<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 27, 1998
REGISTRATION NUMBER 333-48371
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PRE-EFFECTIVE AMENDMENT NO. 4 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
FACILICOM INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 4813 52-1926328
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
1401 NEW YORK AVENUE, NWWASHINGTON, D.C. 20005 (202) 496-1100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
WALTER J. BURMEISTERCHIEF EXECUTIVE OFFICER AND PRESIDENT
1401 NEW YORK AVENUE, NWWASHINGTON, D.C. 20005 (202) 496-1100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
MORRIS F. DEFEO, JR., ESQ.SWIDLER & BERLIN, CHARTERED3000 K STREET, N.W.,
SUITE 300WASHINGTON, D.C. 20007
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, 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(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED PROPOSED
TITLE OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE AGGREGATE OFFERING PRICE REGISTRATION
REGISTERED REGISTERED OFFERING PRICE PER NOTE(1) FEE(2)
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<S> <C> <C> <C> <C>
10 1/2% Series B Senior
Notes due 2008........ 300,000 $300,000,000 $1,000 $88,500
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933, as amended.
(2) Previously paid.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, APPLICATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion, dated May 27, 1998
[LOGO OF FACILICOM INTERNATIONAL, INC. APPEARS HERE]
FACILICOM INTERNATIONAL, INC.
OFFER TO EXCHANGE
10 1/2% SERIES B SENIOR NOTES DUE 2008
FOR ANY AND ALL
10 1/2% SENIOR NOTES DUE 2008
($300,000,000 AGGREGATE PRINCIPAL AMOUNT OUTSTANDING)
-----------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON . , 1998, UNLESS EXTENDED
SEE "RISK FACTORS" ON PAGE 17, IMMEDIATELY FOLLOWING THE PROSPECTUS
SUMMARY, FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER
AND AN INVESTMENT IN THE EXCHANGE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
THE DATE OF THIS PROSPECTUS IS . , 1998
FaciliCom International, Inc., a Delaware corporation (the "Company" or
"FCI"), hereby offers, upon the terms and subject to the conditions set forth
in this Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange up to $300,000,000 aggregate
principal amount of its 10 1/2% Series B Senior Notes due 2008 (the "Exchange
Notes") for up to $300,000,000 aggregate principal amount of its 10 1/2% Senior
Notes due 2008 (the "Old Notes" and together with the Exchange Notes, the
"Notes"). As of the date of this Prospectus, there was $300,000,000 aggregate
principal amount of the Old Notes outstanding. The terms of the Exchange Notes
are identical in all material respects to those of the Old Notes, except that
(i) the Exchange Notes have been registered under the Securities Act of 1933,
as amended (the "Securities Act"), and, therefore, will not bear legends
restricting their transfer and (ii) the holders of the Exchange Notes will not
be entitled to certain rights under the Registration Rights Agreement (as
defined herein), including the terms providing for an increase in the interest
rate on the Old Notes under certain circumstances relating to the timing of the
Exchange Offer, all of which rights will terminate when the Exchange Offer is
consummated. See "The Exchange Offer--Purposes and Effects of the Exchange
Offer."
Based on an interpretation by the Securities and Exchange Commission (the
"Commission") set forth in no-action letters issued to Exxon Capital Holdings
Corp. (available April 13, 1988) and Morgan Stanley & Co. Inc. (available June
5, 1991), among others. The Company believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a holder thereof (other than (i) a
broker-dealer who purchases such Exchange Notes directly from the Company to
resell pursuant to Rule 144A under the Securities Act or any other available
exemption under the Securities Act or (ii) a person that is an affiliate (as
defined in Rule 405 under the Securities Act) of the Company), without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the holder is acquiring the Exchange Notes in the
ordinary course of its business and is not participating, and has no
arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes. Eligible holders wishing to accept the
Exchange Offer must represent to the Company that such conditions have been
<PAGE>
met. Each broker-dealer that receives the Exchange Notes for its own account
in exchange for the Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of market-making activity or other
trading activities. The Company has agreed that, for a period of 180 days
after the Expiration Date (as defined herein), it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
Interest on the Exchange Notes will be payable semiannually in arrears on
January 15 and July 15 of each year, commencing on July 15, 1998. Holders of
the Exchange Notes will receive interest from the date of initial issuance of
the Exchange Notes, plus an amount equal to the accrued interest on the Old
Notes from the later of (i) the most recent date to which interest has been
paid thereon or (ii) the date of issuance of the Old Notes, to the date of
exchange thereof.
