein; provided that at least one-half of the aggregate principal
amount of the Senior Discount Notes originally issued remains outstanding
after such redemption. See "Description of the Notes--Terms of the Senior
Discount Notes--Optional Redemption." In the event of a Change of Control, as
defined in the Indenture, the Company will be required to offer to redeem all
of the Senior Discount Notes at redemption prices specified elsewhere herein.
See "Description of the Notes--Change of Control." Upon the occurrence of a
Special Redemption Event, the Company will be required to redeem a portion of
the Senior Discount Notes aggregating up to $253 million in Accreted Value at
redemption prices specified elsewhere herein. See "Description of the Notes--
Terms of the Senior Discount Notes--Special Redemption." Such redemption
rights and obligations will be treated by the Company as not affecting the
determination of the yield or maturity of the Senior Discount Notes. The
Treasury Regulations contain rules for determining the "maturity date" and the
stated redemption price at maturity of an instrument that may be redeemed
prior to its stated maturity date upon the occurrence of one or more
contingencies. Under such Treasury Regulations, if the timing and amounts of
the payments that
114
<PAGE>
comprise each payment schedule are known as of the issue date, the "maturity
date" and stated redemption price at maturity of such an instrument are
determined by assuming that payments will be made according to the
instrument's stated payment schedule, unless based upon all the facts and
circumstances as of the issue date, it is more likely than not that the
instrument's stated payment schedule will not occur. The Company has
determined that the stated maturity date and stated payment schedule of the
Senior Discount Notes is more likely than not to occur based on the facts and
circumstances known as of the issue date. On these facts, under these
regulations, the "maturity date" and stated redemption price at maturity of
the Senior Discount Notes would be determined on the basis of the stated
maturity and stated payment schedule.
If notwithstanding the foregoing, it is presumed that the Company will
exercise its option to redeem, then the maturity date of the Senior Discount
Notes for the purpose of calculating yield to maturity would be the exercise
date of such call option and the stated redemption price at maturity for each
Senior Discount Note would equal the amount payable upon such exercise. If
subsequently the call option is not exercised then, for purposes of the OID
rules, the issuer would be treated as having issued on the presumed exercise
date of the call option a new debt instrument in exchange for the existing
instrument. The new debt instrument deemed issued would have an issue price
equal to the call price. As a result, another OID computation would have to be
made with respect to the constructively issued new debt instrument.
SALE, EXCHANGE AND REDEMPTION OF SENIOR DISCOUNT NOTES
A sale, exchange or redemption of Senior Discount Notes will result in
taxable gain or loss equal to the difference between the amount of cash or
other property received and the Holder's adjusted tax basis in the Note. A
Holder's adjusted tax basis for determining gain or loss on the sale or other
disposition of a Senior Discount Note will initially equal the cost of the
Note to such Holder and will be increased by any amounts included in income as
OID, and decreased by the amount of any cash payments received by such Holder
regardless of whether such payments are denominated as principal or interest.
Gain or loss upon a sale, exchange, or redemption of a Senior Discount Note
will be capital gain or loss if the Note is held as a capital asset, and will
be long term capital gain or loss if the Note has been held by the Holder for
more than one year.
THE SENIOR NOTES
The Senior Notes were not issued with (and thus do not bear) original issue
discount. For purposes of this discussion, it is assumed that all the initial
Holders will purchase their Senior Notes at a price equal to the stated
principal amount.
Holders of Senior Notes will be required to include stated interest on the
Senior Notes in gross income for federal income tax purposes in accordance
with the Holder's method of accounting for tax purposes.
Upon a sale, exchange or redemption of a Senior Note, a Holder will
recognize gain or loss measured by the difference between the amount received
in exchange therefor (except to the extent the consideration received is
attributable to stated interest not previously taken into account, which
consideration is treated as interest income) and such Holder's adjusted tax
basis in the Senior Note. Any gain or loss recognized on the redemption, sale
or exchange of a Senior Note will be capital gain or loss if the Senior Note
is held as a capital asset and will be long term capital gain or loss if the
Senior Note has been held by a Holder for more than one year.
In certain circumstances, notes issued in connection with the same
transaction or related transactions may be treated as a single note for
purposes of the OID rules. The Company has determined that a substantial
portion of each of the Senior Notes and the Senior Discount Notes will be
issued to purchasers not related to the Company or to other purchasers and who
do not purchase both Senior Notes and Senior Discount Notes in connection with
the same transaction or related transactions. Assuming this is the case, the
aggregation rules will not apply.
FOREIGN HOLDERS
The following discussion is a summary of certain United States federal
income tax consequences to a Foreign Person that holds a Note. The term
"Foreign Person" means a nonresident alien individual or foreign
115
<PAGE>
corporation, but only if the income or gain on the Note is not "effectively
connected with the conduct of a trade or business within the United States,"
in which case the nonresident alien individual or foreign corporation will be
subject to tax on such income or gain in essentially the same manner as a
United States citizen or resident or a domestic corporation, as discussed
above, and in the case of a foreign corporation, may also be subject to the
branch profits tax.
Under the "portfolio interest" exception to the general rules for the
withholding of tax on interest and original issue discount paid to a Foreign
Person, a Foreign Person will not be subject to United States tax (or to
withholding) on interest or OID on a Note, provided that (i) the Foreign
Person does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote
and (ii) the Company, its paying agent or the person who would otherwise be
required to withhold tax receives either (A) a statement (an "Owner's
Statement") on the Internal Revenue Service's Form W-8 signed under penalties
of perjury by the beneficial owner of the Note in which the owner certifies
that the owner is not a United States person and which provides the owner's
name and address, or (B) a statement signed under penalties of perjury by a
financial institution holding the Note on behalf of the beneficial owners,
together with a copy of the Owner's Statement. Regulations proposed in April,
1996 would retain these procedures for certifying that a Holder is a Foreign
Person and would add several alternative certification procedures. A Foreign
Person who does not qualify for the "portfolio interest" exception would be
subject to United States withholding tax at a flat rate of 30% (or a lower
applicable treaty rate) on interest payments and payments (including proceeds
from a sale, exchange or retirement) attributable to OID on the Notes.
Gain recognized by a Foreign Person upon the redemption, sale or exchange of
a Note (including any gain representing accrued market discount) will not be
subject to United States tax unless the Foreign Person is an individual
present in the United States for 183 days or more during the taxable year in
which the Note is redeemed, sold or exchanged, and certain other requirements
are met, in which case the Foreign Person will be subject to United States Tax
at a flat rate of 30% (unless exempt by applicable treaty).
Federal Estate and Gift Tax
A Note beneficially owned by an individual who at the time of death is not a
domiciliary of the United States will not be subject to United States federal
estate tax as a result of such individual's death, provided that such
individual does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote
within the meaning of Section 871(h)(3) of the Code and provided that the
interest payments with respect to such Note would not have been, if received
at the time of such individual's death, effectively connected with the conduct
of a United States trade or business by such individual.
Any individual will not be subject to United States federal gift tax on a
transfer of Notes, unless such person is a domiciliary of the United States.
BACKUP WITHHOLDING
A Holder may be subject, under certain circumstances, to backup withholding
at a 31% rate with respect to payments received with respect to the Notes.
This withholding applies if the Holder (i) fails to furnish his or her social
security or other taxpayer identification number ("TIN"), (ii) furnishes an
incorrect TIN, (iii) is notified by the Internal Revenue Service that he or
she has failed to report properly payments of interest and dividends and the
Internal Revenue Service has notified the Company that he or she is subject to
backup withholding, or (iv) fails, under certain circumstances, to provide a
certified statement, signed under penalty of perjury, that the TIN provided is
his or her correct number and that he or she is not subject to backup
withholding. Any amount withheld from a payment to a Holder under the backup
withholding rules is allowable as a credit against such Holder's Federal
income tax liability, provided that the required information is furnished to
the Internal Revenue Service. Certain Holders (including, among others,
corporations and foreign individuals who comply with certain certification
requirements described above under "Foreign Holders") are not subject to
backup withholding. Holders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
116
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Underwriting Agreement") between the Company and Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), Chase Securities Inc. ("CSI") and Toronto Dominion Securities (USA)
Inc. ("TD," together, the "Underwriters"), the Company has agreed to sell to
the Underwriters, and each Underwriter has severally agreed to purchase from
the Company, the aggregate principal amount at maturity of Notes set forth
opposite its name below. The Underwriting Agreement provides that, subject to
the terms and conditions set forth therein, the Underwriters will be obligated
to purchase all of the Notes if any Notes are purchased.
<TABLE>
<CAPTION>
SENIOR NOTES SENIOR DISCOUNT NOTES
UNDERWRITERS PRINCIPAL AMOUNT PRINCIPAL AMOUNT AT MATURITY
------------ ---------------- ----------------------------
<S> <C> <C>
Donaldson, Lufkin & Jenrette
Securities Corporation......... $120,000,000 $ 429,443,000
Merrill Lynch, Pierce, Fenner &
Smith
Incorporated........... 90,000,000 322,082,000
Morgan Stanley & Co.
Incorporated............. 60,000,000 214,721,000
Chase Securities Inc............ 21,000,000 75,152,000
Toronto Dominion Securities
(USA) Inc...................... 9,000,000 32,208,000
------------ --------------
Total...................... $300,000,000 $1,073,606,000
============ ==============
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
thereunder are subject to certain conditions precedent. The Underwriting
Agreement also provides that the Company will indemnify the Underwriters
against certain liabilities and expenses, including those under the Securities
Act. The nature of the Underwriters' obligations is such that they are
committed to purchase all of the Notes if the Notes are purchased.
The Underwriters propose to offer the Notes directly to the public initially
at the price to the public set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of 0.40% of
the principal amount at maturity of the Notes. The Underwriters may allow, and
such dealers may reallow, a discount not in excess of 0.25% of the principal
amount at maturity of the Notes to certain other dealers. After the initial
offering of the Notes, the offering price and other selling terms may be
changed by the Underwriters.
The Company has been advised by the Underwriters that they presently intend
to make a market in the Notes in the secondary market, as permitted by
applicable laws and regulations, but that they are not obligated to do so and
may discontinue any such market making at any time without notice. The Notes
will not be listed on any securities exchange, and there can be no assurance
that a secondary market for the Notes will develop.
Certain Underwriters have from time to time provided customary brokerage and
investment banking services to the Company and expect in the future to provide
such services, for which they have received and will receive customary fees
and commissions.
Merrill Lynch & Co., Inc., an affiliate of one of the Underwriters, was the
majority owner of the Company from its inception until November 23, 1992.
Merrill Lynch & Co., Inc. was one of the Company's first customers and remains
one of its 10 largest customers. From March 3, 1983 to November 23, 1992, the
Company was included in the consolidated federal and combined income tax
returns for Merrill Lynch & Co., Inc. A Stockholders' Agreement among Cox
Teleport, Inc., Merrill Lynch Group, Inc. and TCG, dated December 11, 1991,
includes provisions governing the allocation and payment of taxes by TCG and
the Merrill Lynch affiliated group for the period from December 11, 1991,
through November 23, 1992. In addition, Merrill Lynch/WFC/L, Inc., an
affiliate of Merrill Lynch, has subleased portions of the Merrill Lynch
Headquarters, World Financial Center, New York, to TC Systems, Inc., a
subsidiary of TCG. In 1995, the Company paid approximately $200,000 under such
sublease.
Morgan Stanley & Co. Incorporated is also a long-standing and significant
customer for the Company's telecommunications services. Donaldson, Lufkin &
Jenrette Securities Corporation is also a customer of the Company. The
Company's provision of telecommunications services to Underwriters is on an
arm's-length basis.
117
<PAGE>
DLJ, Merrill Lynch and Morgan Stanley and certain of their affiliates have
been retained to act as underwriters in connection with the Stock Offerings.
CSI is an affiliate of the documentation agent and a lender under the
Revolving Credit Agreement. TD is an affiliate of the administrative agent and
a lender under the Revolving Credit Agreement.
Affiliates of CSI and TD will receive their proportionate share of the
repayment by the Company of amounts outstanding under the Revolving Credit
Agreement from the proceeds of the Offerings. See "Use of Proceeds" and
"Description of Certain Indebtedness."
