<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1996
REGISTRATION NO. 333-3850
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
TELEPORT COMMUNICATIONS GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 4813 13-3173139
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NUMBER)
JURISDICTION OF CLASSIFICATION CODE
INCORPORATION OR NUMBER)
ORGANIZATION)
ONE TELEPORT DRIVE
STATEN ISLAND, NEW YORK 10311-1011
(718) 355-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOHN W. THOMSON, ESQ.
VICE PRESIDENT AND SECRETARY
TELEPORT COMMUNICATIONS GROUP INC.
ONE TELEPORT DRIVE
STATEN ISLAND, NEW YORK 10311-1011
(718) 355-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S AGENT FOR SERVICE)
----------------
PLEASE ADDRESS A COPY OF ALL COMMUNICATIONS TO:
KEVIN F. REED, ESQ. ROHAN S. WEERASINGHE, ESQ.
TIMOTHY J. KELLEY, ESQ. ROBERT EVANS III, ESQ.
DOW, LOHNES & ALBERTSON SHEARMAN & STERLING
1200 NEW HAMPSHIRE AVENUE, N.W. 599 LEXINGTON AVENUE
WASHINGTON, D.C. 20036-6802 NEW YORK, N.Y. 10022-6069
(202) 776-2000 (212) 848-4000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
TELEPORT COMMUNICATIONS GROUP INC.
CROSS-REFERENCE SHEET
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION
REQUIRED BY THE ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM AND CAPTION LOCATION IN PROSPECTUS
---------------- ----------------------
<S> <C>
1.Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus.......................... Outside Front Cover Page
2.Inside Front and Outside Back Cover
Pages of Prospectus................. Inside Front Cover Page; Outside
Back Cover Page
3.Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.. Prospectus Summary; Risk Factors;
The Reorganization; Selected
Combined Financial Data
4.Use of Proceeds....................... Prospectus Summary; Use of Proceeds
5.Determination of Offering Price....... Outside Front Cover Page;
Underwriting
6.Dilution.............................. Dilution
7.Selling Security Holders.............. *
8.Plan of Distribution.................. Outside Front Cover Page;
Underwriting
9.Description of Securities to be
Registered.......................... Outside Front Cover Page; Prospectus
Summary; Description of Capital
Stock
10.Interests of Named Experts and
Counsel............................. *
11.Information with Respect to the
Registrant
(a)Description of Business............. Prospectus Summary; Risk Factors;
The Reorganization; Pro Forma
Financial Information; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; The Local
Telecommunications Services
Industry; Business; Certain
Relationships and Related
Transactions; Description of
Certain Indebtedness
(b)Description of Property............. Business
(c)Legal Proceedings................... Business
(d)Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters....... Dilution; Dividend Policy;
Description of Capital Stock;
Shares Eligible for Future Sale
(e)Financial Statements................ Pro Forma Financial Information;
Combined Financial Statements
(f)Selected Combined Financial Data.... Capitalization; Selected Combined
Financial Data
(g)Supplementary Financial
Information....................... *
(h)Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... Management's Discussion and Analysis
of Financial Condition and Results
of Operations
(i)Changes in and Disagreements with
Accountants....................... *
(j)Directors and Executive Officers.... Management
(k)Executive Compensation.............. Management
(l)Security Ownership of Certain
Beneficial Owners and Management.. Principal Stockholders; Shares
Eligible for Future Sale
(m)Certain Relationships and Related
Transactions...................... Management; Certain Relationships
and Related Transactions;
Underwriting
12.Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities......................... *
</TABLE>
- --------
* Item is omitted because response is negative or item is inapplicable.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains a preliminary prospectus relating to a
public offering of Class A Common Stock of Teleport Communications Group Inc.
in the United States (the "U.S. Offering"), together with separate preliminary
prospectus pages relating to a concurrent public offering of Class A Common
Stock outside the United States (the "International Offering"). The complete
preliminary prospectus for the U.S. Offering follows immediately after this
Explanatory Note. After such preliminary prospectus are the following
alternate pages for the preliminary prospectus for the International Offering:
a front cover page, an "Underwriting" section and a back cover page. Each such
page has been labeled "Alternate Page for International Prospectus." All other
pages of the preliminary prospectus for the U.S. Offering are to be used for
both the U.S. Offering and the International Offering.
<PAGE>
PROSPECTUS
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23,500,000 SHARES TCG
TELEPORT COMMUNICATIONS GROUP INC. ===
CLASS A COMMON STOCK
---------------
All of the shares of Class A Common Stock offered hereby are being sold by
Teleport Communications Group Inc. ("TCG" or the "Company"). Of the 23,500,000
shares of Class A Common Stock offered hereby, 18,800,000 shares are being
offered in the United States and Canada (the "U.S. Offering") by the U.S.
Underwriters (as defined herein) and 4,700,000 shares are 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") by the
International Underwriters (as defined herein), subject to transfers between
the U.S. Underwriters and the International Underwriters (collectively, the
"Underwriters"). The initial public offering price and the aggregate
underwriting discount per share are identical for both Stock Offerings. See
"Underwriting."
The Company has also filed a registration statement with respect to the
offerings of $300 million of 9 7/8% Senior Notes due 2006 (the "Senior Notes")
and $625 million gross proceeds of 11 1/8% Senior Discount Notes due 2007 (the
"Senior Discount Notes" and, together with the Senior Notes, the "Notes"), and
such offerings (the "Notes Offerings") will be made by a separate prospectus.
The Stock Offerings and the Notes Offerings are collectively referred to
herein as the "Offerings." The Senior Discount Notes will be issued at a
substantial discount from their principal amount. 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 Company has two classes of common stock: Class A Common Stock and Class
B Common Stock (collectively, the "Common Stock"). The shares of Common Stock
are substantially identical, except that holders of Class A Common Stock are
entitled to one vote per share and holders of Class B Common Stock are
entitled to 10 votes per share on all matters submitted to a vote of
stockholders and except that only the holders of Class B Common Stock, voting
separately as a class, are entitled to vote on certain matters relating to the
scope of the business of the Company. Each share of Class B Common Stock is
convertible at the option of the holder into one share of Class A Common
Stock. Immediately following the completion of the Stock Offerings (assuming
no exercise of the over-allotment options granted to the Underwriters), the
holders of the Class B Common Stock will have approximately 98.2% of the
combined voting power of the outstanding Common Stock and generally will have
the collective ability to control all matters requiring stockholder approval,
including the election of directors. See "Description of Capital Stock."
Prior to the Stock Offerings, there has been no public market for the Class
A Common Stock. See "Underwriting" for a discussion of the factors considered
in determining the initial public offering price. The Class A Common Stock has
been approved for listing on The Nasdaq National Market under the symbol
"TCGI."
At the Company's request, the U.S. Underwriters have reserved up to
1,500,000 shares for sale at the initial public offering price to certain of
the Company's employees, members of their immediate families and other
individuals who are business associates of the Company (including employees of
the Cable Stockholders (as defined herein), certain vendors and consultants),
in each case as such parties have expressed an interest in purchasing such
shares. The number of shares available for sale to the general public will be
reduced to the extent these individuals purchase such reserved shares. Any
reserved shares not purchased will be offered by the U.S. Underwriters to the
general public on the same basis as the other shares offered hereby.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON
STOCK 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.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share...... $16.00 $.82 $15.18
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Total (3)...... $376,000,000 $19,270,000 $356,730,000
</TABLE>
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(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Stock Offerings payable by the Company
estimated at $2,033,000.
(3) The Company has granted the U.S. Underwriters and the International
Underwriters options exercisable within 30 days after the date hereof to
purchase up to 2,820,000 and 705,000 additional shares of Class A Common
Stock, respectively, solely to cover over-allotments, if any. If such
options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $432,400,000, $22,160,500 and
$410,239,500, respectively. See "Underwriting."
---------------
The shares of Class A Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Class A Common Stock will be made in
New York, New York on or about July 2, 1996 against payment therefor in
immediately available funds.
---------------
MERRILL LYNCH & CO.
MORGAN STANLEY & CO. INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
DEUTSCHE MORGAN GRENFELL
---------------
The date of this Prospectus is June 27, 1996.
<PAGE>
[INSIDE FRONT COVER PAGE]
[ADD ART]
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.
----------------
IN CONNECTION WITH THE STOCK OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS
A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
NATIONAL MARKET, THE OVER-THE-COUNTER MARKET OR OTHERWISE. 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. 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.
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,
3
<PAGE>
"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 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,
4
<PAGE>
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 Class A
Common Stock 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 interest 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:
[ORGANIZATIONAL CHART HERE]
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,
. 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
6
<PAGE>
. 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
Underwriters' over-allotment options are exercised in full) 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 (representing an aggregate redemption price
of $118.5 million ($121.0 million if the Underwriters' over-allotment options
are exercised in full)).
Consummation of the Offering 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:
[ORGANIZATIONAL CHART HERE]
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:
[ORGANIZATIONAL CHART HERE]
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 interest of Viacom Telecom, Inc. in TCG Seattle and TCG San
Francisco, respectively. 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 make certain payments to TCGI. See "The Reorganization."
7
<PAGE>
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
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 organizations of TCGI, TCG Partners and the Local
Market Partnerships will be as set forth below:
[ORGANIZATIONAL CHART HERE]
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.
7--1
<PAGE>
THE STOCK OFFERINGS
Class A Common Stock Offered:
U.S. Offering...............
International Offering ..... 18,800,000 shares
4,700,000 shares
Total..................... 23,500,000 shares
Common Stock to be outstanding after the Stock Offerings:
Class A Common Stock........ 24,715,125 shares(1)(2)
Class B Common Stock........ 131,442,489 shares
Total..................... 156,157,614 shares(1)(2)
Use of Proceeds...............
The net proceeds of the Stock Offerings,
together with the net proceeds of the Notes
Offerings, are estimated to be $1,253.2
million. The Company intends to use such
proceeds (i) to redeem up to 7,807,881 shares
(7,975,738 shares if the Underwriters' over-
allotment options are exercised in full) of
Class B Common Stock held by a subsidiary of
Continental for $118.5 million ($121.0 million
if the Underwriters' over-allotment options are
exercised in full), representing $16 per share,
less the applicable underwriting discount 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, (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" and "Use of
- -------- Proceeds."
(1) Includes 285,750 shares and 290,513 shares of Class A Common Stock to be
issued to Booth Telecable, Inc. and Time Warner Entertainment-Advance
Newhouse Partnership, respectively, in consideration for their partnership
interests in TCG Detroit, which share amounts have been calculated on the
basis of an aggregate acquisition price of approximately $9.2 million. Also
includes 638,862 shares of Class A Common Stock to be issued to TCI upon
its transfer to the Company of a partnership interest in TCG San Francisco
acquired from an unaffiliated minority partner (MicroNet, Inc.). See "The
Reorganization."
(2) Excludes (i) 10,931,033 shares of Class A Common Stock reserved for
issuance under the TCG 1993 Stock Option Plan (under which options to
purchase approximately 2,538,063 shares had been granted and were
outstanding as of December 31, 1995, at a weighted average exercise price
per share of $8.03, options to purchase 1,497,517 shares have been granted
at an exercise price per share equal to the initial public offering price
of the Class A Common Stock and options to purchase 343,589 shares have
been granted at an exercise price per share equal to 135% of the initial
public offering price of the Class A Common Stock), (ii) 745,000 shares of
Class A Common Stock reserved for issuance under the TCG Employee Stock
Purchase Plan, (iii) 637,792 shares of Class A Common Stock to be reserved
for issuance under the TCG Equity Incentive Plan and (iv) 372,666 shares of
Class A Common Stock to be issued to TCI upon its transfer to TCG 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.
See "The Reorganization" and "Management--Executive Compensation--1993
Stock Option Plan; --Employee Stock Purchase Plan;--Equity Incentive Plan."
Of the approximately 4,380,000 shares of Class A Common Stock underlying
the options granted under the Stock Option Plan, options representing
302,264 shares have vested as of March 31, 1996.
8
<PAGE>
Voting Rights................. Holders of Class A Common Stock are entitled to
one vote per share and holders of Class B
Common Stock are entitled to 10 votes per share
on all matters submitted to a vote of
stockholders. The holders of the Class A Common
Stock and the Class B Common Stock vote
together as a single class on all matters
submitted to a vote of stockholders, except as
otherwise required by law and except that only
the holders of the Class B Common Stock, voting
separately as a class, are entitled to vote on
certain matters relating to the scope of the
business of the Company. Immediately following
the completion of the Stock Offerings and after
giving effect to the Reorganization, the Cable
Stockholders will have approximately 98.2% of
the combined voting power of the Company's
outstanding Common Stock and generally will
have the collective ability to control all
matters requiring stockholder approval,
including the election of directors. See
"Principal Stockholders" and "Description of
Capital Stock."
Concurrent Notes Offerings.... Concurrent with the Stock Offerings, the
Company will offer $300 million of 9 7/8%
Senior Notes due 2006, and $625 million gross
proceeds of 11 1/8% Senior Discount Notes due
2007. The Senior Discount Notes will be issued
at a substantial discount from their principal
amount. See "Description of Certain
Indebtedness--The Notes."
Nasdaq National Market
Symbol....................... "TCGI"
RISK FACTORS
Prospective purchasers of the Class A Common Stock should consider all of the
information contained in this Prospectus before making an investment in the
Class A Common Stock. In particular, prospective purchasers should consider the
factors set forth herein under "Risk Factors."
9
<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 amor-
tization............. 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 ex-
pense............... (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>
10
<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 equiva-
lents.................. $ 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... 146,250 193,650 329,686 422,964 545,653 576,806 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 related to the Notes Offerings 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.
11
<PAGE>
RISK FACTORS
Prior to purchasing any shares of Class A Common Stock 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.
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--Revolving Credit Agreement."
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
12
<PAGE>
telecommunications services industry and its ability to service its debt. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
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
12--1
<PAGE>
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.
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
13
<PAGE>
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 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
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<PAGE>
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.
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
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<PAGE>
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 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.
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<PAGE>
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 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."
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Affiliates of TCI, Cox and Comcast, which collectively 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.
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,
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<PAGE>
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 PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY
Prior to the Stock Offerings, there has been no public market for the shares
of Class A Common Stock, and, although the Class A Common Stock has been
approved for listing on the Nasdaq National Market, there can be no assurance
that an active trading market for the Class A Common Stock will develop or
will be sustained. The initial public offering price of the Class A Common
Stock has been determined through negotiations with the representatives of the
Underwriters. There can be no assurance that future market prices for the
Class A Common Stock will equal or exceed the initial public offering price
set forth on the cover page of this Prospectus. The market prices of
securities of growth companies similar to TCG have historically been highly
volatile. Future announcements on matters concerning TCG or its competitors,
including quarterly results, technological innovations, mergers or strategic
alliances, new services or government legislation or regulation, may have a
significant effect on the market price of the Class A Common Stock. See
"Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE; EFFECT OF POTENTIAL DIVESTITURE OF
CONTINENTAL SHARES
Upon completion of the Stock Offerings, there will be 24,715,125 shares of
Class A Common Stock outstanding (156,157,614 shares assuming the conversion
of all outstanding shares of Class B Common Stock), of which the 23,500,000
shares to be sold in the Stock Offerings will be tradeable without restriction
by persons other than "affiliates" of TCG. The remaining shares of Class A
Common Stock (including any Class A Common Stock issued upon conversion of
Class B Common Stock) will be deemed "restricted" securities within the
meaning of the Securities Act, and, as such, may not be sold in the absence of
registration under the Securities Act or an exemption therefrom, including the
exemptions contained in Rule 144 under the Securities Act.
Except for the issuance by the Company of Common Stock to effectuate the
Reorganization, the Company, certain of its officers and the holders of the
Class B Common Stock have agreed not to offer, sell, contract to sell, file a
registration statement pursuant to the Securities Act (except for certain
registration statements relating to the issuance of stock and stock options to
employees) or otherwise dispose of any shares of Class A Common Stock or
securities convertible into or exchangeable or exercisable for Class A Common
Stock (except for the 7,807,881 shares (7,975,738 shares if the over-allotment
options of the Underwriters are exercised in full) of Class B Common Stock
held by a subsidiary of Continental to be redeemed by the Company as part of
the Reorganization, and except for private transactions by the holders of
Class B Common Stock where the transferee agrees to be bound by such
restrictions), without the prior written consent of Merrill Lynch on behalf of
the U.S. Representatives and the International Representatives (as defined
herein), for a period of 180 days after the date of this Prospectus. In
addition, each of the holders of the Class B Common Stock has advised TCG that
it currently intends to hold the shares of the Class B Common Stock owned by
it for the foreseeable future, except for the shares of Class B Common Stock
held by a subsidiary of Continental to be redeemed as part of the
Reorganization and except that 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. Except for the shares of Class B Common
Stock to be purchased from Continental as part of the Reorganization, the
Company has no obligation to repurchase any shares of Continental's stock.
After giving effect to the redemption of the shares of Class B Common Stock
held by a subsidiary of Continental pursuant to the Reorganization,
Continental's subsidiary will continue to own up to 17,953,449 shares of Class
B Common Stock, which are convertible (subject to a right of first offer of
the other Cable Stockholders) at any time by Continental into shares of Class
A Common Stock on a one-to-one basis. See "Certain Relationships and Related
Transactions--Amended Stockholders' Agreement." If it is required to divest
all of these shares, Continental could dispose of its additional shares either
in a private transaction, subject to the rights of first offer and rights of
first refusal of the other Cable Stockholders under the Amended Stockholders'
Agreement, or in a public sale after first
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converting its Class B Common Stock to Class A Common Stock, subject to the
right of first offer of the other Cable Stockholders, and then exercising its
demand registration rights to the extent available to it under the Amended
Stockholders' Agreement. See "Certain Relationships and Related Transactions"
and "Shares Eligible for Future Sale." The timing and manner of any disposition
of shares by Continental may have an adverse impact on the market price for
shares of Class A Common Stock offered hereby or on the ability of the Company
to raise capital through a public offering of its equity securities. No
assurance can be given that other holders of the Class B Common Stock will not
decide, based upon then prevailing market and other conditions, to convert
their Class B Common Stock to Class A Common Stock and to dispose of all or a
portion of such stock pursuant to the provisions of Rule 144 under the
Securities Act or pursuant to the demand registration rights contained in the
Amended Stockholders' Agreement. In addition to the demand registration rights
of the holders of the Class B Common Stock under the Amended Stockholders'
Agreement, certain holders of Class A Common Stock have "piggy-back"
registration rights. See "The Reorganization" and "Shares Eligible for Future
Sale."
No predictions can be made about the effect, if any, that market sales of
shares of Class A Common Stock or the availability of such shares for sale
would have on the market price prevailing from time to time. Nevertheless,
sales of substantial amounts of Class A Common Stock in the public market, or
the perception that such sales could occur, may have an adverse impact on the
market price for the shares of Class A Common Stock offered hereby or on the
ability of the Company to raise capital through a public offering of its equity
securities. See "The Reorganization," "Principal Stockholders" and "Shares
Eligible for Future Sale."
SUBSTANTIAL DILUTION
Purchasers of the Class A Common Stock offered hereby will incur immediate
and substantial dilution in pro forma net tangible book value per share. See
"Dilution."
ABSENCE OF DIVIDENDS
TCG has never paid or declared dividends on its capital stock and intends to
retain future earnings, if any, to finance the development and expansion of its
networks and operations. In addition, the Indentures governing the Notes that
are the subject of the Notes Offerings will contain covenants that may limit
the ability of TCG to pay dividends on the Common Stock. Therefore, TCG does
not anticipate paying any dividends in the foreseeable future. See "Dividend
Policy."
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THE REORGANIZATION
Teleport Communications Group Inc. or "TCGI" is the issuer of the Class A
Common Stock 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, 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.
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.
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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 on or prior to 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, 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.
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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
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
23
<PAGE>
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 Underwriters' over-allotment options 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. See "Risk Factors--Shares Eligible
for Future Sale."
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 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
24
<PAGE>
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 parternship 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.
24--1
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Stock Offerings are estimated to be
approximately $354.7 million (approximately $408.2 million if the
Underwriters' over-allotment options are exercised in full) after deducting
underwriting discount and estimated expenses of the Stock Offerings. The net
proceeds to the Company of the Notes Offerings are estimated to be
approximately $898.5 million after deducting underwriting discount and
estimated expenses of the Notes Offerings.
TCG intends to use the net proceeds of the Offerings (i) to redeem 7,807,881
shares (7,975,738 shares if the Underwriters' over-allotment options are
exercised in full) of Class B Common Stock held by a subsidiary of Continental
for $118.5 million ($121.0 million if the Underwriters' over-allotment options
are exercised in full), representing $16 per share, 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 Certain
Indebtedness--The Notes." 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--
Revolving Credit Agreement" and "Underwriting."
Pending the foregoing uses, the net proceeds of the Offerings will be
invested in short-term, interest bearing investment-grade securities.
25
<PAGE>
DILUTION
As of March 31, 1996, the net tangible book value of TCG was $80.0 million,
or $1.14 per share of Common Stock. Net tangible book value per share
represents the Company's net worth less intangible assets of $26.6 million
divided by the total number of shares of Common Stock outstanding before
giving effect to the Reorganization (including the redemption of 7,807,881
shares of Class B Common Stock held by Continental). After (i) giving effect
to the Reorganization (including the redemption of 7,807,881 shares of Class B
Common Stock held by Continental) and to the sale by TCG of 23,500,000 shares
of Class A Common Stock pursuant to the Stock Offerings and (ii) deducting the
underwriting discount and estimated expenses of the Offerings, the pro forma
net tangible book value of TCG as of March 31, 1996 would have been $775.1
million, or $4.96 per share of Common Stock. Such amount represents an
immediate increase in pro forma net tangible book value of $3.82 per share of
Common Stock to the Company's existing stockholders and an immediate dilution
to new investors of $11.04 per share of Common Stock. See "Risk Factors--
Substantial Dilution." The following table illustrates the dilution in pro
forma net tangible book value per share to new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share.................... $16.00
Net tangible book value per share before the
Reorganization, Stock Offerings and redemption of Class
B Common Stock.......................................... $1.14
Increase in net tangible book value per share attribut-
able to the Reorganization.............................. 2.70
Increase in net tangible book value per share attribut-
able to net proceeds of the Stock Offerings............. 1.79
Decrease in net tangible book value per share attribut-
able to the redemption of Class B Common Stock.......... (0.67)
-----
Pro forma net tangible book value per share................ 4.96
------
Dilution per share to new investors........................ $11.04
======
</TABLE>
The following table sets forth as of March 31, 1996, on a pro forma basis,
the number of shares of Common Stock purchased from TCG, the total
consideration paid and the average price per share paid by the Company's
existing stockholders, by new investors purchasing shares of Class A Common
Stock in the Stock Offerings and by cable operators receiving shares of Class
A Common Stock in exchange for minority interests in Local Market Partnerships
in connection with the Reorganization:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
ACQUIRED TOTAL CONSIDERATION
(IN THOUSANDS) (IN MILLIONS) AVERAGE PRICE
------------------------ ---------------------- PER SHARE OF
NUMBER PERCENT AMOUNT PERCENT COMMON STOCK
------------ ----------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(Class B Common Stock,
net of shares
redeemed)(1)........... 131,443 84.2% $ 726.9 64.8% $ 5.53
New stockholders (Class
A Common Stock)(2):
Shares to be issued
for minority interest
acquisitions......... 1,215 0.8 19.4 1.7 $16.00
Shares to be issued in
the Stock Offerings.. 23,500 15.0 376.0 33.5 $16.00
------------ ---------- ----------- --------
156,158 100.0% $ 1,122.3 100.0%
============ ========== =========== ========
</TABLE>
- --------
(1) All pro forma per share information gives effect to the Reorganization.
(2) Excludes 10,931,033 shares of Class A Common Stock reserved for issuance
under the TCG 1993 Stock Option Plan, 745,000 shares of Class A Common
Stock reserved for issuance under the TCG Employee Stock Purchase Plan and
637,792 shares of Class A Common Stock to be reserved for issuance under
the TCG Equity Incentive Plan. See "Management--Executive Compensation;--
1993 Stock Option Plan;--Employee Stock Purchase Plan;--Equity Incentive
Plan."
26
<PAGE>
DIVIDEND POLICY
TCG has never paid or declared dividends on its capital stock and intends to
retain future earnings, if any, to finance the development and expansion of
its networks and operations and, therefore, does not anticipate paying any
dividends in the foreseeable future. The decision whether to pay dividends
will be made by the Company's Board of Directors in light of conditions then
existing, including the Company's results of operations, financial condition
and requirements, business conditions, covenants under loan agreements and
other contractual arrangements, and other factors. In addition, the Indentures
governing the Notes that are the subject of the Notes Offerings will contain
covenants that may limit the ability of TCG to pay dividends on the Common
Stock. See "Risk Factors--Absence of Dividends."
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
obligations................. 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
partners' 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
outstanding 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
YEAR ENDED DECEMBER 31, MARCH 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
administrative(2)...... 12,782 16,569 40,275 56,306 69,850 16,070 20,197
Depreciation and
amortization........... 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
unconsolidated
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
(provision)............ 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
available 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
equivalents............ $ 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
(including 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 related to the Notes Offerings 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>
COMBINED PRO FORMA
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
depreciation and
amortization......... (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
STOCKHOLDERS' 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 (def-
icit).................. 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'
equity 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>
PRO FORMA
COMBINED COMBINED FOR THE
TCGI AND LOCAL PRO FORMA REORGANIZATION
TCG MARKET REORGANIZATION FOR THE OFFERINGS AND
PARTNERS PARTNERSHIPS(1) ADJUSTMENTS(2)(4) REORGANIZATION ADJUSTMENTS(3) 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 COMBINED PRO FORMA
TCGI AND 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 amor-
tization............. 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 in-
terest, equity in
losses of unconsoli-
dated 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>
TCG San Francisco........... 22.9% Viacom Telecom, Inc.; 4.2% InterMedia
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>
35--1
<PAGE>
(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 in 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 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.
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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 state 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%.
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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.
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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.
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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
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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
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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--Revolving Credit Agreement."
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 Certain Indebtedness--The
Notes."
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 $46.8 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
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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.
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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
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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
investigation concludes favorably to the Company, TCG anticipates that these
expanded interconnection
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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."
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<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.
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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
50
<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.
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<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.
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<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
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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, 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.
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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."
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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.
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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'
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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
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addition to those general duties of all LECs, ILECs have additional duties to
(i) interconnect at any technically 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.
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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 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 non-discriminatory 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.
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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 opinion of the
Office of General Counsel that the incurrence of indebtedness pursuant to the
Notes Offerings is authorized under the laws of New York 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
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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.
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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, Jr........ 43 Vice President and General Counsel
</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
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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.
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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.
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<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."
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<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").
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<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 PLAN MAKE-UP PLAN GROUP LIFE 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
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<PAGE>
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 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 disclosure contained in this
Prospectus of the Option Plan will constitute approval of the Company's
adoption of the Option Plan for purposes of the stockholder approval
requirements of SEC Rule 16b-3, which will exempt certain transactions
involving the Option Plan from "short-swing" profit liability under Section
16(b) of the Exchange Act.
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
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<PAGE>
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").
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 $69.70, and the vesting schedule and the maximum appreciation
period for a Unit is set forward one year. Under the 1993 UAP, Units were
awarded to 18 employees of TCG.
The disclosure contained in this Prospectus of the 1992 UAP and 1993 UAP
will constitute approval of the Company's adoption of the 1992 UAP and the
1993 UAP for purposes of stockholder approval requirements of SEC Rule 16b-3,
which will exempt certain transactions involving the 1992 UAP and 1993 UAP
from "short-swing" profit liability under Section 16(b) of the Exchange Act.
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<PAGE>
The following table sets forth information as of December 31, 1995
concerning the value of stock option and UAP awards held by (i) each Named
Executive Officer, (ii) all executive officers as a group and (iii) all non-
executive officer employees as a group and concerning the value of stock
options awarded to the foregoing in 1996. No stock option or UAP awards were
made to any director who is not an executive officer. No stock options were
exercised by any Named Executive Officer in 1995.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END(#)(A) FY-END($)(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 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
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<PAGE>
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 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
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<PAGE>
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.
The disclosure contained in this Prospectus of the Stock Purchase Plan will
constitute approval of the Company's adoption of the Stock Purchase Plan for
purposes of the stockholder approval requirements of SEC Rule 16b-3, which
will exempt certain transactions involving the Stock Purchase Plan from
"short-swing" profit liability under Section 16(b) of the Exchange Act.
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 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
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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.
The disclosure contained in this Prospectus of the Equity Incentive Plan
will constitute approval of the Company's adoption of the Equity Incentive
Plan for purposes of the stockholder approval requirements of SEC Rule 16b-3,
which will exempt certain transactions involving the Equity Incentive plan
from "short-swing" profit liability under Section 16(b) of the Exchange Act.
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,
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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
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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.
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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 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
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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 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 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 currently owned by it 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
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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 a call
payments. Thus, 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 in the aggregate.
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 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
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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.
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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>
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.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
REVOLVING CREDIT AGREEMENT
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
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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 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.
THE NOTES
Concurrent with the Stock Offerings, the Company will offer $300 million
aggregate principal amount of the Senior Notes due 2006 and $1,074 million
aggregate principal amount of the Senior Discount Notes due 2007. 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
and the Senior Discount Notes will be issued pursuant to an Indenture (the
"Senior Discount Notes Indenture" and, together with the Senior Notes
Indenture, the "Indentures") between the Company and United States Trust
Company of New York, as trustee.
The Notes will be unsecured obligations of the Company, ranking pari passu
in right of payment with all senior unsecured indebtedness of the Company. The
Senior Notes will bear interest at the rate of 9 7/8% per annum from June 27,
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 January 1 and July 1 in each year until the principal thereof is
paid or duly provided for. The Senior Discount Notes will be issued at a
discount to their aggregate principal amount to generate gross proceeds of
approximately $625 million. The Senior Discount Notes will accrete at a rate
of 11 1/8%, compounded semiannually, to an aggregate principal amount of
$1,074 million by 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
semiannually on January 1 and July 1, commencing on January 1, 2002; provided
that at any time prior to July 1, 2001, the Company may elect to commence the
accrual of cash interest on the Senior Discount Notes, in which case the
outstanding principal amount of such Notes will be reduced to their accreted
value as of the date of such election and cash interest shall become payable
thereafter. The Notes will be subject to redemption at the option of the
Company, in whole or in part, at any time on or after July 1, 2001, initially
at 104.938% of their principal amount in the case of the Senior Notes, and
105.563% in the case of the Senior Discount Notes and declining to 100% of
their principal amount on or after July 1, 2004 in the case of the Senior
Notes, and July 1, 2004 in the case of the Senior Discount Notes, in all cases
plus accrued and unpaid interest thereon to the applicable redemption date. In
addition, in the event of the first to occur prior to July 1, 1999 of a public
equity offering with proceeds of $150 million or more or a sale or series of
related sales by the Company of its capital stock to certain Strategic Equity
Investors (as defined in the Indentures) for an aggregate purchase price of
$150 million or more, the Company may, at its option, within 60 days thereof,
use net proceeds of such equity offering to redeem up to one-third of the
aggregate principal amount of the Notes originally issued at a redemption
price of 110% of the accreted value as of the redemption date of the Notes so
redeemed; provided that at least one-half of the aggregate principal amount of
the Notes originally issued remains outstanding after such redemption. Upon
the occurrence of a Change of Control (as defined in
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the Indentures), each holder of Notes will have the right to require the
Company to purchase all or any part of such holder's Notes at a purchase price
equal to, in the case of the Senior Discount Notes, 101% of the accreted value
thereof in the event of a Change of Control occurring prior to July 1, 2001,
plus any accrued and unpaid interest not otherwise included in the accreted
value or, in the case of the Senior Notes and, in the event of a Change of
Control occurring on or after July 1, 2001, the Senior Discount Notes, 101% of
the principal amount thereof plus accrued and unpaid interest.
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 such 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."
The Indentures contain certain restrictive covenants which impose
limitations on the Company's and certain of its subsidiaries' ability to,
among other things: (i) incur additional indebtedness, (ii) pay dividends or
make certain other distributions and investments, (iii) create liens, (iv)
create dividend and other payment restrictions on subsidiaries, (v) incur
certain guarantees, (vi) enter into certain asset sale transactions,
(vii) enter into certain transactions with affiliates (including the Cable
Stockholders) and (viii) merge, consolidate or transfer substantially all of
the Company's assets.
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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 and 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,
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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 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 voting stock of the corporation or (iii)
on or after such date the business combination is approved by the board
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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.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is The Bank of New
York.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF COMMON STOCK
The following is a general discussion of certain United States federal
income and estate and gift tax consequences of the ownership and disposition
of Class A Common Stock by a holder that, for United States federal income tax
purposes, is not a "United States person" (a "Non-United States Holder"). For
purposes of this discussion, a "United States person" means a citizen or
resident (as determined for U.S. federal income tax purposes) of the United
States; a corporation, partnership or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof; or an estate or trust the income of which is includible
in gross income for United States federal income tax purposes regardless of
its source. Resident alien individuals will be subject to United States
federal income tax with respect to the Class A Common Stock as if they were
United States citizens.
THIS DISCUSSION IS BASED ON THE INTERNAL REVENUE CODE OF 1986, AS AMENDED
(THE "CODE"), AND THE ADMINISTRATIVE INTERPRETATIONS THEREOF AS OF THE DATE
HEREOF, ALL OF WHICH MAY BE CHANGED EITHER RETROACTIVELY OR PROSPECTIVELY.
THIS DISCUSSION IS FOR GENERAL INFORMATION ONLY, DOES NOT CONSIDER ANY
SPECIFIC FACTS OR CIRCUMSTANCES THAT MAY APPLY TO A PARTICULAR NON-UNITED
STATES HOLDER AND DOES NOT ADDRESS ANY TAX CONSEQUENCES ARISING UNDER ANY
STATE, MUNICIPALITY, FOREIGN COUNTRY OR OTHER TAXING JURISDICTION. PROSPECTIVE
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES
FEDERAL TAX CONSEQUENCES OF OWNING AND DISPOSING OF CLASS A COMMON STOCK
(INCLUDING THE INVESTOR'S STATUS AS A UNITED STATES PERSON OR NON-UNITED
STATES HOLDER), AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS
OF ANY STATE, MUNICIPALITY, FOREIGN COUNTRY OR OTHER TAXING JURISDICTION.