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after January 15, 2003, at the redemption prices set
forth herein plus accrued and unpaid interest and Liquidated Damages (as
defined), if any, thereon to the date of redemption. In addition, at any time
prior to January 15, 2001, the Company may redeem from time to time up to
35.0% of the originally issued aggregate principal amount of the Notes at the
redemption price set forth herein plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of redemption with the Net Cash
Proceeds (as defined) of one or more Public Equity Offerings (as defined);
provided that at least 65.0% of the originally issued aggregate principal
amount of the Notes remains outstanding after such redemption. In the event of
a Change in Control (as defined), each holder of the Notes will have the right
to require the Company to purchase all or any part of such holder's Notes at a
purchase price in cash equal to 101.0% of the aggregate principal amount
thereof, plus accrued and unpaid interest and Liquidated Damages, if any, to
the date of purchase. There can be no assurance that the Company will be able
to fund these repurchase obligations in the event of a Change in Control.
The Notes will be unsecured obligations of the Company, will rank senior in
right of payment to any existing and future obligations of the Company
expressly subordinated in right of payment to the Notes and pari passu in
right of payment with all other existing and future unsecured and
unsubordinated obligations of the Company. As of March 31, 1998, the Company
had approximately $309.5 million of Indebtedness (as defined). Because the
Company is a holding company that conducts its business through its
subsidiaries, all existing and future Indebtedness and other liabilities and
commitments of the Company's subsidiaries, including trade payables, will be
effectively senior to the Notes, and the Company's subsidiaries will not be
guarantors of the Notes. As of March 31, 1998, the Company's consolidated
subsidiaries had aggregate liabilities of $380.1 million, which included
$309.5 million of Indebtedness. See "Capitalization."
The Exchange Offer is not conditioned on any minimum aggregate principal
amount of Old Notes being tendered for exchange. The Company will accept for
exchange any and all validly tendered Old Notes not withdrawn prior to 5:00
p.m., New York City time, on . , 1998 unless extended by the Company (the
"Expiration Date"). The Company can, in its sole discretion, extend the
Exchange Offer indefinitely, subject to the Company's obligation to pay
Liquidated Damages if the Exchange Offer is not consummated by . , 1998 and,
under certain circumstances, file a shelf registration statement with respect
to the Old Notes. Tenders of Old Notes may be withdrawn at any time prior to
the Expiration Date. The Exchange Offer is subject to certain customary
conditions. See "The Exchange Offer--Conditions to Exchange Offer." The
Company has agreed to pay all expenses incident to the Exchange Offer. The
Company will not receive any proceeds from the Exchange Offer.
The Notes are new securities for which there currently is no market. The
Company does not intend to apply for listing of the Exchange Notes on any
securities exchange or for quotation through the Nasdaq National Market
("Nasdaq"). Although the Initial Purchasers (as defined herein) have informed
the Company that they
2
<PAGE>
currently intend to make a market in the Notes, they are not obligated to do
so and any such market-making may be discontinued at any time without notice.