LEGAL MATTERS
The legality of the Notes offered hereby and certain other legal matters
will be passed upon for TCG by Dow, Lohnes & Albertson, a Professional Limited
Liability Company, Washington, D.C., and for the Underwriters by Shearman &
Sterling, New York, New York; provided, however, that certain state regulatory
matters relating to the issuance of the Notes will be passed upon for TCG by
Roland, Fogel, Koblenz & Carr, LLP, Albany, New York (with respect to New York
regulatory matters), and by Smith, Don, Alampi, D'Argenio & Arturi, Englewood
Cliffs, New Jersey (with respect to New Jersey regulatory matters).
EXPERTS
The combined financial statements of Teleport Communications Group Inc. and
its subsidiaries and TCG Partners as of December 31, 1995 and 1994 and for
each of the three years in the period ended December 31, 1995 and the combined
financial statements of Local Market Partnerships to be acquired by Teleport
Communications Group Inc. as of December 31, 1995 and 1994 and for each of the
three years in the period ended December 31, 1995 included in this Prospectus
have been audited by Deloitte & Touche llp, independent auditors, as stated in
their reports appearing herein, and are included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
TCG has filed with the Securities and Exchange Commission (the "SEC") a
Registration Statement on Form S-1 under the Securities Act with respect to
the Notes being offered in the Notes Offerings. For the purposes hereof, the
term "Registration Statement" means the original Registration Statement and
any and all amendments thereto, including the schedules and exhibits to such
original Registration Statement or any such amendment. This Prospectus does
not contain all of the information set forth in the Registration Statement, to
which reference hereby is made. Each statement made in this Prospectus
concerning a document filed as an exhibit to the Registration Statement is
qualified in its entirety by reference to such exhibit for a complete
statement of its provisions.
TCG is not currently subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result
of the Offerings, TCG will become subject to the informational requirements of
the Exchange Act and in accordance therewith will file periodic reports, proxy
statements and other information relating to its business, financial
statements and other matters. Any interested party may inspect the
Registration Statement, the reports, proxy statements and other information
without charge, at the public reference facilities of the SEC at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and at its regional offices in Chicago (Northwestern Atrium Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60601), and in New York
(Seven World Trade Center, 13th Floor, New
118
<PAGE>
York, New York 10048). Any interested party may obtain copies of all or any
portion of the Registration Statement, the reports, proxy statements and other
information at prescribed rates from the Public Reference Section of the SEC
at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549.
The Company intends to distribute to all holders of the Notes offered hereby
annual reports containing audited consolidated financial statements and a
report thereon by its independent certified public accountants and quarterly
reports containing unaudited consolidated financial information for each of
the first three quarters of each fiscal year.
119
<PAGE>
GLOSSARY
Access charges--The fees paid by long distance carriers for the local
connections between the long distance carriers' networks and the long distance
carriers' customers.
ATM (asynchronous transfer mode)--A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits
of a standard fifty-three bit-long packet or cell. ATM-based packet transport
was specifically developed to allow switching and transmission of mixed voice,
data and video at varying rates. The ATM format can be used by many different
information systems, including LANs.
BOC (Bell Operating Company)--A telephone operating subsidiary of an RBOC;
an incumbent local exchange carrier.
CAP (competitive access provider)--A company that provides dedicated
services (private line, local transport and special access) telecommunications
services as an alternative to the ILEC.
Central offices--A telecommunications center where switches and other
telecommunications facilities are housed. CAPs may connect with ILEC networks
either at this location or through a remote location.
Centrex--A switched service that offers dial tone and other features similar
to those of Private Branch Exchange ("PBX"), except the switching equipment is
located at the carrier's premises and not at the customer's premises. These
features include direct dialing within a given telephone system, direct
dialing of outgoing telephone calls and automatic identification of incoming
telephone calls. This is a value-added service that carriers can provide to a
wide range of business customers.
Colocation--The ability of a telecommunications carrier to interconnect its
network to the ILEC's network by extending its facilities to the ILEC's
central office. Physical colocation occurs when the interconnecting carrier
places its network equipment within the ILEC's central offices. Virtual
colocation is an alternative to physical colocation under which the ILEC
permits a carrier to interconnect its network to the ILEC's network in a
manner which is technically, operationally and economically comparable to
physical colocation, even though the interconnecting carrier's network
connection equipment is not physically located within the central offices.
CLEC (competitive local exchange carrier)--A company that provides local
exchange services in competition with the incumbent local exchange carrier.
Dedicated--Telecommunications lines dedicated to, or reserved for use by, a
particular customer along predetermined routes (in contrast to links which are
temporarily established).
Digital--A means of storing, processing and transmitting information by
using distinct electronic or optical pulses that represent the binary digits 0
and 1. Digital transmission and switching technologies use a sequence of these
pulses to represent information as opposed to the continuously variable analog
signal. The precise digital numbers preclude any distortion (such as
graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).
Diverse routing--A telecommunications network configuration in which signals
are transmitted simultaneously along two different paths so that if one path
is cut or impaired, traffic can continue in the other direction without
interrupting service. The Company's networks generally provide diverse
routing.
DS-0, DS-1, DS-3--Standard North American telecommunications industry
digital signal formats, which are distinguishable by bit rate (the number of
binary digits (0 and 1) transmitted per second). DS-0 service has a bit rate
of 64 kilobits per second. DS-1 service has a bit rate of 1.544 megabits per
second and DS-3 service has a bit rate of 44.736 megabits per second. A DS-0
can transmit a single uncompressed voice conversation.
120
<PAGE>
FCC--Federal Communications Commission.
Fiber Miles--The number of route miles of fiber optic cable installed
(excluding pending installations) along a telecommunications path multiplied
by the number of fibers in the cable. See the definition of "route mile"
below.
Fiber Optics--Fiber optic technology involves sending laser light pulses
across glass strands in order to transmit digital information. Fiber optic
cable is the medium of choice for the telecommunications and cable industries.
Fiber is immune to electrical interference and environmental factors that
affect copper wiring and satellite transmission.
Hybrid fiber coaxial (HFC)--A new technology consisting of fiber optic
distribution facilities and coaxial cable deployed to the home or business.
This technology enables the operator to offer a wide variety of two-way
broadband services, including telecommunications and entertainment.
Interconnection decisions--Rulings by the FCC announced in September 1992
and August 1993, which require the BOCs and other large ILECs to provide
interconnection in ILEC central offices to any CAP, long distance carrier or
end user requesting such interconnection to provide interstate special access
or switched transport services.
ILECs (incumbent local exchange carriers)--The local phone companies, either
a BOC or an independent (such as GTE) which provides local exchange services.
Internet--The name used to describe the global open network of computers
that permits a person with access to the Internet to exchange information with
any other computer connected to the network.
ISDN (Integrated Services Digital Network)--ISDN is an internationally
agreed standard which, through special equipment, allows two-way, simultaneous
voice and data transmission in digital formats over the same transmission
line. ISDN permits video conferencing over a single line, for example, and
also supports a multitude of value-added switched service applications such as
Incoming Calling Line Identification. ISDN's combined voice and data
networking capabilities reduce costs for end users and result in more
efficient use of available facilities. ISDN combines standards for highly
flexible customer to network signaling with both voice and data within a
common facility.
IXC (interexchange carrier)--a long distance carrier.
Kbps (kilobits)--One thousand bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "thousands of bits
per second."
LANs (local area networks)--The interconnection of computers for the purpose
of sharing files, programs and peripheral devices such as printers and high-
speed modems. LANs may include dedicated computers or file servers that
provide a centralized source of shared files and programs. LANs are generally
confined to a single customer's premises and may be extended or interconnected
to other locations through the use of bridges and routers.
LATA (local access and transport area)--The geographical areas within which
a local telephone company may offer telecommunications services, as defined in
the divestiture order known as the Modified Final Judgment ("MFJ") unless and
until redefined by the FCC pursuant to the Telecommunications Act of 1996.
Local exchange--A geographic area defined by the appropriate state
regulatory authority in which telephone calls generally are transmitted
without toll charges to the calling or called party.
Local Exchange Service/Local Exchange Telephone Service--Basic local
telephone service, including the provision of telephone numbers, dial tone and
calling within the local exchange area.
121
<PAGE>
Long distance carriers (interexchange carriers or IXC)--Long distance
carriers providing services between LATAs, on an interstate or intrastate
basis. A long distance carrier may be facilities-based or offer service by
reselling the services of a facilities-based carrier.
Local transport services--Dedicated lines between the ILEC's central offices
and long distance carrier POPs used to carry switched traffic.
Mbps (megabit)--One million bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "millions of bits
per second."
Multiplexing--An electronic or optical process that combines a number of
lower speed transmission signals into one higher speed signal. There are
various techniques for multiplexing, including frequency division (splitting
the total available frequency bandwidth into smaller frequency slices), time
division (slicing a channel into timeslots and placing each signal into its
assigned timeslot), and statistical (wherein multiplexed signals share the
same channel and each transmits only when it has data to send).
Nodes--An individual point of origination and termination or intersection on
the network, usually where electronics are housed.
PBX (private branch exchange)--A customer owned and operated switch on
customer premises, typically used by large businesses with multiple telephone
lines.
PBX trunk--A transmission facility which connects a PBX to the Company's or
ILEC's central office switching center.
POPs (points of presence)--Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
telephone calls to, a network switching center of the same long distance
carrier.
Private line--A private, dedicated telecommunications link between different
customer locations (excluding long distance carrier POPs).
Public switched network--The switched network available to all users
generally on a shared basis (i.e., not dedicated to a particular user). The
local exchange telephone service networks operated by ILECs are the largest
and often the only public switched networks in a given locality.
PUC (public utility commission)--A state regulatory body, established in
most states, which regulates utilities, including telecommunications companies
providing intrastate services. In some states this regulatory body may have a
different name, such as public service commission ("PSC").
RBOC (Regional Bell Operating Company)--The holding company which owns a
BOC.
Reciprocal compensation--An arrangement in which two local exchange carriers
agree to terminate traffic originating on each other's networks in exchange
for a negotiated level of compensation.
Redundant electronics--A telecommunications facility that uses two separate
electronic devices to transmit a telecommunications signal so that if one
device malfunctions, the signal may continue without interruption.
Route mile--The number of miles along which fiber optic cables are
installed.
SONET (synchronous optical network)--A set of standards for optical
communications transmission systems that define the optical rates and formats,
signal characteristics, performance, management and maintenance information to
be embedded within the signals and the multiplexing techniques to be employed
in optical communications transmission systems. SONET facilitates the
interoperability of dissimilar vendors
122
<PAGE>
equipment. SONET benefits business customers by minimizing the equipment
necessary for various telecommunications applications and supports networking
diagnostic and maintenance features.
Special access services--The lease of private, dedicated telecommunications
lines or circuits on an ILEC's or a CAP's network which run to or from the
long distance carrier's POPs. Special access services do not require the use
of switches. Examples of special access services are telecommunications
circuits running between POPs of a single long distance carrier, from one long
distance carrier's POP to another long distance carrier's POP or from an end
user to its long distance carrier's POP.
Switch--A mechanical or electronic device that opens or closes circuits or
selects the paths or circuits to be used for the transmission of information.
Switching is a process of linking different circuits to create a temporary
transmission path between users. Within this document, switches generally
refer to voice grade telecommunications switches unless specifically stated
otherwise.
Switched access services--The connection between a long distance carrier's
POP and an end user's premises through the switching facilities of a local
exchange carrier.
Toll services--Otherwise known as EAS or intra LATA toll services are those
calls that are beyond the free local calling area but originate and terminate
within the same LATA; such calls are usually priced on a measured basis.
Voice grade equivalent circuit--One DS-0. One voice grade equivalent circuit
is equal to 64 kilobits of bandwidth.