DIVIDENDS
Dividends paid to a Non-United States Holder will generally be subject to
the withholding of United States federal income tax at the rate of 30%, unless
the dividend is effectively connected with the conduct of a trade or business
within the United States by the Non-United States Holder, in which case the
dividend will be subject to the rules described in the next paragraph. Non-
United States Holders should consult any applicable income tax treaties, which
may provide for reduced withholding or other rules different from those
described above. For purposes of determining whether tax is to be withheld at
a 30% rate or a reduced rate as specified by an income tax treaty, current law
permits the Company to presume that dividends paid to an address in a foreign
country are paid to a resident of such country absent knowledge that such
presumption is not warranted. However, under proposed regulations, in the case
of dividends paid after December 31, 1997 (December 31, 1999 in the case of
dividends paid to accounts in existence on or before the date that is 60 days
after the proposed regulations are published as final regulations), a Non-
United States Holder generally would be subject to United States withholding
tax at a 31-percent rate under the backup withholding rules described below,
rather than at a 30-percent rate or at a reduced rate under an income tax
treaty, unless certain certification procedures (or, in the case of payments
made outside the United States with respect to an offshore account, certain
documentary evidence procedures) are complied with, directly or through an
intermediary. A Non-United States Holder who is eligible for a reduced
withholding tax rate may obtain a refund of any excess amounts withheld by
filing a tax return with the Internal Revenue Service (the "Service").
The Company will not withhold federal income tax upon dividends paid to a
Non-United States Holder if it receives the appropriate form of the Service
(currently Form 4224) from that Non-United States Holder, establishing that
such income is effectively connected with the conduct of a trade or business
in the United States, unless the Company has knowledge to the contrary.
Dividends realized by a Non-United States Holder of Class A Common Stock that
are effectively connected with the conduct by the holder of a trade or
business in the United States are generally taxed at the graduated rates that
are applicable to United States persons. In the case of a Non-United States
Holder that is a corporation, such effectively connected income may also be
subject to the United States federal branch profits tax (which is generally
imposed on a foreign corporation on the deemed repatriation from the United
States of effectively connected earnings and profits) at a 30% rate (unless
the rate is reduced or eliminated by an applicable income tax treaty and the
holder is a qualified resident of the treaty country).
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GAIN ON DISPOSITION
Subject to special rules applicable to individuals as described below, a
Non-United States Holder will generally not be subject to regular United
States federal income or withholding tax on gain recognized on a sale or other
disposition of Class A Common Stock unless (i) the gain is effectively
connected with the conduct of a trade or business within the United States by
the Non-United States Holder or by a partnership, trust or estate in which the
Non-United States Holder is a partner or beneficiary or (ii) the Company has
been, is or becomes a "United States real property holding corporation" within
the meaning of Section 897(c)(2) of the Code at any time within the shorter of
the five-year period preceding such disposition or such Non-United States
Holder's holding period for the Class A Common Stock.
A corporation is generally considered to be a United States real property
holding corporation if the fair market value of its "United States real
property interests" within the meaning of Section 897(c)(1) of the Code equals
or exceeds 50% of the sum of the fair market value of its worldwide real
property interests plus the fair market value of any other of its assets used
or held for use in a trade or business. The Company believes that it has not
been, is not currently, and is not likely to become a United States real
property holding corporation. Further, even if the Company were to become a
United States real property holding corporation, any gain recognized by a Non-
United States Holder still would not be subject to U.S. federal income tax if
the Class A Common Stock were considered to be "regularly traded" on an
established securities market (e.g., the Nasdaq National Market, on which the
Company's Class A Common Stock will be listed), and the Non-United States
Holder did not own, directly or indirectly, at any time during the five-year
period ending on the date of the disposition, more than 5% of the Class A
Common Stock.
Gains realized by a Non-United States Holder of Class A Common Stock that
are effectively connected with the conduct by the holder of a trade or
business in the United States are generally taxed at the graduated rates that
are applicable to United States persons. In the case of a Non-United States
Holder that is a corporation, such effectively connected income may also be
subject to the United States federal branch profits tax (which is generally
imposed on a foreign corporation on the repatriation from the United States of
effectively connected earnings and profits) at a 30% rate (unless the rate is
reduced or eliminated by an applicable income tax treaty and the holder is a
qualified resident of the treaty country).
In addition to being subject to the rules described above, an individual
Non-United States Holder who holds Class A Common Stock as a capital asset
will generally be subject to tax at a 30% rate on any gain recognized on the
disposition of such stock if (i) such gain is not effectively connected with
the conduct of a trade or business in the United States by such individual and
(ii) such individual is present in the United States for 183 days or more in
the taxable year of disposition and certain other requirements are met.
Individual Non-United States Holders may also be subject to tax pursuant to
provisions of United States federal income tax law applicable to certain
United States expatriates. Under a recent legislative proposal of the Clinton
Administration, U.S. citizens and residents who expatriate on or after
February 6, 1995, would be deemed to have sold their Class A Common Stock at
fair market value immediately prior to their expatriation. Accordingly, gain
or loss would be recognized and subject to tax at the graduated rates
applicable to United States persons. The Clinton Administration proposal or
some similar legislative proposal may or may not be enacted.
In past years, legislation has been introduced that, if enacted, would under
certain circumstances have imposed United States federal income tax on gain
realized from dispositions of Class A Common Stock by certain Non-United
States Holders who owned at or prior to the time of disposition 10% or more of
the Class A Common Stock. There can be no assurance that similar legislation
will not again be proposed in the future and, if proposed, enacted.
FEDERAL ESTATE AND GIFT TAXES
Class A Common Stock owned or treated as owned by an individual (regardless
of whether such an individual is a citizen or resident of the United States)
at the date of death will be included in such individual's estate for United
States federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise. Any Non-United States Holder will not be subject to United
States federal gift tax on a transfer of Class A Common Stock unless such
person is an individual who is a domiciliary of the United States.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Service and to each Non-United
States Holder the amount of dividends paid to, and the tax withheld with
respect to, such Non-United States Holder, regardless of whether tax was
actually withheld and whether withholding was reduced or eliminated by an
applicable income tax treaty. Pursuant to certain income tax treaties and
other agreements, that information may also be made available to the tax
authorities of the country in which the Non-United States Holder resides.
United States federal backup withholding (which generally is withholding
imposed at the rate of 31% on certain payments to persons not otherwise exempt
who fail to furnish certain identifying information) will generally not apply
to (i) dividends paid to a Non-United States Holder that is subject to
withholding at the 30% rate (or that is subject to withholding at a reduced
rate under an applicable treaty) or (ii) under current law, dividends paid to
a Non-United States Holder at an address outside of the United States.
However, under proposed regulations, in the case of dividends paid after
December 31, 1997 (December 31, 1999 in the case of dividends paid to accounts
in existence on or before the date that is 60 days after the proposed
regulations are published as final regulations), a Non-United States Holder
generally would be subject to backup withholding at a 31-percent rate, unless
certain certification procedures (or, in the case of payments made outside the
United States with respect to an offshore account, certain documentary
evidence procedures) are complied with, directly or through an intermediary.
The backup withholding and information reporting requirements also apply to
the gross proceeds paid to a Non-United States Holder upon the disposition of
Class A Common Stock by or through a United States office of a United States
or foreign broker, unless the Holder certifies to the broker under penalties
of perjury as to, among other things, its name, address and status as a Non-
United States Holder by filing the Service's Form W-8 with the broker or the
Non-United States Holder otherwise establishes an exemption. Information
reporting requirements (but not backup withholding) will apply to a payment of
the proceeds of a disposition of Class A Common Stock effected at a foreign
office of (i) a United States broker, (ii) a foreign broker 50% or more of
whose gross income for certain periods is effectively connected with the
conduct of a trade or business in the United States or (iii) a foreign broker
that is a "controlled foreign corporation" for United States federal income
tax purposes, unless the broker has documentary evidence in its records that
the Non-United States Holder is a Non-United States Holder (and the broker has
no knowledge to the contrary) and certain other conditions are met, or the
Non-United States Holder otherwise establishes an exemption. Neither backup
withholding nor information reporting will generally apply to a payment of the
proceeds of a disposition of Class A Common Stock effected at a foreign office
of a foreign broker not subject to the preceding sentence.
Any amounts withheld under the backup withholding rules will be refunded or
credited against the Non-United States Holder's United States federal income
tax liability, provided that such holder files a tax return.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of the Stock Offerings and the Reorganization, there
will be 24,715,125 shares of Class A Common Stock outstanding (156,157,614
shares assuming the conversion of all outstanding shares of Class B Common
Stock), of which the 23,500,000 shares to be sold in the Stock Offerings will
be tradeable without restriction by persons other than "affiliates" of TCG.
The remaining shares of Class A Common Stock (including any Class A Common
Stock issued upon conversion of Class B Common Stock) will be deemed
"restricted" securities within the meaning of the Securities Act, and, as
such, may not be sold in the absence of registration under the Securities Act
or an exemption therefrom, including the exemptions contained in Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has been deemed to have
beneficially owned shares of an issuer for at least two years, including an
"affiliate," is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the then outstanding number
of shares of such class or the average trading volume in composite trading in
all national securities exchanges during the four calendar weeks preceding the
filing of the required notice of such sale, provided that such issuer has been
a reporting company for at least 90 days. A person (or persons whose shares
are required to be aggregated) who is not deemed an affiliate of an issuer and
who has beneficially owned shares for at least three years is entitled to sell
such shares under Rule 144 without regard to the volume limitations described
above. Affiliates continue to be subject to such limitations. As defined in
Rule 144, an "affiliate" of an issuer is a person that directly or indirectly,
through one or more intermediaries, controls or is controlled by, or is under
common control with, such issuer. Each of the Cable Stockholders would be
deemed "affiliates" of TCG under the Securities Act.
Except for the issuance by the Company of Common Stock to effectuate the
Reorganization, the Company, certain of its officers and the holders of the
Class B Common Stock have agreed not to offer, sell, contract to sell, file a
registration statement pursuant to the Securities Act (except for certain
registration statements relating to the issuance of stock and stock options to
employees) or otherwise dispose of any shares of Class A Common Stock or
securities convertible into or exchangeable or exercisable for Class A Common
Stock (except for the 7,807,881 shares (7,975,738 shares if the over-allotment
options of the Underwriters are exercised in full) of Class B Common Stock
held by a subsidiary of Continental to be redeemed by the Company as part of
the Reorganization, and except for private transactions by the holders of
Class B Common Stock where the transferee agrees to be band by such
restrictions), without the prior written consent of Merrill Lynch on behalf of
the U.S. Representatives and the International Representatives, for a period
of 180 days after the date of this Prospectus.
Subject to the Amended Stockholders' Agreement, the shares of the Company's
Class B Common Stock are convertible into shares of Class A Common Stock and,
in the event of conversion of such shares and expiration of the 180 day lock-
up period described above, 61,442,349 of the aggregate shares of Class A
Common Stock issuable upon conversion of the Class B Common Stock would be
immediately eligible for sale pursuant to the provisions of Rule 144 under the
Securities Act. Each of the holders of the Class B Common Stock has advised
TCG that it currently intends to hold the shares of Class B Common Stock owned
by it for the foreseeable future, except for the shares of Class B Common
Stock held by a subsidiary of Continental to be redeemed as part of the
Reorganization and except that 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. Except for the shares of Class B Common
Stock to be purchased from Continental as part of the Reorganization, the
Company has no obligation to repurchase any shares of Continental's stock.
After giving effect to the redemption of the shares of Class B Common Stock
held by a subsidiary of Continental pursuant to the Reorganization,
Continental's subsidiary will continue to own up to 17,953,449 shares of Class
B Common Stock, which are convertible (subject to a right of first offer of
the other Cable Stockholders) at any time by Continental into shares of Class
A Common Stock on a one-to-one basis. See "Certain Relationships and Related
Transactions--Amended Stockholders' Agreement." If it is required to divest
all of these shares, Continental could dispose of its additional shares either
in a private transaction, subject to the rights of first offer and rights of
first refusal of the other Cable Stockholders under the Amended Stockholders'
Agreement, or in a public sale after first converting its Class B Common Stock
to Class A Common Stock, subject to the right of first offer of the other
Cable Stockholders, and then exercising its demand registration rights to the
extent
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available to it under the Amended Stockholders' Agreement. See "Risk Factors--
Shares Eligible for Future Sale" and "Certain Relationships and Related
Transactions". No assurance can be given that other holders of the Class B
Common Stock will not decide, based upon then prevailing market and other
conditions, to convert their Class B Common Stock to Class A Common Stock and
to dispose of all or a portion of such stock pursuant to the provisions of
Rule 144 under the Securities Act or pursuant to the demand registration
rights contained in the Amended Stockholders' Agreement. See "Certain
Relationships and Related Transactions--Amended Stockholders' Agreement."
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 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 at or prior to the closing of the Offerings in consideration of the
issuance to the current holders of such partnership interests of Class A
Common Stock. TCG has granted to such holders "piggy-back" registration rights
with respect to such Class A Common Stock.
Prior to the Stock Offerings, there has been no established market for the
Class A Common Stock, and no predictions can be made about the effect, if any,
that market sales of shares of Class A Common Stock or the availability of
such shares for sale would have on the market price prevailing from time to
time. Nevertheless, sales of substantial amounts of Class A Common Stock in
the public market, or the perception that such sales could occur, may have an
adverse impact on the market price for the shares of Class A Common Stock
offered hereby or on the ability of the Company to raise capital through a
public offering of its equity securities. See "Risk Factors--Shares Eligible
for Future Sale."
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UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"U.S. Purchase Agreement") between the Company and each of the underwriters
named below (the "U.S. Underwriters"), and concurrently with the sale of
4,700,000 shares of Class A Common Stock to the International Underwriters (as
defined below), the Company has agreed to sell to each of the U.S.
Underwriters, and each of the U.S. Underwriters severally has agreed to
purchase from the Company, the aggregate number of shares of Class A Common
Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................................ 2,140,000
Morgan Stanley & Co. Incorporated.................................... 2,140,000
Donaldson, Lufkin & Jenrette Securities Corporation.................. 2,140,000
Lehman Brothers Inc. ................................................ 2,140,000
Deutsche Morgan Grenfell/C. J. Lawrence Inc. ........................ 2,140,000
UBS Securities LLC................................................... 300,000
Bear, Stearns & Co. Inc. ............................................ 300,000
J.C. Bradford & Co................................................... 300,000
Alex. Brown & Sons Incorporated...................................... 300,000
Chase Securities Inc. ............................................... 300,000
A.G. Edwards & Sons, Inc. ........................................... 300,000
Goldman, Sachs & Co. ................................................ 300,000
Lazard Freres & Co. LLC.............................................. 300,000
Montgomery Securities................................................ 300,000
Oppenheimer & Co., Inc. ............................................. 300,000
PaineWebber Incorporated............................................. 300,000
Prudential Securities Incorporated................................... 300,000
Schroder Wertheim & Co. Incorporated................................. 300,000
Smith Barney Inc. ................................................... 300,000
Wasserstein Perella Securities, Inc. ................................ 300,000
Brad Peery Inc. ..................................................... 150,000
Brean Murray, Foster Securities Inc. ................................ 150,000
The Buckingham Research Group Incorporated........................... 150,000
The Chicago Corporation.............................................. 150,000
Dain Bosworth Incorporated........................................... 150,000
First Analysis Securities Corporation................................ 150,000
First Hanover Securities, Inc. ...................................... 150,000
Furman Selz LLC...................................................... 150,000
Gabelli & Company, Inc. ............................................. 150,000
Gerard Klauer Mattison & Co. LLC..................................... 150,000
Hanifen, Imhoff Inc. ................................................ 150,000
Janney Montgomery Scott Inc. ........................................ 150,000
Edward D. Jones & Co. ............................................... 150,000
Kirkpatrick, Pettis, Smith, Polian Inc. ............................. 150,000
Legg Mason Wood Walker, Incorporated................................. 150,000
Moran & Associates, Inc. Securities Brokerage........................ 150,000
Morgan Keegan & Company, Inc. ....................................... 150,000
Piper Jaffray Inc. .................................................. 150,000
Ragen MacKenzie Incorporated......................................... 150,000
Raymond James & Associates, Inc. .................................... 150,000
Scott & Stringfellow, Inc. .......................................... 150,000
Sutro & Co. Incorporated............................................. 150,000
Tucker Anthony Incorporated.......................................... 150,000
Wheat, First Securities, Inc. ....................................... 150,000
----------
Total........................................................... 18,800,000
==========
</TABLE>
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Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman
Brothers Inc. and Deutsche Morgan Grenfell/C. J. Lawrence Inc. are acting as
representatives (the "U.S. Representatives") of the U.S. Underwriters.
The Company has also entered into a purchase agreement (the "International
Purchase Agreement") with certain underwriters outside the United States and
Canada (the "International Underwriters") for whom Merrill Lynch International,
Morgan Stanley & Co. International, Donaldson, Lufkin & Jenrette Securities
Corporation, Lehman Brothers International (Europe) and Morgan Grenfell & Co.,
Limited are acting as representatives (the "International Representatives").
Subject to the terms and conditions set forth in the International Purchase
Agreement, and concurrently with the sale of 18,800,000 shares to the U.S.
Underwriters, the Company has agreed to sell to the International Underwriters,
and the International Underwriters severally have agreed to purchase from the
Company, an aggregate of 4,700,000 shares. The initial public offering price
per share and the total underwriting discount per share are identical under the
U.S. Purchase Agreement and the International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement, the
several U.S. Underwriters and the several International Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares being sold pursuant to each such
agreement if any of the shares being sold pursuant to each such agreement are
purchased. Under certain circumstances, the commitments of non-defaulting U.S.
Underwriters or International Underwriters (as the case may be) may be
increased. The closings with respect to the sale of shares of Class A Common
Stock to be purchased by the U.S. Underwriters and the International
Underwriters are conditioned upon one another.
The U.S. Underwriters and the International Underwriters have entered into an
Intersyndicate Agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement,
sales may be made between the U.S. Underwriters and the International
Underwriters of such number of shares of Class A Common Stock as may be
mutually agreed. The price of any shares of Class A Common Stock so sold shall
be the initial public offering price, less an amount not greater than the
selling concession.
Under the terms of the Intersyndicate Agreement, the International
Underwriters and any dealer to whom they sell shares of Class A Common Stock
will not offer to sell or sell shares of Class A Common Stock to persons who
are United States or Canadian persons or to persons they believe intend to
resell to persons who are United States or Canadian persons, and the U.S.
Underwriters and any dealer to whom they sell shares of Class A Common Stock
will not offer to sell or sell shares of Class A Common Stock to any non-United
States or Canadian person or to persons they believe intend to resell to non-
United States or Canadian persons, except, in each case, for transactions
pursuant to such agreement.
The U.S. Underwriters propose initially to offer the shares of Class A Common
Stock to the public at the public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $.50 per share, and the U.S. Underwriters may allow, and such dealers
may reallow, a discount not in excess of $.10 per share on sales to certain
dealers. After the initial public offering, the public offering price, discount
and reallowance may be changed.
The U.S. Underwriters do not intend to confirm sales of Class A Common Stock
offered hereby to any accounts over which they exercise discretionary
authority.
The Company has granted to the U.S. Underwriters an option to purchase up to
an aggregate of 2,820,000 additional shares of Class A Common Stock,
exercisable in whole or in part for 30 days after the date of this Prospectus,
to cover over-allotments, if any, at the initial public offering price, less
the underwriting discount. To the extent that the U.S. Underwriters exercise
this option, each U.S. Underwriter will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage of shares
that the number of shares of Class A Common Stock to be purchased by it shown
in the foregoing table bears to the total number of shares initially offered to
the U.S. Underwriters hereby. The Company has granted to the International
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Underwriters an option to purchase up to an aggregate of 705,000 additional
shares of Class A Common Stock, exercisable for 30 days after the date of this
Prospectus, to cover over-allotments, if any, on terms similar to those
granted to the U.S. Underwriters.
Except for the issuance by the Company of Common Stock to effectuate the
Reorganization, the Company, certain of its officers and the holders of the
Class B Common Stock have agreed not to offer, sell, contract to sell, file a
registration statement pursuant to the Securities Act (except for certain
registration statements relating to the issuance of stock and stock options to
employees) or otherwise dispose of any shares of Class A Common Stock or
securities convertible into or exchangeable or exercisable for Class A Common
Stock (except for the 7,807,881 shares (7,975,738 shares if the over-allotment
options of the Underwriters are exercised in full) of Class B Common Stock
held by a subsidiary of Continental to be redeemed by the Company as part of
the Reorganization, and except for private transactions by the holders of
Class B Common Stock where the transferee agrees to be bound by such
restrictions), without the prior written consent of Merrill Lynch on behalf of
the U.S. Representatives, for a period of 180 days after the date of this
Prospectus. See "Shares Eligible for Future Sale."
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act.
Prior to the Stock Offerings, there has been no public market for the Class
A Common Stock. The initial public offering price will be determined by
negotiations among the Company, the U.S. Representatives and the International
Representatives. Among the factors to be considered in such negotiations are
an assessment of the Company's recent results of operations, the future
prospects of the Company and its industry in general, market prices of
securities of companies engaged in activities similar to those of the Company
and prevailing conditions in the securities market. There can be no assurance
that an active market will develop for the Class A Common Stock or that the
Class A Common Stock will trade in the public market subsequent to the Stock
Offerings at or above the initial public offering price.
The Class A Common Stock has been approved for listing on The Nasdaq
National Market under the symbol "TCGI."
At the Company's request, the U.S. Underwriters have reserved up to
1,500,000 shares for sale at the initial public offering price to certain of
the Company's employees, members of their immediate families and other
individuals who are business associates of the Company (including employees of
the Cable Stockholders, certain vendors and consultants), in each case as such
parties have expressed an interest in purchasing such shares. The number of
shares available for sale to the general public will be reduced to the extent
these individuals purchase such reserved shares. Any reserved shares not
purchased will be offered by the U.S. Underwriters to the general public on
the same basis as the other shares offered hereby.
Certain U.S. Underwriters perform brokerage and investment banking services
for the Company and its affiliates from time to time, for which they receive
customary compensation.
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, Lehman Brothers Inc. and Deutsche Morgan
Grenfell are also customers of the Company. The Company's provision of
telecommunications services to Underwriters is on an arm's-length basis.
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Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated have been
retained to act as underwriters in connection with the Notes Offerings.
Chase Securities Inc., one of the Underwriters, is an affiliate of the
documentation agent and a lender under the Revolving Credit Agreement. Such
affiliate of Chase Securities Inc. will receive its 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 Class A Common Stock 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.
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
Class A Common Stock being offered in the Stock 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 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 shares of Class A
Common Stock 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.
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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.
97
<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.
98
<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 equipment. SONET benefits business
customers by minimizing the equipment necessary for various telecommunications
applications and supports networking diagnostic and maintenance features.
99
<PAGE>
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.
100
<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
</TABLE>
<TABLE>
<S> <C> <C>
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 INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SHARES OF
CLASS A COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 12
The Reorganization....................................................... 21
Use of Proceeds.......................................................... 25
Dilution................................................................. 26
Dividend Policy.......................................................... 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........................... 46
Business................................................................. 49
Management............................................................... 63
Certain Relationships and Related Transactions........................... 77
Principal Stockholders................................................... 81
Description of Certain Indebtedness...................................... 82
Description of Capital Stock............................................. 85
Certain United States Federal Income Tax Consequences to Non-United
States Holders of Common Stock.......................................... 88
Shares Eligible for Future Sale.......................................... 91
Underwriting............................................................. 93
Legal Matters............................................................ 96
Experts.................................................................. 96
Additional Information................................................... 96
Glossary................................................................. 97
Index to Combined Financial Statements................................... F-1
</TABLE>
---------------
UNTIL JULY 22, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIV-
ERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
23,500,000 SHARES
TCG
===
TELEPORT COMMUNICATIONS GROUP INC.
CLASS A COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
DEUTSCHE MORGAN GRENFELL
JUNE 27, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
PROSPECTUS
- -------------
23,500,000 SHARES TCG
TELEPORT COMMUNICATIONS GROUP INC. ===
CLASS A COMMON STOCK
---------------
All of the shares of Class A Common Stock offered hereby are being sold by
Teleport Communications Group Inc. ("TCG" or the "Company"). Of the 23,500,000
shares of Class A Common Stock being offered hereby, 4,700,000 shares are
being offered outside the United States and Canada (the "International
Offering") by the International Underwriters (as defined herein) and
18,800,000 shares are being offered in a concurrent offering in the United
States and Canada (the "U.S. Offering" and, together with the International
Offering, the "Stock Offerings") by the U.S. Underwriters (as defined herein),
subject to transfers between the International Underwriters and the U.S.
Underwriters (collectively, the "Underwriters"). The initial public offering
price and the aggregate underwriting discount per share are identical for both
Stock Offerings. See "Underwriting."
The Company has also filed a registration statement with respect to the
offerings of $300 million of 9 7/8% Senior Notes due 2006 (the "Senior Notes")
and $625 million gross proceeds of 11 1/8% Senior Discount Notes due 2007 (the
"Senior Discount Notes" and, together with the Senior Notes, the "Notes"), and
such offerings (the "Notes Offerings") will be made by a separate prospectus.
The Stock Offerings and the Notes Offerings are collectively referred to
herein as the "Offerings." The Senior Discount Notes will be issued at a
substantial discount from their principal amount. 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 Company has two classes of common stock: Class A Common Stock and Class
B Common Stock (collectively, the "Common Stock"). The shares of Common Stock
are substantially identical, except that holders of Class A Common Stock are
entitled to one vote per share and holders of Class B Common Stock are
entitled to 10 votes per share on all matters submitted to a vote of
stockholders and except that only the holders of Class B Common Stock, voting
separately as a class, are entitled to vote on certain matters relating to the
scope of the business of the Company. Each share of Class B Common Stock is
convertible at the option of the holder into one share of Class A Common
Stock. Immediately following the completion of the Stock Offerings (assuming
no exercise of the over-allotment options granted to the Underwriters), the
holders of the Class B Common Stock will have approximately 98.2% of the
combined voting power of the outstanding Common Stock and generally will have
the collective ability to control all matters requiring stockholder approval,
including the election of directors. See "Description of Capital Stock."
Prior to the Stock Offerings, there has been no public market for the Class
A Common Stock. See "Underwriting" for a discussion of the factors considered
in determining the initial public offering price. The Class A Common Stock has
been approved for listing on The Nasdaq National Market under the symbol
"TCGI."
At the Company's request, the U.S. Underwriters have reserved up to
1,500,000 shares for sale at the initial public offering price to certain of
the Company's employees, members of their immediate families and other
individuals who are business associates of the Company (including employees of
the Cable Stockholders (as defined herein), certain vendors and consultants),
in each case as such parties have expressed an interest in purchasing such
shares. The number of shares available for sale to the general public will be
reduced to the extent these individuals purchase such reserved shares. Any
reserved shares not purchased will be offered by the U.S. Underwriters to the
general public on the same basis as the other shares offered hereby.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON
STOCK 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 TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share...... $16.00 $.82 $15.18
- --------------------------------------------------------------------------------
Total (3)...... $376,000,000 $19,270,000 $356,730,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Stock Offerings payable by the Company
estimated at $2,033,000.
(3) The Company has granted the International Underwriters and the U.S.
Underwriters options exercisable within 30 days after the date hereof to
purchase up to 705,000 and 2,820,000 additional shares of Class A Common
Stock, respectively, solely to cover over-allotments, if any. If such
options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $432,400,000, $22,160,500 and
$410,239,500, respectively. See "Underwriting."
---------------
The shares of Class A Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the shares of Class A Common Stock will be made in
New York, New York on or about July 2, 1996 against payment therefor in
immediately available funds.
---------------
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY & CO.
INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
DEUTSCHE MORGAN GRENFELL
CAZENOVE & CO.
ABN AMRO HOARE GOVETT CREDIT LYONNAIS SECURITIES DAIWA EUROPE LIMITED
NATWEST SECURITIES LIMITED SOCIETE GENERALE UBS LIMITED
---------------
The date of this Prospectus is June 27, 1996.
<PAGE>
[Alternate page for International Prospectus]
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"International Purchase Agreement") between the Company and each of the
underwriters named below (the "International Underwriters"), and concurrently
with the sale of 18,800,000 shares of Class A Common Stock to the U.S.
Underwriters (as defined below), the Company has agreed to sell to each of the
International Underwriters, and each of the International Underwriters
severally has agreed to purchase from the Company, the aggregate number of
shares of Class A Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL UNDERWRITERS SHARES
-------------------------- ---------
<S> <C>
Merrill Lynch International ........................................... 778,000
Morgan Stanley & Co. International Limited............................. 778,000
Donaldson, Lufkin & Jenrette Securities Corporation.................... 778,000
Lehman Brothers International (Europe)................................. 778,000
Morgan Grenfell & Co. Limited.......................................... 778,000
Cazenove & Co. ........................................................ 210,000
ABN AMRO Bank N.V. .................................................... 100,000
Credit Lyonnais Securities............................................. 100,000
Daiwa Europe Limited................................................... 100,000
NatWest Securities Limited............................................. 100,000
Societe Generale....................................................... 100,000
UBS Limited............................................................ 100,000
---------
Total................................................................ 4,700,000
=========
</TABLE>
Merrill Lynch International, Morgan Stanley & Co. International Limited,
Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers
International (Europe) and Morgan Grenfell & Co. Limited are acting as
representatives (the "International Representatives") of the International
Underwriters.
The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement") with certain underwriters in the United States (the "U.S.
Underwriters") for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation, Lehman Brothers Inc. and Deutsche Morgan Grenfell/C. J. Lawrence
Inc. are acting as representatives (the "U.S. Representatives"). Subject to
the terms and conditions set forth in the U.S. Purchase Agreement, and
concurrently with the sale of 4,700,000 shares to the International
Underwriters, the Company has agreed to sell to the U.S. Underwriters, and the
U.S. Underwriters severally have agreed to purchase from the Company, an
aggregate of 18,800,000 shares. The initial public offering price per share
and the total underwriting discount per share are identical under the
International Purchase Agreement and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement, the
several International Underwriters and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares being sold pursuant to each such
agreement if any of the shares being sold pursuant to each such agreement are
purchased. Under certain circumstances, the commitments of non-defaulting
International Underwriters or U.S. Underwriters (as the case may be) may be
increased. The closings with respect to the sale of shares of Class A Common
Stock to be purchased by the U.S. Underwriters and the International
Underwriters are conditioned upon one another.
The International Underwriters and the U.S. Underwriters have entered into
an Intersyndicate Agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, sales may be made between the International Underwriters and the
U.S. Underwriters of such number of shares of Class A Common Stock as may be
mutually agreed. The price of any shares of Class A Common Stock so sold shall
be the initial public offering price, less an amount not greater than the
selling concession.
93
<PAGE>
[Alternate page for International Prospectus]
Under the terms of the Intersyndicate Agreement, the International
Underwriters and any dealer to whom they sell shares of Class A Common Stock
will not offer to sell or sell shares of Class A Common Stock to persons who
are United States or Canadian persons or to persons they believe intend to
resell to persons who are United States or Canadian persons, and the U.S.
Underwriters and any dealer to whom they sell shares of Class A Common Stock
will not offer to sell or sell shares of Class A Common Stock to any non-
United States or Canadian person or to persons they believe intend to resell
to non-United States or Canadian persons, except, in each case, for
transactions pursuant to such agreement.
The International Underwriters propose initially to offer the shares of
Class A Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $.50 per share, and the International Underwriters
may allow, and such dealers may reallow, a discount not in excess of $.10 per
share on sales to certain dealers. After the initial public offering, the
public offering price, discount and reallowance may be changed.
The International Underwriters do not intend to confirm sales of Class A
Common Stock offered hereby to any accounts over which they exercise
discretionary authority.
The Company has granted to the International Underwriters an option to
purchase up to an aggregate of 705,000 additional shares of Class A Common
Stock, exercisable in whole or in part for 30 days after the date of this
Prospectus, to cover over-allotments, if any, at the initial public offering
price, less the underwriting discount. To the extent that the International
Underwriters exercise this option, each International Underwriter will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage of such shares that the number of shares of Class A Common
Stock to be purchased by it shown in the foregoing table bears to the total
number of shares initially offered to the International Underwriters hereby.
The Company has granted to the U.S. Underwriters an option to purchase up to
an aggregate of 2,820,000 additional shares of Class A Common Stock,
exercisable for 30 days after the date of this Prospectus, to cover over-
allotments, if any, on terms similar to those granted to the International
Underwriters.
Except for the issuance by the Company of Common Stock to effectuate the
Reorganization, the Company, certain of its officers and the holders of the
Class B Common Stock have agreed not to offer, sell, contract to sell, file a
registration statement pursuant to the Securities Act (except for certain
registration statements relating to the issuance of stock and stock options to
employees) or otherwise dispose of any shares of Class A Common Stock or
securities convertible into or exchangeable or exercisable for Class A Common
Stock (except for the 7,807,881 shares (7,975,738 shares if the Underwriters'
over-allotment options are exercised in full) of Class B Common Stock held by
a subsidiary of Continental to be redeemed by the Company as part of the
Reorganization, and except for private transactions by the holders of Class B
Common Stock where the transferee agrees to be bound by such restrictions),
without the prior written consent of Merrill Lynch on behalf of the
International Representatives, for a period of 180 days after the date of this
Prospectus. See "Shares Eligible for Future Sale."
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act.
Prior to the Stock Offerings, there has been no public market for the Class
A Common Stock. The initial public offering price will be determined by
negotiations among the Company, the U.S. Representatives and the International
Representatives. Among the factors to be considered in such negotiations are
an assessment of the Company's recent results of operations, the future
prospects of the Company and its industry in general, market prices of
securities of companies engaged in activities similar to those of the Company
and prevailing conditions in the securities market. There can be no assurance
that an active market will develop for the Class A Common Stock or that the
Class A Common Stock will trade in the public market subsequent to the Stock
Offerings at or above the initial public offering price.
The Class A Common Stock has been approved for listing on The Nasdaq
National Market under the symbol "TCGI."
94
<PAGE>
[Alternate page for International Prospectus]
At the Company's request, the U.S. Underwriters have reserved up to
1,500,000 shares for sale at the initial public offering price to certain of
the Company's employees, members of their immediate families and other
individuals who are business associates of the Company (including employees of
the Cable Stockholders, certain vendors and consultants), in each case as such
parties have expressed an interest in purchasing such shares. The number of
shares available for sale to the general public will be reduced to the extent
these individuals purchase such reserved shares. Any reserved shares not
purchased will be offered by the U.S. Underwriters to the general public on
the same basis as the other shares offered hereby.
Each International Underwriter has represented and agreed that (i) it has
not offered or sold and will not offer or sell any shares of Class A Common
Stock offered hereby to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purpose of their business or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995 (the "Regulations"), (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the Regulations with respect to anything done by it in
relation to the shares of Class A Common Stock offered hereby in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on to any person in the United Kingdom any
document received by it in connection with the issue of the shares of Class A
Common Stock offered hereby if that person is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995 or is a person to whom such document may otherwise
lawfully be issued or passed on.
Certain International Underwriters perform brokerage and investment banking
services for the Company and its affiliates from time to time, for which they
receive customary compensation.
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 local 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, Lehman Brothers Inc., and Deutsche Morgan
Grenfell are also customers of the Company. The Company's provision of
telecommunications services to Underwriters is on an arm's-length basis.
Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated have been
retained to act as underwriters in connection with the Notes Offerings.
Chase Securities Inc., one of the Underwriters, is an affiliate of the
documentation agent and a lender under the Revolving Credit Agreement. Such
affiliate of Chase Securities Inc. will receive its 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."
95
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SHARES OF CLASS A
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAW-
FUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICA-
TION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPEC-
TUS OR THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
THERE ARE RESTRICTIONS ON THE OFFER AND SALE OF THE SHARES OF CLASS A COMMON
STOCK IN THE UNITED KINGDOM. ALL APPLICABLE PROVISIONS OF THE FINANCIAL SERV-
ICES ACT OF 1986 AND THE PUBLIC OFFERS OF SECURITIES REGULATIONS 1995 WITH RE-
SPECT TO ANYTHING DONE BY ANY PERSON IN RELATION TO THE CLASS A COMMON STOCK
IN, FROM OR OTHERWISE INVOLVING THE UNITED KINGDOM MUST BE COMPLIED WITH.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 12
The Reorganization....................................................... 21
Use of Proceeds.......................................................... 25
Dilution................................................................. 26
Dividend Policy.......................................................... 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........................... 46
Business................................................................. 49
Management............................................................... 63
Certain Relationships and Related Transactions........................... 77
Principal Stockholders................................................... 81
Description of Certain Indebtedness...................................... 82
Description of Capital Stock............................................. 85
Certain United States Federal Income Tax Consequences to Non-United
States Holders of Common Stock.......................................... 88
Shares Eligible for Future Sale.......................................... 91
Underwriting............................................................. 93
Legal Matters............................................................ 96
Experts.................................................................. 96
Additional Information................................................... 96
Glossary................................................................. 97
Index to Combined Financial Statements................................... F-1
</TABLE>
---------------
UNTIL JULY 22, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIV-
ERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
23,500,000 SHARES
TCG
===
TELEPORT COMMUNICATIONS GROUP INC.
CLASS A COMMON STOCK
---------------
PROSPECTUS
---------------
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY & CO.
INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
LEHMAN BROTHERS
DEUTSCHE MORGAN GRENFELL
CAZENOVE & CO.
ABN AMRO HOARE GOVETT
CREDIT LYONNAIS SECURITIES
DAIWA EUROPE LIMITED
NATWEST SECURITIES LIMITED
SOCIETE GENERALE
UBS LIMITED
JUNE 27, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the expenses of issuance and distribution of the shares of
Class A Common Stock registered hereunder on Form S-1, other than underwriting
discounts and commissions. All amounts except the Registration Fee are
estimated.
<TABLE>
<S> <C>
Registration Fee................................................. $ 158,423
Nasdaq National Market Listing Fee............................... 49,000
NASD Filing Fee.................................................. 30,500
Printing and Engraving Fees...................................... 795,000
Blue Sky Fees and Expenses....................................... 10,000
Legal Fees and Expenses.......................................... 415,000
Accounting Fees and Expenses..................................... 175,000
Registrar and Transfer Agent's Fees.............................. 25,000
Miscellaneous.................................................... 375,546
----------
Total.......................................................... $2,033,469
==========
</TABLE>
- --------
* To be supplied by amendment.
All of the above expenses have been or will be paid by Teleport
Communications Group Inc.; provided, however, that Teleport Communications
Group Inc. will be reimbursed by Continental for a pro rata portion of the
Registration Fee based on the total number of shares of Class B Common Stock
to be redeemed from Continental compared to the total number of shares issued
in the Stock Offerings.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article V of the Amended and Restated Certificate of Incorporation of
Teleport Communications Group Inc. ("TCGI"), (the "Certificate of
Incorporation"), provides that to the fullest extent of Section 102 of the
General Corporation Law of the State of Delaware (the "DGCL"), a director of
TCGI shall not be personally liable to TCGI or its stockholders for monetary
damages for breach of fiduciary duty as a director.
Section 102(b)(7) of the DGCL, provides that a corporation (in its original
certificate of incorporation or an amendment thereto) may eliminate or limit
the personal liability of a director (or certain persons who, pursuant to the
provisions of the certificate of incorporation, exercise or perform duties
conferred or imposed upon directors by the DGCL) to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provisions shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions) or
(iv) for any transaction from which the director derived an improper personal
benefit.
Under Section 145 of the DGCL, in general, a corporation may indemnify its
directors, officers, employees or agents against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by them in connection with any action, suit or proceeding
brought by third parties to which they may be made parties by reason of their
being or having been directors, officers, employees or agents and shall so
indemnify such persons if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful. Article VIII of the
Certificate of Incorporation
II-1
<PAGE>
provides that TCGI shall indemnify its officers, directors, employees and
agents to the full extent permitted by Delaware law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of securities sold by TCGI during the past three
years without registration under the Act.
1. On May 5, 1993, TCGI issued and sold 333.335 shares of its common stock
representing approximately 20% of the then outstanding capital stock of TCGI
to each of Comcast Teleport, Inc. and Continental Teleport, Inc., for a
purchase price of approximately $60 million each.
2. Prior to the consummation of the Offerings, TCGI will issue 69,250,230
shares of Class B Common Stock to the Cable Stockholders in exchange for the
contribution by the Cable Stockholders of approximately $269.0 million
aggregate principal amount of indebtedness, plus accrued interest from May
1995, owed by TCGI under the Stockholder Loan Agreement (except that TCI will
retain a $26 million subordinated note of TCGI) and for the transfer by the
Cable Stockholders, directly or indirectly, of their partnership interests in
TCG Partners and the Local Market Partnerships.
3. Concurrent with the consummation of the Offerings, TCGI will issue
approximately 285,750 shares and 290,513 shares of Class A Common Stock to be
issued to Booth Telecable, Inc. and Time Warner Entertainment-Advance-Newhouse
Partnership, respectively, in consideration for their partnership interests in
TCG Detroit, which share amounts have been calculated on the basis of an
aggregate acquisition price of approximately $9.2 million.
In each of the foregoing instances, the issuance of common stock was deemed
to be exempt from the registration requirements of the Act as a transaction
not involving any public offering, pursuant to Section 4(2) of the Act.
ITEM 16. EXHIBITS
(a) Exhibits:
TELEPORT COMMUNICATIONS GROUP INC.
<TABLE>
<CAPTION>
EXHIBIT LIST
------------
<C> <S>
1.1 Form of U.S. Purchase Agreement
1.2 Form of International Purchase Agreement
**2.1 Reorganization Agreement, dated as of April 18, 1996
**3.1 Amended and Restated Certificate of Incorporation of TCGI
**3.2 Form of Amended and Restated Certificate of Incorporation of TCGI
**3.3 Amended and Restated By-laws of TCGI
**3.4 Form of Amended and Restated By-laws of TCGI
**3.5 Form of Amended and Restated Certificate of Incorporation of TCGI
+3.6 Form of Amended and Restated Certificate of Incorporation of TCGI, as
revised
+3.7 Form of Amended and Restated By-laws of TCGI, as revised
**4.1 Amended and Restated Stockholders' Agreement, dated as of May 5, 1993,
as amended November 2, 1993
**4.2 Form of Amended and Restated Stockholders' Agreement (incorporated by
reference to Exhibit E of Exhibit 2.1 hereof)
+4.3 Form of Indenture between TCGI and United States Trust Company of New
York, as Trustee, relating to the 11 1/8% Senior Discount Notes due 2007
of TCGI
**4.4 Form of Indenture between TCGI and United States Trust Company of New
York, as Trustee, relating to the 9 7/8% Senior Notes due 2006 of TCGI
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
4.5 Form of Stock Certificate for Teleport Communications Group Inc. Class
A Common Stock
5.1 Opinion of Dow, Lohnes & Albertson (including consent)
+5.2 1996 Telecommunications Act Opinion of Dow, Lohnes & Albertson
(including consent)
+5.3 Opinion of Smith, Don, Alampi, D'Argenio & Arturi (including consent)
+5.4 Opinion of Roland, Fogel, Koblenz & Carr, LLP (including consent)
+5.5 Opinion of the Office of the General Counsel of the State of New York
Department of Public Service dated June 25, 1996
**10.1 New York Franchise Agreement, dated May 2, 1994, as amended
**10.2 Participation Agreement, dated May 15, 1984
**10.3 Agreement of Lease, dated May 15, 1984
**10.4 The Keepwell Agreement, dated June 7, 1984, as amended
**10.5 Agreement of Lease with Teleport Associates, dated November 10, 1987
**10.6 Agreement of Sublease between Merrill Lynch/WFC/L, Inc. and TC
Systems, Inc., dated January 30, 1990
**10.7 Loan Agreement, dated May 5, 1993
**10.8 Amendment No. 1 to Loan Agreement, dated March 1, 1994
**10.9 Amendment No. 2 to Loan Agreement, dated October 24, 1994
**10.10 Amendment No. 3 to Loan Agreement, dated February 15, 1995
**10.11 Loan Agreement, dated May 22, 1995 and related documents
+10.12 Amendment No. 1 to Loan Agreement, dated May 31, 1996
**10.13 Teleport Communications Group Inc. 1992 Unit Appreciation Plan
**10.14 Teleport Communications Group Inc. 1993 Unit Appreciation Plan
**10.15 Teleport Communications Group Inc. 1993 Stock Option Plan, as amended
+10.16 Form of Teleport Communications Group Inc. Employee Stock Purchase
Plan
**10.17 Deferred Compensation Plan of Teleport Communications Group Inc.
**10.18 Make-Up Plan of Teleport Communications Group Inc. for the Retirement
Savings Plan
**10.19 Teleport Communications Group Inc. 1996 Equity Incentive Plan
**10.20 Robert Annunziata Employment Agreement, dated December 18, 1992, as
amended
**10.21 John A. Scarpati Employment Agreement, dated July 12, 1994, as amended
**10.22 Robert C. Atkinson Employment Agreement, dated July 12, 1994, as
amended
**10.23 Stuart A. Mencher Employment Agreement, dated July 12, 1994, as
amended
**10.24 Alf T. Hansen Employment Agreement, dated July 12, 1994, as amended
**10.25 Partnership Agreement of TCG Detroit, dated as of November 1, 1993
**10.26 Amended and Restated Partnership Agreement of TCG Los Angeles, dated
as of March 1, 1994
**10.27 Partnership Agreement of TCG Pittsburgh, dated as of March 1, 1994
**10.28 Partnership Agreement of TCG San Diego, dated as of June 1, 1994
**10.29 Partnership Agreement of TCG San Francisco, dated as of January 1,
1994, as amended
**10.30 Partnership Agreement of TCG Seattle, dated as of January 1, 1994, as
amended
**10.31 Agreement among Teleport Communications Group Inc. and Comcast
Corporation, dated April 18, 1996.
+10.32 First Amendment to the Teleport Communications Group Inc. 1993 Stock
Option Plan
+10.33 Second Amendment to the Teleport Communications Group Inc. 1993 Stock
Option Plan
+10.34 Letter of Intent between Viacom Telecom, Inc. and Teleport
Communications Group Inc., dated as of May 30, 1996
+10.35 Letter of Intent between Viacom Telecom, Inc. and Teleport
Communications Group Inc., dated as of May 30, 1996
+10.36 First Amendment to the Teleport Communications Group Inc. 1996 Equity
Incentive Plan
+10.37 Stockholders' Agreement of Comcast CAP of Philadelphia, Inc. dated as
of June 30, 1993
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
**21 Subsidiaries of Teleport Communications Group Inc.
23.1 Consent of Deloitte & Touche LLP
23.2 Consents of Dow, Lohnes & Albertson (contained in their opinions filed
as Exhibits 5.1
and 5.2)
**23.3 Consent of James Bruce Llewellyn
**23.4 Consent of C.B. Rogers, Jr.
+23.5 Consent of Smith, Alampi, D'Argenio & Arturi (contained in their
opinion filed as Exhibit 5.3)
+23.6 Consent of Roland, Fogel, Koblenz & Carr, LLP (contained in their
opinion filed as Exhibit 5.4)
**24 Power of Attorney (included on page II-5)
**27 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Incorporated by reference to the corresponding exhibit of TCGI's
Registration Statement on Form S-1 (File No. 333-3984).
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of TCGI pursuant to
the provisions described under Item 14 above or otherwise, TCGI has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by TCGI of expenses incurred
or paid by a director, officer or controlling person of TCGI in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, TCGI will, unless in the opinion of their counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
TCGI hereby undertakes that:
1. For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as a part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by TCGI pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed part of this Registration Statement as of the
time it was declared effective.
2. For the purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at such time shall be deemed to be the
initial bona fide offering thereof.
3. It will provide the underwriters at the closing specified in the
underwriting agreements certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to
each purchaser.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
TELEPORT COMMUNICATIONS GROUP INC. HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW YORK, ON JUNE 27, 1996.
Teleport Communications Group Inc.
/s/ Robert Annunziata
By: _________________________________
ROBERT ANNUNZIATA PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
* Chairman of the
- ------------------------------------- Board of Directors, June 27, 1996
ROBERT ANNUNZIATA President, Chief
Executive Officer,
and Chief Operating
Officer
/s/ John A. Scarpati Senior Vice
- ------------------------------------- President and Chief June 27, 1996
JOHN A. SCARPATI Financial Officer
(Principal
Financial Officer)
* Vice President and
- ------------------------------------- Controller June 27, 1996
MARIA TERRANOVA-EVANS (Principal
Accounting Officer)
* Director
- ------------------------------------- June 27, 1996
JAMES O. ROBBINS
* Director
- ------------------------------------- June 27, 1996
BRIAN L. ROBERTS
II-5
<PAGE>
SIGNATURE TITLE DATE
* Director
- ------------------------------------- June 27, 1996
RONALD H. COOPER
* Director
- ------------------------------------- June 27, 1996
BRENDAN R. CLOUSTON
* Director
- ------------------------------------- June 27, 1996
JOHN R. DILLON
* Director
- ------------------------------------- June 27, 1996
GERALD W. GAINES
* Director
- ------------------------------------- June 27, 1996
NANCY HAWTHORNE
* Director
- ------------------------------------- June 27, 1996
LAWRENCE S. SMITH
* Director
- ------------------------------------- June 27, 1996
LARRY E. ROMRELL
* Director
- ------------------------------------- June 27, 1996
DAVID M. WOODROW
* John A. Scarpati, by signing his name hereto, does sign this document on
behalf of each of the persons indicated above for whom he is attorney-in-fact
pursuant to a power of attorney duly executed by such person and filed with the
Securities and Exchange Commission.
/s/ John A. Scarpati
By: _________________________________
JOHN A. SCARPATI
Attorney-In-Fact
II-6
<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 43
- -------
- - 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(a)
- ----
- - Ownership chart of Teleport Communications Group Inc., TCG Partners and the
Local Market Partnerships as of June 3, 1996.
6(b)
- ----
- - Ownership chart of Teleport Communications Group Inc., TCG Partners and the
Local Market Partnerships immediately prior to the consummation of the
Offerings.
6(c)
- ----
- - 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.
6(d)
- ----
- - Ownership chart of Teleport Communications Group Inc., TCG Partners and the
Local Market Partnerships after giving effect to the Reorganization and the
Offerings.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
------- ----------- ----
<C> <S> <C>
1.1 Form of Purchase Agreement
1.2 Form of International Purchase Agreement
**2.1 Reorganization Agreement, dated as of April 18, 1996
**3.1 Amended and Restated Certificate of Incorporation of TCGI
**3.2 Form of Amended and Restated Certificate of Incorporation of
TCGI
**3.3 Amended and Restated By-laws of TCGI
**3.4 Form of Amended and Restated By-laws of TCGI
**3.5 Form of Amended and Restated Certification of Incorporation of
TCGI
+3.6 Amended and Restated Certificate of Incorporation of TCGI, as
revised
+3.7 Amended and Restated By-laws of TCGI, as revised
**4.1 Amended and Restated Stockholders' Agreement, dated May 5,
1993, as amended November 2, 1993
**4.2 Form of Amended and Restated Stockholders' Agreement
(incorporated by reference to Exhibit E of Exhibit 2.1 hereof)
+4.3 Form of Indenture between TCGI and United States Trust Company
of New York, as Trustee, relating to the 11 1/8% Senior
Discount Notes due 2007 of TCGI
**4.4 Form of Indenture between TCGI and United States Trust Company
of New York, as Trustee, relating to the 9 7/8% Senior Notes
due 2006 of TCGI
4.5 Form of Stock Certificate for Teleport Communications Group
Inc.
5.1 Opinion of Dow, Lohnes & Albertson (including consent)
+5.2 1996 Telecommunications Act Opinion of Dow, Lohnes & Albertson
(including consent)
+5.3 Opinion of Smith, Don, Alampi, D'Argenio & Arturi (including
consent)
+5.4 Opinion of Roland, Fogel, Koblenz & Carr, LLP (including
consent)
+5.5 Opinion of the Office of the General Counsel of the State of
New York Department of Public Service dated June 25, 1996
**10.1 New York Franchise Agreement, dated May 2, 1994, as amended
**10.2 Participation Agreement, dated May 15, 1984
**10.3 Agreement of Lease, dated May 15, 1984
**10.4 The Keepwell Agreement, dated June 7, 1984, as amended
**10.5 Agreement of Lease with Teleport Associates, dated November 10,
1987
**10.6 Agreement of Sublease between Merrill Lynch/WFC/L, Inc. and TC
Systems, Inc., dated
January 30, 1990
**10.7 Loan Agreement, dated May 5, 1993
**10.8 Amendment No. 1 to Loan Agreement, dated March 1, 1994
**10.9 Amendment No. 2 to Loan Agreement, dated October 24, 1994
**10.10 Amendment No. 3 to Loan Agreement, dated February 15, 1995
**10.11 Loan Agreement, dated May 22, 1995 and related documents
+10.12 Amendment No. 1 to Loan Agreement, dated May 31, 1996
**10.13 Teleport Communications Group Inc. 1992 Unit Appreciation Plan
**10.14 Teleport Communications Group Inc. 1993 Unit Appreciation Plan
**10.15 Teleport Communications Group Inc. 1993 Stock Option Plan, as
amended
+10.16 Form of Teleport Communications Group Inc. Employee Stock
Purchase Plan
**10.17 Deferred Compensation Plan of Teleport Communications Group
Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
------- ----------- ----
<C> <S> <C>
**10.18 Make-Up Plan of Teleport Communications Group Inc. for the
Retirement Savings Plan
**10.19 Teleport Communications Group Inc. 1996 Equity Incentive Plan
**10.20 Robert Annunziata Employment Agreement, dated December 18,
1992, as amended
**10.21 John A. Scarpati Employment Agreement, dated July 12, 1994, as
amended
**10.22 Robert C. Atkinson Employment Agreement, dated July 12, 1994,
as amended
**10.23 Stuart A. Mencher Employment Agreement, dated July 12, 1994, as
amended
**10.24 Alf T. Hansen Employment Agreement, dated July 12, 1994, as
amended
**10.25 Partnership Agreement of TCG Detroit, dated as of November 1,
1993
**10.26 Amended and Restated Partnership Agreement of TCG Los Angeles,
dated as of March 1, 1994
**10.27 Partnership Agreement of TCG Pittsburgh, dated as of March 1,
1994
**10.28 Partnership Agreement of TCG San Diego, dated as of June 1,
1994
**10.29 Partnership Agreement of TCG San Francisco, dated as of January
1, 1994, as amended
**10.30 Partnership Agreement of TCG Seattle, dated as of January 1,
1994, as amended
**10.31 Agreement among Teleport Communications Group Inc. and Comcast
Corporation, dated April 18, 1996
+10.32 First Amendment to the Teleport Communications Group Inc. 1993
Stock Option Plan
+10.33 Second Amendment to the Teleport Communications Group Inc. 1993
Stock Option Plan
+10.34 Letter of Intent between Viacom Telecom, Inc. and Teleport
Communications Group Inc., dated as of May 30, 1996
+10.35 Letter of Intent between Viacom Telecom, Inc. and Teleport
Communications Group Inc., dated as of May 30, 1996
+10.36 First Amendment to the Teleport Communications Group Inc. 1996
Equity Incentive Plan
+10.37 Stockholders' Agreement of Comcast CAP of Philadelphia, Inc.
dated as of June 30, 1993
**21 Subsidiaries of Teleport Communications Group Inc.
23.1 Consent of Deloitte & Touche LLP
23.2 Consents of Dow, Lohnes & Albertson (contained in their
opinions filed as Exhibits 5.1 and 5.2)
**23.3 Consent of James Bruce Llewellyn
**23.4 Consent of C.B. Rogers, Jr.
+23.5 Consent of Smith, Don, Alampi, D'Argenio & Arturi (contained in
their opinion filed as Exhibit 5.3)
+23.6 Consent of Roland, Fogel, Koblenz & Carr, LLP (contained in
their opinion filed as Exhibit 5.4)
**24 Power of Attorney (included on page II-5)
**27 Financial Data Schedule
</TABLE>
- -------
* To be filed by amendment.
** Previously filed.
+ Incorporated by reference to the corresponding exhibit of TCGI's
Registration Statement on Form S-1 (File No. 333- 3984).
<PAGE>
EXHIBIT 1.1
S&S Draft of June 22, 1996
TELEPORT COMMUNICATIONS GROUP INC.
(a Delaware corporation)
18,800,000 Shares of Class A Common Stock
(Par Value $.01 Per Share)
U.S. PURCHASE AGREEMENT
-----------------------
June __, 1996
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Lehman Brothers Inc.
Deutsche Morgan Grenfell/C.J. Lawrence Inc.
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Teleport Communications Group Inc., a Delaware corporation (the "Company"),
confirms its agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and each of the other U.S. Underwriters named in Schedule A
hereto (collectively, the "U.S. Underwriters," which term shall also include any
underwriter substituted as hereinafter provided in Section 10 hereof), for which
Merrill Lynch and Morgan Stanley & Co. Incorporated, Donaldson, Lufkin &
Jenrette Securities Corporation, Lehman Brothers Inc. and Deutsche Morgan
Grenfell/C.J. Lawrence Inc. are acting as representatives (in such capacity, the
"U.S. Representatives"), with respect to the issue and sale by the Company and
the purchase by the U.S. Underwriters, acting severally and not jointly, of the
respective numbers of shares of Class A Common Stock, par value $.01 per share,
of the Company ("Class A Common Stock") set forth in said Schedule A, and with
respect to the grant by the Company to the U.S. Underwriters, acting severally
and not jointly, of the option described in Section 2(b) hereof to purchase all
or any part of 2,820,000 additional shares of Class A Common Stock to cover
over-allotments, if any. The aforesaid 18,800,000 shares of Class A Common
Stock (the "Initial U.S. Securities") to be purchased by the U.S. Underwriters
and all or any part of the 2,820,000 shares of Class A
<PAGE>
2
Common Stock subject to the option described in Section 2(b) hereof (the "U.S.
Option Securities") are hereinafter called, collectively, the "U.S. Securities."
It is understood that the Company is entering into an agreement dated the
date hereof (the "International Purchase Agreement") providing for the offering
by the Company of an aggregate of 4,700,000 shares of Class A Common Stock (the
"Initial International Securities") through arrangements with certain
underwriters outside the United States and Canada (the "International Managers")
for which Merrill Lynch International, Morgan Stanley & Co. International,
Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers
International (Europe) and Morgan Grenfell & Co., Limited are acting as lead
managers (the "Lead Managers") and the grant by the Company to the International
Managers, acting severally and not jointly, of an option to purchase all or any
part of the International Managers' pro rata portion of up to 705,000 additional
shares of Class A Common Stock solely to cover over-allotments, if any (the
"International Option Securities" and, together with the U.S. Option Securities,
the "Option Securities"). The Initial International Securities and the
International Option Securities are hereinafter called the "International
Securities." It is understood that the Company is not obligated to sell and the
U.S. Underwriters are not obligated to purchase, any Initial U.S. Securities
unless all of the Initial International Securities are contemporaneously
purchased by the International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters," the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities," and the U.S. Securities and the International Securities
are hereinafter collectively called the "Securities."
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch (in such capacity, the "Global Coordinator").
The Company understands that the U.S. Underwriters propose to make a public
offering of the U.S. Securities as soon as the U.S. Representatives deem
advisable after this Agreement has been executed and delivered.
The Company and the U.S. Underwriters agree that up to 1,175,000 shares of
the Initial U.S. Securities to be purchased by the U.S. Underwriters (the
"Reserved Securities") shall be reserved for sale by the U.S. Underwriters to
certain eligible employees and persons having business relationships with the
Company, as part of the distribution of the U.S. Securities by the U.S.
Underwriters, subject to the terms of this Agreement, the applicable rules,
regulations and interpretations of the National Association of Securities
Dealers, Inc. and all other applicable laws, rules and regulations. To the
extent that such
<PAGE>
3
Reserved Securities are not orally confirmed for purchase by such eligible
employees and persons having business relationships with the Company by the end
of the first business day after the date of this Agreement, such Reserved
Securities may be offered to the public as part of the public offering
contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-3850) and [two]
amendments thereto covering the registration of the Securities under the
Securities Act of 1933, as amended (the "1933 Act"), including the related
preliminary prospectus or prospectuses. Promptly after execution and delivery
of this Agreement, the Company will either (i) prepare and file a prospectus in
accordance with the provisions of Rule 430A ("Rule 430A") of the rules and
regulations of the Commission under the 1933 Act (the "1933 Act Regulations")
and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or
(ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933
Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance
with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to
be used in connection with the offering and sale of the Securities: one
relating to the U.S. Securities (the "Form of U.S. Prospectus") and one relating
to the International Securities (the "Form of International Prospectus"). The
Form of International Prospectus is identical to the Form of U.S. Prospectus,
except for the front cover and back cover pages and the information under the
caption "Underwriting." The information included in any such prospectus or in
any such Term Sheet, as the case may be, that was omitted from such registration
statement at the time it became effective but that is deemed to be part of such
registration statement at the time it became effective (a) pursuant to paragraph
(b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to
paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Form
of U.S. Prospectus and Form of International Prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits, schedules and amendment(s) thereto, if any,
at the time it became effective and including the Rule 430A Information and the
Rule 434 Information, as applicable, is herein called the "Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of the
1933 Act Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final Form of U.S.
Prospectus and the final Form of International Prospectus in the forms first
furnished to the Underwriters for use in connection with the confirmation of
sales of the Securities are herein called the "U.S. Prospectus" and the
"International Prospectus," respectively, and collectively, the "Prospectuses."
If Rule 434 is relied on, the terms "U.S. Prospectus" and "International
Prospectus" shall refer to the preliminary U.S. Prospectus dated June 3, 1996
and preliminary International Prospectus dated June 3, 1996, respectively, each
together with the applicable Term Sheet and all references in this Agreement to
the date
<PAGE>
4
of such Prospectuses shall mean the date of the applicable Term Sheet. For
purposes of this Agreement, all references to the Registration Statement, any
preliminary prospectus, the International Prospectus, the U.S. Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties. (a) Representations and
------------------------------
Warranties by the Company. The Company represents and warrants to each U.S.
Underwriter as follows:
(i) Compliance with Registration Requirements. Each of the
-----------------------------------------
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information from the Company or its agents
has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective, the Registration Statement, the Rule 462(b) Registration
Statement and any amendments and supplements thereto complied in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations and did not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading. Neither of the Prospectuses
nor any amendments or supplements thereto, at the time the Prospectuses or
any amendments or supplements thereto were issued and at the Closing Time
(and, if any U.S. Option Securities are purchased, at the Date of
Delivery), included or will include an untrue statement of a material fact
or omitted or will omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. If Rule 434 is used, the Company will comply
with the requirements of Rule 434 and the Prospectuses shall not be
"materially different," as such term is used in Rule 434, from the
prospectuses included in the Registration Statement at the time it became
effective. The representations and warranties in this subsection shall not
apply to statements in or omissions from the Registration Statement or the
Prospectuses made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through the U.S.
Representatives or the Lead Managers expressly for use in the Registration
Statement or the Prospectuses.
<PAGE>
5
(ii) Independent Accountants. The accountants who certified the
-----------------------
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(iii) Financial Statements. The combined balance sheets of the
--------------------
Company and its subsidiaries and TCG Partners, a New York general
partnership (collectively, "TCG"), as of December 31, 1994 and 1995 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, 1993, 1994 and 1995 and the combined balance sheet of TCG as
of March 31, 1996 and the related combined statements of operations and
cash flows for the three month periods ended March 31, 1995 and 1996
included in the Registration Statement and the Prospectuses, together with
the related schedules and notes, present fairly the combined financial
position of TCG at the dates indicated and the combined results of TCG's
operations and TCG's combined cash flows for the periods specified; said
financial statements have been prepared in conformity with generally
accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods involved. The combined balance sheets of the Local
Market Partnerships (as defined in Note 1 to the financial statements
thereof), as of December 31, 1994 and 1995 and the related combined
statements of operations and partners' capital and of cash flows for the
three years ended December 31, 1993, 1994 and 1995 and the combined balance
sheet of the Local Market Partnerships as of March 31, 1996 and the related
combined statements of operations and cash flows for the three month
periods ended March 31, 1995 and 1996 included in the Registration
Statement and Prospectuses, together with the related schedules and notes,
present fairly the combined financial position of the Local Market
Partnerships at the dates indicated and the combined results of the Local
Market Partnerships' operations and the Local Market Partnerships' combined
cash flows for the periods specified; said financial statements have been
prepared in conformity with GAAP applied on a consistent basis throughout
the periods involved. The supporting schedules, if any, included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data and
the summary financial information included in the Prospectuses present
fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement. The pro forma financial statements and the related
notes thereto included in the Registration Statement and the Prospectuses
present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein.
<PAGE>
6
(iv) No Material Adverse Change in Business. Since the respective dates as
--------------------------------------
of which information is given in the Registration Statement and the
Prospectuses, except as otherwise stated therein, (A) there has been no
material adverse change or no development involving a prospective material
adverse change, in the condition, financial or otherwise, or in the
earnings or business affairs of the Company and its Subsidiaries considered
as one enterprise, whether or not arising in the ordinary course of
business (a "Material Adverse Effect"), (B) there have been no transactions
entered into by the Company or any of its Subsidiaries, other than those in
the ordinary course of business, which are material with respect to the
Company and its Subsidiaries considered as one enterprise and which are
required to be disclosed in the Registration Statement or which would have
been required to be disclosed in the Registration Statement prior to its
effectiveness, and (C) there has been no dividend or distribution of any
kind declared, paid or made by the Company on any class of its capital
stock.
(v) Good Standing of the Company. The Company has been duly organized
----------------------------
and is validly existing as a corporation in good standing under the laws of
the State of Delaware and has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under this
Agreement; and the Company is duly qualified as a foreign corporation to
transact business and is in good standing in each other jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so
to qualify or to be in good standing would not result in a Material Adverse
Effect.
(vi) Good Standing of Subsidiaries. Schedule C lists each
-----------------------------
"significant subsidiary" of the Company (as such term is defined in Rule 1-
02 of Regulation S-X) and other subsidiaries not deemed "significant" but
nonetheless material (each a "Subsidiary" and, collectively, the
"Subsidiaries"). Each Subsidiary has been duly organized or formed and is
validly existing as a corporation, a partnership or a limited partnership
in good standing (with respect to a Subsidiary that is a corporation or
limited partnership) under the laws of the jurisdiction in which it has
been incorporated or formed, as applicable, has the necessary corporate or
partnership power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectuses and (with
respect to a Subsidiary that is a corporation or a limited partnership) is
duly qualified as a foreign corporation or limited partnership to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify
or to be in good standing would not result in a Material Adverse Effect;
except as otherwise disclosed in the Registration Statement or on Schedule
C hereof, all of the issued and
<PAGE>
7
outstanding capital stock of each such Subsidiary which is a corporation
has been duly authorized and validly issued, is fully paid and non-
assessable and all the issued and outstanding capital stock of each such
Subsidiary which is a corporation and all the existing partnership
interests of such Subsidiary which is a partnership or a limited
partnership are owned by the Company, directly or through subsidiaries,
free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity; none of the outstanding shares of capital
stock of any Subsidiary which is a corporation was issued in violation of
the preemptive rights of any securityholder of such Subsidiary.
(vii) Capitalization. The authorized, issued and outstanding capital
--------------
stock of the Company is as set forth in the Prospectuses in the column
entitled "Pro Forma for the Reorganization" under the caption
"Capitalization" (except for subsequent issuances, if any, pursuant to this
Agreement, pursuant to reservations, agreements or employee benefit plans
referred to in the Prospectuses or pursuant to the exercise of convertible
securities or options referred to in the Prospectuses). The shares of
issued and outstanding capital stock of the Company have been duly
authorized and validly issued and are fully paid and non-assessable; none
of the outstanding shares of capital stock of the Company was issued in
violation of the preemptive rights of any securityholder of the Company
arising under the Delaware General Corporation Law (the "DGCL"), the
Company's certificate of incorporation or bylaws or any agreement to which
the Company is a party.
(viii) Authorization of Agreement. This Agreement and the
--------------------------
International Purchase Agreement have been duly authorized, executed and
delivered by the Company.
(ix) Authorization and Description of Securities. The Securities to
-------------------------------------------
be purchased by the U.S. Underwriters and the International Managers from
the Company have been duly authorized for issuance and sale to the U.S.
Underwriters pursuant to this Agreement and the International Managers
pursuant to the International Purchase Agreement, respectively, and, when
issued and delivered by the Company pursuant to this Agreement and the
International Purchase Agreement, respectively, against payment of the
consideration set forth herein and the International Purchase Agreement,
respectively, will be validly issued, fully paid and non-assessable; the
Class A Common Stock conforms to all statements relating thereto contained
in the Prospectuses and such description conforms to the rights set forth
in the instruments defining the same; no holder of the Securities will be
subject to personal liability for the payment of the Company's debts except
as they may be liable by reason of their own conduct or acts and except as
holders of the Securities may be liable pursuant to Section 282 of the
DGCL; and the issuance of the Securities is not subject to preemptive or
other similar rights of any securityholder of the
<PAGE>
8
Company arising under the DGCL, the Company's certificate of incorporation
or bylaws or any agreement to which the Company is a party.
(x) Absence of Defaults and Conflicts. Neither the Company nor any
---------------------------------
Subsidiary is in violation of its charter or by-laws or partnership
agreement, as the case may be, or in default in the performance or
observance of any obligation, agreement, covenant or condition contained in
any contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or other agreement or instrument to which the Company or any
Subsidiary is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company or any Subsidiary is
subject (collectively, "Agreements and Instruments") except for such
violations or defaults that would not reasonably be expected to result in a
Material Adverse Effect; and the execution, delivery and performance of
this Agreement and the International Purchase Agreement and the
consummation of the transactions contemplated in this Agreement and the
International Purchase Agreement, the consummation of the Reorganization,
as defined in the Registration Statement, the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities as
described in the Prospectuses under the caption "Use of Proceeds" and
compliance by the Company with its obligations under this Agreement and the
International Purchase Agreement have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute a
breach of, or default or Repayment Event (as defined below) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any Subsidiary pursuant to
the Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not reasonably be
expected to result in a Material Adverse Effect), nor will such actions
result in any violation of the provisions of the charter or by-laws or
partnership agreement, as the case may be, of the Company or any Subsidiary
or (subject to the receipt of regulatory consents and approvals for the
Reorganization as described in the Registration Statement) any applicable
law (including the Communications Act of 1934, as amended, and the
Telecommunications Act of 1996, as amended (the "1996 Act"), and the rules,
regulations and policies of the Federal Communications Commission (the
"FCC") and the public utilities laws of the various states in which the
Company and the Subsidiaries do business or the ordinances, rules and
regulations of the various local governments in which the Company and the
Subsidiaries do business), statute, rule, regulation, judgment, order, writ
or decree of any government, government instrumentality or court, domestic
or foreign, having jurisdiction over the Company or any Subsidiary or any
of their assets, properties or operations (except for such violations that
would not reasonably be expected to result in a Material Adverse Effect).
As used herein, a "Repayment Event" means any event or condition which
gives the holder of any note, debenture or other evidence of indebtedness
for
<PAGE>
9
borrowed money in principal amount in excess of $10 million (or any person
acting on such holder's behalf) the right to require the repurchase,
redemption or repayment of all or a portion of such indebtedness by the
Company or any Subsidiary.
(xi) Absence of Labor Dispute. No labor dispute with the employees of
------------------------
the Company or any Subsidiary exists or, to the knowledge of the Company,
is imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its or any Subsidiary's principal
suppliers, manufacturers, customers or contractors, which, in either case,
may reasonably be expected to result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
----------------------
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any Subsidiary
(or any of the properties or assets thereof), which is required to be
disclosed in the Registration Statement (other than as disclosed therein),
or which might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and adversely
affect the consummation of the transactions contemplated in this Agreement
and the International Purchase Agreement or the performance by the Company
of its obligations hereunder or thereunder; the aggregate of all pending
legal or governmental proceedings to which the Company or any Subsidiary is
a party or of which any of their respective properties or assets is the
subject which are not described in the Registration Statement, including
ordinary routine litigation incidental to the business, could not
reasonably be expected to result in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
--------------------
which are required by the 1993 Act or the 1933 Regulations to be described
in the Registration Statement or the Prospectuses or to be filed as
exhibits thereto which have not been so described and filed as required.
(xiv) Possession of Intellectual Property. The Company and the
-----------------------------------
Subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, and neither the Company nor any of the Subsidiaries
has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
<PAGE>
10
Company or any of the Subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, singly or in the aggregate, would reasonably be
expected to result in a Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities under this Agreement and the International Purchase
Agreement or the consummation of the transactions contemplated by this
Agreement and the International Purchase Agreement, (i) except such as have
been already obtained or as may be required under the 1933 Act or the 1933
Act Regulations and foreign or state securities or blue sky laws and (ii)
except for notice filings the failure with which to comply would not
materially adversely affect the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities under this Agreement and the International Purchase
Agreement or the consummation of the transactions contemplated by this
Agreement and the International Purchase Agreement.
(xvi) Possession of Licenses and Permits. The Company and the
----------------------------------
Subsidiaries possess all permits, licenses, approvals, consents and other
authorizations issued by the appropriate federal, state, local or foreign
regulatory agencies or bodies (including the FCC, the public utilities
commission, or any equivalent body, of each state in which the Company does
business and any other relevant state and local authorities (the "Local
Authorities")) required for the conduct the business now operated by them
(collectively, "Governmental Licenses"), except where the failure to
possess any such permit, license, approval consent or authorization would
not reasonably be expected to result in a Material Adverse Effect; the
Company and the Subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure so
to comply would not reasonably be expected to, singly or in the aggregate,
have a Material Adverse Effect; all of the Governmental Licenses are
(except for the effects of the 1996 Act as described in the Prospectus)
valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be in
full force and effect would not reasonably be expected to have a Material
Adverse Effect; there is no outstanding adverse judgment, decree or order
that has been issued by the FCC or any of the Local Authorities against the
Company and the Subsidiaries and which, singly or in the aggregate, would
reasonably be expected to result in a Material Adverse Effect; and neither
the Company nor any of the Subsidiaries has received any notice of or is
aware of proceedings relating to the revocation or modification of any such
Governmental Licenses or that would otherwise affect the operations of the
<PAGE>
11
Company or the Subsidiaries and which, singly or in the aggregate, would
reasonably be expected to result in a Material Adverse Effect.
(xvii) Title to Property. The Company and the Subsidiaries have good
-----------------
and marketable title to all real property owned by the Company and the
Subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a) are
described in the Prospectuses, (b) are "Permitted Liens" under the
Indenture and Revolving Credit Agreement (as such terms are defined in the
Prospectuses) or (c) would not reasonably be expected to, singly or in the
aggregate, result in a Material Adverse Effect; and all of the leases and
subleases material to the business of the Company and the Subsidiaries,
considered as one enterprise, and under which the Company or any of the
Subsidiaries holds properties described in the Prospectuses, are in full
force and effect, and neither the Company nor any Subsidiary has any notice
of any claim of any sort that has been asserted by anyone adverse to the
rights of the Company or any Subsidiary under any of the leases or
subleases mentioned above, or affecting or questioning the rights of the
Company or such Subsidiary to the continued possession of the leased or
subleased premises under any such lease or sublease except for such claims
that would not reasonably be expected to result in a Material Adverse
Effect.
(xviii) Compliance with Cuba Act. The Company has complied with, and
------------------------
is and will be in compliance with, the provisions of that certain Florida
act relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(xix) Investment Company Act. The Company is not, and upon the
----------------------
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectuses
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the Registration
------------------
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of the
Subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance or code or any judicial or
administrative interpretation thereof, including any judicial or
administrative order, consent, decree or judgment, relating to pollution or
protection of human health, the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata)
or wildlife, including, without limitation, laws and regulations relating
to the release or threatened release of
<PAGE>
12
chemicals, pollutants, contaminants, wastes, toxic substances, hazardous
substances, petroleum or petroleum products (collectively, "Hazardous
Materials") or to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials
(collectively, "Environmental Laws"), (B) the Company and its Subsidiaries
have all permits, authorizations and approvals required under any
applicable Environmental Laws and are each in compliance with their
requirements, (C) there are no pending or, to the Company's knowledge,
threatened administrative, regulatory or judicial actions, suits, demands,
demand letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against the
Company or any of its Subsidiaries and (D) there are no events or
circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company or any of its Subsidiaries relating to Hazardous Materials or the
violation of Environmental Laws.
(xxi) Registration Rights. Except as described in the Registration
-------------------
Statement, there are no persons with registration rights or other similar
rights to have any securities registered pursuant to the Registration
Statement or otherwise registered by the Company under the 1933 Act.
(xxii) Reorganization. The agreements entered into by the Company
--------------
for the purposes of completing the Reorganization are all in full force and
effect with respect to the Company and, to the knowledge of the Company,
with respect to the other parties thereto, the representations and
warranties of the Company set forth in such agreements are true and correct
in all material respects, except to the extent any such representation or
warranty was expressly made as of a specific date, in which case such
representation and warranty was true and correct in all material respects
at such date. The Company has used its commercially reasonable efforts to
obtain all regulatory and contractual consents and approvals necessary to
consummate the Reorganization. All aspects of the Reorganization will be
completed prior to or simultaneously with the Closing Time, except that, as
described in the Registration Statement, (A) the Company may not acquire
the partnership interests in certain Local Market Partnerships (as defined
in the Registration Statement) without first obtaining certain regulatory
consents and approvals, (B) the Company will acquire the interests of the
Cable Stockholders (as defined in the Registration Statement) in the Local
Market Partnerships in the Seattle and San Francisco areas at the earliest
time such acquisitions can be accomplished without the consent of the
unaffiliated minority partners of such Local Market Partnerships and (C)
the Company may not have completed the redemption of the Class B Common
Stock held by a subsidiary of Continental Cablevision, Inc.
<PAGE>
13
(b) Officer's Certificates. Any certificate signed by any officer of
the Company or any of the Subsidiaries delivered to the Global Coordinator, the
U.S. Representatives or to counsel for the U.S. Underwriters pursuant to this
Agreement or otherwise in connection with the offering of the Securities shall
be deemed a representation and warranty by the Company to each U.S. Underwriter
as to the matters covered thereby.
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing. (a)
-----------------------------------------------
Initial Securities. On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
agrees to sell to each U.S. Underwriter, severally and not jointly, and each
U.S. Underwriter, severally and not jointly, agrees to purchase from the
Company, at the price per share set forth in Schedule B, the number of Initial
U.S. Securities set forth in Schedule A opposite the name of such U.S.
Underwriter, plus any additional number of Initial U.S. Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the U.S.
Underwriters, severally and not jointly, to purchase up to an additional
2,820,000 shares of Class A Common Stock at the price per share set forth in
Schedule B. The option hereby granted will expire 30 days after the date hereof
and may be exercised in whole or in part from time to time only for the purpose
of covering over-allotments which may be made in connection with the offering
and distribution of the Initial U.S. Securities upon notice by the Global
Coordinator to the Company setting forth the number of U.S. Option Securities as
to which the several U.S. Underwriters are then exercising the option and the
time and date of payment and delivery for such U.S. Option Securities. Any such
time and date of delivery for the U.S. Option Securities (a "Date of Delivery")
shall be determined by the Global Coordinator, but shall not be later than seven
full business days after the exercise of said option, nor in any event prior to
the Closing Time, as hereinafter defined. If the option is exercised as to all
or any portion of the U.S. Option Securities, each of the U.S. Underwriters,
acting severally and not jointly, will purchase that proportion of the total
number of U.S. Option Securities then being purchased which the number of
Initial U.S. Securities set forth in Schedule A opposite the name of such U.S.
Underwriter bears to the total number of Initial U.S. Securities, subject in
each case to such adjustments as the Global Coordinator in its discretion shall
make to eliminate any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Shearman & Sterling, 599 Lexington Avenue, New York, NY 10022, or at such other
place as shall be agreed upon by the Global Coordinator and the Company, at
10:00 A.M. (Eastern time) on the third (fourth if the pricing occurs after 4:30
P.M. (Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10 hereof), or
<PAGE>
14
such other time not later than ten business days after such date as shall be
agreed upon by the Global Coordinator and the Company (such time and date of
payment and delivery being herein called the "Closing Time").
In addition, in the event that any or all of the U.S. Option
Securities are purchased by the U.S. Underwriters, payment of the purchase price
for, and delivery of certificates for, such U.S. Option Securities shall be made
at the above-mentioned offices, or at such other place as shall be agreed upon
by the Global Coordinator and the Company, on each Date of Delivery as specified
in the notice from the Global Coordinator to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company against delivery to
the U.S. Representatives for the respective accounts of the U.S. Underwriters of
certificates for the U.S. Securities to be purchased by them. It is understood
that each U.S. Underwriter has authorized the U.S. Representatives, for its
account, to accept delivery of, receipt for, and make payment of the purchase
price for, the Initial U.S. Securities and the U.S. Option Securities, if any,
which it has agreed to purchase. Merrill Lynch, individually and not as
representative of the U.S. Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial U.S. Securities or the U.S.
Option Securities, if any, to be purchased by any U.S. Underwriter whose funds
have not been received by the Closing Time or the relevant Date of Delivery, as
the case may be, but such payment shall not relieve such U.S. Underwriter from
its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, will be made available
for examination and packaging by the U.S. Representatives in The City of New
York not later than 10:00 A.M. (Eastern Time) on the business day prior to the
Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each
------------------------
U.S. Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(b) hereof, will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify the
Global Coordinator immediately, and confirm the notice in writing, (i) when
any post-effective amendment to the Registration Statement shall become
effective, or any supplement to the Prospectuses or any amended
Prospectuses shall have been filed, (ii) of the receipt of any
<PAGE>
15
comments from the Commission relating to the Registration Statement, the
Prospectuses or the Registration Statement on Form 8-A relating to the
registration of the Securities under the Securities Exchange Act of 1934,
as amended (the "1934 Act"), or any amendment or supplement thereto, (iii)
of any request by the Commission for any amendment to the Registration
Statement or any amendment or supplement to the Prospectuses or for
additional information relating to the offering of the Securities, and (iv)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of
the qualification of the Securities for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceedings for
any of such purposes. The Company will promptly effect the filings
necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted
for filing under Rule 424(b) was received for filing by the Commission and,
in the event that it was not, it will promptly file such prospectus. The
Company will make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, to obtain the lifting thereof
at the earliest practicable moment.
(b) Filing of Amendments. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectus
included in the Registration Statement at the time it became effective or
to the Prospectuses, will furnish the Global Coordinator with copies of any
such documents a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file or use any such document to
which the Global Coordinator or counsel for the U.S. Underwriters shall
reasonably object.
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the Global Coordinator and counsel for the U.S.
Underwriters, without charge, signed copies of the Registration Statement
as originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the U.S.
Representatives, without charge, a conformed copy of the Registration
Statement as originally filed and of each amendment thereto (without
exhibits) for each of the U.S. Underwriters. If applicable, the copies of
the Registration Statement and each amendment thereto furnished to the U.S.
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
<PAGE>
16
(d) Delivery of Prospectuses. The Company has delivered to each U.S.
Underwriter, without charge, as many copies of each preliminary prospectus
as such U.S. Underwriter reasonably requested, and the Company hereby
consents to the use of such copies for purposes permitted by the 1933 Act.
The Company will furnish to each U.S. Underwriter, without charge, during
the period when the U.S. Prospectus is required to be delivered under the
1933 Act or the 1934 Act such number of copies of the U.S. Prospectus (as
amended or supplemented) as such U.S. Underwriter may reasonably request.
If applicable, the U.S. Prospectus and any amendments or supplements
thereto furnished to the U.S. Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act and
the rules and regulations of the Commission under the 1934 Act (the "1934
Act Regulations") so as to permit the completion of the distribution of the
Securities as contemplated in this Agreement, the International Purchase
Agreement and in the Prospectuses. If at any time when a prospectus is
required by the 1933 Act to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of
which it is necessary, in the opinion of counsel for the U.S. Underwriters
or for the Company, to amend the Registration Statement or amend or
supplement either of the Prospectuses in order that the Prospectuses will
not include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of
such counsel, at any such time to amend the Registration Statement or amend
or supplement either of the Prospectuses in order to comply with the
requirements of the 1933 Act or the 1933 Act Regulations, the Company will
promptly prepare and file with the Commission, subject to Section 3(b)
hereof, such amendment or supplement as may be necessary to correct such
statement or omission or to make the Registration Statement or the
Prospectuses comply with such requirements, and the Company will furnish to
the U.S. Underwriters such number of copies of such amendment or supplement
as the U.S. Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts,
in cooperation with the U.S. Underwriters, to qualify the Securities for
offering and sale under the applicable securities laws of such states and
other jurisdictions (domestic or foreign) as the Global Coordinator may
designate and to maintain such qualifications in effect for a period of not
less than one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement; provided, however,
that the Company shall not be obligated to file any general consent to
<PAGE>
17
service of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction
in which it is not otherwise so subject. In each jurisdiction in which the
Securities have been so qualified, the Company will file such statements
and reports as may be required by the laws of such jurisdiction to continue
such qualification in effect for a period of not less than one year from
the effective date of the Registration Statement and any Rule 462(b)
Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant to
the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earning statement for the
purposes of, and to provide the benefits contemplated by, the last
paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received
by it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds."
(i) Listing. The Company will use its best efforts to effect and
maintain the quotation of the Securities on the Nasdaq National Market and
will file with the Nasdaq National Market all documents and notices
required by the Nasdaq National Market to be filed by companies that have
securities that are traded in the over-the-counter market and quotations
for which are reported by the Nasdaq National Market.
(j) Restriction on Sale of Securities. During a period of 180 days
from the date of the Prospectuses, the Company will not, without the prior
written consent of the Global Coordinator, (i) directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of any share of
Class A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock or file any registration statement
under the 1933 Act with respect to any of the foregoing or (ii) enter into
any swap or any other agreement or any transaction that transfers, in whole
or in part, directly or indirectly, the economic consequence of ownership
of the Class A Common Stock, whether any such swap or transaction described
in clause (i) or (ii) above is to be settled by delivery of Class A Common
Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Securities to be sold hereunder and
under the International Purchase Agreement, (B) any shares of Class A
Common Stock issued or options to purchase Class A Common Stock granted
pursuant to existing employee benefit plans of the Company referred to in
the Prospectuses, (C) any shares of Class A Common Stock issued pursuant to
any non-employee director stock plan or dividend reinvestment plan or (D)
the issuance by the Company of
<PAGE>
18
shares of Class A Common Stock or shares of its Class B Common Stock, par
value $.01 per share, to effectuate the Reorganization.
(k) Reporting Requirements. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission
pursuant to the 1934 Act within the time periods required by the 1934 Act
and the 1934 Act Regulations.
(l) Reorganization. Following the Closing Time, the Company will use
its commercially reasonable efforts to complete as promptly as practicable
those aspects of the Reorganization that had not been completed prior to or
simultaneously with the Closing Time.
(m) Compliance with NASD Rules. The Company hereby agrees that it
will ensure that the Reserved Securities will be restricted if and to the
extent required by Section IM-21 10-1(d) of the Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD
rules from sale, transfer, assignment, pledge or hypothecation for a period
of three months following the date of the effectiveness of the Registration
Statement. The Underwriters will notify the Company as to which persons
will need to be so restricted. At the request of the Underwriters, the
Company will direct the transfer agent to place a stop transfer restriction
upon such securities for such period of time. Should the Company release,
or seek to release, from such restrictions any of the Reserved Securities,
the Company agrees to reimburse the Underwriters for any reasonable
expenses including, without limitation, legal expenses they incur directly
in connection with such release.
SECTION 4. Payment of Their Expenses. (a) Expenses. The Company
-------------------------
will pay or cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including (i) the preparation, printing and
filing of the Registration Statement (including financial statements and
exhibits) as originally filed and of each amendment thereto, (ii) the printing
and delivery to the Underwriters of this Agreement and any Agreement among
Underwriters, (iii) the preparation, issuance and delivery of the certificates
for the Securities to the Underwriters, including any stock or other transfer
taxes and any stamp or other duties payable upon the sale, issuance or delivery
of the Securities to the Underwriters, and the transfer of the Securities
between the U.S. Underwriters and International Managers, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors, (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectuses and any
amendments or supplements thereto, (vii) the
<PAGE>
19
preparation, printing and delivery to the Underwriters of copies of the Blue Sky
Survey and any supplement thereto, (viii) the fees and expenses of any transfer
agent or registrar for the Securities, (ix) the filing fees incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in connection
with, the review by the National Association of Securities Dealers, Inc. (the
"NASD") of the terms of the sale of the Securities, (x) the fees and expenses
incurred in connection with the inclusion of the Securities in the Nasdaq
National Market and (xi) all reasonable costs and expenses of the Underwriters,
including the reasonable fees and disbursements of counsel for the Underwriters,
in connection with matters related to the Reserved Securities which are
designated by the Company for sale to employees and others having a business
relationship with the Company.
(b) Termination of Agreement. If this Agreement is terminated by the
U.S. Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the U.S. Underwriters for all of
their reasonable out-of-pocket expenses incurred in connection with the offering
and sale of the Securities, including the reasonable fees and disbursements of
counsel for the U.S. Underwriters.
SECTION 5. Conditions of U.S. Underwriters' Obligations. The
--------------------------------------------
obligations of the several U.S. Underwriters hereunder are subject to the
accuracy as of the Closing Date of the representations and warranties of the
Company contained in Section 1 hereof or in certificates of any officer of the
Company or any Subsidiary of the Company delivered pursuant to the provisions
hereof, to the performance by the Company of its covenants and other obligations
hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, shall have
become effective and at the Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued under
the 1933 Act or proceedings therefor initiated or threatened by the
Commission, and any request on the part of the Commission for additional
information from the Company or its agents shall have been complied with to
the reasonable satisfaction of counsel to the U.S. Underwriters. A
prospectus containing the Rule 430A information shall have been filed with
the Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the
Company has elected to rely upon Rule 434, a Term Sheet shall have been
filed with the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for the Company. At the Closing Time, the U.S.
Representatives shall have received the favorable opinions, dated as of the
Closing Time, of (i) the General Counsel of the Company and (ii) Dow,
Lohnes & Albertson, counsel for the Company, together with signed or
reproduced copies of such letters
<PAGE>
20
for each of the other U.S. Underwriters substantially in the form set forth
in Exhibits A(i) and A(ii) hereto, respectively, and to such further
effect, arising as a result of changed circumstances between the date
hereof and the Closing Date, as counsel to the U.S. Underwriters may
reasonably request. In giving such opinions such counsel may rely, as to
all matters governed by the laws of jurisdictions other than the law of the
State of New York, the federal law of the United States and the General
Corporation Law of the State of Delaware, upon the opinions of counsel
reasonably satisfactory to the U.S. Representatives. Such counsel may also
state that, insofar as such opinions involve factual matters, they have
relied, to the extent they deem proper, upon certificates of officers of
the Company and its Subsidiaries and certificates of public officials.
Such opinions shall not state that they are to be governed or qualified by,
or that they are otherwise subject to, any treatise, written policy or
other document relating to legal opinions, including without limitation,
the Legal Opinion Accord of the ABA Section of Business Law (1991).
(c) Opinion of Counsel for U.S. Underwriters. At the Closing Time,
the U.S. Representatives shall have received the favorable opinion, dated
as of the Closing Time, of Shearman & Sterling, counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters with respect to the matters set forth
in clause (iv) (solely as to preemptive rights arising under the DGCL or
the Company's certificate of incorporation or bylaws) of Exhibit A(i)
hereto and with respect to the matters set forth in clauses (i), (ii),
(iii), (iv), (v), (vii) and (viii) (solely as to the information in the
Prospectuses under "Description of Capital Stock--Class A Common Stock")
and the penultimate paragraph of Exhibit A(ii) hereto. In giving such
opinion such counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of New York, the federal law
of the United States and the General Corporation Law of the State of
Delaware, upon the opinions of counsel satisfactory to the U.S.
Representatives. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper,
upon certificates of officers of the Company and its Subsidiaries and
certificates of public officials.
(d) Officers' Certificate. At the Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs
or business prospects of the Company and its Subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, and
the U.S. Representatives shall have received a certificate of the Company,
signed by the President or a Vice President of the Company and by the chief
financial or chief accounting officer of the Company, dated as of the
Closing Time, to the effect that (i) there has been no such material
adverse change, (ii) the
<PAGE>
21
representations and warranties in Section 1(a) hereof are true and correct
with the same force and effect as though expressly made at and as of the
Closing Time, (iii) the Company has complied with all agreements and
satisfied all conditions herein on its part to be performed or satisfied at
or prior to the Closing Time, and (iv) no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or, to the
knowledge of the Company, are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the U.S. Representatives shall have received from Deloitte &
Touche LLP a letter dated such date, in form and substance satisfactory to
the U.S. Representatives, together with signed or reproduced copies of such
letter for each of the other U.S. Underwriters containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and
the Prospectuses.
(f) Bring-down Comfort Letter. At the Closing Time the
Representatives shall have received from Deloitte & Touche LLP a letter,
dated as of the Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (e) of this
Section, except that the specified date referred to shall be a date not
more than three business days prior to the Closing Time.
(g) Approval of Listing. At the Closing Time the Securities shall
have been approved for inclusion in the Nasdaq National Market, subject
only to official notice of issuance.
(h) No Objection. The NASD shall not have raised any objection with
respect to the fairness and reasonableness of the underwriting terms and
arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the U.S.
Representatives shall have received an agreement substantially in the form
of Exhibit B hereto signed by the persons listed on Schedule D hereto.
(j) FIRPTA Affidavit. The Company will issue to the Underwriters an
affidavit, dated no more than thirty (30) days prior to the Closing Time,
in accordance with Section 1445(b)(3) of the Internal Revenue Code of 1986,
as amended and Sections 1.897-2(h) and 1.1445-2(c)(3) of the Treasury
Regulations issued pursuant to the Internal Revenue Code of 1986, as
amended, which statement certifies that the Securities are U.S. real estate
interests.
<PAGE>
22
(k) Reorganization. At the Closing Time, the agreements entered into
by the Company for the purposes of completing the Reorganization shall be
in full force and effect with respect to the Company and, to the knowledge
of the Company, with respect to the other parties thereto; prior to, or
simultaneously with, the Closing Time, all aspects of the Reorganization
shall be completed (except that, as described in the Registration
Statement, (A) the Company shall not be required to acquire the partnership
interests in those Local Market Partnerships for which regulatory consents
and approvals are required; (B) the Company shall not be required to
acquire the interests of the Cable Stockholders in the Local Market
Partnerships in the Seattle and San Francisco areas without the consent of
the unaffiliated minority partners of such Local Market Partnerships and
(C) the Company may not have completed the redemption of the Class B Common
Stock held by a subsidiary of Continental Cablevision, Inc.) and the
Company shall have provided to the Global Coordinator and the Underwriters'
counsel copies of all closing documents delivered to the parties to the
transactions contemplated in these agreements.
(l) Purchase of Initial International Securities. Contemporaneously
with the purchase by the U.S. Underwriters of the Initial U.S. Securities
under this Agreement, the International Managers shall have purchased the
Initial International Securities under the International Purchase
Agreement.
(m) Conditions to Purchase of U.S. Option Securities. In the event
that the U.S. Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the U.S. Option Securities, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company or any Subsidiary
of the Company hereunder shall be true and correct as of each Date of
Delivery and, at the relevant Date of Delivery, the U.S. Representatives
shall have received:
(i) Company Officers' Certificate. A certificate of the Company,
-----------------------------
dated such Date of Delivery, signed by the President or a Vice
President of the Company and by the chief financial or chief
accounting officer of the Company, confirming that the certificate
delivered at the Closing Time pursuant to Section 5(d) hereof remains
true and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinions of
------------------------------
(A) the General Counsel of the Company and (B) Dow, Lohnes &
Albertson, counsel for the Company, each in form and substance
reasonably satisfactory to counsel for the Underwriters, dated such
Date of Delivery, relating to the U.S. Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect as
the opinion required by Section 5(b) hereof.
<PAGE>
23
(iii) Opinion of Counsel for U.S. Underwriters. The favorable opinion of
----------------------------------------
Shearman & Sterling, counsel for the U.S. Underwriters, dated such
Date of Delivery, relating to the U.S. Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect as
the opinion required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from Deloitte & Touche
-------------------------
LLP, in form and substance satisfactory to the U.S. Representatives
and dated such Date of Delivery, substantially in the same form and
substance as the letter furnished to the U.S. Representatives pursuant
to Section 5(f) hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more than
five days prior to such Date of Delivery.
(v) FIRPTA Affidavit. An affidavit, dated no more than thirty
----------------
(30) days prior to the Date of Delivery, in accordance with Section
1445(b)(3) of the Internal Revenue Code of 1986, as amended and
Sections 1.897-2(h) and 1.1445-2(c)(3) of the Treasury Regulations
issued pursuant to the Internal Revenue Code of 1986, as amended,
which statement certifies that the Securities are U.S. real estate
interests.
(n) Additional Documents. At the Closing Time and at each Date of
Delivery, counsel for the U.S. Underwriters shall have been furnished with
such documents as they may reasonably require for the purpose of enabling
them to pass upon the issuance and sale of the Securities as herein
contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Company in connection
with the issuance and sale of the Securities as herein contemplated shall
be reasonably satisfactory in form and substance to the U.S.
Representatives and counsel for the U.S. Underwriters.
(o) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of U.S.
Option Securities on a Date of Delivery which is after the Closing Time,
the obligations of the several U.S. Underwriters to purchase the relevant
Option Securities, may be terminated by the U.S. Representatives by notice
to the Company at any time at or prior to the Closing Time or such Date of
Delivery, as the case may be, and such termination shall be without
liability of any party to any other party except as provided in Section 4
hereof and except that Sections 1, 6, 7 and 8 hereof shall survive any such
termination and remain in full force and effect.
<PAGE>
24
SECTION 6. Indemnification. (a) Indemnification of U.S.
---------------
Underwriters. The Company agrees to indemnify and hold harmless each U.S.
Underwriter, its directors, officers and employees, and each person, if any, who
controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectuses (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) in connection with the offer and sale of the Reserved Securities,
against any and all loss, liability, claim, damage and expense whatsoever,
as incurred, arising out of the failure of eligible employees and persons
having business relationships with the Company to pay for and accept
delivery of Reserved Securities which were subject to a properly confirmed
agreement to purchase;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever, in any such case, based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred (including
the reasonable fees and disbursements of counsel chosen by Merrill Lynch),
reasonably incurred in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency
or body, commenced or threatened, or any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i), (ii)
or (iii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
- -------- -------
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written
<PAGE>
25
information furnished to the Company by any U.S. Underwriter through the U.S.
Representatives expressly for use in the Registration Statement (or any
amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the Prospectuses
(or any amendment or supplement thereto). The foregoing indemnity agreement
with respect to any preliminary prospectus or any Prospectus (or amendments or
supplement thereto) shall not inure to the benefit of any U.S. Underwriter from
whom the person asserting any such loss, liability, claim, damage or expense
purchased Securities (or any director, officer or employee of such U.S.
Underwriter, or any person who controls such U.S. Underwriter within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act) if a copy of the
applicable Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by or on
behalf of such U.S. Underwriter to such person, if such is required by law, at
or prior to the written confirmation of the sale of such Securities to such
person and if such Prospectus (as so amended or supplemented) would have cured
the defect giving rise to such loss, liability, claim, damage or expense.
(b) Indemnification of Company, Directors and Officers. Each U.S.
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
U.S. Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such U.S.
Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the Prospectuses (or any amendment or supplement thereto).
(c) Actions Against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof and in any event shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to Section
6(a) above, counsel to the indemnified parties shall be selected by Merrill
Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above,
counsel to the indemnified parties shall be selected by the Company. If it so
elects within a reasonable time after receipt of the notice mentioned above from
an indemnified party, an indemnifying party, jointly with any
<PAGE>
26
other indemnifying parties receiving such notice, may assume the defense of such
action with counsel chosen by it and reasonably satisfactory to the indemnified
parties defendant in such action, unless such indemnified parties reasonably
object to such assumption on the ground that there may be legal defenses
available to them which are different from or in addition to those available to
such indemnifying party. If an indemnifying party assumes the defense of such
action, the indemnifying party shall not be liable for any fees and expenses of
counsel for the indemnified parties incurred thereafter in connection with such
action. In no event shall the indemnifying parties be liable for fees and
expenses of more than one counsel (in addition to any local counsel) separate
from their own counsel for all indemnified parties in connection with any one
action or separate but similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances. No indemnifying
party shall, without the prior written consent of the indemnified parties,
settle or compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement Without Consent If Failure to Reimburse. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(iii) hereof effected without its written
consent if (i) such settlement is entered into more than 45 days after receipt
by such indemnifying party of the aforesaid request, (ii) such indemnifying
party shall have received notice of the terms of such settlement at least 30
days prior to such settlement being entered into and (iii) such indemnifying
party fails, prior to the date of such settlement, to reimburse such indemnified
party in accordance with such request to the extent it considers such request to
be reasonable or to provide written notice to the indemnified party
substantiating the unpaid balance as unreasonable.
SECTION 7. Contribution. If the indemnification provided for in
------------
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the U.S. Underwriters on the other hand from the
offering of the Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits
<PAGE>
27
referred to in clause (i) above but also the relative fault of the Company on
the one hand and of the U.S. Underwriters on the other hand in connection with
the statements or omissions, or in connection with any failure of the nature
referred to in Section 6(a)(ii) hereof, which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company on the one hand and the
U.S. Underwriters on the other hand in connection with the offering of the U.S.
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the U.S.
Securities pursuant to this Agreement (before deducting expenses but after
deducting the underwriting discount) received by the Company and the total
underwriting discount received by the U.S. Underwriters, in each case as set
forth on the cover of the U.S. Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the U.S. Securities as set forth on such cover.
The relative fault of the Company on the one hand and the U.S.
Underwriters on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the U.S. Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission or any failure of the nature referred to in Section
6(a)(ii) hereof.
The Company and the U.S. Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the U.S. Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 7. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 7 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the U.S. Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such U.S. Underwriter has otherwise been required to pay by reason of any such
untrue or alleged untrue statement or omission or alleged omission.
<PAGE>
28
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a
U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act shall have the same rights to contribution as the Company. The U.S.
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the number of Initial U.S. Securities set forth
opposite their respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
-----------------------------------------------------
Delivery. All representations, warranties and agreements contained in this
- --------
Agreement or in certificates of the Company submitted pursuant hereto, shall
remain operative and in full force and effect, regardless of any investigation
made by or on behalf of any U.S. Underwriter or controlling person, or by or on
behalf of the Company, and shall survive delivery of the U.S. Securities to the
U.S. Underwriters; provided, however, that in no event shall this Section 8 be
-------- -------
construed as a waiver by the Company of any statute of limitations applicable to
any such representation, warranty or agreement.
SECTION 9. Termination of Agreement. (a) Termination; General. The
------------------------
U.S. Representatives may terminate this Agreement, by notice to the Company, at
any time at or prior to the Closing Time (i) if there has been, since the time
of execution of this Agreement or since the respective dates as of which
information is given in the U.S. Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its Subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, or (ii)
if there has occurred any material adverse change in the financial markets in
the United States or the international financial markets, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the U.S. Representatives, impracticable
to market the Securities or to enforce contracts for the sale of the Securities,
or (iii) if trading in any securities of the Company has been suspended or
limited by the Commission or the Nasdaq National Market, or if trading generally
on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq
National Market has been suspended or limited, or minimum or maximum prices for
trading have been fixed, or maximum ranges for prices have been required, by any
of said exchanges or by such system or by order of the Commission, the National
Association of Securities Dealers, Inc. or any other governmental
<PAGE>
29
authority, or (iv) if a banking moratorium has been declared by either Federal
or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6 and 7 hereof shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the U.S. Underwriters. If one
-----------------------------------------------
or more of the U.S. Underwriters shall fail at the Closing Time or a Date of
Delivery to purchase the Securities which it or they are obligated to purchase
under this Agreement (the "Defaulted Securities"), the U.S. Representatives
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non-defaulting U.S. Underwriters, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such amounts
as may be agreed upon and upon the terms herein set forth; if, however, the U.S.
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the non-
defaulting U.S. Underwriters shall be obligated, severally and not jointly,
to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting U.S. Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
Securities to be purchased on such date, this Agreement or, with respect to
any Date of Delivery which occurs after the Closing Time, the obligation of
the Underwriters to purchase and of the Company to sell the Option
Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting U.S.
Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
U.S. Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not result in a termination of the obligation
of the U.S. Underwriters to purchase and the Company to sell the relevant U.S.