123
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS:
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report............................................ F-2
Combined Balance Sheets at December 31, 1995 and 1994................... F-3
Combined Statements of Operations for the Years Ended December 31, 1995,
1994 and 1993.......................................................... F-4
Combined Statements of Changes in Stockholders' Equity and Partners'
Capital (Deficit) for the Years Ended December 31, 1995, 1994 and
1993................................................................... F-5
Combined Statements of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993.......................................................... F-6
Notes to Combined Financial Statements.................................. F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS:
Combined Balance Sheet at March 31, 1996................................ F-18
Combined Statements of Operations for the Three Months Ended March 31,
1996 and 1995.......................................................... F-19
Combined Statements of Cash Flows for the Three Months Ended March 31,
1996 and 1995.......................................................... F-20
Notes to Combined Interim Financial Statements.......................... F-21
LOCAL MARKET PARTNERSHIPS TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP
INC.:
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report............................................ F-22
Combined Balance Sheets at December 31, 1995 and 1994................... F-23
Combined Statements of Operations and Partners' Capital for the Years
Ended December 31, 1995, 1994, and 1993................................ F-24
Combined Statements of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993.......................................................... F-25
Notes to Combined Financial Statements.................................. F-26
UNAUDITED INTERIM FINANCIAL STATEMENTS:
Combined Balance Sheet at March 31, 1996................................ F-31
Combined Statements of Operations for the Three Months Ended March 31,
1996 and 1995.......................................................... F-32
Combined Statements of Cash Flows for the Three Months Ended March 31,
1996 and 1995.......................................................... F-33
Notes to Combined Interim Financial Statements.......................... F-34
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Teleport Communications Group Inc. and
Partners of TCG Partners:
We have audited the accompanying combined balance sheets of Teleport
Communications Group Inc. and its subsidiaries and TCG Partners (collectively,
"TCG"), both of which are under common ownership and common management, as of
December 31, 1995 and 1994 and the related combined statements of operations,
changes in stockholders' equity and partners' capital (deficit), and cash
flows for the three years ended December 31, 1995, 1994 and 1993. These
financial statements are the responsibility of TCG's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of TCG at December 31, 1995
and 1994 and the combined results of their operations and their combined cash
flows for the three years ended December 31, 1995, 1994 and 1993 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
February 16, 1996
(April 24, 1996 as to Note 1,
May 13, 1996 as to Note 12 and
June 25, 1996 as to Note 6)
F-2
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 11,862 $ 26,000
--------- --------
Accounts receivable:
Trade--net of allowance for doubtful accounts ($1,161 in
1995 and $1,457 in 1994)................................ 26,196 19,535
Related parties.......................................... 4,640 6,264
Miscellaneous--net of allowance for doubtful accounts
($543 in 1995 and $747 in 1994)......................... 2,037 1,669
--------- --------
Accounts receivable--net............................... 32,873 27,468
--------- --------
Prepaid expenses......................................... 4,939 3,950
--------- --------
Other current assets..................................... 532 481
--------- --------
Total current assets..................................... 50,206 57,899
--------- --------
Fixed assets--at cost:
Communications network................................... 492,858 389,010
Other.................................................... 52,795 33,954
--------- --------
545,653 422,964
Less accumulated depreciation and amortization........... (113,202) (78,973)
--------- --------
Fixed assets--net...................................... 432,451 343,991
--------- --------
Investment in unconsolidated affiliates................... 99,299 53,958
--------- --------
Goodwill--net of accumulated amortization ($1,716 in 1995
and $279 in 1994)........................................ 27,008 28,445
--------- --------
Other assets.............................................. 5,829 2,690
--------- --------
Total assets............................................. $ 614,793 $486,983
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
(DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities................. $ 92,104 $ 62,015
Current portion of capital lease obligations ($3,338 in
1995 and $1,076 in 1994 with related parties)........... 4,354 1,845
Notes payable to unconsolidated affiliates............... -- 25,983
Other current liabilities................................ 831 775
--------- --------
Total current liabilities................................ 97,289 90,618
Capital lease obligations ($10,017 in 1995 and $2,634 in
1994 with related parties)............................... 11,964 2,962
Subordinated debt to parents.............................. 269,000 197,500
Long-term bank debt....................................... 87,500 --
Minority interest......................................... 4,409 2,903
Other liabilities......................................... 19,283 13,848
--------- --------
Total liabilities........................................ 489,445 307,831
--------- --------
Commitments and contingencies
Stockholders' equity and partners' capital (deficit):
Stockholders' equity (common stock, $1.00 par value;
authorized, 3,000 shares; outstanding, 1,667 shares)...... 129,742 162,129
Partners' capital (deficit)................................ (4,394) 17,023
-------- --------
Total stockholders' equity and partners' capital
(deficit)................................................. 125,348 179,152
-------- --------
Total liabilities and stockholders' equity and partners'
capital (deficit)......................................... $614,793 $486,983
======== ========
</TABLE>
See notes to combined financial statements.
F-3
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Telecommunications services.................... $134,652 $ 99,983 $ 82,374
Management and royalty fees from affiliates.... 31,517 20,691 1,555
-------- -------- --------
Total revenues............................... 166,169 120,674 83,929
-------- -------- --------
Expenses:
Operating...................................... 73,743 60,255 48,224
Selling, general and administrative............ 69,850 56,306 40,275
Depreciation and amortization.................. 37,837 19,933 16,197
-------- -------- --------
Total expenses............................... 181,430 136,494 104,696
-------- -------- --------
Operating loss................................... (15,261) (15,820) (20,767)
-------- -------- --------
Interest:
Interest income................................ 4,067 1,711 1,072
Interest expense ($18,763 in 1995, $4,998 in
1994 and $1,123 in 1993 with related
parties)...................................... (23,331) (5,079) (1,407)
-------- -------- --------
Total interest............................... (19,264) (3,368) (335)
-------- -------- --------
Loss before minority interest, equity in losses
of unconsolidated affiliates and income tax
(provision) benefit............................. (34,525) (19,188) (21,102)
Minority interest................................ 663 1,395 796
Equity in losses of unconsolidated affiliates.... (19,541) (11,763) (2,114)
-------- -------- --------
Loss before income tax (provision) benefit....... (53,403) (29,556) (22,420)
Income tax (provision) benefit................... (401) (433) 4,149
-------- -------- --------
Net loss......................................... $(53,804) $(29,989) $(18,271)
======== ======== ========
</TABLE>
See notes to combined financial statements.
F-4
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
(DEFICIT)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
-------------------------------------
TOTAL
STOCKHOLDERS'
EQUITY AND
ADDITIONAL RETAINED PARTNERS' PARTNERS'
COMMON PAID-IN EARNINGS CAPITAL CAPITAL
STOCK CAPITAL (DEFICIT) TOTAL (DEFICIT) (DEFICIT)
------ ---------- --------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1993................... $ 1 $ 75,348 $ 2,360 $ 77,709 $ (338) $ 77,371
Net loss.............. -- -- (13,240) (13,240) (5,031) (18,271)
Issuance of capital
stock................ 1 120,040 -- 120,041 -- 120,041
Capital
contributions........ -- -- -- -- 30,000 30,000
---- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31,
1993................... 2 195,388 (10,880) 184,510 24,631 209,141
Net loss.............. -- -- (22,381) (22,381) (7,608) (29,989)
---- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31,
1994................... 2 195,388 (33,261) 162,129 17,023 179,152
Net loss.............. -- -- (32,387) (32,387) (21,417) (53,804)
---- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31,
1995................... $ 2 $195,388 $(65,648) $129,742 $ (4,394) $125,348
==== ======== ======== ======== ======== ========
</TABLE>
See notes to combined financial statements.
F-5
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $ (53,804) $ (29,989) $ (18,271)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization............. 37,837 19,933 16,197
Deferred income taxes..................... -- -- (4,149)
Equity in losses of unconsolidated
affiliates............................... 19,541 11,763 2,114
Amortization of deferred credits.......... (2,228) (1,886) (658)
Provision for losses on accounts
receivable............................... 877 768 549
Minority interest........................... (663) (1,395) (796)
(Increase) decrease in operating assets and
increase (decrease) in operating
liabilities:
Accounts receivable....................... (12,771) (8,958) (7,495)
Other assets.............................. (3,108) 592 (2,152)
Accounts payable and accrued liabilities.. 45,832 94,472 60,738
Deferred credits.......................... 4,628 2,453 (628)
--------- --------- ---------
Net cash provided by operating
activities............................. 36,141 87,753 45,449
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for communications net-
work....................................... (120,814) (118,924) (130,833)
Capital expenditures for other fixed as-
sets....................................... (18,842) (19,968) (5,135)
Acquisition of Diginet...................... -- -- (12,581)
Due to (from) related parties............... (6,707) (69,007) (8,689)
Purchase of minority interest in TCB........ -- (36,975) --
Investment in unconsolidated affiliates--
cash component............................. (61,604) (42,342) (9,487)
Advances to unconsolidated affiliate........ (3,400) -- --
Repayment of advances to unconsolidated af-
filiate.................................... 3,400 -- --
Reimbursement of funds advanced to unconsol-
idated affiliates.......................... -- 22,190 19,607
--------- --------- ---------
Net cash used for investing activities.. (207,967) (265,026) (147,118)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.... 159,000 172,500 55,400
Repayment of long-term debt................. -- -- (79,984)
Issuance of capital stock................... -- -- 120,041
Capital contributions from minority
partners................................... 2,168 6,058 5,756
Capital contribution........................ -- -- 30,000
Principal payments under capital lease
obligations................................ (3,480) (459) (1,391)
Repayments of short-term debt............... -- (6,542) --
--------- --------- ---------
Net cash provided by financing
activities............................. 157,688 171,557 129,822
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. (14,138) (5,716) 28,153
CASH AND CASH EQUIVALENTS, JANUARY 1.......... 26,000 31,716 3,563
--------- --------- ---------
CASH AND CASH EQUIVALENTS, DECEMBER 31........ $ 11,862 $ 26,000 $ 31,716
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--Cash paid during the year for
interest..................................... $ 8,675 $ 5,693 $ 1,099
========= ========= =========
</TABLE>
See notes to combined financial statements.
F-6
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. ORGANIZATION AND OPERATIONS
Teleport Communications Group Inc. ("TCGI"), incorporated in March 1983, and
TCG Partners, formed in December 1992, (collectively, "TCG") are each owned
30.05994 percent by wholly-owned subsidiaries of Cox Communications, Inc.
("Cox"), 29.93994 percent by wholly-owned subsidiaries of Tele-Communications,
Inc. ("TCI"), 20.00006 percent by wholly-owned subsidiaries of Comcast
Corporation ("Comcast"), and 20.00006 percent by wholly-owned subsidiaries of
Continental Cablevision, Inc. ("Continental").
TCGI and TCG Partners are affiliated through common ownership and
management.
TCG, the first and largest competitive local exchange carrier in the United
States, offers a wide range of local telecommunications services in major
metropolitan markets nationwide. TCG competes with incumbent local exchange
carriers as "The Other Local Phone Company"SM by providing high quality,
integrated local telecommunications services, primarily over fiber optic
digital networks, to meet the voice, data and video transmission needs of its
customers. TCG's customers are principally telecommunications-intensive
businesses, long distance carriers and resellers and wireless communications
companies. TCG offers these customers technologically advanced local
telecommunications services, as well as superior customer service, flexible
pricing and vendor and route diversity.
In connection with the proposed public offerings of Class A Common Stock and
Notes, TCGI and its owners entered into a reorganization agreement dated April
18, 1996 pursuant to which TCG Partners and certain of the unconsolidated
affiliates will become wholly owned subsidiaries of TCGI, and TCGI will
acquire the minority interests of certain of the owners of the remaining
unconsolidated affiliates.
On April 19, 1996 and April 24, 1996, TCGI filed registration statements
with the Securities and Exchange Commission for the registration of Class A
Common Stock and Senior Discount Notes, respectively.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination--The accompanying combined financial statements
include the accounts of TCGI and its subsidiaries and of TCG Partners.
Minority interest represents other partners' equity in TCG St. Louis in 1995
and 1994 and in Teleport Communications Boston, a Massachusetts partnership
("TCB"), in 1994 (until acquisition) and in 1993. In addition, TCG San Diego
was included in minority interest from June 1, 1993 (date of inception)
through May 31, 1994. Effective June 1, 1994, TCG San Diego became an
unconsolidated affiliate due to Times Mirror Inc. acquiring an interest in the
partnership. All significant intercompany transactions and balances have been
eliminated. Investments in which TCG holds less than a 50 percent interest are
accounted for under the equity method.
Basis of Accounting--The accompanying combined financial statements have
been prepared on the accrual basis of accounting.
Revenue Recognition--Revenue on dedicated line and switch services is
recognized in accordance with the terms of the underlying customer contracts
or tariffs and over the period in which the services are provided.
Depreciation and Amortization--Depreciation and amortization are computed on
the straight-line basis over the estimated useful lives of the assets or the
length of the lease, whichever is shorter. Estimated useful lives are 5 to 25
years for the communications network and 3 to 5 years for other fixed assets,
except for buildings which are 40 years.
During 1995, TCG completed a review of the useful lives of its fixed assets.