Option Securities, as the case may be, either the U.S. Representatives or the
Company shall have the right to postpone the Closing Time or the relevant Date
of Delivery, as the case may be, for a period not exceeding seven days in order
to effect any required changes in the Registration Statement or the Prospectuses
or in
<PAGE>
30
any other documents or arrangements. As used herein, the term "U.S.
Underwriter" includes any person substituted for a U.S. Underwriter under this
Section 10.
SECTION 11. Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given if delivered by
overnight courier or transmitted by any standard form of telecommunication.
Notices to the U.S. Underwriters shall be directed to the U.S. Representatives
at North Tower, World Financial Center, New York, New York 10281-1201, notices
to the Company shall be directed to it at One Teleport Drive, Staten Island, New
York, New York 10311, Attention: John W. Thomson, Esq.
---------
SECTION 12. Parties. This Agreement shall inure to the benefit of
-------
and be binding upon the U.S. Underwriters, the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the U.S.
Underwriters, the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 hereof and
their heirs and legal representatives, any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision herein contained.
This Agreement and all conditions and provisions hereof are intended to be for
the sole and exclusive benefit of the U.S. Underwriters, the Company and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Securities from any U.S.
Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
----------------------
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT
AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY
TIME.
SECTION 14. Effect of Headings. The Article and Section headings
------------------
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
<PAGE>
31
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the U.S. Underwriters and the Company in accordance with its terms.
Very truly yours,
TELEPORT COMMUNICATIONS GROUP INC.
By: ______________________
Name:
Title:
<PAGE>
32
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MORGAN STANLEY & CO. INCORPORATED
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
LEHMAN BROTHERS INC.
DEUTSCHE MORGAN GRENFELL/C.J. LAWRENCE INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
By __________________________________
Authorized Signatory
For itself and as U.S. Representatives of the other U.S. Underwriters named in
Schedule A hereto.
<PAGE>
SCHEDULE A
Number of
Initial U.S.
Name of U.S. Underwriter Securities
------------------------ ------------
Merrill Lynch , Pierce, Fenner & Smith
Incorporated.........................................
Morgan Stanley & Co. Incorporated....................
Donaldson, Lufkin & Jenrette Securities Corporation..
Lehman Brothers Inc..................................
Morgan Grenfell/C.J. Lawrence Inc....................
_______
Total................................................ 18,800,000
============
<PAGE>
SCHEDULE B
TELEPORT COMMUNICATIONS GROUP INC.
18,800,000 Shares of Class A Common Stock
(Par Value $.01 per Share)
1. The initial public offering price per share for the Initial
U.S. Securities, determined as provided in said Section 2, shall be $o.
2. The purchase price per share for the Initial U.S. Securities
to be paid by the several U.S. Underwriters shall be $o, being an amount equal
to the initial public offering price set forth above less $o per share.
<PAGE>
SCHEDULE II
LIST OF SUBSIDIARIES
Corporations
- ------------
TC Boston Holdings, Inc.
TC Boston Holdings II, Inc.
TC New York Holdings I, Inc.
TC New York Holdings II, Inc.
TC Systems, Inc.
Teleport Communications Chicago, Inc.
Teleport Communications Dallas, Inc.
Teleport Communications Houston, Inc.
Teleport Communications Los Angeles, Inc.
Teleport Communications San Francisco, Inc.
Teleport Communications Washington, D.C., Inc.
TCG America, Inc.
TCG Indiana, Inc.
TCG Joint Venture Holdings, Inc.
TCG Miami, Inc.
TCG Milwaukee, Inc.
TCG New Hampshire, Inc.
TCG New York, Inc.
TCG Payphones, Inc.
TCG Seattle, Inc.
Partnerships
- ------------
TCG Partners
Teleport Communications Boston
Teleport Communications New York
TCG Chicago
TCG Cleveland
TCG Colorado
TCG Connecticut
TCG Dallas
TCG Data - New York
TCG Detroit
TCG Illinois
TCG Indianapolis
TCG Los Angeles
TCG Maryland
C-1
<PAGE>
TCG Northern New Jersey
TCG Omaha
TCG Phoenix
TCG Pittsburgh
TCG Rhode Island
TCG San Diego
TCG San Francisco
TCG Seattle
TCG South Florida
TCG St. Louis
1. The outstanding partnership interests of each Subsidiary which is a
partnership are subject to certain restrictions on transfer pursuant to the
partnership agreement with respect to such Partnership. Such partnership
interests and the outstanding capital stock of each Subsidiary which is a
corporation are subject to certain restrictions on transfer pursuant to
securities laws.
2. The capital stock and partnership interests of the subsidiaries of TCG New
York, Inc. are pledged as security for the loans under the Revolving Credit
Agreement.
3. Equity interests in certain partnerships identified as Subsidiaries are
held by third parties in the percentages identified in Attachment 1 to this
Schedule C./1/
- ---------------------
/1/ Attachment 1 reflects the ownership of the Local Market Partnerships before
the Reorganization, we understand that it will be modified to reflect the
ownership on the effective date.
C-2
<PAGE>
SCHEDULE D
LIST OF PERSONS AND ENTITIES
SUBJECT TO LOCK-UP
Tele-Communications, Inc. and its subsidiaries
Cox Communications, Inc. and its subsidiaries
Comcast Corporation and its subsidiaries
Continental Cablevision, Inc. and its subsidiaries
Robert Annunziata
Robert C. Atkinson
Joel D. Gross
Alf T. Hansen
J. Curt Hockemeier
Marvin L. Lindsey
Stuart A. Mencher
John A. Scarpati
Kenneth A. Shulman
Maria Terranova-Evans
Wayne G. Fox
John W. Thompson
W. Terrell Wingfield, Jr.
<PAGE>
Exhibit A(i)
FORM OF OPINION OF THE COMPANY'S GENERAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
See Attachment
<PAGE>
Attachment
----------
July __, 1996
Merrill Lynch, Pierce,
Fenner & Smith, Incorporated
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
Lehman Brothers Inc. and
Deutsche Morgan Grenfell/CJ Lawrence Inc.
c/o Merrill Lynch, Pierce,
Fenner & Smith, Incorporated
World Financial Center
North Tower
New York, NY 10281-1229
Merrill Lynch International
Morgan Stanley & Co. International
Donaldson, Lufkin & Jenrette
Securities Corporation
Lehman Brothers International (Europe)
Morgan Grenfell & Co.
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
This opinion is being delivered to you pursuant to Section 5(b) of
the U.S. Purchase Agreement dated as of June , 1996 (the "U.S. Purchase
Agreement") and Section 5(b) of the International Purchase Agreement dated as of
June , 1996 (the "International Purchase Agreement" and, together with the
U.S. Purchase Agreement, the "Purchase Agreements") among you and Teleport
Communications Group Inc. (the "Company"), providing for the sale to you on
this date of an aggregate of 23,500,000 shares of the Class A Common Stock, par
value $0.01 per share (the "Class A Common Stock"), of the Company (the
"Securities"). I am the General Counsel of the Company. Capitalized terms used
herein that are not otherwise defined herein shall have the same meaning as in
the Purchase Agreements.
<PAGE>
2
In this connection, I have examined the Registration Statement on
Form S-1 (No. 333-3850) relating to the Securities filed with the
Securities and Exchange Commission (the "Commission") on April 19, 1996, under
the Securities Act of 1933, as amended (the "Securities Act"), Amendment No. 1
thereto filed with the Commission on June 3, 1996, (such Registration Statement,
as so amended, being hereinafter referred to as the "Equity Registration
Statement"); the final prospectus, dated June , 1996, filed with the Commission
on June , 1996, relating to the offering of the Class A Common Stock in the
United States and Canada (the "U.S. Prospectus") and the final prospectus, dated
June , 1996, filed with the Commission on June , 1996 relating to the offering
of the Class A Common Stock outside the United States and Canada (the
"International Prospectus" and, together with the U.S. Prospectus, the
"Prospectuses"), both filed pursuant to Rule 424(b) of the Commission's General
Rules and Regulations under the Securities Act; and the Purchase Agreements.
On June , 1996, I was informed by telephone by a member of the
staff of the Commission that the Equity Registration Statement had become
effective under the Securities Act at ________ [A.M./P.M.], New York City time,
on that date.
I have also examined originals or copies, certified or otherwise,
identified to my satisfaction, of all such records of the Company and all such
agreements, certificates of public officials, certificates of officers or
representatives of the Company and others, and such other documents,
certificates and corporate or other records as I have deemed necessary or
appropriate as a basis for the opinions set forth herein. In my examination I
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to me as originals, the
conformity to original documents of all documents submitted to me as certified
or photostatic copies and the authenticity of the originals of such latter
documents and the due, binding and valid authorization, execution and delivery
pursuant to lawful power and legal right of applicable instruments and documents
on behalf of persons and entities other than the Company.
As to matters of law set forth below, my opinion is limited to
matters of law under the laws of the State of New York, the laws of the United
States, to the extent applicable hereto, and the conflicts of law rules, or the
laws of any states or jurisdictions other than as specified above.
Based upon the foregoing and subject to the other qualifications
stated herein, I am of the opinion that:
(i) The Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required,
<PAGE>
3
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect.
(ii) Each Subsidiary has been duly incorporated or formed, as
applicable, and is validly existing as a corporation, a partnership or a limited
partnership in good standing (with respect to a Subsidiary that is a corporation
or a limited partnership) under the laws of the jurisdiction in which it has
been incorporated or formed, as applicable, has the necessary corporate or
partnership power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectuses and (with respect to a
Subsidiary that is a corporation or a limited partnership) is duly qualified as
a foreign corporation or a limited partnership to transact business and is in
good standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect; except as otherwise disclosed in the
Equity Registration Statement or in Schedule C to the Purchase Agreements, all
of the issued and outstanding capital stock of each Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and all the
issued and outstanding capital stock of each such Subsidiary which is a
corporation and all the existing partnership interests of each such Subsidiary
which is a partnership or limited partnership, to the best of my knowledge and
information, is owned by the Company, directly or through subsidiaries, free and
clear of any security interest, mortgage, pledge, lien, encumbrance, claim or
equity; none of the outstanding shares of capital stock of any Subsidiary which
is a corporation was issued in violation of the preemptive rights of any
securityholder of such Subsidiary arising under the DGCL, the certificate of
incorporation or bylaws of such Subsidiary or any agreement to which such
Subsidiary is a party.
(iii) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectuses in the column entitled "Pro Forma
for the Reorganization" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to the U.S. Purchase Agreement and the
International Purchase Agreement or pursuant to reservations, agreements or
employee benefit plans referred to in the Prospectuses or pursuant to the
exercise of convertible securities or options referred to in the Prospectuses);
the shares of issued and outstanding capital stock have been duly authorized and
validly issued and are fully paid and non-assessable; and none of the
outstanding shares of capital stock of the Company was issued in violation of
the preemptive rights of any securityholder of the Company arising under the
DGCL, the Company's certificate of incorporation or bylaws or any agreement to
which the Company is a party.
(iv) The issuance of the Securities by the Company is not subject to
preemptive rights of any securityholder of the Company arising under the DGCL,
the Company's certificate of incorporation or bylaws or any agreement to which
the Company is a party.
<PAGE>
4
(v) To the best of my knowledge, there are no actions, suits,
proceedings, inquiries or investigations before or brought by any court or
governmental agency or body, domestic or foreign, now pending or threatened,
against or affecting the Company or any Subsidiary, which, in the aggregate,
might reasonably be expected to result in a Material Adverse Effect, or which,
in the aggregate, might reasonably be expected to materially and adversely
affect the properties or assets thereof or the consummation of the transactions
contemplated in the U.S. Purchase Agreement and International Purchase Agreement
or the performance by the Company of its obligations thereunder.
(vi) The information in the Prospectuses under "Business," to the
extent that it constitutes matters of law, summaries of legal matters, the
Company's certificate of incorporation and bylaws or legal proceedings, or legal
conclusions, has been reviewed by me and is correct in all material respects.
(vii) To the best of my knowledge, there are no statutes or
regulations that are required to be described in the Prospectuses that are not
described as required.
(viii) All descriptions in the Equity Registration Statement of
contracts and other documents to which the Company or the Subsidiaries are a
party are accurate in all material respects; to the best of my knowledge, there
are no franchises, contracts, indentures, mortgages, loan agreements, notes,
leases or other instruments required to be described or referred to in the
Equity Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed as exhibits thereto, and the
descriptions thereof or references thereto are correct in all material respects.
(ix) To the best of my knowledge, neither the Company nor any
Subsidiary is in violation of its charter or bylaws or partnership agreement, as
the case may be, and no default by the Company or any Subsidiary exists in the
due performance or observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan agreement, note,
lease or other agreement or instrument that is described or referred to in the
Equity Registration Statement or the Prospectuses or filed as an exhibit to the
Equity Registration Statement except for such violations or defaults that would
not reasonably be expected to result in a Material Adverse Effect.
(x) The execution, delivery and performance of the U.S. Purchase
Agreement and the International Purchase Agreement and the consummation of the
transactions contemplated in the U.S. Purchase Agreement and the International
Purchase Agreement, the consummation of the Reorganization, as defined in the
Equity Registration Statement, the issuance and sale of the Securities, and the
use of the proceeds from the sale of the Securities as expressly described in
the Prospectuses under the caption "Use Of Proceeds" and compliance by the
Company with its obligations under the U.S. Purchase Agreement and the
International Purchase Agreement do not and will not, whether with or without
the giving
<PAGE>
5
of notice or lapse of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined in Section 1(a)(x) of the Purchase
Agreements) under or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any Subsidiary
pursuant to any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, lease or any other agreement or instrument, known to me, to
which the Company or any Subsidiary is a party or by which it or any of them may
be bound, or to which any of the property or assets of the Company or any
Subsidiary is subject (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not reasonably be expected to have a Material
Adverse Effect).
(xi) To the best of my knowledge, except as described in the Equity
Registration Statement, there are no persons with registration rights or other
similar rights to have any securities registered pursuant to the Equity
Registration Statement or otherwise registered by the Company under the 1933
Act.
(xii) The Company and the Subsidiaries possess the Governmental
Licenses and are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure to so comply would not
reasonably be expected to, singly or in the aggregate, have a Material Adverse
Effect, and all of the Governmental Licenses are valid and in full force and
effect, except when the invalidity of such Governmental Licenses or the failure
of such Governmental Licenses to be in full force and effect would not
reasonably be expected to have a Material Adverse Effect.
(xiii) There is no outstanding adverse judgment, decree or order that
has been issued by the FCC or any of the Local Authorities against the Company
and the Subsidiaries which, singly or in the aggregate, would reasonably be
expected to result in a Material Adverse Effect and, to the best of my
knowledge, neither the Company nor any of the Subsidiaries is the object of, or
threatened by, any proceedings relating to the revocation or modification of any
such Governmental Licenses or that would otherwise affect the operation of the
Company or any of the Subsidiaries, which, singly or in the aggregate, would
reasonably be expected to result in a Material Adverse Effect.
(xiv) At the Closing Time, the agreements entered into by the Company
for the purposes of completing the Reorganization are in full force and effect
and the closings contemplated by these agreements have been consummated in
accordance with the terms thereof in all material respects.
In the course of the preparation of the Equity Registration Statement
and the Prospectuses, I participated in conferences with officers and other
representatives of the Company, representatives of the independent certified
public accountants of the Company, your representatives and your counsel, at
which conferences the contents of the Equity Registration Statement and the
Prospectuses and related matters were discussed and, although
<PAGE>
6
I am not passing upon and do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Equity Registration
Statement and the Prospectuses (except as expressly provided in paragraph (vi))
and have not made an independent investigation, check or verification of facts
for the purposes of rendering this opinion, on the basis of the foregoing, I
advise you that, nothing has come to my attention that leads me to believe (i)
that the Equity Registration Statement or any amendment thereto, including the
Rule 430A Information and Rule 434 Information, if applicable (except for
financial statements and schedules and other financial and statistical data
included therein or omitted therefrom, as to which I make no statement), at the
time such Equity Registration Statement or any such amendment became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, (ii) that the Prospectuses or any amendment or supplement
thereto (except for financial statements and schedules and other financial and
statistical data included or incorporated by reference therein or omitted
therefrom), at the time the Prospectus was issued, at the time any such
amended or supplemented prospectus was issued or at the Closing Time, included
or includes an untrue statement of a material fact or omitted or omits to state
a material fact necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading or (iii) that the
Equity Registration Statement, including any Rule 462(b) Equity Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectuses and each amendment or supplement to the Equity
Registration Statement and the Prospectuses, excluding the documents
incorporated by reference therein as of their respective effective or issue
dates (other than the financial statements and schedules and other financial and
statistical data included or incorporated by reference therein or omitted
therefrom, as to which I make no statement) did not comply as to form in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
The opinions set forth above are subject to the following
qualifications:
(i) the enforceability of agreements, documents and instruments is
subject to general principles of equity, including, without limitation,
concepts of materiality, reasonableness, good faith and fair dealing, and
the discretion of the court before which any proceeding therefor may be
brought, regardless of whether enforcement is sought in a proceeding in
equity or at law, and bankruptcy, reorganization, insolvency, fraudulent
conveyance or transfer, moratorium (whether general or specific) and other
laws affecting creditors' rights or the relief of debtors generally.
(ii) I express no opinion concerning the enforceability of (a)
waivers of notice or of any other constitutional, statutory or common law
rights, (b) indemnification provisions to the extent such provisions are
deemed to violate public
<PAGE>
7
policy or federal or state securities laws, and (c) submissions to the
personal jurisdiction of any particular court.
(iii) I express no opinion as to any New York state or local laws,
rules or regulations relating to the regulation of telecommunications.
This opinion is furnished by me as General Counsel of the Company in
connection with the closing of the above-referenced public offering to date
hereof. I assume no obligation to advise you of changes which may thereafter
be brought to our attention. My opinion is based upon statutory laws and
judicial decisions in effect at the date hereof, and I do not opine with
respect to any law, regulation, rule or governmental policy which may be enacted
or adopted after the date hereof, nor assume any responsibility to advise you of
future changes in our opinion. The opinion is solely for your benefit and is
not to be used, circulated, quoted or otherwise referred to for any other
purpose, and may not be relied upon by any other person, without my express
prior written permission.
<PAGE>
Exhibit A(ii)
FORM OF OPINION OF DL&A
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
See Attachment
<PAGE>
[DOW, LOHNES & ALBERTSON
A Professional Limited Liability Company
LETTERHEAD]
Attachment
----------
July __, 1996
Merrill Lynch, Pierce,
Fenner & Smith, Incorporated
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
Lehman Brothers Inc. and
Deutsche Morgan Grenfell/CJ Lawrence Inc.
c/o Merrill Lynch, Pierce,
Fenner & Smith, Incorporated
World Financial Center
North Tower
New York, NY 10281-1229
Merrill Lynch International
Morgan Stanley & Co. International
Donaldson, Lufkin & Jenrette
Securities Corporation
Lehman Brothers International (Europe)
Morgan Grenfell & Co.
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
This opinion is being delivered to you pursuant to Section 5(b) of the
U.S. Purchase Agreement dated as of June , 1996 (the "U.S. Purchase Agreement")
and Section 5(b) of the International Purchase Agreement dated as of June ,
1996 (the "International Purchase Agreement" and, together with the U.S.
Purchase Agreement, the "Purchase Agreements") among you and Teleport
Communications Group Inc. (the "Company"), providing for the sale to you on this
date of an aggregate of 23,500,000 shares of the Class A Common Stock, par value
$0.01 per share (the "Class A Common Stock"), of the Company (the "Securities").
We have served as counsel to the Company in connection with the issuance and
sale of the Securities. Capitalized terms used herein that are not otherwise
defined herein shall have the same meaning as in the Purchase Agreements.
In this connection, we have examined the Registration Statement on Form S-1
(No. 333-3850) relating to the Securities filed with the Securities and Exchange
Commission (the
<PAGE>
-2-
"Commission") on April 19, 1996, under the Securities Act of 1933, as amended
(the "Securities Act"), Amendment No. 1 thereto filed with the Commission on
June 3, 1996, and Amendment No. 2 thereto filed with the Commission on June ,
1996 (such Registration Statement, as so amended, being hereinafter referred to
as the "Equity Registration Statement"); the final prospectus, dated June ,
1996, filed with the Commission on June , 1996, relating to the offering of the
Class A Common Stock in the United States and Canada (the "U.S. Prospectus") and
the final prospectus, dated June __, 1996, filed with the Commission on June __,
1996, relating to the offering of the Class A Common Stock outside the United
States and Canada (the "International Prospectus" and, together with the U.S.
Prospectus, the "Prospectuses"), both filed pursuant to Rule 424(b) of the
Commission's General Rules and Regulations under the Securities Act; and the
Purchase Agreements.
On June __, 1996, we were informed by telephone by a member of the staff of
the Commission that the Equity Registration Statement had become effective under
the Securities Act at _____ [A.M./P.M.], New York City time, on that date.
We have also examined originals or copies, certified or otherwise
identified to our satisfaction, of all such records of the Company and all such
agreements, certificates of public officials, certificates of officers or
representatives of the Company and others, and such other documents,
certificates and corporate or other records as we have deemed necessary or
appropriate as a basis for the opinions set forth herein. In our examination we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies and the authenticity of the originals of such latter
documents and the due, binding and valid authorization, execution and delivery
pursuant to lawful power and legal right of applicable instruments and documents
on behalf of persons and entities other than the Company. As to any facts
material to the opinions expressed herein, we have relied upon statements and
representations of officers and other representatives of the Company and others.
As to matters of law set forth below, our opinion is limited to matters of
law under the laws of the State of New York, the laws of the United States to
the extent applicable hereto and the Delaware General Corporation Law, and we
express no opinion as to conflicts of law rules, or the laws of any States or
jurisdictions other than as specified above.
Based upon the foregoing and subject to the other qualifications stated
herein, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
<PAGE>
-3-
2. The Company has the corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the Purchase
Agreements.
3. The Securities to be purchased by the U.S. Underwriters and the
International Managers from the Company have been duly authorized for issuance
and sale to the Underwriters pursuant to the U.S. Purchase Agreement and the
International Purchase Agreement, respectively, and, when issued and delivered
by the Company pursuant to the U.S. Purchase Agreement and the International
Purchase Agreement, respectively, against payment of the consideration set forth
in the U.S. Purchase Agreement and the International Purchase Agreement,
respectively, will be validly issued, fully paid and non-assessable, and no
holder of the Securities will be subject to personal liability for the payment
of the Company's debts, except (i) as such holder may be liable by reason of its
own conduct or acts, (ii) as provided by the Delaware General Corporation Law
and (iii) for any liability that may arise upon application of any fraudulent
conveyance or transfer or other insolvency law.
4. The Purchase Agreements have been duly authorized, executed and
delivered by the Company.
5. The Equity Registration Statement, including any Rule 462(b) Equity
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectuses pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and, to the best of
our knowledge, no stop order suspending the effectiveness of the Equity
Registration Statement or any Rule 462(b) Equity Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
6. The form of certificate used to evidence the Class A Common Stock
complies in all material respects with all applicable requirements of the
certificate of incorporation and by-laws of the Company.
7. The information in the Prospectuses under the captions "Description of
Capital Stock," "Certain United States Federal Income Tax Consequences to Non-
United States Holders of Common Stock" and in the Equity Registration Statement
under Item 14, to the extent that it constitutes matters of law, summaries of
legal matters, the Company's certificate of incorporation and bylaws or legal
proceedings, or legal conclusions has been reviewed by us and is correct in all
material respects.
8. No filing with, or authorization, approval, consent, license, order,
registration, qualification or decree of, any court or governmental authority or
agency (other than under the Securities Act and the Securities Act Regulations,
which have been obtained, or as may be required under the securities or blue
<PAGE>
-4-
sky laws of the various states, as to which we express no opinion) is necessary
or required in connection with the due authorization, execution and delivery of
the Purchase Agreements or for the offering, issuance, sale or delivery of the
Securities, except for notice filings where the failure to make such filings
would not materially adversely affect the performance by the Company of its
obligations under the Purchase Agreements.
9. The execution, delivery and performance of the Purchase Agreements and
the consummation of the transactions contemplated in the Purchase Agreements,
the consummation of the Reorganization, as defined in the Equity Registration
Statement, the issuance and sale of the Securities, and the use of the proceeds
from the sale of the Securities to the extent expressly described in the
Prospectuses under the caption "Use of Proceeds" and compliance by the Company
with its obligations under the Purchase Agreements do not and will not, whether
with or without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined in Section
1(a)(x) of the Purchase Agreements) under or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or any Subsidiary pursuant to any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, lease or other agreement or instrument
that has been filed or incorporated by reference as an exhibit to the Equity
Registration Statement (except for such conflicts, breaches, defaults, Repayment
Events, liens, charges or encumbrances that would not reasonably be expected to
result in a Material Adverse Effect), nor will such actions result in any
violation of the provisions of the certificate of incorporation or by-laws or
partnership agreement, as the case may be, of the Company or any Subsidiary, or
(subject to the receipt of regulatory consents and approvals for the
Reorganization as described in the Equity Registration Statement) any applicable
law, statute, rule, regulation, judgment, order, writ or decree, known to us of
any governmental, government instrumentality or court having jurisdiction over
the Company or any Subsidiary or any of their respective properties, assets or
operations, except for such violations that would not reasonably be expected to
result in a Material Adverse Effect.
10. The Company is not an "investment company" or an entity "controlled"
by an "investment company," as such terms are defined in the Investment Company
Act of 1940.
11. The statements contained in the Equity Registration Statement under
the captions "Risk Factors -- Federal and State Regulation -- Governmental and
Other Authorizations" and "Business -- Government Regulation --
Telecommunications Act of 1996 -- Federal Regulation -- State Regulation --
Local Government Authorizations," insofar as such statements constitute a
summary of the legal matters or legal proceedings referred to therein, have been
reviewed by us and are correct in all material respects.
<PAGE>
-5-
In the course of the preparation of the Equity Registration Statement and
the Prospectuses, we participated in conferences with officers and other
representatives of the Company, representatives of the independent certified
public accountants of the Company, your representatives and your counsel, at
which conferences the contents of the Equity Registration Statement and the
Prospectuses and related matters were discussed and, although we are not passing
upon and do not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Equity Registration Statement and
the Prospectuses (except as expressly provided in subparagraphs 7 and 11) and
have not made an independent investigation, check or verification of facts for
the purpose of rendering this opinion, on the basis of the foregoing (relying as
to materiality upon the opinions of officers and other representatives of the
Company), we advise you that, nothing has come to our attention that leads us to
believe (i) that the Equity Registration Statement or any amendment thereto,
including the Rule 430A Information and Rule 434 Information (if applicable)
(except for financial statements and schedules and other financial and
statistical data included therein or omitted therefrom, as to which we make no
statement), at the time such Equity Registration Statement or any such amendment
became effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) that the Prospectuses or any amendment
or supplement thereto (except for financial statements and schedules and other
financial and statistical data included or incorporated by reference therein or
omitted therefrom, as to which we make no statement), at the time the
Prospectuses were issued, at the time any such amended or supplemented
prospectus was issued or at the Closing Time, included or includes an untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading or (iii) that the
Equity Registration Statement, including any Rule 462(b) Equity Registration
Statement, the Rule 430A Information and the Rule 434 Information, as
applicable, the Prospectuses and each amendment or supplement to the Equity
Registration Statement and the Prospectuses, excluding the documents
incorporated by reference therein as of their respective effective or issue
dates (other than the financial statements and schedules and other financial and
statistical data included or incorporated by reference therein or omitted
therefrom, as to which we make no statement) did not comply as to form in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
The opinions set forth above are subject to the following qualifications:
(i) The enforceability of agreements, documents and instruments is subject
to general principles of equity,
<PAGE>
-6-
including, without limitation, concepts of materiality, reasonableness, good
faith and fair dealing, and the discretion of the court before which any
proceeding therefor may be brought, regardless of whether enforcement is sought
in a proceeding in equity or at law, and bankruptcy, reorganization, insolvency,
fraudulent conveyance or transfer, moratorium (whether general or specific) and
other laws affecting creditors' rights or the relief of debtors generally.
(ii) We express no opinion concerning the enforceability of (a) waivers of
notice or of any other constitutional, statutory or common law rights, (b)
indemnification provisions to the extent such provisions are deemed to violate
public policy or federal or state securities laws, and (c) submissions to the
personal jurisdiction of any particular court.
(iii) We express no opinion as to any New York state or local laws, rules
or regulations relating to the regulation of telecommunications.
This opinion is furnished by us as counsel to the Company in connection
with the closing of the above-referenced public offering occurring today. The
information set forth herein is as of the date hereof. We assume no obligation
to advise you of changes which may thereafter be brought to our attention. Our
opinion is based upon statutory laws and judicial decisions in effect at the
date hereof, and we do not opine with respect to any law, regulation, rule or
governmental policy which may be enacted or adopted after the date hereof, nor
assume any responsibility to advise you of future changes in our opinion. The
opinion is solely for your benefit and is not to be used, circulated, quoted or
otherwise referred to for any other purpose, and may not be relied upon by any
other person, without our express prior written permission.
Very truly yours,
DOW, LOHNES & ALBERTSON
_______________________
Timothy J. Kelley, Member
<PAGE>
[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(i)]
Exhibit B
June ___, 1996
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette Securities Corporation
Lehman Brothers Inc.
Deutsche Morgan Grenfell/C.J. Lawrence Inc.
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Teleport Communications Group Inc.
--------------------------------------------------------------
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of
Teleport Communications Group Inc., a Delaware corporation (the "Company"),
understands that Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch"), Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Lehman Brothers Inc. , Deutsche Morgan Grenfell/C.J.
Lawrence Inc. proposes to enter into a U.S. Purchase Agreement (the "U.S.
Purchase Agreement") with the Company providing for the public offering of
shares (the "Securities") of the Company's common stock, par value $.01 per
share (the "Class A Common Stock"). In recognition of the benefit that such an
offering will confer upon the undersigned as a stockholder [and an officer
and/or director] of the Company, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the undersigned
agrees with each underwriter to be named in the U.S. Purchase Agreement that,
during a period of 180 days from the date of the U.S. Purchase Agreement, the
undersigned will not, without the prior written consent of Merrill Lynch,
directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of, or otherwise dispose of or
transfer any shares of the Company's Class A Common Stock or any securities
convertible into or exchangeable or exercisable for Class A Common Stock [FOR
CONTINENTAL ONLY: (except for the 7,807,738 shares of the Company's Class B
Common Stock (7,975,738 shares of the U.S. Underwriters' and International
Managers' over-allotment options are exercised in full) currently held by the
undersigned to be redeemed by the Company as part of the Reorganization (as
defined in the U.S. Purchase Agreement))], whether now owned or hereafter
acquired by the undersigned
<PAGE>
or with respect to which the undersigned has or hereafter acquires the power of
disposition, or file any registration statement under the Securities Act of
1933, as amended, with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the Class
A Common Stock, whether any such swap or transaction is to be settled by
delivery of Class A Common Stock or other securities, in cash or otherwise.
Very truly yours,
Signature:__________________________
Print Name:_________________________
B-2
<PAGE>
Annex A
[FORM OF ACCOUNTANTS' COMFORT LETTER PURSUANT TO SECTION 5(e)]
See Attachment
<PAGE>
[We are independent public accountants with respect to the Company within the
meaning of the 1933 Act and the applicable published 1933 Act Regulations]
(i) in our opinion, the audited financial statements [and the related
financial statement schedules] included in the Registration Statement and
the Prospectuses comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the published rules
and regulations thereunder;
(ii) on the basis of procedures (but not an examination in accordance
with generally accepted auditing standards) consisting of a reading of the
unaudited interim [consolidated] financial statements of the Company for
the [three month periods ended _____________, 19__, and _____________,
19__, the three and six month periods ended _____________, 19__ and
_____________, 19__ and the three and nine month periods ended
_____________, 19__ and _____________, 19__ , included in the Registration
Statement and the Prospectuses (collectively, the "Quarterly Financials")]
[, a reading of the latest available unaudited interim [consolidated]
financial statements of the Company for the ____-month periods ended
_____________, 19__ and _____________, 19__, included in the Registration
Statement and the Prospectuses (the "____-month financials" )] [, a reading
of the latest available unaudited interim [consolidated] financial
statements of the Company], a reading of the minutes of all meetings of the
stockholders and directors of the Company [and its Subsidiaries] and
the______________ and _____________ Committees of the Company's Board of
Directors [and any Subsidiary committees] since [day after end of last
audited period], inquiries of certain officials of the Company [and its
Subsidiaries] responsible for financial and accounting matters, a review of
interim financial information in accordance with standards established by
the American Institute of Certified Public Accountants in Statement on
Auditing Standards No. 71, Interim Financial Information ("SAS 71"), with
respect to the [description of relevant periods] and such other inquiries
and procedures as may be specified in such letter, nothing came to our
attention that caused us to believe that:
[(A) the Quarterly Financials included the Registration
Statement and the Prospectuses do not comply as to form in all
material respects with the applicable accounting statements of the
1934 Act and the 1934 Act Regulations or any material modifications
should be made to the unaudited [consolidated] financial statements
included in the Registration Statement and the Prospectuses for them
to be in conformity with generally accepted accounting principles;]
[(B) the ___-month financials included in the Registration
Statement and the Prospectuses do not comply as to form in all
material with the applicable accounting requirements of the 1933 Act
and the 1933 Act Regulations applicable to unaudited interim financial
statements included in
Annex A
<PAGE>
registration statements or any material modifications should be made
to the ___-month financials included in the Registration Statement and
the Prospectuses for them to be in conformity with generally accepted
accounting principles;]
(C) at [______________, 19__ and at] a specified date not more
than five days prior to the date of this Agreement, there was any
change in the __________ of the Company [and its Subsidiaries] or any
decrease in the __________ of the Company [and its Subsidiaries] or
any increase in the __________ of the Company [and its Subsidiaries,]
in each case as compared with amounts shown in the latest balance
sheet included in the Registration Statement, except in each case for
changes, decreases or increases that the Registration Statement
discloses have occurred or may occur; or
(D) [for the period from _____________, 19__, to _____________,
19__, and] for the period from _____________, 19__, to a specified
date not more than five days prior to the date of this Agreement,
there was any decrease in __________, ____________ or ____________ in
each case as compared with the comparable period in the preceding
year, except in each case for any decreases that the Registration
Statement discloses have occurred or may occur;
(iii) based upon the procedures set forth in clause (ii) above and a
reading of the [Selected Financial Data] included in the Registration
Statement [and a reading of the financial statements from which such data
were derived], nothing came to our attention that caused us to believe that
the [Selected Financial Data] included in the Registration Statement do not
comply as to form in all material respects with the disclosure requirements
of Item 301 of Regulation S-K of the 1933 Act [, that the amounts included
in the [Selected Financial Data] are not in agreement with the
corresponding amounts in the audited [consolidated] financial statements
for the respective periods or that the financial statements not included in
the Registration Statement from which certain of such data were derived are
not in conformity with generally accepted accounting principles];
(iv) we have compared the information in the Registration Statement
under selected captions with the disclosure requirements of Regulation S-K
of the 1933 Act and on the basis of limited procedures specified herein.
nothing came to our attention that caused us to believe that this
information does not comply as to form in all material respects with the
disclosure requirements of Items 302, 402 and 503(d), respectively, of
Regulation S-K;
[(v) based upon the procedures set forth in clause (ii) above, a
reading of the unaudited financial statements of the Company for [the most
recent period] that have not been included in the Registration Statement
and a review of such financial
Annex A
<PAGE>
statements in accordance with SAS 71, nothing came to our attention that
caused us to believe that the unaudited amounts for ____________ for the
[most recent period] do not agree with the amounts set forth in the
unaudited consolidated financial statements for those periods or that such
unaudited amounts were not determined on a basis substantially consistent
with that of the corresponding amounts in the audited [consolidated]
financial statements;]
[(vi)] we are unable to and do not express any opinion on the [Pro
Forma Combining Statement of Operations] (the "Pro Forma Statement")
included in the Registration Statement or on the pro forma adjustments
applied to the historical amounts included in the Pro Forma Statement;
however, for purposes of this letter we have:
(A) read the Pro Forma Statement;
(B) performed [an audit] [a review in accordance with SAS 71] of
the financial statements to which the pro forma adjustments were
applied;
(C) made inquiries of certain officials of the Company who have
responsibility for financial and accounting matters about the basis
for their determination of the pro forma adjustments and whether the
Pro Forma Statement complies as to form in all material respects with
the applicable accounting requirements of Rule 11-02 of Regulation S-
X; and
(D) proved the arithmetic accuracy of the application of the pro
forma adjustments to the historical amounts in the Pro Forma
Statement; and
on the basis of such procedures and such other inquiries and procedures as
specified herein, nothing came to our attention that caused us to believe
that the Pro Forma Statement included in the Registration Statement does
not comply as to form in all material respects with the applicable
requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of those statements; and
[(vii)] in addition to the procedures referred to in clause (ii)
above, we have performed other procedures, not constituting an audit, with
respect to certain amounts, percentages, numerical data and financial
information appearing in the Registration Statement, which are specified
herein, and have compared certain of such items with, and have found such
items to be in agreement with, the accounting and financial records of the
Company; and
[(viii) in addition, we comfort on a financial forecast that is
included in the Registration Statement].