TCG determined that the lives of certain electronics equipment were longer
than industry standard, while the lives of other electronics equipment were
shorter than industry standard. Therefore, TCG adjusted the estimated useful
lives of certain
F-7
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
electronics equipment to conform with industry standard, effective December 1,
1995. The effect of these changes in estimate increased depreciation expense
for the year ended December 31, 1995 by approximately $700,000.
Goodwill--Goodwill represents the excess purchase price paid over the net
assets associated with the purchase of the remaining partnership interest in
Teleport Communications, a New York partnership, and TCB. Goodwill is
amortized on a straight line basis over 40 years for Teleport Communications
and 20 years for TCB. The goodwill amortization recorded in 1995, 1994 and
1993 was $1,437,000, $207,000 and $35,000, respectively.
The carrying value of intangible assets is periodically reviewed and
impairments will be recognized when the undiscounted expected future cash
flows, computed after interest expense derived from the related operations, is
less than their carrying value. Effective January 1, 1995, TCG changed its
estimate of the useful life of the goodwill associated with TCB to 20 years.
The effect of this change in estimate was to increase depreciation and
amortization expense by approximately $650,000.
Deferred Credits--Deferred credits principally represent advance payments
received from customers for long-term fiber optic service, and are amortized
into income over the life of the related contracts. The current portions,
$831,000 and $775,000 at December 31, 1995 and 1994, respectively, are
included in other current liabilities and the non-current portions, $5,392,000
and $3,216,000 at December 31, 1995 and 1994, respectively, are included in
other liabilities.
Income Taxes--TCGI accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," pursuant to which deferred income tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities, using enacted tax rates currently in effect.
State and local taxes are based on factors other than income.
TCG Partners is not subject to Federal or state and local income taxes. Each
partner's distributive share of partnership revenues, expenses and other items
is computed on the basis of the respective partner's capital interest in the
partnership and is reported by the partners in their respective Federal or
state income tax returns.
Financial Instruments--Financial instruments which potentially subject TCG
to concentration of credit risk consist of accounts receivable. Concentrations
of credit risk with respect to accounts receivable are limited due to the
dispersion of TCG's customer base among different industries and geographic
areas in the United States, by credit granting policies adopted by TCG, and by
remedies provided by terms of contracts, tariffs and statutes.
Cash Equivalents--TCG considers all highly liquid instruments readily
convertible to known amounts of cash to be cash equivalents.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Long-Lived Assets--In March 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." This statement is effective for fiscal years beginning
after December 15, 1995. Management has evaluated the effect on its financial
condition and results of operations from the adoption of this statement and
does not believe an impairment of the long-lived assets has occurred.
Stock-Based Compensation--In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires adoption of the
disclosure provisions no later than fiscal years beginning after December 15,
1995 and adoption of the measurement and recognition provisions for non-
employee
F-8
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
transactions no later than after December 15, 1995. The new standard defines a
fair value method of accounting for the issuance of stock options and other
equity instruments. Under the fair value method, compensation cost is measured
at the grant date based on the fair value of the award and is recognized over
the service period, which is usually the vesting period. Pursuant to SFAS No.
123, companies are encouraged, but are not required, to adopt the fair value
method of accounting for employee stock-based transactions. Companies are also
permitted to continue to account for such transactions under Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," but would be required to disclose in a note to the financial
statements pro forma net income and, per share amounts as if the company had
applied the new method of accounting. SFAS No. 123 also requires increased
disclosures for stock-based compensation arrangements regardless of the method
chosen to measure and recognize compensation for employee stock-based
arrangements. TCG has elected to continue to account for such transactions
under APB No. 25. TCGI has determined that if SFAS No. 123 had been adopted,
its impact to the combined statement of operations for the year ended December
31, 1995 would have been insignificant.
Presentation--Certain 1994 and 1993 amounts have been reclassified to
conform with the 1995 presentation.
3. INCOME TAXES
There are no current income taxes payable based on TCGI's operating loss.
The following temporary differences compose the net deferred income tax
liability (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Deferred income tax liabilities--depreciation,
amortization and excess credits...................... $ 23,294 $ 17,495
-------- --------
Deferred income tax assets:
Deferred revenue.................................... (2,089) (1,308)
Assets recorded for tax purposes.................... (1,301) (1,514)
Incentive compensation.............................. (3,303) (2,134)
Operating loss...................................... (35,233) (19,594)
Equity on investments............................... (710) (694)
Excess credits...................................... -- (684)
-------- --------
(42,636) (25,928)
Less valuation allowance............................ 20,264 9,355
-------- --------
Total deferred tax assets......................... (22,372) (16,573)
-------- --------
Deferred income taxes payable--net.................... $ 922 $ 922
======== ========
</TABLE>
In 1995, 1994 and 1993, the income tax benefits of approximately
$10,909,000, $7,782,000 and $5,722,000, respectively, have been offset by
increases in the valuation allowance of $10,909,000, $7,782,000 and
$1,573,000, respectively, due to the uncertainty of realizing the benefit of
the loss carryforwards.
F-9
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the statutory Federal income tax rate to TCGI's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Statutory Federal income
tax rate............... 35.0 % 35.0 % (35.0)%
State and local taxes,
less federal benefit... 1.3 % 2.0 % 0.0 %
Unutilized tax benefit
due to net operating
loss................... (33.3)% (35.5)% 9.0 %
Permanent differences
and other.............. (1.7)% 0.5 % 2.1 %
----- ----- -----
Effective rate.......... 1.3 % 2.0 % (23.9)%
===== ===== =====
</TABLE>
At December 31, 1995, TCGI's had operating loss carryforwards for tax
purposes of approximately $105,300,000, expiring principally in 2009 through
2011.
4. RELATED PARTY TRANSACTIONS
In connection with the management of its unconsolidated partnerships and
certain other affiliates, TCGI has entered into management services
agreements. Under the terms of such agreements, TCGI provides certain
operating and administrative services to such entities, for which it earns
management fees. Management fees earned were approximately $29,638,000,
$19,403,000 and $1,380,000 in 1995, 1994 and 1993, respectively.
At the request of certain cable television operators, including Cable
Stockholders, TCG is participating in residential telephone trials in
Arlington Heights, Illinois, Hartford, Connecticut and the San Francisco Bay
area. TCG expects to be fully reimbursed for its costs incurred in connection
with these trials. At December 31, 1995, the amount due to TCG for this
reimbursement was $461,000, and is included in miscellaneous accounts
receivable.
TCG also provides management services to certain affiliates of Cox under
three Operator Managed Ventures Services Agreements, including billing
services, network monitoring and accounts receivable functions. Under the
terms of the agreements, TCG retains 8% of the collected revenues from Cox
customers as a royalty fee. Royalty fees recorded from Cox were approximately
$98,000, $27,000 and $0 for 1995, 1994 and 1993, respectively, and are
included in management and royalty fees in the statements of operations.
Included in accounts receivable--trade are approximately $262,000 and $99,000
at December 31, 1995 and 1994, respectively, for amounts owed by Cox
customers.
In 1995 TCG purchased cable on behalf of certain of its owners which it then
sold to them at cost. At December 31, 1995, the amount receivable from the
owners was $3,683,000.
Revenues earned from all services to the other partner of TCB and its
affiliates were approximately $3,709,000 and $771,000 for the years ended
December 31, 1994 and 1993, respectively.
5. EMPLOYEE BENEFIT PLANS
Teleport Communications Group Retirement Savings Plan. TCGI has a Retirement
Savings Plan with a 401(k) savings component and a retirement component
covering substantially all eligible employees of TCG with one or more years of
service. Under the 401(k) component of the plan, participants may make pre-tax
contributions and TCG matches 50 percent of the first 6 percent of annual
eligible compensation to a maximum company contribution of $1,500 per
employee. Under the retirement component of the plan, TCG contributes an
amount based on years of service and annual eligible compensation.
In 1995, 1994 and 1993, TCG made matching contributions of $735,963,
$456,259 and $257,709, respectively, as required by the 401(k) component and
$977,949, $606,390 and $288,838 respectively, under the retirement component
of the plan.
F-10
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
TCGI has established a nonqualified, unfunded, deferred compensation Make-Up
Plan of Teleport Communications Group Inc. (the "Make-Up Plan") for the
Teleport Communications Group Inc. Retirement Savings Plan (the "Retirement
Savings Plan"). The purpose of the Make-Up Plan is to provide certain eligible
participants benefits which would have been payable under the Retirement
Savings Plan, but were limited by the maximum company match of $1,500, as well
as compensation limits set forth by the IRS. Expenses incurred in connection
with the Make-Up Plan were insignificant.
Teleport Communications Group Unit Appreciation Plan. TCGI has established a
Teleport Communications Group Unit Appreciation Plan (the "UAP"). During the
years ended December 31, 1993 and 1992, TCGI made awards of deferred
compensation in the form of units (the "Units"), pursuant to the UAP, to
certain eligible employees of TCGI. The initial base price of each Unit as of
January 1, 1993 and 1992 was $34.85 and $30.00, respectively. Awards under the
UAP are subject to a five-year vesting schedule, pursuant to which the Units
granted will be partially vested commencing as of December 31, 1995 and
December 31, 1994, respectively, and fully vested no later than December 31,
1997 and December 31, 1996, respectively, subject to certain exceptions. The
terms of the UAP have been modified pursuant to employment agreements with
certain employees, as provided therein. In connection with the UAP, TCGI
recognized compensation expense of $2,474,845, $6,070,955 and $3,047,436 for
the years ended December 31, 1995, 1994 and 1993, respectively. In January
1996, TCGI adopted a plan which permits the awards under the UAP to be
deferred in whole or in part at the election of the participants for certain
periods.
The following table provides additional information concerning the Unit
Appreciation Plan awards:
<TABLE>
<CAPTION>
NUMBER NUMBER NUMBER
OF UNITS NUMBER OF VALUE OF UNITS OF UNITS OF UNITS VALUE OF UNITS
INITIAL OUTSTANDING AT UNITS VESTED AT VESTED AT OUTSTANDING AT VESTED AT VESTED AT
YEAR OF NUMBER DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
AWARD OF UNITS 1995 1995(1) 1995 1994(2) 1994 1994
------- -------- -------------- --------------- -------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993............ 36,000 23,700 14,220 $ 991,134 25,100 -- --
1992............ 170,850 139,200 111,360 7,486,200 156,850 94,110 $5,926,500
------- ------- ------- ---------- ------- ------ ----------
Total........... 206,850 162,900 125,580 $8,477,334 181,950 94,110 $5,926,500
======= ======= ======= ========== ======= ====== ==========
<CAPTION>
NUMBER
OF UNITS
OUTSTANDING AT
YEAR OF DECEMBER 31,
AWARD 1993
------- --------------
<S> <C>
1993............ 36,000
1992............ 160,350
--------------
Total........... 196,350
==============
</TABLE>
- --------
(1) No Units awarded in 1993 were vested prior to December 31, 1995.
(2) No Units awarded in 1992 were vested prior to December 31, 1994.
Teleport Communications Group Stock Option Plan. TCGI established the
Teleport Communications Group Stock Option Plan (the "SOP") effective
September 26, 1993. TCGI has made long term incentive compensation awards in
the form of stock option grants pursuant to the SOP to eligible employees. The
SOP reserved 128.175000 shares for issuance pursuant to stock option grants.
Adjusted for the recapture of stock options issued to former employees, as of
February 16, 1996, stock options relating to 59.91685 shares were outstanding.
Stock options were granted at fair value and no compensation expense has been
recognized in connection with the options.
F-11
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table provides additional information concerning SOP awards.
<TABLE>
<CAPTION>
NUMBER NUMBER NUMBER NUMBER NUMBER
OF SHARES OF SHARES OF SHARES OF SHARES OF SHARES
UNDERLYING RANGE OF EXERCISE UNDERLYING UNDERLYING UNDERLYING UNDERLYING
OPTIONS PRICES OF OPTIONS OPTIONS OPTIONS OPTIONS OPTIONS
ISSUED ISSUED DURING OUTSTANDING AT EXERCISED CANCELLED EXERCISABLE AT
YEAR DURING YEAR YEAR YEAR-END DURING YEAR DURING YEAR YEAR-END
---- ----------- ----------------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
1995.................... 6.7880 $597,227 60.4300 .6456 5.1244 7.1967
1994.................... 7.7149 $436,217 59.4120 -- 5.2694 3.7503
1993.................... 56.9665 $289,643-$329,140 56.9665 -- -- --
</TABLE>
Employment Agreements. TCGI's employment agreements are with certain of its
executive officers and senior management personnel. These agreements are
effective through December 31, 1996, unless terminated earlier by the
executive or TCGI, and provide for annual salaries, cost-of-living
adjustments, additional compensation in the form of bonuses based on the
performance of TCGI and the executive, and participation in the various
benefit plans of TCGI. The agreements contain certain benefits to the
executive if TCGI terminates the executive's employment without cause or if
the executive terminated his employment as a result of change in ownership of
TCGI. The salary and bonus expense related to these executives for the year
ended December 31, 1995 approximated $2,133,000. TCGI's remaining aggregate
commitments for salaries under such agreements is approximately $1,480,000.
In the event the executive terminates his employment as a result of a change
in control, the agreements provide for the payment of a base salary plus an
annual bonus in a minimum amount equal to 30 percent of such base salary,
except for the President whose minimum annual bonus is 50% of base salary.
6. LONG-TERM DEBT
Long-term debt at December 31 consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Subordinated debt to parents, weighted average rate
1995, 6.82% and 1994, 5.51% due through 2002........... $269,000 $197,500
Long-term bank debt, weighted average rate 6.80%, due
through 2004........................................... 87,500 --
-------- --------
Total................................................. $356,500 $197,500
======== ========
</TABLE>
The aggregate long-term debt maturing during the next five years is as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS AMOUNT
----- --------
<S> <C>
1996............................................................. $ --
1997............................................................. --
1998............................................................. --
1999............................................................. 12,500
2000............................................................. 50,000
Thereafter........................................................ 294,000
--------
$356,500
========
</TABLE>
TCGI has a loan agreement with Cox, Continental, Comcast and TCI aggregating
$349,600,000 ($269,000,000 and $197,500,000 outstanding at December 31, 1995
and 1994, respectively). Borrowings bear interest at 75 basis points above the
one-month London Interbank Offered Rate ("LIBOR").
F-12
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Total interest expense for this loan was $17,643,000, $5,477,000 and
$656,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
At December 31, 1995, $12,179,000 of such interest was included in accrued
expenses.
In May 1995, TCGI entered into a loan agreement (the "Revolving Credit
Agreement") with seventeen banks (the "Bank Group") for a total credit
facility of $250,000,000 ($87,500,000 outstanding at December 31, 1995).
Interest on borrowings under this agreement is at varying rates based, at
TCGI's option, on the prime rate of Toronto-Dominion Bank (the administrative
agent for the banks) or the LIBOR plus a spread based on certain financial
ratios. Commitment fees on the unused amount of the credit facility of 3/8 of
1 percent are payable under this agreement.
Additionally, TCGI entered into an agreement with Comcast, Continental, Cox
and TCI, whereby TCGI's debt to related parties was subordinated to the long-
term indebtedness from the Bank Group.
The shares of capital stock owned by TCGI in certain of the wholly owned
subsidiaries of TCGI (TC New York Holdings I, Inc., TC New York Holdings II,
Inc., TCG Payphones, Inc., and TC Systems, Inc., collectively the "Restricted
Subsidiaries") were pledged as collateral to secure the loan and may not be
pledged to any other party under the terms of the Revolving Credit Agreement.
In December 1995, the capital stock of the wholly owned Restricted
Subsidiaries of TCGI was transferred to TCG New York, Inc., a wholly owned
subsidiary of TCGI. TCG New York, Inc. assumed all obligations under the
Revolving Credit Agreement as of the date of transfer. TCG New York, Inc. is
permitted under the terms of the Revolving Credit Agreement to advance funds
to TCGI. When made, such advances are to be evidenced by notes from TCGI to
TCG New York, Inc. which will be pledged as collateral under the Revolving
Credit Agreement to the Bank Group.
The Revolving Credit Agreement contains various covenants and conditions,
including restrictions on additional indebtedness, maintenance of certain
financial ratios and limitations on capital expenditures. None of these
covenants negatively impact TCGI's liquidity or capital resources at this
time.
Subsequent to December 31, 1995, TCG New York Inc. increased its borrowing
under the Revolving Credit Agreement. Total borrowings under this agreement
were $250,000,000 as of June 25, 1996.
The total amount of interest paid on long-term debt in 1995, 1994 and 1993
was approximately $7,642,000, $5,477,000 and $656,000, respectively.
TCG's long-term debt had fair values that approximated their carrying
amounts.
7. FINANCIAL INSTRUMENTS
TCGI has entered into interest rate swap agreements to mitigate the impact
of changes in interest rates on its long-term bank debt. At December 31, 1995,
TCGI had interest rate swaps with commercial banks with a notional value of
$55,000,000. The average fixed interest rate is 5.93 percent. These agreements
effectively fix TCGI's interest rate exposure on various LIBOR based floating
rate notes (which range from 5.87 percent to 5.94 percent). TCGI is exposed to
credit loss in the event of nonperformance by the other parties to the
interest rate swap agreements; however, TCGI does not anticipate
nonperformance by the counterparts.
F-13
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. INVESTMENT IN UNCONSOLIDATED AFFILIATES
During 1995, TCG contributed cash ($12,114,000) for a 40 percent partnership
interest in TCG Pittsburgh. TCI holds the remaining 60 percent interest in the
Pittsburgh partnership.
During 1994, TCG contributed cash and certain other assets, or agreed to
contribute certain other assets, subject to certain liabilities, in exchange
for partnership interests in TCG Seattle (35 percent), TCG San Francisco (35
percent), TCG Los Angeles (35 percent), TCG Phoenix (35 percent), and TCG
Dallas Systems (44.9 percent). Such initial contributions of cash and net
assets aggregated $9,712,000 and $19,100,000, respectively. In addition, TCG
Partners reduced its partnership interest in TCG San Diego from 50 to 46.35
percent on June 1, 1994 as a result of Times Mirror Inc. acquiring an interest
in the partnership. TCI also holds a portion of all these new partnerships
formed in 1994. Cox, Comcast, Continental and various unrelated parties have
partnership interests in several of the partnerships.
In 1993, partnerships were formed for TCG Chicago (35 percent), TCG Illinois
(35 percent), TCG Detroit (44.9 percent), TCG Dallas (44.9 percent), TCG South
Florida (35 percent) and TCG Connecticut (35 percent). In connection with such
formation, TCG contributed cash of $13,601,000 and net assets of $24,700,000.
Subsequent to the partnerships' formation, the partnerships reimbursed TCG
for the pre-organization operating expenses and capital expenditures incurred
by the TCG subsidiaries prior to the formation of the partnerships. Such
amounts were included in the liabilities contributed by such subsidiaries to
the partnerships upon formation. The purpose of these partnerships is to
acquire, own, design, construct, operate, manage and sell certain local
telecommunications services in the respective metropolitan areas.
In connection with the establishment of these partnerships, local licensing
regulations, state regulatory requirements, and contractual restrictions did
not permit the transfer of title of fixed assets from certain TCG subsidiaries
to the local partnerships. At December 31, 1994, the obligations of TCG to
contribute the fixed assets once the appropriate approvals were received were
evidenced by noninterest-bearing notes aggregating approximately $25,983,000.
Depreciation of the related fixed assets, which remained recorded on the books
and records of the TCG subsidiary, was accounted for by a reduction of the
note payable. TCG transferred title of certain fixed assets from the TCG
subsidiary to the local partnership in 1994 and upon obtaining the necessary
approvals in 1995, TCG transferred title of the remaining fixed assets.
Additionally, the excess of the contributed capital, as defined in the
partnership agreement, over the historical carrying value of the net assets
contributed by the TCG subsidiaries (aggregating approximately $36,162,000 and
$39,500,000 at December 31, 1995 and 1994, respectively) is being amortized
over periods representing the average remaining useful lives of the
contributed assets, and is classified in the line item investments in
unconsolidated affiliates in the accompanying combined balance sheets as a
reduction to such account.
Summarized financial information for these investments, including Comcast
CAP (see Note 9), as of December 31, 1995 and 1994, and for the periods then
ended, is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Total assets............................................. $501,094 $359,940
Total liabilities........................................ 151,562 32,533
Total revenues........................................... 68,389 35,404
Net loss................................................. (47,408) (31,955)
</TABLE>
F-14
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. ACQUISITIONS
Effective October 1, 1995, TC Systems, Inc., a wholly owned subsidiary of
TCG New York, Inc., entered into an assumption agreement with Local Area
Telecommunications, Inc. ("LOCATE") to acquire certain assets subject to
associated liabilities. Aggregate assets and associated liabilities at that
time were approximately $2.7 million. TC Systems is managing the assets and
funding the associated operating losses pending the closing of the transaction
which is expected to occur as of May 31, 1996.
Effective September 1, 1994, TCG Indiana, Inc., a wholly owned subsidiary of
TCG Partners, entered into an agreement with City Signal Inc. to purchase all
the assets of City Signal Inc. of Indianapolis for approximately $2.6 million,
representing the assets acquired subject to the liabilities assumed. The
results of operations related to City Signal Inc. are included in the
accompanying combined financial statements from September 1, 1994. The results
of operations prior to September 1, 1994 were insignificant.
On October 24, 1994, Teleport paid $6,978,433 to FMR Corp., representing a
return of Fidelity Communications Inc.'s share of TCB's capital calls received
from March 1993 to February 1994, including interest in the amount of
$503,433. On the same date, TCG Partners entered into a purchase agreement
with FMR Corp. to purchase 100 percent of the capital stock of Fidelity
Communications Inc. In accordance with the purchase agreement, TCG Partners
gave a promissory note in the amount of $30,500,000 to Continental Cablevision
Inc. ("Continental") in consideration of Continental issuing to Fidelity Non-
Profit Management Foundation 62,886 shares of Continental common stock and in
exchange for Fidelity Non-Profit Management Foundation transferring all of the
common stock of Fidelity to TCG Partners.
On November 9, 1994, TCGI, on behalf of TCG Partners, paid Continental
$30,605,320 in payment of TCG Partners' promissory note, including interest of
$105,320. TCG Partners' promissory note was canceled on November 15, 1994 and
subsequently all security interests of Continental in the stock of Fidelity
Communications Inc. were released.
In connection with the issuance of capital stock to Comcast and Continental
in 1993, TCGI purchased from the parent of Comcast, for approximately $6.5
million, 49 percent of the issued and outstanding stock of Comcast CAP, which
owns 51 percent of the outstanding capital stock of Eastern TeleLogic
Corporation ("ETC"), on a fully-diluted basis. Such purchase price was
evidenced by a note payable in one year from the date thereof with interest at
the LIBOR rate plus .75 percent per annum and was secured by a pledge to the
parent of Comcast of the capital stock of Comcast CAP. On June 30, 1994, this
note was repaid in full.
On August 24, 1994 and September 19, 1994, TCGI increased its investment in
Comcast CAP by approximately $3.2 million in the aggregate. These investments
primarily represented TCGI's 49 percent participation in Comcast CAP's
purchase of various issues of ETC's convertible subordinated debt. Such
investment is included in investments in unconsolidated affiliates in the
accompanying combined balance sheets. On October 3, 1995, ETC converted
principal and interest on these notes to Common Stock.
In March and July 1995, TCGI and Comcast CAP provided interim financing to
ETC for ETC to expand its network geographically. TCGI's portion of the
financing was approximately $3.4 million in the form of convertible
subordinated demand promissory notes. On October 3, 1995, ETC repaid these
notes plus interest.
During February 1993, Teleport Communications Chicago Inc., a wholly owned
subsidiary of TCGI, entered into an agreement by and among Communications
Credit Corporation, Northern Telecom Finance Corporation and Diginet, Inc. to
purchase substantially all of the assets of Diginet, Inc. ("Diginet"). Such
purchase was consummated on August 9, 1993, effective June 30, 1993, for
approximately $12.6 million,
F-15
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
representing the assets acquired subject to the liabilities assumed. The
results of operations of Diginet are included in the accompanying combined
financial statements from July 1, 1993. The results of operations prior to
July 1, 1993 were insignificant.
10. COMMITMENTS AND CONTINGENCIES
Under the terms of contracts with various parties, TCG is obligated to pay
franchise fees, office rents, node rents and right-of-way fees in connection
with its fiber optic network through 2022. These contracts provide for certain
scheduled increases and for possible escalation of basic rentals based on a
change in the cost of living or on other factors. TCG expects to enter into
other contracts for additional franchise fees, office rents, node rents,
rights-of-way, facilities, equipment, and maintenance services in the future.