Annex A
<PAGE>
Annex A
<PAGE>
================================================================================
TELEPORT COMMUNICATIONS GROUP INC.
(a Delaware corporation)
18,800,000 Shares of Class A Common Stock
U.S. PURCHASE AGREEMENT
-----------------------
Dated: June __, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 1. Representations and Warranties................................. 4
(a) Representations and Warranties by the Company.................. 4
(i) Compliance with Registration Requirements...................... 4
(ii) Independent Accountants........................................ 5
(iii) Financial Statements........................................... 5
(iv) No Material Adverse Change in Business......................... 6
(v) Good Standing of the Company................................... 6
(vi) Good Standing of Subsidiaries.................................. 6
(vii) Capitalization................................................. 7
(viii) Authorization of Agreement..................................... 7
(ix) Authorization and Description of Securities.................... 7
(x) Absence of Defaults and Conflicts.............................. 8
(xi) Absence of Labor Dispute....................................... 9
(xii) Absence of Proceedings......................................... 9
(xiii) Accuracy of Exhibits........................................... 9
(xiv) Possession of Intellectual Property............................ 9
(xv) Absence of Further Requirements................................ 10
(xvi) Possession of Licenses and Permits............................. 10
(xvii) Title to Property.............................................. 11
(xviii) Compliance with Cuba Act....................................... 11
(xix) Investment Company Act......................................... 11
(xx) Environmental Laws............................................. 11
(xxi) Registration Rights............................................ 12
(xxii) Reorganization................................................. 12
(b) Officer's Certificates......................................... 13
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing................ 13
(a) Initial Securities............................................. 13
(b) Option Securities.............................................. 13
(c) Payment........................................................ 13
(d) Denominations; Registration.................................... 14
SECTION 3. Covenants of the Company....................................... 14
(a) Compliance with Securities Regulations and Commission Requests. 14
(b) Filing of Amendments........................................... 15
(c) Delivery of Registration Statements............................ 15
(d) Delivery of Prospectuses....................................... 16
(e) Continued Compliance with Securities Laws...................... 16
(f) Blue Sky Qualifications........................................ 16
(g) Rule 158....................................................... 17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ii
<S> <C>............................................................ <C>
(h) Use of Proceeds................................................ 17
(i) Listing........................................................ 17
(j) Restriction on Sale of Securities.............................. 17
(k) Reporting Requirements......................................... 18
(l) Reorganization................................................. 18
SECTION 4. Payment of Their Expenses...................................... 18
(a) Expenses....................................................... 18
(b) Termination of Agreement....................................... 19
SECTION 5. Conditions of U.S. Underwriters' Obligations................... 19
(a) Effectiveness of Registration Statement........................ 19
(b) Opinion of Counsel for the Company............................. 19
(c) Opinion of Counsel for U.S. Underwriters....................... 20
(d) Officers' Certificate.......................................... 20
(e) Accountant's Comfort Letter.................................... 21
(f) Bring-down Comfort Letter...................................... 21
(g) Approval of Listing............................................ 21
(h) No Objection................................................... 21
(i) Lock-up Agreements............................................. 21
(j) FIRPTA Affidavit............................................... 21
(k) Reorganization................................................. 22
(l) Purchase of Initial International Securities................... 22
(m) Conditions to Purchase of U.S. Option Securities............... 22
(i) Company Officers' Certificate.................................. 22
(ii) Opinion of Counsel for Company................................. 22
(iii) Opinion of Counsel for U.S. Underwriters....................... 23
(iv) Bring-down Comfort Letter...................................... 23
(v) FIRPTA Affidavit............................................... 23
(n) Additional Documents........................................... 23
(o) Termination of Agreement....................................... 23
SECTION 6. Indemnification................................................ 24
(a) Indemnification of U.S. Underwriters........................... 24
(b) Indemnification of Company, Directors and Officers............. 25
(c) Actions Against Parties; Notification.......................... 25
(d) Settlement Without Consent If Failure to Reimburse............. 26
SECTION 7. Contribution................................................... 26
SECTION 8. Representations, Warranties and Agreements to Survive Delivery. 28
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
iii
<S> <C>............................................................ <C>
SECTION 9. Termination of Agreement....................................... 28
(a) Termination; General........................................... 28
(b) Liabilities.................................................... 29
SECTION 10. Default by One or More of the U.S. Underwriters................ 29
SECTION 11. Notices........................................................ 30
SECTION 12. Parties........................................................ 30
SECTION 13. GOVERNING LAW AND TIME......................................... 30
SECTION 14. Effect of Headings............................................. 30
</TABLE>
<PAGE>
EXHIBIT 1.2
S&S Draft of June 22, 1996
TELEPORT COMMUNICATIONS GROUP INC.
(a Delaware corporation)
4,700,000 Shares of Class A Common Stock
(Par Value $.01 Per Share)
INTERNATIONAL PURCHASE AGREEMENT
Dated: June ___, 1996
Merrill Lynch International
Morgan Stanley & Co. International
Donaldson, Lufkin & Jenrette Securities Corporation
Lehman Brothers International (Europe)
Morgan Grenfell & Co., Limited
as Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
Teleport Communications Group Inc., a Delaware corporation (the
"Company"), confirms its agreement with Merrill Lynch International ("Merrill
Lynch") and each of the other international underwriters named in Schedule A
hereto (collectively, the "International Managers," which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch and Morgan Stanley & Co. International,
Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers
International (Europe), and Morgan Grenfell & Co., Limited acting as
representatives (in such capacity, the "Lead Managers"), with respect to the
issue and sale by the Company and the purchase by the International Managers,
acting severally and not jointly, of the respective numbers of shares of Class A
Common Stock, par value $.01 per share, of the Company ("Class A Common Stock")
set forth in said Schedule A, and with respect to the grant by the Company to
the International Managers, acting severally and not jointly, of the option
described in Section 2(b) hereof to purchase all or any part of 705,000
additional shares of
<PAGE>
2
Class A Common Stock to cover over-allotments, if any. The aforesaid 4,700,000
shares of Class A Common Stock (the "Initial International Securities") to be
purchased by the International Managers and all or any part of the 705,000
shares of Class A Common Stock subject to the option described in Section 2(b)
hereof (the "International Option Securities") are hereinafter called,
collectively, the "International Securities."
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "U.S. Purchase Agreement") providing for
the offering by the Company of an aggregate of 18,800,000 shares of Class A
Common Stock (the "Initial U.S. Securities") through arrangements with certain
underwriters in the United States and Canada (the "U.S. Underwriters") for which
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co.
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman
Brothers Inc. and Deutsche Morgan Grenfell/C.J. Lawrence Inc. are acting as
representatives (the "U.S. Representatives") and the grant by the Company to the
U.S. Underwriters, acting severally and not jointly, of an option to purchase
all or any part of the U.S. Underwriters' pro rata portion of up to 2,820,000
additional shares of Class A Common Stock solely to cover over-allotments, if
any (the "U.S. Option Securities" and, together with the International Option
Securities, the "Option Securities"). The Initial U.S. Securities and the U.S.
Option Securities are hereinafter called the "U.S. Securities." It is
understood that the Company is not obligated to sell and the International
Managers are not obligated to purchase, any Initial International Securities
unless all of the Initial U.S. Securities are contemporaneously purchased by the
U.S. Underwriters.
The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters," the Initial International Securities and
the Initial U.S. Securities are hereinafter collectively called the "Initial
Securities," and the International Securities and the U.S. Securities are
hereinafter collectively called the "Securities."
The Underwriters will concurrently enter into an Intersyndicate
Agreement of even date herewith (the "Intersyndicate Agreement") providing for
the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch (in such capacity, the "Global Coordinator").
The Company understands that the International Managers propose to
make a public offering of the International Securities as soon as the Lead
Managers deem advisable after this Agreement has been executed and delivered.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-3850) and two
amendments thereto covering the registration of the Securities under the
Securities Act of 1933, as amended (the "1933 Act"), including the related
preliminary prospectus or prospectuses. Promptly after execution and delivery
of this Agreement, the Company will either (i) prepare
<PAGE>
3
and file a prospectus in accordance with the provisions of Rule 430A ("Rule
430A") of the rules and regulations of the Commission under the 1933 Act (the
"1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the
1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434
("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term
Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two
forms of prospectus are to be used in connection with the offering and sale of
the Securities: one relating to the International Securities (the "Form of
International Prospectus") and one relating to the U.S. Securities (the "Form of
U.S. Prospectus"). The Form of International Prospectus is identical to the
Form of U.S. Prospectus, except for the front cover and back cover pages and the
information under the caption "Underwriting." The information included in any
such prospectus or in any such Term Sheet, as the case may be, that was omitted
from such registration statement at the time it became effective but that is
deemed to be part of such registration statement at the time it became effective
(a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A
Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as
"Rule 434 Information." Each Form of International Prospectus and Form of U.S.
Prospectus used before such registration statement became effective, and any
prospectus that omitted, as applicable, the Rule 430A Information or the Rule
434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits, schedules and
amendment(s) thereto, if any, at the time it became effective and including the
Rule 430A Information and the Rule 434 Information, as applicable, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final Form
of International Prospectus and the Form of U.S. Prospectus in the forms first
furnished to the Underwriters for use in connection with the offering (including
confirmation of sales) of the Securities are herein called the "International
Prospectus" and the "U.S. Prospectus," respectively, and collectively, the
"Prospectuses." If Rule 434 is relied on, the terms "International Prospectus"
and "U.S. Prospectus" shall refer to the preliminary International Prospectus
dated June 3, 1996 and preliminary U.S. Prospectus dated June 3, 1996,
respectively, each together with the applicable Term Sheet and all references in
this Agreement to the date of such Prospectuses shall mean the date of the
applicable Term Sheet. For purposes of this Agreement, all references to the
Registration Statement, any preliminary prospectus, the International
Prospectus, the U.S. Prospectus or any Term Sheet or any amendment or supplement
to any of the foregoing shall be deemed to include the copy filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR").
<PAGE>
4
SECTION 1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Company. The Company
represents and warrants to each International Manager as follows:
(i) Compliance with Registration Requirements. Each of the
-----------------------------------------
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information from the Company or its agents
has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective, the Registration Statement, the Rule 462(b) Registration
Statement and any amendments and supplements thereto complied in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations and did not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading. Neither of the Prospectuses
nor any amendments or supplements thereto, at the time the Prospectuses or
any amendments or supplements thereto were issued and at the Closing Time
(and, if any International Option Securities are purchased, at the Date of
Delivery), included or will include an untrue statement of a material fact
or omitted or will omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. If Rule 434 is used, the Company will comply
with the requirements of Rule 434 and the Prospectuses shall not be
"materially different," as such term is used in Rule 434, from the
prospectuses included in the Registration Statement at the time it became
effective. The representations and warranties in this subsection shall not
apply to statements in or omissions from the Registration Statement or the
Prospectuses made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through the Lead
Managers or the U.S. Representatives expressly for use in the Registration
Statement or the Prospectuses.
(ii) Independent Accountants. The accountants who certified the
-----------------------
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
<PAGE>
5
(iii) Financial Statements. The combined balance sheets of the
--------------------
Company and its subsidiaries and TCG Partners, a New York general
partnership (collectively, "TCG"), as of December 31, 1994 and 1995 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, 1993, 1994 and 1995 and the combined balance sheet of TCG as
of March 31, 1996 and the related combined statements of operations and
cash flows for the three month periods ended March 31, 1995 and 1996
included in the Registration Statement and the Prospectuses, together with
the related schedules and notes, present fairly the combined financial
position of TCG at the dates indicated and the combined results of TCG's
operations and TCG's combined cash flows for the periods specified; said
financial statements have been prepared in conformity with generally
accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods involved. The combined balance sheets of the Local
Market Partnerships (as defined in Note 1 to the financial statements
thereof), as of December 31, 1994 and 1995 and the related combined
statements of operations and partners' capital and of cash flows for the
three years ended December 31, 1993, 1994 and 1995 and the combined balance
sheet of the Local Market Partnerships as of March 31, 1996 and the related
combined statements of operations and cash flows for the three month
periods ended March 31, 1995 and 1996 included in the Registration
Statement and Prospectuses, together with the related schedules and notes,
present fairly the combined financial position of the Local Market
Partnerships at the dates indicated and the combined results of the Local
Market Partnerships' operations and the Local Market Partnerships' combined
cash flows for the periods specified; said financial statements have been
prepared in conformity with GAAP applied on a consistent basis throughout
the periods involved. The supporting schedules, if any, included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data and
the summary financial information included in the Prospectuses present
fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement. The pro forma financial statements and the related
notes thereto included in the Registration Statement and the Prospectuses
present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein.
(iv) No Material Adverse Change in Business. Since the respective
--------------------------------------
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been no
material adverse change or no development involving a prospective material
adverse change, in the condition,
<PAGE>
6
financial or otherwise, or in the earnings or business affairs of the
Company and its Subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business (a "Material Adverse Effect"),
(B) there have been no transactions entered into by the Company or any of
its Subsidiaries, other than those in the ordinary course of business,
which are material with respect to the Company and its Subsidiaries
considered as one enterprise and which are required to be disclosed in the
Registration Statement or which would have been required to be disclosed in
the Registration Statement prior to its effectiveness, and (C) there has
been no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly organized
----------------------------
and is validly existing as a corporation in good standing under the laws of
the State of Delaware and has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under this
Agreement; and the Company is duly qualified as a foreign corporation to
transact business and is in good standing in each other jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so
to qualify or to be in good standing would not result in a Material Adverse
Effect.
(vi) Good Standing of Subsidiaries. Schedule C lists each
-----------------------------
"significant subsidiary" of the Company (as such term is defined in Rule 1-
02 of Regulation S-X) and other subsidiaries not deemed "significant" but
nonetheless material (each a "Subsidiary" and, collectively, the
"Subsidiaries"). Each Subsidiary has been duly organized or formed and is
validly existing as a corporation, a partnership or a limited partnership
in good standing (with respect to a Subsidiary that is a corporation or
limited partnership) under the laws of the jurisdiction in which it has
been incorporated or formed, as applicable, has the necessary corporate or
partnership power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectuses and (with
respect to a Subsidiary that is a corporation or a limited partnership) is
duly qualified as a foreign corporation or limited partnership to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify
or to be in good standing would not result in a Material Adverse Effect;
except as otherwise disclosed in the Registration Statement or on Schedule
C hereof, all of the issued and outstanding capital stock of each such
Subsidiary which is a corporation has been duly authorized and validly
issued, is fully paid and non-assessable and all the issued and outstanding
capital stock of each such Subsidiary which is a corporation and all the
existing partnership interests of such Subsidiary which is a partnership or
a limited
<PAGE>
7
partnership are owned by the Company, directly or through subsidiaries,
free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity; none of the outstanding shares of capital
stock of any Subsidiary which is a corporation was issued in violation of
the preemptive rights of any securityholder of such Subsidiary.
(vii) Capitalization. The authorized, issued and outstanding capital
--------------
stock of the Company is as set forth in the Prospectuses in the column
entitled "Pro Forma for the Reorganization" under the caption
"Capitalization" (except for subsequent issuances, if any, pursuant to this
Agreement, pursuant to reservations, agreements or employee benefit plans
referred to in the Prospectuses or pursuant to the exercise of convertible
securities or options referred to in the Prospectuses). The shares of
issued and outstanding capital stock of the Company have been duly
authorized and validly issued and are fully paid and non-assessable; none
of the outstanding shares of capital stock of the Company was issued in
violation of the preemptive rights of any securityholder of the Company
arising under the Delaware General Corporation Law (the "DGCL"), the
Company's certificate of incorporation or bylaws or any agreement to which
the Company is a party.
(viii) Authorization of Agreement. This Agreement and the U.S.
--------------------------
Purchase Agreement have been duly authorized, executed and delivered by the
Company.
(ix) Authorization and Description of Securities. The Securities to
-------------------------------------------
be purchased by the International Managers and the U.S. Underwriters from
the Company have been duly authorized for issuance and sale to the
International Managers pursuant to this Agreement and the U.S.Underwriters
pursuant to the U.S. Purchase Agreement, respectively, and, when issued and
delivered by the Company pursuant to this Agreement and the U.S. Purchase
Agreement, respectively, against payment of the consideration set forth
herein and the U.S. Purchase Agreement, respectively, will be validly
issued, fully paid and non-assessable; the Class A Common Stock conforms to
all statements relating thereto contained in the Prospectuses and such
description conforms to the rights set forth in the instruments defining
the same; no holder of the Securities will be subject to personal liability
for the payment of the Company's debts except as they may be liable by
reason of their own conduct or acts and except as holders of the Securities
may be liable pursuant to Section 282 of the DGCL; and the issuance of the
Securities is not subject to preemptive or other similar rights of any
securityholder of the Company arising under the DGCL, the Company's
certificate of incorporation or bylaws or any agreement to which the
Company is a party.
(x) Absence of Defaults and Conflicts. Neither the Company nor any
---------------------------------
Subsidiary is in violation of its charter or by-laws or partnership
agreement, as the
<PAGE>
8
case may be, or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease
or other agreement or instrument to which the Company or any Subsidiary is
a party or by which it or any of them may be bound, or to which any of the
property or assets of the Company or any Subsidiary is subject
(collectively, "Agreements and Instruments") except for such violations or
defaults that would not reasonably be expected to result in a Material
Adverse Effect; and the execution, delivery and performance of this
Agreement and the U.S. Purchase Agreement and the consummation of the
transactions contemplated in this Agreement and the U.S. Purchase
Agreement, the consummation of the Reorganization, as defined in the
Registration Statement, the issuance and sale of the Securities and the use
of the proceeds from the sale of the Securities as described in the
Prospectuses under the caption "Use of Proceeds" and compliance by the
Company with its obligations under this Agreement and the U.S. Purchase
Agreement have been duly authorized by all necessary corporate action and
do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any Subsidiary pursuant to the Agreements and
Instruments (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not reasonably be expected to result in
a Material Adverse Effect), nor will such actions result in any violation
of the provisions of the charter or by-laws or partnership agreement, as
the case may be, of the Company or any Subsidiary or (subject to the
receipt of regulatory consents and approvals for the Reorganization as
described in the Registration Statement) any applicable law (including the
Communications Act of 1934, as amended, and the Telecommunications Act of
1996, as amended (the "1996 Act"), and the rules, regulations and policies
of the Federal Communications Commission (the "FCC") and the public
utilities laws of the various states in which the Company and the
Subsidiaries do business or the ordinances, rules and regulations of the
various local governments in which the Company and the Subsidiaries do
business), statute, rule, regulation, judgment, order, writ or decree of
any government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any Subsidiary or any of their
assets, properties or operations (except for such violations that would not
reasonably be expected to result in a Material Adverse Effect). As used
herein, a "Repayment Event" means any event or condition which gives the
holder of any note, debenture or other evidence of indebtedness for
borrowed money in principal amount in excess of $10 million (or any person
acting on such holder's behalf) the right to require the repurchase,
redemption or repayment of all or a portion of such indebtedness by the
Company or any Subsidiary.
<PAGE>
9
(xi) Absence of Labor Dispute. No labor dispute with the employees of
------------------------
the Company or any Subsidiary exists or, to the knowledge of the Company,
is imminent, and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its or any Subsidiary's principal
suppliers, manufacturers, customers or contractors, which, in either case,
may reasonably be expected to result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
----------------------
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any Subsidiary
(or any of the properties or assets thereof), which is required to be
disclosed in the Registration Statement (other than as disclosed therein),
or which might reasonably be expected to result in a Material Adverse
Effect, or which might reasonably be expected to materially and adversely
affect the consummation of the transactions contemplated in this Agreement
and the U.S. Purchase Agreement or the performance by the Company of its
obligations hereunder or thereunder; the aggregate of all pending legal or
governmental proceedings to which the Company or any Subsidiary is a party
or of which any of their respective properties or assets is the subject
which are not described in the Registration Statement, including ordinary
routine litigation incidental to the business, could not reasonably be
expected to result in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
--------------------
which are required by the 1993 Act or the 1933 Regulations to be described
in the Registration Statement or the Prospectuses or to be filed as
exhibits thereto which have not been so described and filed as required.
(xiv) Possession of Intellectual Property. The Company and the
-----------------------------------
Subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, and neither the Company nor any of the Subsidiaries
has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of the Subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, singly or in the aggregate, would reasonably be
expected to result in a Material Adverse Effect.
<PAGE>
10
(xv) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale of
the Securities under this Agreement and the U.S. Purchase Agreement or the
consummation of the transactions contemplated by this Agreement and the
U.S. Purchase Agreement, (i) except such as have been already obtained or
as may be required under the 1933 Act or the 1933 Act Regulations and
foreign or state securities or blue sky laws and (ii) except for notice
filings the failure with which to comply would not materially adversely
affect the performance by the Company of its obligations hereunder, in
connection with the offering, issuance or sale of the Securities under this
Agreement and the U.S. Purchase Agreement or the consummation of the
transactions contemplated by this Agreement and the International Purchase
Agreement.
(xvi) Possession of Licenses and Permits. The Company and the
----------------------------------
Subsidiaries possess all permits, licenses, approvals, consents and other
authorizations issued by the appropriate federal, state, local or foreign
regulatory agencies or bodies (including the FCC, the public utilities
commission, or any equivalent body, of each state in which the Company does
business and any other relevant state and local authorities (the "Local
Authorities")) required for the conduct the business now operated by them
(collectively, "Governmental Licenses"), except where the failure to
possess any such permit, license, approval consent or authorization would
not reasonably be expected to result in a Material Adverse Effect; the
Company and the Subsidiaries are in compliance with the terms and
conditions of all such Governmental Licenses, except where the failure so
to comply would not reasonably be expected to, singly or in the aggregate,
have a Material Adverse Effect; all of the Governmental Licenses are
(except for the effects of the 1996 Act as described in the Prospectus)
valid and in full force and effect, except when the invalidity of such
Governmental Licenses or the failure of such Governmental Licenses to be in
full force and effect would not reasonably be expected to have a Material
Adverse Effect; there is no outstanding adverse judgment, decree or order
that has been issued by the FCC or any of the Local Authorities against the
Company and the Subsidiaries and which, singly or in the aggregate, would
reasonably be expected to result in a Material Adverse Effect; and neither
the Company nor any of the Subsidiaries has received any notice of or is
aware of proceedings relating to the revocation or modification of any such
Governmental Licenses or that would otherwise affect the operations of the
Company or the Subsidiaries and which, singly or in the aggregate, would
reasonably be expected to result in a Material Adverse Effect.
(xvii) Title to Property. The Company and the Subsidiaries have good
-----------------
and marketable title to all real property owned by the Company and the
Subsidiaries and
<PAGE>
11
good title to all other properties owned by them, in each case, free and
clear of all mortgages, pledges, liens, security interests, claims,
restrictions or encumbrances of any kind except such as (a) are described
in the Prospectuses, (b) are "Permitted Liens" under the Indenture and
Revolving Credit Agreement (as such terms are defined in the Prospectuses)
or (c) would not reasonably be expected to, singly or in the aggregate,
result in a Material Adverse Effect; and all of the leases and subleases
material to the business of the Company and the Subsidiaries, considered as
one enterprise, and under which the Company or any of the Subsidiaries
holds properties described in the Prospectuses, are in full force and
effect, and neither the Company nor any Subsidiary has any notice of any
claim of any sort that has been asserted by anyone adverse to the rights of
the Company or any Subsidiary under any of the leases or subleases
mentioned above, or affecting or questioning the rights of the Company or
such Subsidiary to the continued possession of the leased or subleased
premises under any such lease or sublease except for such claims that would
not reasonably be expected to result in a Material Adverse Effect.
(xviii) Compliance with Cuba Act. The Company has complied with, and
------------------------
is and will be in compliance with, the provisions of that certain Florida
act relating to disclosure of doing business with Cuba, codified as Section
517.075 of the Florida statutes, and the rules and regulations thereunder
(collectively, the "Cuba Act") or is exempt therefrom.
(xix) Investment Company Act. The Company is not, and upon the
----------------------
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectuses
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the Registration
------------------
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of the
Subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance or code or any judicial or
administrative interpretation thereof, including any judicial or
administrative order, consent, decree or judgment, relating to pollution or
protection of human health, the environment (including, without limitation,
ambient air, surface water, groundwater, land surface or subsurface strata)
or wildlife, including, without limitation, laws and regulations relating
to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum or
petroleum products (collectively, "Hazardous Materials") or to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials (collectively, "Environmental
Laws"), (B) the Company and its Subsidiaries have all permits,
authorizations and approvals required
<PAGE>
12
under any applicable Environmental Laws and are each in compliance with
their requirements, (C) there are no pending or, to the Company's
knowledge, threatened administrative, regulatory or judicial actions,
suits, demands, demand letters, claims, liens, notices of noncompliance or
violation, investigation or proceedings relating to any Environmental Law
against the Company or any of its Subsidiaries and (D) there are no events
or circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company or any of its Subsidiaries relating to Hazardous Materials or the
violation of Environmental Laws.
(xxi) Registration Rights. Except as described in the Registration
-------------------
Statement, there are no persons with registration rights or other similar
rights to have any securities registered pursuant to the Registration
Statement or otherwise registered by the Company under the 1933 Act.
(xxii) Reorganization. The agreements entered into by the Company
--------------
for the purposes of completing the Reorganization are all in full force and
effect with respect to the Company and, to the knowledge of the Company,
with respect to the other parties thereto, the representations and
warranties of the Company set forth in such agreements are true and correct
in all material respects, except to the extent any such representation or
warranty was expressly made as of a specific date, in which case such
representation and warranty was true and correct in all material respects
at such date. The Company has used its commercially reasonable efforts to
obtain all regulatory and contractual consents and approvals necessary to
consummate the Reorganization. All aspects of the Reorganization will be
completed prior to or simultaneously with the Closing Time, except that, as
described in the Registration Statement, (A) the Company may not acquire
the partnership interests in certain Local Market Partnerships (as defined
in the Registration Statement) without first obtaining certain regulatory
consents and approvals, (B) the Company will acquire the interests of the
Cable Stockholders (as defined in the Registration Statement) in the Local
Market Partnerships in the Seattle and San Francisco areas at the earliest
time such acquisitions can be accomplished without the consent of the
unaffiliated minority partners of such Local Market Partnerships and (C)
the Company may not have completed the redemption of the Class B Common
Stock held by a subsidiary of Continental Cablevision, Inc.
(b) Officer's Certificates. Any certificate signed by any officer of
the Company or any of the Subsidiaries delivered to the Global Coordinator, the
Lead Managers or to counsel for the International Managers pursuant to this
Agreement or otherwise in connection with the offering of the Securities shall
be deemed a representation and warranty by the Company to each International
Manager as to the matters covered thereby.
<PAGE>
13
SECTION 2. Sale and Delivery to International Managers; Closing.
----------------------------------------------------
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each International Manager, severally and
not jointly, and each International Manager, severally and not jointly, agrees
to purchase from the Company, at the price per share set forth in Schedule B,
the number of Initial International Securities set forth in Schedule A opposite
the name of such International Manager, plus any additional number of Initial
International Securities which such International Manager may become obligated
to purchase pursuant to the provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
International Managers, severally and not jointly, to purchase up to an
additional 705,000 shares of Class A Common Stock at the price per share set
forth in Schedule B. The option hereby granted will expire 30 days after the
date hereof and may be exercised in whole or in part from time to time only for
the purpose of covering over-allotments which may be made in connection with the
offering and distribution of the Initial International Securities upon notice by
the Global Coordinator to the Company setting forth the number of International
Option Securities as to which the several International Managers are then
exercising the option and the time and date of payment and delivery for such
International Option Securities. Any such time and date of delivery for the
International Option Securities (a "Date of Delivery") shall be determined by
the Global Coordinator, but shall not be later than seven full business days
after the exercise of said option, nor in any event prior to the Closing Time,
as hereinafter defined. If the option is exercised as to all or any portion of
the International Option Securities, each of the International Managers, acting
severally and not jointly, will purchase that proportion of the total number of
International Option Securities then being purchased which the number of Initial
International Securities set forth in Schedule A opposite the name of such
International Manager bears to the total number of Initial International
Securities, subject in each case to such adjustments as the Global Coordinator
in its discretion shall make to eliminate any sales or purchases of fractional
shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Shearman & Sterling, 599 Lexington Avenue, New York, NY 10022, or at such other
place as shall be agreed upon by the Global Coordinator and the Company, at
10:00 A.M. (Eastern time) on the third (fourth if the pricing occurs after 4:30
P.M. (Eastern time) on any given day) business day after the date hereof
(unless postponed in accordance with the provisions of Section 10 hereof), or
such other time not later than ten business days after such date as shall be
agreed upon by the Global Coordinator and the Company (such time and date of
payment and delivery being herein called the "Closing Time").
<PAGE>
14
In addition, in the event that any or all of the International Option
Securities are purchased by the International Managers, payment of the purchase
price for, and delivery of certificates for, such International Option
Securities shall be made at the above-mentioned offices, or at such other place
as shall be agreed upon by the Global Coordinator and the Company, on each Date
of Delivery as specified in the notice from the Global Coordinator to the
Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Lead Managers for the respective accounts of the International Managers of
certificates for the International Securities to be purchased by them. It is
understood that each International Manager has authorized the Lead Managers, for
its account, to accept delivery of, receipt for, and make payment of the
purchase price for, the Initial International Securities and the International
Option Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the International Managers, may (but
shall not be obligated to) make payment of the purchase price for the Initial
International Securities or the International Option Securities, if any, to be
purchased by any International Manager whose funds have not been received by the
Closing Time or the relevant Date of Delivery, as the case may be, but such
payment shall not relieve such International Manager from its obligations
hereunder.
(d) Denominations; Registration. Certificates for the Initial
International Securities and the International Option Securities, if any, shall
be in such denominations and registered in such names as the Lead Managers may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
International Securities and the International Option Securities, if any, will
be made available for examination and packaging by the Lead Managers in The City
of New York not later than 10:00 A.M. (Eastern Time) on the business day prior
to the Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each
------------------------
International Manager as follows:
(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(b) hereof, will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify the
Global Coordinator immediately, and confirm the notice in writing, (i) when
any post-effective amendment to the Registration Statement, shall become
effective, or any supplement to the Prospectuses or any amended
Prospectuses shall have been filed, (ii) of the receipt of any comments
from the Commission relating to the Registration Statement, the
Prospectuses or the Registration Statement on Form 8-A relating to the
registration of the Securities under the Securities Exchange Act of 1934,
as amended
<PAGE>
15
(the "1934 Act") or any amendment or supplement thereto, (iii) of any
request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectuses or for additional
information relating to the offering of the Securities and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement or of any order preventing or suspending the
use of any preliminary prospectus, or of the suspension of the
qualification of the Securities for offering or sale in any jurisdiction,
or of the initiation or threatening of any proceedings for any of such
purposes. The Company will promptly effect the filings necessary pursuant
to Rule 424(b) and will take such steps as it deems necessary to ascertain
promptly whether the form of prospectus transmitted for filing under Rule
424(b) was received for filing by the Commission and, in the event that it
was not, it will promptly file such prospectus. The Company will make
every reasonable effort to prevent the issuance of any stop order and, if
any stop order is issued, to obtain the lifting thereof at the earliest
practicable moment.
(b) Filing of Amendments. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term
Sheet or any amendment, supplement or revision to either the prospectus
included in the Registration Statement at the time it became effective or
to the Prospectuses will furnish the Global Coordinator with copies of any
such documents a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file or use any such document to
which the Global Coordinator or counsel for the International Managers
shall reasonably object.
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the Global Coordinator and counsel for the International
Managers, without charge, signed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the Lead
Managers, without charge, a conformed copy of the Registration Statement as
originally filed and of each amendment thereto (without exhibits) for each
of the International Managers. If applicable, the copies of the
Registration Statement and each amendment thereto furnished to the
International Managers will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
International Manager, without charge, as many copies of each preliminary
prospectus as such International Manager reasonably requested, and the
Company hereby
<PAGE>
16
consents to the use of such copies for purposes permitted by the 1933 Act.