A summary of such fixed commitments at December 31, 1995 is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS AMOUNT
----- -------
<S> <C>
1996.............................................................. $12,030
1997.............................................................. 11,303
1998.............................................................. 11,071
1999.............................................................. 11,098
2000.............................................................. 10,822
Thereafter......................................................... 42,585
-------
Total............................................................ $98,909
=======
</TABLE>
Rent expense under operating leases was approximately $11,770,000,
$11,185,000 and $8,701,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
Communications network includes assets acquired under capital leases of
approximately $22,430,000 and $7,279,000 (including approximately $16,615,000
and $4,051,000 with related parties) at December 31, 1995 and 1994,
respectively. The related accumulated depreciation and amortization was
approximately $1,085,000 and $471,000, respectively.
The following is a schedule, by year, of future minimum payments under the
leases, together with the present value of the net minimum payments as of
December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
YEARS AMOUNT
----- -------
<S> <C>
1996............................................................. $ 5,878
1997............................................................. 5,114
1998............................................................. 4,474
1999............................................................. 3,519
2000............................................................. 1,173
-------
Total minimum lease payments...................................... 20,158
Less amount representing interest................................. 3,840
-------
Total obligations under capital leases............................ $16,318
=======
</TABLE>
Teleport Communications is subject to a revenue sharing agreement with The
Port Authority of New York and New Jersey (the "Port Authority"). Based on the
agreement, Teleport Communications is obligated to pay five percent of its
gross revenues, and may be required to pay a "net return rental fee," as
defined, to the extent its cumulative net return exceeds the entitlement
amount. Teleport Communications is also required to remit to the Port
Authority a minimum payment currently equal to $250,000 annually.
F-16
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC. AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Teleport Communications entered into a 15 year franchise agreement with the
City of New York during 1994, which among other things, requires a payment
based on certain gross revenues, as defined in the agreement. The franchise
provides for the payment of 10 percent of certain gross revenues in 1995 and
1996, six percent in 1997 and five percent thereafter, all subject to certain
set-offs, reductions and adjustments. The franchise also provides that
commencing with calendar year 1995, payment to the City will be no less than
$200,000 per year.
In the ordinary course of business, TCG is involved in various litigation
and regulatory matters, proceedings and claims. In the opinion of TCG's
management, after consultation with counsel, the outcome of such proceedings
will not have a materially adverse effect on TCG's combined financial
position, results of operations or cash flows.
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash investing activities for the years ended December 31, 1995, 1994 and
1993 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Fixed assets acquired under capital leases........... $15,151 $4,384 $6,635
======= ====== ======
Right of way obtained in exchange for cable
installation........................................ $ 1,330 $ -- $ --
======= ====== ======
</TABLE>
12. SUBSEQUENT EVENTS
On February 2, 1996, TCGI entered into a Stock Purchase Agreement, subject
to Board approval, with all the shareholders of BizTel Communications, Inc.
for the eventual purchase by TCGI of certain capital stock of BizTel
Communications, Inc. and certain related transactions. Such purchase closed on
February 29, 1996.
On May 13, 1996, in connection with the Reorganization, TCGI purchased the
partnership interest of Hyperion Telecommunications, Inc. of Florida in TCG
South Florida for $11,618,000.
F-17
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC.
AND SUBSIDIARIES AND TCG PARTNERS
COMBINED BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Current assets:
Cash and cash equivalents.......................................... $ 16,805
--------
Accounts receivable:
Trade--net of allowance for doubtful accounts of $2,362........... 26,041
Related parties................................................... 5,763
Miscellaneous--net of allowance for doubtful accounts of $910..... 1,764
--------
Accounts receivable--net........................................ 33,568
--------
Prepaid expenses................................................... 5,220
--------
Other current assets............................................... 919
--------
Total current assets.............................................. 56,512
--------
Fixed assets--at cost:
Communications network............................................. 518,861
Other.............................................................. 57,945
--------
576,806
Less accumulated depreciation and amortization..................... (126,273)
--------
Fixed assets--net............................................... 450,533
--------
Investment in unconsolidated affiliates............................. 118,985
--------
Goodwill--net of accumulated amortization of $2,076................. 26,649
--------
Other assets........................................................ 6,227
--------
Total assets...................................................... $658,906
========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL (DEFICIT)
<TABLE>
<S> <C>
Current liabilities:
Accounts payable and accrued liabilities............................ $ 93,024
Current portion of capital lease obligation ($3,657 with related
parties)........................................................... 4,575
Other current liabilities........................................... 928
--------
Total current liabilities.......................................... 98,527
Capital lease obligations ($9,196 with related parties).............. 10,903
Subordinated debt to parents......................................... 269,000
Long-term bank debt.................................................. 155,000
Minority interest.................................................... 4,847
Other liabilities.................................................... 13,973
--------
Total liabilities.................................................. 552,250
--------
Commitments and contingencies
Stockholders' equity and partners' capital (deficit):
Stockholders' equity (common stock, $1.00 par value; authorized,
3,000 shares; outstanding,
1,667 shares)...................................................... 119,100
Partners' capital (deficit)......................................... (12,444)
--------
Total stockholders' equity and partners' capital (deficit)......... 106,656
--------
Total liabilities and stockholders' equity and partners' capital
(deficit)........................................................... $658,906
========
</TABLE>
See notes to combined financial statements.
F-18
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC.
AND SUBSIDIARIES AND TCG PARTNERS
COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues:
Telecommunications services............................. $ 39,553 $ 29,855
Management fees from affiliates......................... 10,882 6,937
-------- --------
Total revenues........................................ 50,435 36,792
-------- --------
Expenses:
Operating............................................... 22,520 17,124
Selling, general and administrative..................... 20,197 16,070
Depreciation and amortization........................... 12,849 7,297
-------- --------
Total expenses........................................ 55,566 40,491
-------- --------
Operating loss............................................ (5,131) (3,699)
-------- --------
Interest:
Interest income......................................... 1,190 1,106
Interest expense ($5,353 in 1996 and $4,077 in 1995 with
related parties)....................................... (8,148) (4,600)
-------- --------
Total interest........................................ (6,958) (3,494)
-------- --------
Loss before minority interest, equity in losses of
unconsolidated affiliates and income tax provision....... (12,089) (7,193)
Minority interest......................................... 150 201
Equity in losses of unconsolidated affiliates............. (6,528) (4,211)
-------- --------
Loss before income tax provision.......................... (18,467) (11,203)
Income tax provision...................................... (225) (335)
-------- --------
Net loss.................................................. (18,692) (11,538)
Stockholders' equity and partners' capital, beginning of
period................................................... 125,348 179,152
-------- --------
Stockholders' equity and partners' capital, end of
period................................................... $106,656 $167,614
======== ========
</TABLE>
See notes to combined financial statements.
F-19
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC.
AND SUBSIDIARIES AND TCG PARTNERS
COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(18,692) $(11,538)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 12,849 7,297
Equity in losses of unconsolidated affiliates........... 6,528 4,211
Amortization of deferred credits........................ (561) (501)
Provision for losses on accounts receivable............. 428 181
Minority interest....................................... (150) (201)
(Increase) decrease in operating assets and increase
(decrease) in operating liabilities:
Accounts receivable.................................... 269 1,625
Due to (from) related parties.......................... 2,549 --
Other assets........................................... (1,150) 442
Accounts payable and accrued liabilities............... (4,186) 19,847
Deferred credits....................................... 437 1,419
-------- --------
Net cash provided by (used in) operating activities... (1,679) 22,782
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for communications network.......... (25,943) (45,188)
Capital expenditures for other fixed assets.............. (5,150) (4,565)
Due to (from) related parties............................ (3,950) --
Notes receivable......................................... -- (1,470)
Investment in unconsolidated affiliates--cash component.. (25,523) (18,416)
-------- --------
Cash used in investing activities..................... (60,566) (69,639)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt................. 67,500 71,500
Capital contributions from minority partners............. 588 993
Principal payments under capital lease obligations....... (900) (567)
-------- --------
Net cash provided by financing activities............. 67,188 71,926
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 4,943 25,069
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 11,862 26,000
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 16,805 $ 51,069
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--Cash
paid during the period for interest...................... $ 1,653 $ 4,083
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION--Fixed
assets acquired under capital leases..................... $ 60 $ 1,078
======== ========
</TABLE>
See notes to combined financial statements.
F-20
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC.
AND SUBSIDIARIES AND TCG PARTNERS
NOTES TO COMBINED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1. PRESENTATION
In the opinion of the management of Teleport Communications Group Inc.
("TCGI") and TCG Partners, the accompanying unaudited combined financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of March
31, 1996 and the results of operations and cash flows for the three month
periods ended March 31, 1996 and 1995. The results of operations for the three
months ended March 31, 1996 are not necessarily indicative of results that may
be expected for any other interim period or for the full year.
The financial statements should be read in conjunction with the combined
financial statements and notes thereto for the year ended December 31, 1995.
The accounting policies used in preparing these financial statements are the
same as those described in the December 31, 1995 combined financial
statements.
2. LONG-TERM DEBT
Long-term debt at March 31, 1996 consisted of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Subordinated debt to parents.................................. $269,000
Long-term bank debt........................................... 155,000
--------
Total....................................................... $424,000
========
</TABLE>
The aggregate long-term debt maturing during the next five years is as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, AMOUNT
------------------------ --------
<S> <C>
1997......................................................... $ --
1998......................................................... --
1999......................................................... 12,500
2000......................................................... 50,000
2001......................................................... 90,000
Thereafter................................................... 271,500
--------
$424,000
========
</TABLE>
3. INVESTMENT IN UNCONSOLIDATED AFFILIATES
On February 2, 1996, TCGI entered into a Stock Purchase Agreement with all
the shareholders of Biztel Communications, Inc. (formerly Video/Phone Systems,
Inc.) for the purchase by TCGI of certain capital stock of Video/Phone
Systems, Inc. and certain related transactions. Subsequently, on February 29,
1996, the aforementioned transaction was consummated resulting in TCGI's
ownership of approximately 49% of the outstanding common stock of Biztel
Communications, Inc.
Summarized financial information for the investments in the Local Market
Partnerships, Comcast CAP and Biztel Communications, Inc. as of March 31, 1996
and for the three months then ended is as follows (in thousands):
<TABLE>
<S> <C>
Total assets.................................................. $522,549
Total liabilities............................................. 145,241
Total revenues................................................ 24,151
Net loss...................................................... (17,094)
</TABLE>
On May 13, 1996, in connection with the Reorganization, TCGI purchased the
partnership interest of Hyperion Telecommunications, Inc. of Florida in TCG
South Florida for $11,618,000.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Teleport
Communications Group Inc. and
Partners of TCG Partners:
We have audited the accompanying combined balance sheets of the Local Market
Partnerships, as defined in Note 1, as of December 31, 1995 and 1994 and the
related combined statements of operations and partners' capital and of cash
flows for the three years ended December 31, 1995, 1994 and 1993. These
financial statements are the responsibility of the Local Market Partnerships'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of the Local Market
Partnerships at December 31, 1995 and 1994 and the combined results of their
operations and their combined cash flows for the three years ended December
31, 1995, 1994 and 1993 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
February 16, 1996 (May 13, 1996 as to Note 9)
F-22
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
ASSETS
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 20,973 $ 22,987
-------- --------
Accounts receivable:
Trade--net of allowance for doubtful accounts ($359 in
1995 and $222 in 1994).................................. 7,774 5,373
Related parties.......................................... 2,079 896
Miscellaneous--net of allowance for doubtful accounts
($543 in 1995 and $747 in 1994)......................... 560 755
-------- --------
Accounts receivable--net............................... 10,413 7,024
-------- --------
Prepaid expenses.......................................... 2,934 1,696
-------- --------
Notes receivable.......................................... -- 25,983
-------- --------
Other current assets...................................... 790 422
-------- --------
Total current assets..................................... 35,110 58,112
-------- --------
Fixed assets--at cost:
Communications network.................................... 391,432 227,969
Other..................................................... 8,941 3,851
-------- --------
400,373 231,820
Less accumulated depreciation and amortization............ (32,086) (7,037)
-------- --------
Fixed assets--net...................................... 368,287 224,783
-------- --------
Goodwill--net of accumulated amortization ($5,033 in 1995
and $2,422 in 1994)....................................... 41,782 38,227
-------- --------
Other assets............................................... 3,459 2,776
-------- --------
Total assets............................................. $448,638 $323,898
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable and accrued liabilities.................. $ 49,462 $ 37,244
Current portion of capital lease obligations ($11,620 in
1995 and $7,831 in 1994 with related parties)............ 14,892 10,711
Due to Teleport Communications Group Inc.................. 1,789 6,857
Other current liabilities................................. 828 743
-------- --------
Total current liabilities................................ 66,971 55,555
Capital lease obligations ($30,503 in 1995 and $31,961 in
1994 with related parties)................................ 35,989 37,227
Other liabilities.......................................... 4,925 5,057
-------- --------
Total liabilities........................................ 107,885 97,839
-------- --------
Commitments and contingencies
Partners' capital.......................................... 340,753 226,059
-------- --------
Total liabilities and partners' capital.................. $448,638 $323,898
======== ========
</TABLE>
See notes to combined financial statements.
F-23
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS TO BE ACQUIRED BY
TELEPORT COMMUNICATIONS GROUP INC.
COMBINED STATEMENTS OF OPERATIONS AND PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Revenues:
Telecommunication services....................... $ 50,276 $ 23,752 $ 943
-------- -------- -------
Expenses:
Operating........................................ 31,073 16,842 537
Selling, general and administrative.............. 41,195 26,830 1,601
Depreciation and amortization.................... 23,645 10,216 185
-------- -------- -------
Total expenses................................ 95,913 53,888 2,323
-------- -------- -------
Operating loss.................................... (45,637) (30,136) (1,380)
Interest:
Interest income.................................. 2,393 1,908 68
Interest expense--($4,763 in 1995, $4,333 in
1994 and $67 in 1993 with related parties)...... (5,622) (4,783) (194)
-------- -------- -------
(3,229) (2,875) (126)
-------- -------- -------
Net loss.......................................... (48,866) (33,011) (1,506)
Partners' capital contributions................... 163,560 244,814 15,762
Partners' capital, January 1...................... 226,059 14,256 --
-------- -------- -------
Partners' capital, December 31.................... $340,753 $226,059 $14,256
======== ======== =======
</TABLE>
See notes to combined financial statements.
F-24
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS TO BE ACQUIRED BY
TELEPORT COMMUNICATIONS GROUP INC.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................... $ (48,866) $ (33,011) $ (1,506)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.............. 23,645 10,216 185
Amortization of deferred credits........... (755) (256) --
Provision for losses on accounts receiv-
able...................................... 464 196 --
Gain on sale of fixed assets............... ( 3) -- --
(Increase) decrease in operating assets and
increase (decrease) in operating
liabilities:
Accounts receivable........................ (3,174) (4,798) (369)
Other assets............................... (1,908) (3,953) (46)
Deferred charges........................... (687) 50 --
Accounts payable and accrued liabilities... 11,157 10,590 1,152
Due to (from) Teleport Communications Group
Inc. ..................................... (5,811) 5,580 199
Deferred credits........................... 555 5,135 --
--------- --------- --------
Net cash used in operating activities..... (25,383) (10,251) (385)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for communications net-
work........................................ (99,032) (105,151) (5,078)
Capital expenditures for other fixed assets.. (5,090) (2,280) (356)
--------- --------- --------
Cash used in investing activities......... (104,122) (107,431) (5,434)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash transferred from managing partner....... -- 10,570 --
Partners' capital contributions--cash compo-
nent........................................ 138,683 170,786 14,998
Due to (from) Teleport Communications Group
Inc. ....................................... 6,706 (43,510) --
Principal payments under capital lease obli-
gations..................................... (17,898) (6,035) (321)
--------- --------- --------
Net cash provided by financing activi-
ties..................................... 127,491 131,811 14,677
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. (2,014) 14,129 8,858
CASH AND CASH EQUIVALENTS, JANUARY 1.......... 22,987 8,858 --
--------- --------- --------
CASH AND CASH EQUIVALENTS, DECEMBER 31........ $ 20,973 $ 22,987 $ 8,858
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--Cash paid during the year for
interest..................................... $ 5,413 $ 4,186 $ 194
========= ========= ========
</TABLE>
See notes to combined financial statements.
F-25
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS TO BE ACQUIRED BY
TELEPORT COMMUNICATIONS GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. ORGANIZATION AND OPERATIONS
Teleport Communications Group Inc. ("TCGI") and TCG Partners ("TCGP")
(collectively, "TCG") together with the four owners of TCGI and TCGP, which
are wholly owned subsidiaries of Tele-Communications, Inc. ("TCI"), Cox
Communications, Inc. ("Cox"), Comcast Corporation ("Comcast") and Continental
Cablevision, Inc. ("Continental") (collectively the "Cable Stockholders"), and
certain other cable television operators formed 14 partnerships (the "Local
Market Partnerships") to develop and operate local telecommunications networks
in various markets across the United States. The following is a list of the
Local Market Partnerships:
TCG Chicago TCG Omaha
TCG Connecticut TCG Phoenix
TCG Dallas TCG Pittsburgh
TCG Dallas Systems TCG San Diego
TCG Detroit* TCG San Francisco*
TCG Illinois TCG Seattle*
TCG Los Angeles TCG South Florida*
* Local Market Partnerships with minority partners that are not affiliated
with either the Company or the Cable Stockholders. (See Note 9.)
Effective January 1, 1996 the assets and liabilities of TCG Dallas Systems
were transferred to TCG Dallas.
Certain of the Local Market Partnerships commenced operations prior to
December 31, 1993; the results of such operations are not significant to the
combined financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination--The accompanying combined financial statements
include the accounts of the Local Market Partnerships. All intercompany
transactions and balances among the Local Market Partnerships have been
eliminated.
Basis of Accounting--The accompanying combined financial statements have
been prepared on the accrual basis of accounting.
Revenue Recognition--Revenue is recognized in accordance with the terms of
the underlying customer contracts or tariffs and over the period in which the
services are provided.
Depreciation and Amortization--Depreciation and amortization are computed on
the straight-line basis over the estimated useful lives of the assets or the
length of the lease, whichever is shorter. Estimated useful lives are 5 to 25
years for the communications network and 3 to 5 years for other fixed assets,
except for buildings which are 40 years.
During 1995, the Local Market Partnerships completed a review of the useful
lives of their fixed assets. The Local Market Partnerships determined that the
lives of certain electronics equipment were longer than industry standard,
while the lives of other electronics equipment were shorter than industry
standard. Therefore, the Local Market Partnerships adjusted the estimated
useful lives of certain electronics equipment to conform with industry
standard, effective December 1, 1995. The effect of these changes in estimate
increased depreciation expense for the year ended December 31, 1995 by
approximately $135,000.
F-26
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill--Goodwill represents the excess of the capital credited to the
partners over the historical basis of the net assets contributed by the
partners. Such goodwill is being amortized over the average remaining useful
lives of the contributed assets. The related amortization was $2,611,000,
$2,422,000 and $26,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
Deferred Credits--Deferred credits principally represent advance payments
received from customers for long-term fiber optic service, and are amortized
into income over the life of the related contracts. The current portions,
$828,000 and $743,000 at December 31, 1995 and 1994, respectively, are
included in accounts payable and accrued liabilities and the non-current
portions, $4,091,000 and $4,376,000 at December 31, 1995 and 1994,
respectively, are included in other liabilities.
Income Taxes--The Local Market Partnerships are not subject to Federal or
state and local income taxes. Each partner's distributive share of partnership
revenues, expenses and other items is computed on the basis of the respective
partner's capital interest in the partnership for reporting by the partners in
their respective Federal and state and local income tax returns.
Financial Instruments--Financial instruments which potentially subject the
Local Market Partnerships to concentration of credit risk consist of accounts
receivable. Concentrations of credit risk with respect to accounts receivable
are limited due to the dispersion of the Local Market Partnerships' customer
base among different industries and geographic areas in the United States, by
credit granting policies adopted by the Local Market Partnerships' and by
remedies provided by terms of contracts, tariffs and statutes.
Cash Equivalents--The Local Market Partnerships consider all highly liquid
instruments readily convertible to known amounts of cash to be cash
equivalents.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation--Certain 1994 and 1993 amounts have been reclassified to
conform with the 1995 presentation.
F-27
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. PARTNERS' CAPITAL
A summary of changes in partners' capital for the years ended December 31,
1995 and 1994 is as follows (in thousands):
<TABLE>
<CAPTION>
PARTNERS' PARTNERS' PARTNERS'
CAPITAL CAPITAL CAPITAL
JANUARY 1, CAPITAL NET DECEMBER 31, CAPITAL NET DECEMBER 31,
1994 CONTRIBUTIONS LOSS 1994 CONTRIBUTIONS LOSS 1995
---------- ------------- -------- ------------ ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
TCGI/TCGP............... $6,042 $ 90,962 $(12,300) $ 84,704 $ 62,297 $(18,231) $128,771
Continental............. -- 38,524 (4,925) 33,599 16,712 (6,294) 44,017
TCI..................... -- 72,232 (8,978) 63,254 48,941 (13,365) 98,830
Comcast................. -- 10,436 (1,532) 8,904 8,226 (2,354) 14,776
Times Mirror Access,
Inc. .................. -- 8,589 (964) 7,625 7,284 (2,136) 12,773
Viacom Telecom Inc. .... -- 11,097 (1,435) 9,662 5,896 (2,366) 13,192
Cox..................... 8,214 3,365 (1,344) 10,235 8,591 (1,907) 16,918
Metrovision
Telecommunications of
Michigan, Inc. ........ -- 1,080 (153) 927 719 (197) 1,449
Booth Telecable, Inc. .. -- 1,062 (151) 911 707 (194) 1,424
Micronet Inc. .......... -- 2,580 (328) 2,252 1,058 (528) 2,782
InterMedia Partners..... -- 1,505 (191) 1,314 617 (308) 1,623
Hyperion
Telecommunications
Inc., of Florida....... -- 2,279 (478) 1,801 1,693 (664) 2,830
M.H. Lightnet, Inc., of
Florida................ -- 1,103 (232) 871 819 (322) 1,368
------- -------- -------- -------- -------- -------- --------
Total.................. $14,256 $244,814 $(33,011) $226,059 $163,560 $(48,866) $340,753
======= ======== ======== ======== ======== ======== ========
</TABLE>
For the year ended December 31, 1993, TCGI/TCGP contributed $6,651,312 and
Cox contributed $9,111,312. The respective shares of the net loss were
$609,661 and $896,644, respectively.
4. RELATED PARTY TRANSACTIONS
TCGI provides various services to and makes certain cash payments on behalf
of each Local Market Partnership (including providing employees to each Local
Market Partnership whose salaries and benefits, which include participation in
the Teleport Communications Group Stock Option Plan, the Teleport
Communications Group Unit Appreciation Plan, and the Teleport Communications
Group Inc. Retirement Savings Plan (including the deferred compensation Make-
Up Plan) are charged directly to each Local Market Partnership. Such expenses
were $23,097,125, $15,777,834 and $847,228 for the years ended December 31,
1995, 1994 and 1993, respectively.
TCGI and its subsidiaries provide each Local Market Partnership with various
management services that include accounting and financial reporting,
marketing, regulatory, legal, systems support and other services. Total
management fees charged to Local Market Partnerships for such services were
$20,770,300, $13,717,415 and $884,227 for the years ended December 31, 1995,
1994 and 1993, respectively, and are included, where appropriate, in operating
or selling, general and administrative expenses in the combined statements of
operations and partners' capital. In the opinion of management, such charges
have been made on a basis which is considered to be reasonable; however, these
charges are not necessarily indicative of the total cost that the Local Market
Partnerships would have incurred had they operated on a stand-alone basis.
In accordance with the Management Services Agreements, TCGI charges each
Local Market Partnership a royalty fee based on revenues. The royalty fees
charged to the Local Market Partnerships were $1,674,695, $1,170,258, and
$158,698 for the years ended December 31, 1995, 1994 and 1993, respectively,
and are included in operating expenses in the combined statements of
operations and partners' capital.
F-28
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. PENSION PLANS
TCGI implemented a retirement savings plan effective January 1, 1992 with a
401(k) savings component and a retirement component covering substantially all
eligible employees of TCGI, as well as other related entities, including
employees dedicated to each Local Market Partnership, with one or more years
of service. Under the 401(k) component of the plan, participants may make pre-
tax contributions and TCGI matches 50 percent of the first 6 percent of
eligible compensation to a maximum company contribution of $1,500 per
employee. Under the retirement component of the plan, TCGI contributes an
amount based on years of service and eligible compensation.