The Company will furnish to each International Manager, without charge,
during the period when the International Prospectus is required to be
delivered under the 1933 Act or the 1934 Act, such number of copies of the
International Prospectus (as amended or supplemented) as such International
Managers may reasonably request. If applicable, the International
Prospectus and any amendments or supplements thereto furnished to the
International Managers will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act and
the rules and regulations of the commission under the 1934 Act (the "1934
Act Regulations") so as to permit the completion of the distribution of the
Securities as contemplated in this Agreement, the U.S. Purchase Agreement
and in the Prospectuses. If at any time when a prospectus is required by
the 1933 Act to be delivered in connection with sales of the Securities,
any event shall occur or condition shall exist as a result of which it is
necessary, in the opinion of counsel for the International Managers or for
the Company, to amend the Registration Statement or amend or supplement
either of the Prospectuses in order that the Prospectuses will not include
any untrue statements of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel, at
any such time to amend the Registration Statement or amend or supplement
either of the Prospectuses in order to comply with the requirements of the
1933 Act or the 1933 Act Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 3(b) hereof, such amendment or
supplement as may be necessary to correct such statement or omission or to
make the Registration Statement or the Prospectuses comply with such
requirements, and the Company will furnish to the International Managers
such number of copies of such amendment or supplement as the International
Managers may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts,
in cooperation with the International Managers, to qualify the Securities
for offering and sale under the applicable securities laws of such states
and other jurisdictions (domestic or foreign) as the Global Coordinator may
designate and to maintain such qualifications in effect for a period of not
less than one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement; provided, however,
that the Company shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to
subject itself
<PAGE>
17
to taxation in respect of doing business in any jurisdiction in which it is
not otherwise so subject. In each jurisdiction in which the Securities have
been so qualified, the Company will file such statements and reports as may
be required by the laws of such jurisdiction to continue such qualification
in effect for a period of not less than one year from the effective date of
the Registration Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant to
the 1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earning statement for the
purposes of, and to provide the benefits contemplated by, the last
paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received
by it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds."
(i) Listing. The Company will use its best efforts to effect and
maintain the quotation of the Securities on the Nasdaq National Market and
will file with the Nasdaq National Market all documents and notices
required by the Nasdaq National Market to be filed by companies that have
securities that are traded in the over-the-counter market and quotations
for which are reported by the Nasdaq National Market.
(j) Restriction on Sale of Securities. During a period of 180 days
from the date of the Prospectuses, the Company will not, without the prior
written consent of the Global Coordinator, (i) directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of any share of
Class A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock or file any registration statement
under the 1933 Act with respect to any of the foregoing or (ii) enter into
any swap or any other agreement or any transaction that transfers, in whole
or in part, directly or indirectly, the economic consequence of ownership
of the Class A Common Stock, whether any such swap or transaction described
in clause (i) or (ii) above is to be settled by delivery of Class A Common
Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Securities to be sold hereunder and
under the International Purchase Agreement, (B) any shares of Class A
Common Stock issued or options to purchase Class A Common Stock granted
pursuant to existing employee benefit plans of the Company referred to in
the Prospectuses, (C) any shares of Class A Common Stock issued pursuant to
any non-employee director stock plan or dividend reinvestment plan or (D)
issuance by the Company of shares of Class A Common Stock or shares of its
Class B common Stock, par value $.01 per share, to effectuate the
Reorganization.
<PAGE>
18
(k) Reporting Requirements. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission
pursuant to the 1934 Act within the time periods required by the 1934 Act
and the 1934 Act Regulations.
(l) Reorganization. Following the Closing Time, the Company will use
its commercially reasonable efforts to complete as promptly as practicable
those aspects of the Reorganization that had not been completed prior to or
simultaneously with the Closing Time.
(m) Compliance with NASD Rules. The Company hereby agrees that it
will ensure that the Reserved Securities will be restricted if and to the
extent required by Section IM-21 10-1(d) of the Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD
rules from sale, transfer, assignment, pledge or hypothecation for a period
of three months following the date of the effectiveness of the Registration
Statement. The Underwriters will notify the Company as to which persons
will need to be so restricted. At the request of the Underwriters, the
Company will direct the transfer agent to place a stop transfer restriction
upon such securities for such period of time. Should the Company release,
or seek to release, from such restrictions any of the Reserved Securities,
the Company agrees to reimburse the Underwriters for any reasonable
expenses including, without limitation, legal expenses they incur directly
in connection with such release.
SECTION 4. Payment of Their Expenses. (a) Expenses. The Company will
-------------------------
pay or cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including (i) the preparation, printing and
filing of the Registration Statement (including financial statements and
exhibits) as originally filed and of each amendment thereto, (ii) the printing
and delivery to the Underwriters of this Agreement and any Agreement among
Underwriters, (iii) the preparation, issuance and delivery of the certificates
for the Securities to the Underwriters, including any stock or other transfer
taxes and any stamp or other duties payable upon the sale, issuance or delivery
of the Securities to the Underwriters, and the transfer of the Securities
between the U.S. Underwriters and the International Managers, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors, (v) the
qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectuses and any
amendments or supplements thereto, (vii) the preparation, printing and delivery
to the Underwriters of copies of the Blue Sky Survey and any supplement thereto,
(viii) the fees and expenses of any transfer agent or registrar for the
Securities, (ix) the filing fees incident to, and the reasonable fees and
disbursements of
<PAGE>
19
counsel to the Underwriters in connection with, the review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of
the Securities and (x) the fees and expenses incurred in connection with the
inclusion of the Securities in the Nasdaq National Market.
(b) Termination of Agreement. If this Agreement is terminated by the
Lead Managers in accordance with the provisions of Section 5 or Section 9(a)(i)
hereof, the Company shall reimburse the International Managers for all of their
reasonable out-of-pocket expenses incurred in connection with the offering and
sale of the Securities, including the reasonable fees and disbursements of
counsel for the International Managers.
SECTION 5. Conditions of International Manager's Obligations. The
-------------------------------------------------
obligations of the several International Managers hereunder are subject to the
accuracy as of the Closing Date of the representations and warranties of the
Company contained in Section 1 hereof or in certificates of any officer of the
Company or any Subsidiary of the Company delivered pursuant to the provisions
hereof, to the performance by the Company of its covenants and other obligations
hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, shall have
become effective and at the Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued under
the 1933 Act or proceedings therefor initiated or threatened by the
Commission, and any request on the part of the Commission for additional
information from the Company or its agents shall have been complied with to
the reasonable satisfaction of counsel to the International Managers. A
prospectus containing the Rule 430A information shall have been filed with
the Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the
Company has elected to rely upon Rule 434, a Term Sheet shall have been
filed with the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for the Company. At the Closing Time the Lead
Managers shall have received the favorable opinions, dated as of the
Closing Time, of (i) the General Counsel of the Company and (ii) Dow,
Lohnes & Albertson, counsel for the Company, together with signed or
reproduced copies of such letters for each of the other International
Managers substantially in the form set forth in Exhibits A(i) and A(ii)
hereto, respectively, and to such further effect, arising as a result of
changed circumstances between the date hereof and the Closing Date, as
counsel to the International Managers may reasonably request. In giving
such opinions such counsel may rely, as to all matters governed by the laws
of jurisdictions other than the law of the State of New York, the federal
law of the United States and the
<PAGE>
20
General Corporation Law of the State of Delaware, upon the opinions of
counsel reasonably satisfactory to the U.S. Representatives. Such counsel
may also state that, insofar as such opinions involve factual matters, they
have relied, to the extent they deem proper, upon certificates of officers
of the Company and its Subsidiaries and certificates of public officials.
Such opinions shall not state that they are to be governed or qualified by,
or that they are otherwise subject to, any treatise, written policy or
other document relating to legal opinions, including without limitation,
the Legal Opinion Accord of the ABA Section of Business Law (1991).
(c) Opinion of Counsel for International Managers. At the Closing
Time, the Lead Managers shall have received the favorable opinion, dated as
of the Closing Time, of Shearman & Sterling, counsel for the International
Managers, together with signed or reproduced copies of such letter for each
of the other International Managers with respect to the matters set forth
in clause (iv) (solely as to preemptive rights arising under the DGCL or
the Company's certificate of incorporation or bylaws) of Exhibit A(i)
hereto and with respect to the matters set forth in clauses (i), (ii),
(iii), (iv), (v), (vii), and (viii) (solely as to the information in the
Prospectuses under "Description of Capital Stock - Class A Common Stock")
and the penultimate paragraph of Exhibit A(ii) hereto. In giving such
opinion such counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of New York, the federal law
of the United States and the General Corporation Law of the State of
Delaware, upon the opinions of counsel satisfactory to the Lead Managers.
Such counsel may also state that, insofar as such opinion involves factual
matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and its Subsidiaries and
certificates of public officials.
(d) Officers' Certificate. At the Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs
or business prospects of the Company and its Subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, and
the Lead Managers shall have received a certificate of the Company, signed
by the President or a Vice President of the Company and by the chief
financial or chief accounting officer of the Company, dated as of the
Closing Time, to the effect that (i) there has been no such material
adverse change, (ii) the representations and warranties in Section 1(a)
hereof are true and correct with the same force and effect as though
expressly made at and as of the Closing Time, (iii) the Company has
complied with all agreements and satisfied all conditions herein on its
part to be performed or satisfied at or prior to the Closing Time, and (iv)
no stop order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been instituted or
are pending or, to the knowledge of the Company, are contemplated by the
Commission.
<PAGE>
21
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Lead Managers shall have received from Deloitte & Touche LLP
a letter dated such date, in form and substance satisfactory to the Lead
Managers, together with signed or reproduced copies of such letter for each
of the other International Managers containing statements and information
of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectuses.
(f) Bring-down Comfort Letter. At the Closing Time the Lead Managers
shall have received from Deloitte & Touche LLP a letter, dated as of the
Closing Time, to the effect that they reaffirm the statements made in the
letter furnished pursuant to subsection (e) of this Section, except that
the specified date referred to shall be a date not more than three business
days prior to the Closing Time.
(g) Approval of Listing. At the Closing Time the Securities shall
have been approved for inclusion in the Nasdaq National Market, subject
only to official notice of issuance.
(h) No Objection. The NASD shall not have raised any objection with
respect to the fairness and reasonableness of the underwriting terms and
arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the Lead
Managers shall have received an agreement substantially in the form of
Exhibit B hereto signed by the persons listed on Schedule D hereto.
(j) FIRPTA Affidavit. The Company will issue to the Underwriters an
affidavit, dated no more than thirty (30) days prior to the Closing Time,
in accordance with Section 1445(b)(3) of the Internal Revenue Code of 1986,
as amended and Sections 1.897-2(h) and 1.1445-2(c)(3) of the Treasury
Regulations issued pursuant to the Internal Revenue Code of 1986, as
amended, which statement certifies that the Securities are U.S. real estate
interests.
(k) Reorganization. At the Closing Time, the agreements entered into
by the Company for the purposes of completing the Reorganization shall be
in full force and effect with respect to the Company and, to the knowledge
of the Company, with respect to the other parties thereto; prior to, or
simultaneously with, the Closing Time, all aspects of the Reorganization
shall be completed (except that, as described in the Registration
Statement, (A) the Company shall not be required to acquire the partnership
interests in those Local Market Partnerships for which regulatory consents
and approvals are required; (B) the Company shall not be required to
acquire the
<PAGE>
22
interests of the Cable Stockholders in the Local Market Partnerships in the
Seattle and San Francisco areas without the consent of the unaffiliated
minority partners of such Local Market Partnerships and (C) the Company may
not have completed the redemption of the Class B Common Stock held by a
subsidiary of Continental Cablevision, Inc.) and the Company shall have
provided to the Global Coordinator and the Underwriters' counsel copies of
all closing documents delivered to the parties to the transactions
contemplated in these agreements.
(l) Purchase of Initial U.S. Securities. Contemporaneously with the
purchase by the International Managers of the Initial International
Securities under this Agreement, the U.S. Underwriters shall have purchased
the Initial U.S. Securities under the U.S. Purchase Agreement.
(m) Conditions to Purchase of lnternational Option Securities. In the
event that the International Managers exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the International
Option Securities, the representations and warranties of the Company
contained herein and the statements in any certificates furnished by the
Company or any Subsidiary of the Company hereunder shall be true and
correct as of each Date of Delivery and, at the relevant Date of Delivery,
the Lead Managers shall have received:
(i) Company Officers' Certificate. A certificate of the Company,
-----------------------------
dated such Date of Delivery, signed by the President or a Vice
President of the Company and by the chief financial or chief
accounting officer of the Company, confirming that the certificate
delivered at the Closing Time pursuant to Section 5(d) hereof remains
true and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinions of
------------------------------
(A) the General Counsel of the Company and (B) Dow, Lohnes &
Albertson, counsel for the Company, each in form and substance
reasonably satisfactory to counsel for the Underwriters, dated such
Date of Delivery, relating to the International Option Securities to
be purchased on such Date of Delivery and otherwise to the same effect
as the opinion required by Section 5(b) hereof.
(iii) Opinion of Counsel for International Managers. The
---------------------------------------------
favorable opinion of Shearman & Sterling, counsel for the
International Managers, dated such Date of Delivery, relating to the
International Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by
Section 5(c) hereof.
<PAGE>
23
(iv) Bring-down Comfort Letter. A letter from Deloitte & Touche
-------------------------
LLP, in form and substance satisfactory to the Lead Managers and dated
such Date of Delivery, substantially in the same form and substance as
the letter furnished to the Lead Managers pursuant to Section 5(f)
hereof, except that the "specified date" in the letter furnished
pursuant to this paragraph shall be a date not more than five days
prior to such Date of Delivery.
(v) FIRPTA Affidavit. An affidavit, dated no more than thirty
----------------
(30) days prior to the Date of Delivery, in accordance with Section
1445(b)(3) of the Internal Revenue Code of 1986, as amended and
Sections 1.897-2(h) and 1.1445-2(c)(3) of the Treasury Regulations
issued pursuant to the Internal Revenue Code of 1986, as amended,
which statement certifies that the Securities are U.S. real estate
interests.
(n) Additional Documents. At the Closing Time and at each Date of
Delivery, counsel for the International Managers shall have been furnished
with such documents and opinions as they may reasonably require for the
purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated, or in order to evidence the accuracy of
any of the representations or warranties, or the fulfillment of any of the
conditions, herein contained; and all proceedings taken by the Company in
connection with the issuance and sale of the Securities as herein
contemplated shall be reasonably satisfactory in form and substance to the
Lead Managers and counsel for the International Managers.
(o) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of
International Option Securities on a Date of Delivery which is after the
Closing Time, the obligations of the several International Managers to
purchase the relevant Option Securities, may be terminated by the Lead
Managers by notice to the Company at any time at or prior to the Closing
Time or such Date of Delivery, as the case may be, and such termination
shall be without liability of any party to any other party except as
provided in Section 4 hereof and except that Sections 1, 6, 7 and 8 hereof
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
---------------
(a) Indemnification of International Managers. The Company agrees to
indemnify and hold harmless each International Manager, its directors, officers
and employees, and each person, if any, who controls any International Manager
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
as follows:
<PAGE>
24
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectuses (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever, in any such case, based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred (including
reasonable the fees and disbursements of counsel chosen by Merrill Lynch),
reasonably incurred in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency
or body, commenced or threatened, or any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i) or (ii)
above;
provided, however, that this indemnity agreement shall not apply to any loss,
- -------- -------
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
International Manager through the Lead Managers expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectuses (or any amendment or supplement thereto). The
foregoing indemnity agreement with respect to any preliminary prospectus or any
Prospectus (or amendments or supplement thereto) shall not inure to the benefit
of any International Manager from whom the person asserting any such loss,
liability, claim, damage or expense purchased Securities (or any director,
officer or employee of such International Manager, or any person who controls
such International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act) if a copy of the applicable Prospectus (as then
amended or supplemented if the Company shall have furnished any amendments or
<PAGE>
25
supplements thereto) was not sent or given by or on behalf of such International
Manager to such person, if such is required by law, at or prior to the written
confirmation of the sale of such Securities to such person and if such
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, liability, claim, damage or expense.
(b) Indemnification of Company, Directors and Officers. Each
International Manager severally agrees to indemnify and hold harmless the
Company, its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the International Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such International Manager through the Lead Managers expressly
for use in the Registration Statement (or any amendment thereto) or such
preliminary prospectus or the Prospectuses (or any amendment or supplement
thereto).
(c) Actions Against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it is
not materially prejudiced as a result thereof and in any event shall not relieve
it from any liability which it may have otherwise than on account of this
indemnity agreement. In the case of parties indemnified pursuant to Section 6(a)
above, counsel to the indemnified parties shall be selected by Merrill Lynch,
and, in the case of parties indemnified pursuant to Section 6(b) above, counsel
to the indemnified parties shall be selected by the Company. If it so elects
within a reasonable time after receipt of the notice mentioned above from an
indemnified party, an indemnifying party, jointly with any other indemnifying
parties receiving such notice, may assume the defense of such action with
counsel reasonably satisfactory to the indemnified parties defendant in such
action, unless such indemnified parties reasonably object to such assumption on
the ground that there may be legal defenses available to them which are
different from or in addition to those available to such indemnifying party. If
an indemnifying party assumes the defense of such action, the indemnifying party
shall not be liable for any fees and expenses of counsel for the indemnified
parties incurred thereafter in connection with such action. In no event shall
the indemnifying parties be liable for fees and expenses of more than one
counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances. No indemnifying party shall, without
<PAGE>
26
the prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which indemnification or
contribution could be sought under this Section 6 or Section 7 hereof (whether
or not the indemnified parties are actual or potential parties thereto), unless
such settlement, compromise or consent (i) includes an unconditional release of
each indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) Settlement Without Consent If Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) hereof effected without its written consent if (i) such
settlement is entered into more than 45 days after receipt by such indemnifying
party of the aforesaid request, (ii) such indemnifying party shall have received
notice of the terms of such settlement at least 30 days prior to such settlement
being entered into and (iii) such indemnifying party fails, prior to the date of
such settlement, to reimburse such indemnified party in accordance with such
request to the extent it considers such request to be reasonable or to provide
written notice to the indemnified party substantiating the unpaid balance as
unreasonable.
SECTION 7. Contribution. If the indemnification provided for in
------------
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the International Managers on the other hand from
the offering of the Securities pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and of the International Managers on the other hand in connection with the
statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
International Managers on the other hand in connection with the offering of the
International Securities pursuant to this Agreement shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of the
International Securities pursuant to this Agreement (before deducting expenses
but after deducting the underwriting discount)
<PAGE>
27
received by the Company and the total underwriting discount received by the
International Managers, in each case as set forth on the cover of the
International Prospectus, or, if Rule 434 is used, the corresponding location on
the Term Sheet, bear to the aggregate initial public offering price of the
International Securities as set forth on such cover.
The relative fault of the Company on the one hand and the
International Managers on the other hand shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or by the International Managers and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the International Managers agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined by
pro rata allocation (even if the International Managers were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no International
Manager shall be required to contribute any amount in excess of the amount by
which the total price at which the International Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such International Managers has otherwise been required to pay
by reason of any such untrue or alleged untrue statement or omission or alleged
omission.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
International Managers within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company.
The International Managers' respective obligations to
<PAGE>
28
contribute pursuant to this Section 7 are several in proportion to the number of
Initial International Securities set forth opposite their respective names in
Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
-----------------------------------------------------
Delivery. All representations, warranties and agreements contained in this
- --------
Agreement or in certificates of the Company submitted pursuant hereto, shall
remain operative and in full force and effect, regardless of any investigation
made by or on behalf of any International Manager or controlling person, or by
or on behalf of the Company, and shall survive delivery of the Securities to the
International Managers.
SECTION 9. Termination of Agreement.
------------------------
(a) Termination; General. The Lead Managers may terminate this
Agreement, by notice to the Company, at any time at or prior to the Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the International
Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Lead Managers, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or limited by the Commission or the
Nasdaq National Market, or if trading generally on the American Stock Exchange
or the New York Stock Exchange or in the Nasdaq National Market has been
suspended or limited, or minimum or maximum prices for trading have been fixed,
or maximum ranges for prices have been required, by any of said exchanges or by
such system or by order of the Commission, the National Association of
Securities Dealers, Inc. or any other governmental authority, or (iv) if a
banking moratorium has been declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6 and 7 hereof shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the International Managers.
----------------------------------------------------
If one or more of the International Managers shall fail at the Closing Time or a
Date of Delivery to purchase the Securities which it or they are obligated to
purchase under this
<PAGE>
29
Agreement (the "Defaulted Securities"), the Lead Managers shall have the right,
within 24 hours thereafter, to make arrangements for one or more of the non-
defaulting International Managers, or any other underwriters, to purchase all,
but not less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the U.S.
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the non-
defaulting International Managers shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting International Managers, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
Securities to be purchased on such date, this Agreement or, with respect to
any Date of Delivery which occurs after the Closing Time, the obligation of
the Underwriters to purchase and of the Company to sell the Option
Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting International
Manager.
No action taken pursuant to this Section shall relieve any defaulting
International Manager from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not result in a termination of the obligation
of the International Managers to purchase and the Company to sell the relevant
International Option Securities, as the case may be, either the Lead Managers or
the Company shall have the right to postpone the Closing Time or the relevant
Date of Delivery, as the case may be, for a period not exceeding seven days in
order to effect any required changes in the Registration Statement or the
Prospectuses or in any other documents or arrangements. As used herein, the
term "International Manager" includes any person substituted for an
International Manager under this Section 10.
SECTION 11. Notices. All notices and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by overnight courier or transmitted by any standard form of
telecommunication. Notices to the International Managers shall be directed to
the Lead Managers at North Tower, World Financial Center, New York, New York
10281-1201; and notices to the Company shall be directed to it at One Teleport
Drive, Staten Island, New York, New York 10311, Attention: John W. Thomson,
---------
Esq.
<PAGE>
30
SECTION 12. Parties. This Agreement shall each inure to the benefit
-------
of and be binding upon the International Managers and the Company and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the International Managers and the Company and their respective successors
and the controlling persons and officers and directors referred to in Sections 6
and 7 hereof and their heirs and legal representatives, any legal or equitable
right, remedy or claim under or in respect of this Agreement or any provision
herein contained. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the International Managers
and the Company and their respective successors, and said controlling persons
and officers and directors and their heirs and legal representatives, and for
the benefit of no other person, firm or corporation. No purchaser of Securities
from any International Manager shall be deemed to be a successor by reason
merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE
----------------------
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK
CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings
------------------
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
<PAGE>
31
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the International Managers and the Company in accordance with its terms.
Very truly yours,
TELEPORT COMMUNICATIONS GROUP INC.
By ______________________________
Name:
Title:
<PAGE>
32
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH INTERNATIONAL
MORGAN STANLEY & CO. INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
MORGAN GRENFELL & CO., LIMITED
By: MERRILL LYNCH INTERNATIONAL
By_______________________________________
Authorized Signatory
For itself and as Lead Managers of the other International Managers named in
Schedule A hereto.
<PAGE>
SCHEDULE A
Number of
Initial
International
Name of International Manager Securities
----------------------------- -------------
Merrill Lynch International........................
Morgan Stanley & Co. International.................
Donaldson, Lufkin & Jenrette Securities
Corporation........................................
Lehman Brothers International (Europe).............
Morgan Grenfell & Co., Limited.....................
_______
Total.............................................. 4,700,000
=============
<PAGE>
SCHEDULE B
TELEPORT COMMUNICATIONS GROUP INC.
4,700,000 Shares of Class A Common Stock (Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities, determined as
provided in said Section 2, shall be $o.
2. The purchase price per share for the Initial International Securities to be
paid by the several International Managers shall be $o., being an amount equal
to the initial public offering price set forth above less $o. per share.
<PAGE>
SCHEDULE C
LIST OF SUBSIDIARIES
Corporations
- ------------
TC Boston Holdings, Inc.
TC Boston Holdings II, Inc.
TC New York Holdings I, Inc.
TC New York Holdings II, Inc.
TC Systems, Inc.
Teleport Communications Chicago, Inc.
Teleport Communications Dallas, Inc.
Teleport Communications Houston, Inc.
Teleport Communications Los Angeles, Inc.
Teleport Communications San Francisco, Inc.
Teleport Communications Washington, D.C., Inc.
TCG America, Inc.
TCG Indiana, Inc.
TCG Joint Venture Holdings, Inc.
TCG Miami, Inc.
TCG Milwaukee, Inc.
TCG New Hampshire, Inc.
TCG New York, Inc.
TCG Payphones, Inc.
TCG Seattle, Inc.
Partnerships
- ------------
TCG Partners
Teleport Communications Boston
Teleport Communications New York
TCG Chicago
TCG Cleveland
TCG Colorado
TCG Connecticut
TCG Dallas
TCG Data - New York
TCG Detroit
TCG Illinois
TCG Indianapolis
TCG Los Angeles
Sch C-1
<PAGE>
TCG Maryland
TCG Northern New Jersey
TCG Omaha
TCG Phoenix
TCG Pittsburgh
TCG Rhode Island
TCG San Diego
TCG San Francisco
TCG Seattle
TCG South Florida
TCG St. Louis
1. The outstanding partnership interests of each Subsidiary which is a
partnership are subject to certain restrictions on transfer pursuant to the
partnership agreement with respect to such Partnership. Such partnership
interests and the outstanding capital stock of each Subsidiary which is a
corporation are subject to certain restrictions on transfer pursuant to
securities laws.
2. The capital stock and partnership interests of the subsidiaries of TCG New
York, Inc. are pledged as security for the loans under the Revolving Credit
Agreement.
3. Equity interests in certain partnerships identified as Subsidiaries are held
by third parties in the percentages identified in Attachment 1 to this
Schedule C./1/
- --------------------
/1/ Attachment 1 reflects the ownership of the Local Market Partnerships before
the Reorganization, we understand that it will be modified to reflect the
ownership on the effective date.
Sch C-2
<PAGE>
SCHEDULE D
LIST OF PERSONS AND ENTITIES
SUBJECT TO LOCK-UP
Tele-Communications, Inc. and its subsidiaries
Cox Communications, Inc. and its subsidiaries
Comcast Corporation and its subsidiaries
Continental Cablevision, Inc. and its subsidiaries
Robert Annunziata
Robert C. Atkinson
Joel D. Gross
Alf T. Hansen
J. Curt Hockemeier
Marvin L. Lindsey
Stuart A. Mencher
John A. Scarpati
Kenneth A. Shulman
Maria Terranova-Evans
Wayne G. Fox
John W. Thompson
W. Terrell Wingfield, Jr.
<PAGE>
Exhibit A(i)
FORM OF OPINION OF THE COMPANY'S GENERAL COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
See Attachment
<PAGE>
Attachment
----------
July __, 1996
Merrill Lynch, Pierce,
Fenner & Smith, Incorporated
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
Lehman Brothers Inc. and
Deutsche Morgan Grenfell/CJ Lawrence Inc.
c/o Merrill Lynch, Pierce,
Fenner & Smith, Incorporated
World Financial Center
North Tower
New York, NY 10281-1229
Merrill Lynch International
Morgan Stanley & Co. International
Donaldson, Lufkin & Jenrette
Securities Corporation
Lehman Brothers International (Europe)
Morgan Grenfell & Co.
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
This opinion is being delivered to you pursuant to Section 5(b) of
the U.S. Purchase Agreement dated as of June , 1996 (the "U.S. Purchase
Agreement") and Section 5(b) of the International Purchase Agreement dated as of
June , 1996 (the "International Purchase Agreement" and, together with the
U.S. Purchase Agreement, the "Purchase Agreements") among you and Teleport
Communications Group Inc. (the "Company":), providing for the sale to you on
this date of an aggregate of 23,500,000 shares of the Class A Common Stock, par
value $0.01 per share (the "Class A Common Stock"), of the Company (the
"Securities"). We have served as counsel to the Company in connection with the
issuance and sale of the Securities. Capitalized terms used herein that are not
otherwise defined herein shall have the same meaning as in the Purchase
Agreements.
<PAGE>
2
In this connection, we have examined the Registration Statement on
Form Section-1 (No. 333-3850) relating to the Securities filed with the
Securities and Exchange Commission (the "Commission") on April 19, 1996, under
the Securities Act of 1933, as amended (the "Securities Act"), Amendment No. 1
thereto filed with the Commission on June 3, 1996, (such Registration Statement,
as so amended, being hereinafter referred to as the "Equity Registration
Statement"); the final prospectus, dated June , 1996, filed with the Commission
on June , 1996, relating to the offering of the Class A Common Stock in the
United States and Canada (the "U.S. Prospectus") and the final prospectus, dated
June , 1996, filed with the Commission on June , 1996 relating to the offering
of the Class A Common Stock outside the United States and Canada (the
"International Prospectus" and, together with the U.S. Prospectus, the
"Prospectuses"), both filed pursuant to Rule 424(b) of the Commission's General
Rules and Regulations under the Securities Act; and the Purchase Agreements.
On June , 1996, we were informed by telephone by a member of the
staff of the Commission that the Equity Registration Statement had become
effective under the Securities Act at ________ [A.M./P.M.], New York City time,
on that date.
We have also examined originals or copies, certified or otherwise
identified to our satisfaction, of all such records of the Company and all such
agreements, certificates of public officials, certificates of officers or
representatives of the Company and others, and such other documents,
certificates and corporate or other records as we have deemed necessary or
appropriate as a basis for the opinions set forth herein. In our examination we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies and the authenticity of the originals of such latter
documents and the due, binding and c=valid authorization, execution and delivery
pursuant to lawful power and legal right of applicable instruments and documents
on behalf of persons and entities other than the Company. As to any facts
material to the opinions expressed herein, we have relied upon statements and
representations of officers and other representatives of the Company and others.
As to matters of law set forth below, our opinion is limited to
matters of law under the laws of the State of New York, the laws of the United
States to the extent applicable hereto and the conflicts of law rules, or the
laws of any states or jurisdictions other than as specified above.
Based upon the foregoing and subject to the other qualifications
stated herein, we are of the opinion that:
(i) The Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required,
<PAGE>
3
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect.
(ii) Each Subsidiary has been duly incorporated or formed, as
applicable, and is validly existing as a corporation, a partnership or a limited
partnership in good standing (with respect to a Subsidiary that is a corporation
or a limited partnership) under the laws of the jurisdiction in which it has
been incorporated or formed, as applicable, has the necessary corporate or
partnership power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectuses and (with respect to a
Subsidiary that is a corporation or a limited partnership) is duly qualified as
a foreign corporation or a limited partnership to transact business and is in
good standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect; except as otherwise disclosed in the
Registration Statement or in Schedule C to the Purchase Agreements, all of the
issued and outstanding capital stock of each Subsidiary has been duly authorized
and validly issued, is fully paid and non-assessable and all the issued and
outstanding capital stock of each such Subsidiary which is a corporation and all
the existing partnership interests of each such Subsidiary which is a
partnership or limited partnership, to the best of my knowledge and information,
is owned by the Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of
the outstanding shares of capital stock of any Subsidiary which is a corporation
was issued in violation of the preemptive rights of any securityholder of such
Subsidiary arising under the DGCL, the certificate of incorporation or bylaws of
such Subsidiary or any agreement to which such Subsidiary is a party.
(iii) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectuses in the column entitled "Pro Forma
for the Reorganization" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to the U.S. Purchase Agreement and the
International Purchase Agreement or pursuant to reservations, agreements or
employee benefit plans referred to in the Prospectuses or pursuant to the
exercise of convertible securities or options referred to in the Prospectuses);
the shares of issued and outstanding capital stock have been duly authorized and
validly issued and are fully paid and non-assessable; and none of the
outstanding shares of capital stock of the Company was issued in violation of
the preemptive rights of any securityholder of the Company arising under the
DGCL, the Company's certificate of incorporation or bylaws or any agreement to
which the Company is a party.
(iv) The issuance of the Securities by the Company is not subject to
preemptive rights of any securityholder of the Company arising under the DGCL,
the Company's certificate of incorporation or bylaws or any agreement to which
the Company is a party.
<PAGE>
4
(v) To the best of my knowledge, there are no actions, suits,
proceedings, inquiries or investigations, before or brought by any court or
governmental agency or body, domestic or foreign, now pending or threatened,
against or affecting the Company or any Subsidiary, which, in the aggregate,
might reasonably be expected to result in a Material Adverse Effect, or which,
in the aggregate, might reasonably be expected to materially and adversely
affect the properties or assets thereof or the consummation of the transactions
contemplated in the U.S. Purchase Agreement and International Purchase Agreement
or the performance by the Company of its obligations thereunder.
(vi) The information in the Prospectuses under "Business," to the
extent that it constitutes matters of law, summaries of legal matters, the
Company's certificate of incorporation and bylaws or legal proceedings, or legal
conclusions, has been reviewed by me and is correct in all material respects.
(vii) To the best of my knowledge, there are no statutes or
regulations that are required to be described in the Prospectuses that are not
described as required.
(viii) All descriptions in the Equity Registration Statement of
contracts and other documents to which the Company or the Subsidiaries are a
party are accurate in all material respects; to the best of my knowledge, there
are no franchises, contracts, indentures, mortgages, loan agreements, notes,
leases or other instruments required to be described or referred to in the
Equity Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed as exhibits thereto, and the
descriptions thereof or references thereto are correct in all material respects.
(ix) To the best of my knowledge, neither the Company nor any
Subsidiary is in violation of its charter or bylaws or partnership agreement, as
the case may be, and no default by the Company or any Subsidiary exists in the
due performance or observance of any material obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan agreement, note,
lease or other agreement or instrument that is described or referred to in the
Equity Registration Statement or the Prospectuses or filed as an exhibit to the
Equity Registration Statement except for such violations or defaults that would
not reasonably be expected to result in a Material Adverse Effect.
(x) The execution, delivery and performance of the U.S. Purchase
Agreement and the International Purchase Agreement and the consummation of the
transactions contemplated in the U.S. Purchase Agreement and the International
Purchase Agreement the consummation of the Reorganization, as defined in the
Equity Registration Statement, the issuance and sale of the Securities, and the
use of the proceeds from the sale of the Securities as expressly described in
the Prospectuses under the caption "Use Of Proceeds" and compliance by the
Company with its obligations under the U.S. Purchase Agreement and the
International Purchase Agreement, do not and will not, whether with or without
the giving
<PAGE>
5
of notice or lapse of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined in Section 1(a)(x) of the Purchase
Agreements) under or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any Subsidiary
pursuant to any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, lease or any other agreement or instrument, known to me, to
which the Company or any Subsidiary is a party or by which it or any of them may
be bound, or to which any of the property or assets of the Company or any
Subsidiary is subject (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not reasonably be expected to have a Material
Adverse Effect.
(xi) To the best of my knowledge, except as described in the
Registration Statement, there are no persons with registration rights or other
similar rights to have any securities registered pursuant to the Registration
Statement or otherwise registered by the Company under the 1933 Act.
(xii) The Company and the Subsidiaries possess the Governmental
Licenses and are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure to so comply would not
reasonably be expected to, singly or in the aggregate, have a Material Adverse
Effect, and all of the Governmental Licenses are valid and in full force and
effect, except when the invalidity of such Governmental License or the failure
of such Governmental Licenses to be in full force and effect would not
reasonably be expected to have a Material Adverse Effect.
(xiii) There is no outstanding adverse judgment, decree or order that
has been issued by the FCC or any of the Local Authorities against the Company
and the Subsidiaries which, singly or in the aggregate, would reasonably be
expected to result in a Material Adverse Effect and, to the best of my
knowledge, neither the Company nor any of the Subsidiaries is the object of or
threatened by any proceedings relating to the revocation or modification of any
such Governmental Licenses or that would otherwise affect the operation of the
Company or any of the Subsidiaries, which, singly or in the aggregate, would
reasonably be expected to result in a Material Adverse Effect.
(xiv) At the Closing Time, the agreements entered into by the Company
for the purposes of completing the Reorganization are in full force and effect
and the closings contemplated by these agreements have been consummated in
accordance with the terms thereof in all material respects.
In the course of the preparation of the Equity Registration Statement
and the Prospectuses, we participated in conferences with officers and other
representatives of the Company, representatives of the independent certified
public accountants of the Company, your representatives and your counsel, at
which conferences the contents of the Equity Registration Statement and the
Prospectuses and related matters were discussed and, although
<PAGE>
6
we are not passing upon and do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Equity Registration
Statement and the Prospectuses (except as expressly provided in subparagraphs [8
and 12] and have not made an independent investigation, check or verification of
facts for the purposes of rendering this opinion, on the basis of the foregoing
[(relying as to materiality to a large extent upon the opinions of officers and
other representatives of the Company)], we advise you that, nothing has come to
our attention that leads us to believe (i) that the Equity Registration
Statement or any amendment thereto, including the Rule A Information and Rule
434 Information (if applicable (except for financial statements and schedules
and other financial and statistical data included therein or omitted thereform,
as to which we make no statement), at the time such Equity registration
Statement or any such amendment became effective, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii) that
the Prospectuses or any amendment or supplement thereto (except for financial
statements and schedules and other financial and statistical data included or
incorporated by reference therein or omitted thereform, at the time the
Prospectuses was issued, at the time any such amended or supplemented prospectus
was issued or at the Closing Time, included or includes an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading or (iii) that the Equity Registration Statement, including
any Rule 462(b) Equity Registration Statement, the Rule 430A Information and the
Rule 434 Information, as applicable, the Prospectuses and each amendment or
supplement to the Equity Registration Statement and the Prospectuses, excluding
the documents incorporated by reference therein as of their respective effective
or issue dates (other than the financial statements and schedules and other
financial and statistical data included or incorporated by reference therein or
omitted therefrom, as to which we make no statement) did not comply as to form
in all material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
The opinions set forth above are subject to the following
qualifications:
(i) the enforceability of agreements, documents and instruments is
subject to general principles of equity, including , without limitation,
concepts of materiality, reasonableness, good faith and fair dealing, and
the discretion of the court before which any proceeding therefor may be
brought, regardless of whether enforcement is sought in a proceeding in
equity or at law, and bankruptcy, reorganization, insolvency, fraudulent
conveyance or transfer, moratorium (whether general or specific) and other
laws affecting creditors' rights or the relief of debtors generally.
(ii) We express no opinion concerning the enforceability of (a)
waivers of notice or of any other constitutional, statutory or common law
rights, (b) indemnification provisions to the extent such provisions are
deemed to violate public
<PAGE>
7
policy or federal or state securities laws, and (c) submissions to the
personal jurisdiction of any particular court.
(iii) We express no opinion as to any New York state or local laws,
rules or regulations relating to the regulation of telecommunications.
This opinion is furnished by us as counsel to the Company in
connection with the closing of the above-referenced public offering to date
hereof. We assume no obligation to advise you of changes which may thereafter
be brought to our attention. Our opinion is based upon statutory laws and
judicial decisions in effect at the date hereof, and we do not opine with
respect to any law, regulation, rule or governmental policy which may be enacted
or adopted after the date hereof, no assume any responsibility to advise you of
future changes in our opinion. The opinion is solely for your benefit and is
not to be used, circulated, quoted or otherwise referred to for any other
purpose, and may not be relied upon by any other person, without our express
prior written express prior written permission.
<PAGE>
Exhibit A(ii)
FORM OF OPINION OF DL&A
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
See Attachment
<PAGE>
[DOW, LOHNES & ALBERTSON
A Professional Limited Liability Company
LETTERHEAD]
Attachment
----------
July __, 1996
Merrill Lynch, Pierce,
Fenner & Smith, Incorporated
Morgan Stanley & Co. Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
Lehman Brothers Inc. and
Deutsche Morgan Grenfell/CJ Lawrence Inc.
c/o Merrill Lynch, Pierce,
Fenner & Smith, Incorporated
World Financial Center
North Tower
New York, NY 10281-1229
Merrill Lynch International
Morgan Stanley & Co. International
Donaldson, Lufkin & Jenrette
Securities Corporation
Lehman Brothers International (Europe)
Morgan Grenfell & Co.
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
This opinion is being delivered to you pursuant to Section 5(b) of the
U.S. Purchase Agreement dated as of June , 1996 (the "U.S. Purchase Agreement")
and Section 5(b) of the International Purchase Agreement dated as of June ,
1996 (the "International Purchase Agreement" and, together with the U.S.
Purchase Agreement, the "Purchase Agreements") among you and Teleport
Communications Group Inc. (the "Company"), providing for the sale to you on this
date of an aggregate of 23,500,000 shares of the Class A Common Stock, par value
$0.01 per share (the "Class A Common Stock"), of the Company (the "Securities").
We have served as counsel to the Company in connection with the issuance and
sale of the Securities. Capitalized terms used herein that are not otherwise
defined herein shall have the same meaning as in the Purchase Agreements.
In this connection, we have examined the Registration Statement on Form S-1
(No. 333-3850) relating to the Securities filed with the Securities and Exchange
Commission (the
<PAGE>
-2-
"Commission") on April 19, 1996, under the Securities Act of 1933, as amended
(the "Securities Act"), Amendment No. 1 thereto filed with the Commission on
June 3, 1996, and Amendment No. 2 thereto filed with the Commission on June ,
1996 (such Registration Statement, as so amended, being hereinafter referred to
as the "Equity Registration Statement"); the final prospectus, dated June ,
1996, filed with the Commission on June , 1996, relating to the offering of the
Class A Common Stock in the United States and Canada (the "U.S. Prospectus") and
the final prospectus, dated June __, 1996, filed with the Commission on June __,
1996, relating to the offering of the Class A Common Stock outside the United
States and Canada (the "International Prospectus" and, together with the U.S.
Prospectus, the "Prospectuses"), both filed pursuant to Rule 424(b) of the
Commission's General Rules and Regulations under the Securities Act; and the
Purchase Agreements.
On June __, 1996, we were informed by telephone by a member of the staff of
the Commission that the Equity Registration Statement had become effective under
the Securities Act at _____ [A.M./P.M.], New York City time, on that date.
We have also examined originals or copies, certified or otherwise
identified to our satisfaction, of all such records of the Company and all such
agreements, certificates of public officials, certificates of officers or
representatives of the Company and others, and such other documents,
certificates and corporate or other records as we have deemed necessary or
appropriate as a basis for the opinions set forth herein. In our examination we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies and the authenticity of the originals of such latter
documents and the due, binding and valid authorization, execution and delivery
pursuant to lawful power and legal right of applicable instruments and documents
on behalf of persons and entities other than the Company. As to any facts
material to the opinions expressed herein, we have relied upon statements and
representations of officers and other representatives of the Company and others.
As to matters of law set forth below, our opinion is limited to matters of
law under the laws of the State of New York, the laws of the United States to
the extent applicable hereto and the Delaware General Corporation Law, and we
express no opinion as to conflicts of law rules, or the laws of any States or
jurisdictions other than as specified above.
Based upon the foregoing and subject to the other qualifications stated
herein, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
<PAGE>
-3-
2. The Company has the corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the Purchase
Agreements.
3. The Securities to be purchased by the U.S. Underwriters and the
International Managers from the Company have been duly authorized for issuance
and sale to the Underwriters pursuant to the U.S. Purchase Agreement and the
International Purchase Agreement, respectively, and, when issued and delivered
by the Company pursuant to the U.S. Purchase Agreement and the International
Purchase Agreement, respectively, against payment of the consideration set forth
in the U.S. Purchase Agreement and the International Purchase Agreement,
respectively, will be validly issued, fully paid and non-assessable, and no
holder of the Securities will be subject to personal liability for the payment
of the Company's debts, except (i) as such holder may be liable by reason of its
own conduct or acts, (ii) as provided by the Delaware General Corporation Law
and (iii) for any liability that may arise upon application of any fraudulent
conveyance or transfer or other insolvency law.
4. The Purchase Agreements have been duly authorized, executed and
delivered by the Company.
5. The Equity Registration Statement, including any Rule 462(b) Equity
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectuses pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and, to the best of
our knowledge, no stop order suspending the effectiveness of the Equity
Registration Statement or any Rule 462(b) Equity Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
6. The form of certificate used to evidence the Class A Common Stock
complies in all material respects with all applicable requirements of the
certificate of incorporation and by-laws of the Company.
7. The information in the Prospectuses under the captions "Description of
Capital Stock," "Certain United States Federal Income Tax Consequences to Non-
United States Holders of Common Stock" and in the Equity Registration Statement
under Item 14, to the extent that it constitutes matters of law, summaries of
legal matters, the Company's certificate of incorporation and bylaws or legal
proceedings, or legal conclusions has been reviewed by us and is correct in all
material respects.
8. No filing with, or authorization, approval, consent, license, order,
registration, qualification or decree of, any court or governmental authority or
agency (other than under the Securities Act and the Securities Act Regulations,
which have been obtained, or as may be required under the securities or blue
<PAGE>
-4-
sky laws of the various states, as to which we express no opinion) is necessary
or required in connection with the due authorization, execution and delivery of
the Purchase Agreements or for the offering, issuance, sale or delivery of the
Securities, except for notice filings where the failure to make such filings
would not materially adversely affect the performance by the Company of its
obligations under the Purchase Agreements.
9. The execution, delivery and performance of the Purchase Agreements and
the consummation of the transactions contemplated in the Purchase Agreements,
the consummation of the Reorganization, as defined in the Equity Registration
Statement, the issuance and sale of the Securities, and the use of the proceeds
from the sale of the Securities to the extent expressly described in the
Prospectuses under the caption "Use of Proceeds" and compliance by the Company
with its obligations under the Purchase Agreements do not and will not, whether
with or without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined in Section
1(a)(x) of the Purchase Agreements) under or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets of the
Company or any Subsidiary pursuant to any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, lease or other agreement or instrument
that has been filed or incorporated by reference as an exhibit to the Equity
Registration Statement (except for such conflicts, breaches, defaults, Repayment
Events, liens, charges or encumbrances that would not reasonably be expected to
result in a Material Adverse Effect), nor will such actions result in any
violation of the provisions of the certificate of incorporation or by-laws or
partnership agreement, as the case may be, of the Company or any Subsidiary, or
(subject to the receipt of regulatory consents and approvals for the
Reorganization as described in the Equity Registration Statement) any applicable
law, statute, rule, regulation, judgment, order, writ or decree, known to us of
any governmental, government instrumentality or court having jurisdiction over
the Company or any Subsidiary or any of their respective properties, assets or
operations, except for such violations that would not reasonably be expected to
result in a Material Adverse Effect.
10. The Company is not an "investment company" or an entity "controlled"
by an "investment company," as such terms are defined in the Investment Company
Act of 1940.
11. The statements contained in the Equity Registration Statement under
the captions "Risk Factors -- Federal and State Regulation -- Governmental and
Other Authorizations" and "Business -- Government Regulation --
Telecommunications Act of 1996 -- Federal Regulation -- State Regulation --
Local Government Authorizations," insofar as such statements constitute a
summary of the legal matters or legal proceedings referred to therein, have been
reviewed by us and are correct in all material respects.
<PAGE>
-5-
In the course of the preparation of the Equity Registration Statement and
the Prospectuses, we participated in conferences with officers and other
representatives of the Company, representatives of the independent certified
public accountants of the Company, your representatives and your counsel, at
which conferences the contents of the Equity Registration Statement and the
Prospectuses and related matters were discussed and, although we are not passing
upon and do not assume any responsibility for the accuracy, completeness or
fairness of the statements contained in the Equity Registration Statement and
the Prospectuses (except as expressly provided in subparagraphs 7 and 11) and
have not made an independent investigation, check or verification of facts for
the purpose of rendering this opinion, on the basis of the foregoing (relying as
to materiality upon the opinions of officers and other representatives of the
Company), we advise you that, nothing has come to our attention that leads us to
believe (i) that the Equity Registration Statement or any amendment thereto,
including the Rule 430A Information and Rule 434 Information (if applicable)
(except for financial statements and schedules and other financial and
statistical data included therein or omitted therefrom, as to which we make no
statement), at the time such Equity Registration Statement or any such amendment
became effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) that the Prospectuses or any amendment
or supplement thereto (except for financial statements and schedules and other
financial and statistical data included or incorporated by reference therein or
omitted therefrom, as to which we make no statement), at the time the
Prospectuses was issued, at the time any such amended or supplemented prospectus
was issued or at the Closing Time, included or includes an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading or (iii) that the Equity Registration Statement,
including any Rule 462(b) Equity Registration Statement, the Rule 430A
Information and the Rule 434 Information, as applicable, the Prospectuses and
each amendment or supplement to the Equity Registration Statement and the
Prospectuses, excluding the documents incorporated by reference therein as of
their respective effective or issue dates (other than the financial statements
and schedules and other financial and statistical data included or incorporated
by reference therein or omitted therefrom, as to which we make no statement) did
not comply as to form in all material respects with the requirements of the 1933
Act and the 1933 Act Regulations.
The opinions set forth above are subject to the following qualifications:
(i) The enforceability of agreements, documents and instruments is subject
to general principles of equity,
<PAGE>
-6-
including, without limitation, concepts of materiality, reasonableness, good
faith and fair dealing, and the discretion of the court before which any
proceeding therefor may be brought, regardless of whether enforcement is sought
in a proceeding in equity or at law, and bankruptcy, reorganization, insolvency,
fraudulent conveyance or transfer, moratorium (whether general or specific) and
other laws affecting creditors' rights or the relief of debtors generally.
(ii) We express no opinion concerning the enforceability of (a) waivers of
notice or of any other constitutional, statutory or common law rights, (b)
indemnification provisions to the extent such provisions are deemed to violate
public policy or federal or state securities laws, and (c) submissions to the
personal jurisdiction of any particular court.
(iii) We express no opinion as to any New York state or local laws, rules
or regulations relating to the regulation of telecommunications.
This opinion is furnished by us as counsel to the Company in connection
with the closing of the above-referenced public offering occurring today. The
information set forth herein is as of the date hereof. We assume no obligation
to advise you of changes which may thereafter be brought to our attention. Our
opinion is based upon statutory laws and judicial decisions in effect at the
date hereof, and we do not opine with respect to any law, regulation, rule or
governmental policy which may be enacted or adopted after the date hereof, nor
assume any responsibility to advise you of future changes in our opinion. The
opinion is solely for your benefit and is not to be used, circulated, quoted or
otherwise referred to for any other purpose, and may not be relied upon by any
other person, without our express prior written permission.
Very truly yours,
DOW, LOHNES & ALBERTSON
_______________________
Timothy J. Kelley, Member
<PAGE>
[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(i)]
Exhibit B
June ___, 1996
Merrill Lynch International
Morgan Stanley & Co. International
Donaldson, Lufkin & Jenrette Securities Corporation
Lehman Brothers International (Europe)
Morgan Grenfell & Co., Limited
as Lead Manager of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC24 (l4
England
Re: Proposed Public Offering by Teleport Communications Group Inc.
--------------------------------------------------------------
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of
Teleport Communications Group Inc., a Delaware corporation (the "Company"),
understands that Merrill Lynch International ("Merrill Lynch") and Morgan
Stanley & Co. International, Donaldson, Lufkin & Jenrette Securities
Corporation, Lehman Brothers International (Europe), and Morgan Grenfell & Co.,
Limited propose to enter into an International Purchase Agreement (the
"International Purchase Agreement") with the Company providing for the public
offering of shares (the "Securities") of the Company's common stock, par value
$.01 per share (the "Class A Common Stock"). In recognition of the benefit that
such an offering will confer upon the undersigned as a stockholder [and an
officer and/or director] of the Company, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned agrees with each underwriter to be named in the International
Purchase Agreement that, during a period of 180 days from the date of the
International Purchase Agreement, the undersigned will not, without the prior
written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of,
or otherwise dispose of or transfer any shares of the Company's Class A Common
Stock or any securities convertible into or exchangeable or exercisable for
Class A Common Stock, [FOR CONTINENTAL ONLY: (except for the 7,807,738 shares
of the Company's Class B Common Stock (7,975,738 shares of the U.S.
Underwriters' and the International Managers' over-allotment options are
exercised in full)
B-1
<PAGE>
currently held by the undersigned to be redeemed by the Company as part of the
Reorganization (as defined in the International Purchase Agreement)], whether
now owned or hereafter acquired by the undersigned or with respect to which the
undersigned has or hereafter acquires the power of disposition, or file any
registration statement under the Securities Act of 1933, as amended, with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Class A Common Stock,
whether any such swap or transaction is to be settled by delivery of Class A
Common Stock or other securities, in cash or otherwise.
Very truly yours,
Signature:_____________________________
Print Name:____________________________
B-2
<PAGE>
Annex A
[FORM OF ACCOUNTANTS' COMFORT LETTER PURSUANT TO SECTION 5(e)]
See Attachment
Annex A-1
<PAGE>
[We are independent public accountants with respect to the Company within the
meaning of the 1933 Act and the applicable published 1933 Act Regulations]
(i) in our opinion, the audited financial statements [and the related
financial statement schedules] included or incorporated by reference in the
Registration Statement and the Prospectuses comply as to form in all
material respects with the applicable accounting requirements of the 1933
Act and the published rules and regulations thereunder;
(ii) on the basis of procedures (but not an examination in accordance
with generally accepted auditing standards) consisting of a reading of the
unaudited interim [consolidated] financial statements of the Company for
the [three month periods ended __________, 19__ and __________, 19__, the
three and six month periods ended __________, 19__ and __________, 19__ and
the three and nine month periods ended __________, 19__ and __________,
19__, included or incorporated by reference in the Registration Statement
and the Prospectuses (collectively, the "10-Q Financials")] [, a reading of
the unaudited interim [consolidated] financial statements of the Company
for the ___-month periods ended __________, 19__ and __________, 19__,
included in the Registration Statement and the Prospectuses (the "___-month
financials")] [, a reading of the latest available unaudited interim
[consolidated] financial statements of the Company], a reading of the
minutes of all meetings of the stockholders and directors of the Company
[and its subsidiaries] and the __________ and __________ Committees of the
Company's Board of Directors [and any subsidiary committees of the
Company's Board of Directors [and any subsidiary committees] since [day
after end of last audited period], inquiries of certain officials of the
Company [and its subsidiaries] responsible for financial and accounting
matters, a review of interim financial information in accordance with
standards established by the American Institute of Certified Public
Accountants in Statement on Auditing Standards No. 71, Interim Financial
Information ("SAS 71"), with respect to the [description of relevant
periods] and such other inquiries and procedures as may be specified in
such letter, nothing came to our attention that caused us to believe that:
[(A) the 10-Q Financials incorporated by reference in the
Registration Statement and the Prospectuses do not comply as to form
in all respects with the applicable accounting requirements of the
1934 Act and the 1934 Act Regulations applicable to unaudited
financial statements included in Form 10-Q or any material
modifications should be made to the 10-Q Financials incorporated by
reference in the Registration Statement and the Prospectuses for them
to be in conformity with generally accepted accounting principles;]
[( ) the ____-month financials included in the Registration
Statement and the Prospectuses do not comply as to form in all
material respects with the applicable accounting requirements of the
1933 Act and the 1933 Act Regulations applicable to unaudited interim
financial statements included in
Annex A-1
<PAGE>
registration statements or any material modifications should be made
to the ____-month financials included in the Registration Statement
and the Prospectuses for them to be in conformity with generally
accepted accounting principles;]
( ) at [__________, 19__ and at] a specified date not more than
five days prior to the date of this Agreement, there was any change in
the __________ of the Company [and its subsidiaries] or any decrease
in the __________ of the Company [and its subsidiaries] or any
increase in the __________ of the Company [and its subsidiaries,] in
each case as compared with amounts shown in the latest balance sheet
included in the Registration Statement, except in each case for
changes, decreases or increases that the Registration Statement
discloses have occurred or may occur; or
( ) [for the period from __________, 19__ to __________, 19__
and] for the period from __________, 19__ to a specified date not more
than five days prior to the date of this Agreement, there was any
decrease in __________, __________ or __________, in each case as
compared with the comparable period in the preceding year, except in
each case for any decreases that the Registration Statement discloses
have occurred or may occur;
(iii) based upon the procedures set forth in clause (ii) above and a
reading of the [Selected Financial Data] included in the Registration
Statement [and a reading of the financial statements from which such data
were derived], nothing came to our attention that caused us to believe that
the [Selected Financial Data] included in the Registration Statement do not
comply as to form in all material respects with the disclosure requirements
of Item 301 of Regulation S-K of the 1933 Act [, that the amounts included
in the [Selected Financial Data] are not in agreement with the
corresponding amounts in the audited [consolidated] financial statements
for the respective periods or that the financial statements not included in
the Registration Statement from which certain of such data were derived are
not in conformity with generally accepted accounting principles];
(iv) we have compared the information in the Registration Statement
under selected captions with the disclosure requirements of Regulation S-K
of the 1933 Act and on the basis of limited procedures specified herein
nothing came to our attention that caused us to believe that this
information does not comply as to form in all material respects with the
disclosure requirements of Items 302, 402 and 503(d), respectively, of
Regulation S-K;
[(v) based upon the procedures set forth in clause (ii) above, a
reading of the unaudited financial statements of the Company for [the most
recent period] that have not been included in the Registration Statement
and a review of such financial statements in accordance with SAS 71,
nothing came to our attention that caused us to
Annex A-2
<PAGE>
believe that the unaudited amounts for the [most recent period] do not
agree with the amounts set forth in the unaudited consolidated financial
statements for those periods or that such unaudited amounts were not
determined on a basis substantially consistent with that of the
corresponding amounts in the audited [consolidated) financial statements;]
[(vi)] we are unable to and do not express any opinion on the [Pro
Forma Combining Statement of Operations] (the "Pro Forma Statement")
included in the Registration Statement or on the pro forma adjustments
applied to the historical amounts included in the Pro Forma Statement;
however, for purposes of this letter we have:
(A) read the Pro Forma Statement;
(B) performed [an audit] [a review in accordance with SAS 71] of
the financial statements to which the pro forma adjustments were
applied;
(C) made inquiries of certain officials of the Company who have
responsibility for financial and accounting matters about the basis
for their determination of the pro forma adjustments and whether the
Pro Forma Statement complies as to form in all material respects with
the applicable accounting requirements of Rule 11-02 of Regulation S-
X; and
(D) proved the arithmetic accuracy of the application of the pro
forma adjustments to the historical amounts in the Pro Forma
Statement; and
on the basis of such procedures and such other inquiries and procedures as
specified herein, nothing came to our attention that caused us to believe
that the Pro Forma Statement included in the Registration Statement does
not comply as to form in all material respects with the applicable
requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical amounts in the
compilation of those statements; and
[(vii)] in addition to the procedures referred to in clause (ii)
above, we have performed other procedures, not constituting an audit, with
respect to certain amounts, percentages, numerical data and financial
information appearing in the Registration Statement, which are specified
herein, and have compared certain of such items with, and have found such
items to be in agreement with, the accounting and financial records of the
Company; and
[(viii) in addition, we [COMFORT ON A FINANCIAL FORECAST THAT IS
INCLUDED IN THE REGISTRATION STATEMENT].
Annex A-3
<PAGE>
================================================================================
TELEPORT COMMUNICATIONS GROUP INC.
(a Delaware corporation)
4,700,000 Shares of Class A Common Stock
INTERNATIONAL PURCHASE AGREEMENT
Dated: June ___, 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 1. Representations and Warranties................................. 4
(a) Representations and Warranties by the Company.................. 4
(i) Compliance with Registration Requirements...................... 4
(ii) Independent Accountants........................................ 4
(iii) Financial Statements........................................... 5
(iv) No Material Adverse Change in Business......................... 5
(v) Good Standing of the Company................................... 6
(vi) Good Standing of Subsidiaries.................................. 6
(vii) Capitalization................................................. 7
(viii) Authorization of Agreement..................................... 7
(ix) Authorization and Description of Securities.................... 7
(x) Absence of Defaults and Conflicts.............................. 7
(xi) Absence of Labor Dispute....................................... 9
(xii) Absence of Proceedings......................................... 9
(xiii) Accuracy of Exhibits........................................... 9
(xiv) Possession of Intellectual Property............................ 9
(xv) Absence of Further Requirements................................ 10
(xvi) Possession of Licenses and Permits............................. 10
(xvii) Title to Property.............................................. 10
(xviii) Compliance with Cuba Act....................................... 11
(xix) Investment Company Act......................................... 11
(xx) Environmental Laws............................................. 11
(xxi) Registration Rights............................................ 12
(xxii) Reorganization................................................. 12
(b) Officer's Certificates......................................... 12
SECTION 2. Sale and Delivery to International Managers; Closing........... 13
(a) Initial Securities............................................. 13
(b) Option Securities.............................................. 13
(c) Payment........................................................ 13
(d) Denominations; Registration.................................... 14
SECTION 3. Covenants of the Company....................................... 14
(a) Compliance with Securities Regulations and Commission Requests. 14
(b) Filing of Amendments........................................... 15
(c) Delivery of Registration Statements............................ 15
(d) Delivery of Prospectuses....................................... 15
(e) Continued Compliance with Securities Laws...................... 16
(f) Blue Sky Qualifications........................................ 16
(g) Rule 158....................................................... 17
(h) Use of Proceeds................................................ 17
(i) Listing........................................................ 17
(j) Restriction on Sale of Securities.............................. 17
(k) Reporting Requirements......................................... 18
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ii
<S> <C>............................................................ <C>
(l) Reorganization................................................. 18
SECTION 4. Payment of Their Expenses...................................... 18
(a) Expenses....................................................... 18
(b) Termination of Agreement....................................... 19
SECTION 5. Conditions of International Manager's Obligations.............. 19
(a) Effectiveness of Registration Statement........................ 19
(b) Opinion of Counsel for the Company............................. 19
(c) Opinion of Counsel for International Managers.................. 20
(d) Officers' Certificate.......................................... 20
(e) Accountant's Comfort Letter.................................... 21
(f) Bring-down Comfort Letter...................................... 21
(g) Approval of Listing............................................ 21
(h) No Objection................................................... 21
(i) Lock-up Agreements............................................. 21
(j) FIRPTA Affidavit............................................... 21
(k) Reorganization................................................. 21
(l) Purchase of Initial U.S. Securities............................ 22
(m) Conditions to Purchase of lnternational Option Securities...... 22
(n) Additional Documents........................................... 23
(o) Termination of Agreement....................................... 23
SECTION 6. Indemnification................................................ 23
(a) Indemnification of International Managers...................... 23
(b) Indemnification of Company, Directors and Officers............. 25
(c) Actions Against Parties; Notification.......................... 25
(d) Settlement Without Consent If Failure to Reimburse............. 26
SECTION 7. Contribution................................................... 26
SECTION 8. Representations, Warranties and Agreements to Survive Delivery. 28
SECTION 9. Termination of Agreement....................................... 28
(a) Termination; General........................................... 28
(b) Liabilities.................................................... 28
SECTION 10. Default by One or More of the International Managers........... 28
SECTION 11. Notices........................................................ 29
SECTION 12. Parties........................................................ 30
SECTION 13. GOVERNING LAW AND TIME......................................... 30
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
iii
<S> <C>............................................................ <C>
SECTION 14. Effect of Headings............................................. 30
</TABLE>
<PAGE>
EXHIBIT 4.5
[TCG] [woman holding fiber optic cable]
CLASS A COMMON STOCK CLASS A COMMON STOCK
PAR VALUE $0.01 CUSIP 879463 10 7
SEE REVERSE FOR CERTAIN DEFINITIONS
Teleport Communications Group Inc.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES, PAR VALUE ONE CENT ($0.01) PER SHARE, OF
CLASS A COMMON STOCK OF
Teleport Communications Group Inc., issued under and subject to the Amended and
Restated Certificate of Incorporation of the Corporation (a copy of which is on
file at the office of the Transfer Agent of the Corporation), to all the terms
and conditions of which the said owner by accepting this Certificate expressly
assents and agrees to be bound. The shares represented by this Certificate are
transferable, to the extent permitted by the Amended and Restated Certificate of
Incorporation of the Corporation, on the books of the Corporation in person or
by attorney duly authorized in writing upon surrender of this Certificate duly
endorsed. This Certificate shall not be valid unless countersigned by the
Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
Attest: [ Corporate seal of
Teleport Communications Group Inc. ]
/s/ John W. Thomson /s/ Robert Annunziata
Secretary Chairman, President and Chief Executive Officer
countersigned and registered:
THE BANK OF NEW YORK
by /s/ William J. Skinner
TRANSFER AGENT
AND REGISTRAR
AUTHORIZED OFFICER
<PAGE>
TELEPORT COMMUNICATIONS GROUP INC.
THE CORPORATION WILL FURNISH TO ANY STOCKHOLDER UPON REQUEST AND WITHOUT CHARGE,
A FULL STATEMENT OF THE DESIGNATION, RELATIVE RIGHTS, PREFERENCES AND
LIMITATIONS OF THE SHARES OF EACH CLASS OF STOCK AUTHORIZED TO BE ISSUED AND OF
EACH SERIES OF PREFERRED STOCK SO FAR AS THE SAME HAVE BEEN FIXED, AND THE
AUTHORITY OF THE BOARD TO DESIGNATE AND FIX THE RELATIVE RIGHTS, PREFERENCES AND
LIMITATIONS OF OTHER SERIES OF PREFERRED STOCK.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM --as tenants in common UNIF GIFT MIN ACT--__________Custodian________
TEN ENT --as tenants by the (Cust) (Minor)
entireties
JT WROS --as joint tenants with right under Uniform Gifts to Minors Act
of survivorship and not as
tenants in common --------------------------------
(State)
Additional abbreviations may also be used though not in the above list.
For value received,____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
(Please print or typewrite name and address including postal zip code of
assignee)
________________________________________________________________________________
__________________________________________________________________________Shares
of the Class A Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint_____________________________________Attorney,
to transfer the said Stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _____________________________ ________________________________________
NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of the Certificate, in
every particular, without alteration or
enlargement, or any change whatever.
Signature Guaranteed:
NOTICE: The signature(s) should be
guaranteed by an eligible guarantor
institution (banks, stockholders,
savings and loan associations and credit
unions with membership in an approved
signature guarantee medallion program),
pursuant to SEC Rule 17 Ad-15.
<PAGE>
EXHIBIT 5.1
[DOW, LOHNES & ALBERTSON
A Professional Limited Liability Company
LETTERHEAD]
June 26, 1996
Teleport Communications Group Inc.
One Teleport Drive
Staten Island, New York 10311
Ladies and Gentlemen:
We refer to the Registration Statement (the "Registration Statement") on
Form S-1 (File No. 333-3850), filed by Teleport Communications Group Inc. (the
"Company"), with the Securities and Exchange Commission (the "Commission"), for
the purpose of registering under the Securities Act of 1933, as amended (the
"Securities Act"), shares of the Company's Class A Common Stock, par value $.01
per share (the "Class A Common Stock"), to be offered to the public pursuant to
a Purchase Agreement (the "U.S. Purchase Agreement") among the Company and
Merrill Lynch, Pierce, Fenner & Smith, Incorporated, Morgan Stanley & Co.
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman
Brothers Inc. and Deutsche Morgan Grenfell/CJ Lawrence Inc. as underwriters; and
a Purchase Agreement (the "International Purchase Agreement" and, together with
the U.S. Purchase Agreement, the "Purchase Agreements") among the Company and
Merrill Lynch International, Morgan Stanley & Co. International, Donaldson,
Lufkin & Jenrette Securities Corporation, Lehman Brothers International (Europe)
and Morgan Grenfell & Co., Limited as underwriters. Capitalized terms used
herein that are not otherwise defined herein shall have the same meaning as in
the Purchase Agreements.
In connection with the foregoing registration, we have acted as counsel
for the Company, and have examined originals or copies, certified or otherwise
identified to our satisfaction, of all such records of the Company and all such
agreements, certificates of public officials, certificates of officers or
representatives of the Company and others, and such other documents,
certificates and corporate or other records as we have deemed necessary or
appropriate as a basis for the opinion set forth herein. In our examination we
have assumed the genuineness of all signatures, the legal capacity of natural
persons, the authenticity of all documents submitted to us as originals, the
<PAGE>
Teleport Communications Group Inc.
June 26, 1996
Page 2
conformity to original documents of all documents submitted to us as certified
or photostatic copies and the authenticity of the originals of such latter
documents.
We are members of the Bar of the District of Columbia and do not purport
to be experts on, or generally familiar with, or certified to express legal
conclusions based upon, the laws of any other jurisdiction, other than the
Delaware General Corporation Law and the laws of the United States to the extent
applicable hereto. Accordingly, as to matters of law set forth below, our
opinion is limited to matters of law under the laws of the District of Columbia,
the laws of the United States to the extent applicable hereto and the Delaware
General Corporation Law, and we express no opinion as to conflicts of law rules,
or the laws of any states or jurisdictions other than as specified above.
Based upon the foregoing and subject to the other qualifications stated
herein, we are of the opinion that the shares of Class A Common Stock being
registered by the Company pursuant to the Registration Statement have been duly
authorized and, when issued and delivered in accordance with the terms of the
Purchase Agreements, will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and any abbreviated registration statements relating
thereto that may be filed to register additional securities identical to those
covered by the Registration Statement (including a registration statement filed
pursuant to Rule 462(b) under the Securities Act), and to the reference to this
firm under the caption "Legal Matters" contained in the prospectus filed as a
part thereof. In giving such consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act.
Very truly yours,
DOW, LOHNES & ALBERTSON
By: /s/ Edward J. O'Connell
---------------------------
Edward J. O'Connell
Member
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in Amendment No. 2 to Registration Statement No. 333-
3850 of Teleport Communications Group Inc. of our report on the combined
financial statements of Teleport Communications Group Inc. and its
subsidiaries and TCG Partners dated 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) and our
report on the combined financial statements of Local Market Partnerships to be
Acquired by Teleport Communications Group Inc. dated February 16, 1996 (May
13, 1996 as to Note 9) appearing in the Prospectus, which is a part of such
Registration Statement, and to the reference to us under the headings "Summary
Combined Financial and Other Operating Data," "Selected Combined Financial
Data" and "Experts" in such Prospectus.
Deloitte & Touche LLP
New York, New York
June 25, 1996