Expenses allocated to the Local Market Partnerships from TCGI aggregated
$288,144, $238,936 and $2,868 for the years ended December 31, 1995, 1994 and
1993, respectively, for contributions required under the plan.
6. COMMITMENTS AND CONTINGENCIES
Under the terms of contracts with various parties, the Local Market
Partnerships are obligated to pay franchise fees, office rents, node rents and
right-of-way fees in connection with their fiber optic networks through 2019.
These contracts provide for certain scheduled increases and for possible
escalation of basic rentals based on a change in the cost of living or on
other factors. The Local Market Partnerships expect to enter into other
contracts for additional franchise fees, office rents, node rents, rights-of-
way, facilities, equipment, and maintenance services in the future.
A summary of such fixed commitments at December 31, 1995 is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS AMOUNT
----- -------
<S> <C>
1996............................................................. $ 5,653
1997............................................................. 5,113
1998............................................................. 4,867
1999............................................................. 4,606
2000............................................................. 4,130
Thereafter........................................................ 17,412
-------
Total........................................................... $41,781
=======
</TABLE>
Communications network includes assets acquired under capital leases of
approximately $77,241,000 and $54,569,000 (including approximately $68,482,000
and $50,898,000 with related parties) at December 31, 1995 and 1994,
respectively. The related accumulated depreciation and amortization was
approximately $5,456,000 and $1,907,000 at December 31, 1995 and 1994,
respectively.
The following is a schedule, by year, of future minimum payments under the
leases, together with the present value of the net minimum payments as of
December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
YEARS AMOUNT
----- -------
<S> <C>
1996............................................................ $18,818
1997............................................................ 17,461
1998............................................................ 14,456
1999............................................................ 7,962
2000............................................................ 2,248
-------
Total minimum lease payments..................................... 60,945
Less amount representing interest................................ 10,064
-------
Total obligations under capital leases........................... $50,881
=======
</TABLE>
F-29
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
In the ordinary course of business, the Local Market Partnerships are
involved in various litigation and regulatory matters, proceedings and claims.
In the opinion of the Local Market Partnerships' management, after
consultation with counsel, the outcome of such proceedings will not have a
materially adverse effect on the Local Market Partnerships' combined financial
position, results of operations or cash flows.
7. NOTES RECEIVABLE
Local licensing regulations, state regulatory requirements, and contractual
restrictions did not permit the immediate transfer of title of fixed assets
from Teleport Communications Los Angeles, Inc. ("TCLA"), Teleport
Communications San Francisco, Inc. ("TCSF") and Teleport Communications
Dallas, Inc. ("TCD") to TCG Los Angeles ("TCGLA"), TCG San Francisco ("TCGSF")
and TCG Dallas ("TCGD"), respectively, in 1994. The obligations of TCLA, TCSF,
and TCD to contribute the fixed assets once the appropriate approvals were
received was evidenced by noninterest-bearing notes aggregating $9,912,758,
$10,955,201 and $5,115,358, respectively, at December 31, 1994. Depreciation
on the related fixed assets of $194,913, $200,678 and $458,191, respectively,
for the period January 1, 1995 to the date of transfer was accounted for by a
reduction of the notes on the books of TCGLA, TCGSF and TCGD, respectively.
Once the appropriate approvals were received, TCLA, TCSF and TCD transferred
title of the fixed assets to TCGLA, TCGSF and TCGD.
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Noncash investing and financing activities for the years ended December 31,
1995, 1994 and 1993 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
Fixed assets acquired under capital leases........ $ 22,672 $ 47,823 $(4,887)
======== ======== =======
Transfer of title to fixed assets................. $ 25,130 $ -- $ --
======== ======== =======
Assets contributed by partners.................... $ -- $(23,464) $(1,207)
Liabilities assumed by partnership................ -- 27,895 1,596
Agreed-upon value assigned to assets.............. 18,170 43,800 --
Net assets contributed............................ (12,004) (7,975) --
-------- -------- -------
Goodwill recorded upon inception of partnerships.. $ 6,166 $ 40,256 $ 389
======== ======== =======
Contribution of assets from partners credited to
the partners' capital accounts................... $ 18,170 $ 62,183 $ --
======== ======== =======
Reimbursement of pre-organization funding from
partners credited to the partners' capital
accounts......................................... $ 6,706 $ 1,275 $ 764
======== ======== =======
</TABLE>
9. SUBSEQUENT EVENTS
On January 2, 1996, January 19, 1996 and January 23, 1996, additional
capital contributions of $6,000,000, $31,917,150, and $4,082,850,
respectively, were made by the partners.
On May 13, 1996, in connection with the Reorganization, TCGI purchased the
partnership interest of Hyperion Telecommunications, Inc. of Florida in TCG
South Florida for $11,618,000.
F-30
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
COMBINED BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Current assets:
Cash and cash equivalents.......................................... $ 19,195
--------
Accounts receivable:
Trade--net of allowance for doubtful accounts of $383............. 10,162
Miscellaneous--net of allowance for doubtful accounts of $14...... 626
Related parties................................................... 1,340
--------
Accounts receivable--net........................................ 12,128
--------
Prepaid expenses................................................... 4,407
--------
Other current assets............................................... 671
--------
Total current assets.............................................. 36,401
--------
Fixed assets--at cost:
Communications network............................................. 413,261
Other.............................................................. 10,017
--------
423,278
Less accumulated depreciation and amortization..................... (39,729)
--------
Fixed assets--net............................................... 383,549
--------
Goodwill--net of accumulated amortization of $5,744................. 41,071
--------
Other assets........................................................ 3,610
--------
Total assets...................................................... $464,631
========
</TABLE>
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<S> <C>
Current liabilities:
Accounts payable and accrued liabilities............................. $ 43,830
Current portion of capital lease obligations ($12,030 with related
parties)............................................................ 13,298
Due to Teleport Communications Group Inc. ........................... 2,446
Other current liabilities............................................ 803
--------
Total current liabilities........................................... 60,377
Capital lease obligations ($26,977 with related parties).............. 32,913
Other liabilities..................................................... 5,045
--------
Total liabilities................................................... 98,335
--------
Commitments and contingencies
Partners' capital..................................................... 366,296
--------
Total liabilities and partners' capital............................. $464,631
========
</TABLE>
See notes to combined financial statements.
F-31
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
COMBINED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues:
Telecommunications services.............................. $ 18,594 $ 9,922
-------- --------
Expenses:
Operating................................................ 11,148 6,948
Selling, general and administrative...................... 14,187 9,050
Depreciation and amortization............................ 8,432 3,838
-------- --------
Total expenses......................................... 33,767 19,836
-------- --------
Operating loss............................................. (15,173) (9,914)
-------- --------
Interest:
Interest income.......................................... 534 489
Interest expense ($1,576 in 1996 and $1,075 in 1995 with
related parties)........................................ (1,818) (1,274)
-------- --------
Total interest......................................... (1,284) (785)
-------- --------
Net loss................................................... (16,457) (10,699)
Partners' capital contributions............................ 42,000 48,045
Partners' capital, beginning of period..................... 340,753 226,059
-------- --------
Partners' capital, end of period........................... $366,296 $263,405
======== ========
</TABLE>
See notes to combined financial statements.
F-32
<PAGE>
COMBINED FINANCIAL STATEMENTS OF LOCAL MARKET PARTNERSHIPS
TO BE ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(16,457) $(10,699)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 8,432 3,839
Amortization of deferred credits........................ (220) (222)
Provision for losses on accounts receivable............. 98 52
(Increase) decrease in operating assets and increase
(decrease) in operating liabilities:
Accounts receivable.................................... (2,553) 2,456
Due to (from) related parties.......................... (806) (6,540)
Other assets........................................... (1,581) (601)
Accounts payable and accrued liabilities............... (5,515) 6,569
Deferred credits....................................... 856 135
-------- --------
Net cash used in operating activities................. (17,746) (5,011)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for communications network.......... (22,337) (25,524)
Capital expenditures for other fixed assets.............. (1,034) (562)
-------- --------
Cash used in investing activities..................... (23,371) (26,086)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partners' capital contributions.......................... 42,000 48,045
Principal payments under capital lease obligations....... (4,862) (3,645)
Due to (from) Teleport Communications Group Inc. ........ 2,200 533
-------- --------
Net cash provided by financing activities............. 39,338 44,933
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (1,779) 13,836
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 20,973 22,987
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 19,194 $ 36,823
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--Cash
paid during the period for interest...................... $ 1,262 $ 819
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION--Fixed
assets acquired under capital leases..................... $ 323 $ 161
======== ========
</TABLE>
See notes to combined financial statements.
F-33
<PAGE>
COMBINED FINANCIAL STATEMENTS OF
LOCAL MARKET PARTNERSHIPS TO BE
ACQUIRED BY TELEPORT COMMUNICATIONS GROUP INC.
NOTES TO COMBINED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1. PRESENTATION
In the opinion of the management of Teleport Communications Group Inc.
("TCGI") and TCG Partners, the accompanying unaudited combined financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position as of March
31, 1996 and the results of operations and cash flows for the three month
periods ended March 31, 1996 and 1995. The results of operations for the
three months ended March 31, 1996 are not necessarily indicative of results
that may be expected for any other interim period or for the full year.
The financial statements should be read in conjunction with the combined
financial statements and notes thereto for the year ended December 31,
1995. The accounting policies used in preparing these financial statements
are the same as those described in the December 31, 1995 combined financial
statements.
2. SUBSEQUENT EVENT
On May 13, 1996, in connection with the Reorganization, TCGI purchased the
partnership interest of Hyperion Telecommunications, Inc. of Florida in TCG
South Florida for $11,618,000.
F-34
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 15
The Reorganization....................................................... 23
Use of Proceeds.......................................................... 27
Capitalization........................................................... 28
Selected Combined Financial Data......................................... 29
Pro Forma Financial Information.......................................... 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 37
The Local Telecommunications Services Industry........................... 47
Business................................................................. 50
Management............................................................... 63
Certain Relationships and Related Transactions........................... 77
Principal Stockholders................................................... 81
Description of Certain Indebtedness...................................... 82
Description of Notes..................................................... 84
Description of Capital Stock............................................. 110
Certain Federal Income Tax Considerations................................ 113
Underwriting............................................................. 117
Legal Matters............................................................ 118
Experts.................................................................. 118
Additional Information................................................... 118
Glossary................................................................. 120
Index to Combined Financial Statements................................... F-1
</TABLE>
----------------
UNTIL JULY 22, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$1,373,606,000
TCG
===
TELEPORT COMMUNICATIONS GROUP INC.
$300,000,000
9 7/8% SENIOR NOTES DUE 2006
$1,073,606,000
11 1/8% SENIOR DISCOUNT NOTES DUE 2007
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
CHASE SECURITIES INC.
TORONTO DOMINION SECURITIES
(USA) INC.
JUNE 27, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
Inside Front Cover
- ------------------
- - Map of the United States with graphic areas enlarged and color coded to
indicate current operating networks and networks in development.
Cover Page of Prospectus
- ------------------------
- - TCG Logo
Page 2
- ------
- - Photograph of TCG's advanced Network Management Center at Staten Island, NY.
Page 48
- -------
- - Pie chart representing $96 billion market of 1995 Estimated Local
Telecommunications Revenue, indicating local services revenue ($55 billion),
toll services revenue ($13 billion), 1 X C switched access services revenue
($22 billion), dedicated services revenue ($5 billion) and other revenue ($1
billion).
Inside Back Cover
- -----------------
- - Diagram of the interrelationship of TCG's fiber optic Sonet Networks,
ISDN/Telephone switches, and ATM switches
6
- ----
- - Ownership chart of Teleport Communications Group Inc., TCG Partners and the
Local Market Partnerships as of June 3, 1996.
7
- ----
- - Ownership chart of Teleport Communications Group Inc., TCG Partners and the
Local Market Partnerships immediately prior to the consummation of the
Offerings.
8
- ----
- - Ownership chart of Teleport Communications Group Inc., TCG Partners and the
Local Market Partnerships after the consummation of the Offerings and the
transactions comprising the Reorganization that will occur prior thereto or
in connection therewith.
9
- ----
- - Ownership chart of Teleport Communications Group Inc., TCG Partners and the
Local Market Partnerships after giving effect to the Reorganization and the
Offerings.