In addition, such market-making activity may be limited during the pendency of
the Exchange Offer or the effectiveness of a shelf registration statement in
lieu thereof. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
3
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement") under the Securities Act
with respect to the Exchange Notes being offered by this Prospectus. This
Prospectus does not contain all the information set forth in the Exchange
Offer Registration Statement and the exhibits and schedules thereto, certain
portions of which have been omitted pursuant to the rules and regulations of
the Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document are not necessarily complete. With
respect to each such contract, agreement or other document filed or
incorporated by reference as an exhibit to the Exchange Offer Registration
Statement, reference is made to such exhibit for a more complete description
of the matter involved, and each such statement is qualified by such
reference.
The Company has agreed to file with the Commission, to the extent permitted,
and distribute to holders of the Exchange Notes reports, information and
documents specified in Sections 13(a) and 15(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), so long as the Exchange Notes are
outstanding, whether or not the Company is subject to such informational
requirements of the Exchange Act.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements and information
relating to the Company that is based on the beliefs of the Management of the
Company, as well as assumptions made by and information currently available to
the Management of the Company. When used in this Prospectus, the words
"estimate," "project," "believe," "anticipate," "intend," "expect" and similar
expressions are intended to identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements, including those discussed under "Risk Factors." Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company does not undertake any
obligation to publicly release any revisions to these forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
4
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including risk factors, and the
financial statements (including the notes thereto) appearing elsewhere in this
Prospectus. References in this Prospectus to the "Company" and "FCI" refer to
FaciliCom International, Inc. and its subsidiaries, and give effect to the
Recapitalization (as defined below) of FaciliCom International, L.L.C. as a
Delaware corporation on December 22, 1997, except where the context otherwise
requires.
THE COMPANY
FCI is a rapidly growing multinational carrier focused on providing
international wholesale telecommunications services to other carriers
worldwide. FCI provides these services over a carrier-grade international
network consisting of five international gateway switches in the U.S., Sweden,
Denmark and the U.K., as well as transmission capacity owned and leased on a
fixed-cost basis that connects its switches in the U.S. and Europe. FCI's
network and its operating agreements with traditional incumbent carriers
("PTTs") enable it to offer high quality services to its carrier customers at
competitive rates. In addition to wholesale services, as of March 31, 1998, FCI
provided domestic and international long distance services on its network to
19,345 retail customers in Sweden and Denmark through its Swedish subsidiary,
Nordiska Tele8 AB ("Tele8"). FCI believes that its multinational, facilities-
based approach and its established carrier status in Europe through Tele8
provide it with significant competitive advantages including control over
transmission quality and reduced termination and network costs, as well as high
quality local sales and customer service. FCI, founded in May 1995, reported
consolidated revenues for the six months ended March 31, 1998, and for the
fiscal year ended September 30, 1997, of $71.0 million and $70.2 million,
respectively, and net loss of ($17.7) million and ($14.0) million,
respectively.
FCI was founded to capitalize on opportunities that have developed for
facilities-based carriers as a result of (i) the increasing demand for
international telecommunications services worldwide, (ii) the rapid pace of
deregulation of the approximately $61 billion international telecommunications
market and (iii) the erosion of the international Accounting Rate Mechanism
("ARM"). Demand for international telecommunications services is expected to
increase as a result of a number of factors, including worldwide economic
growth, global deregulation, technological advancements and the introduction of
new services. FCI believes that, as in the U.S., deregulation in Europe, Latin
America, Asia and the Pacific Rim will accelerate demand for international
telecommunications services and lead to the establishment of new carriers in
these markets. FCI believes that it is well positioned to capture international
traffic from established and emerging carriers seeking carrier-grade network
quality, competitively priced network services and flexible, responsive
technical support and customer service.
The Company's target customer base consists primarily of PTTs and other
first-tier carriers, emerging carriers and wireless carriers with international
traffic. PTTs and other first-tier carriers generally have their own
international networks, but will use carriers such as FCI for overflow traffic
and least-cost routing. Emerging carriers and wireless carriers constitute
rapidly growing industry segments that generally rely on PTTs and wholesale
carriers such as the Company to provide international connectivity. As of March
31, 1998, the Company provided service to 97 carriers, including nine of the
ten largest U.S. carriers (based on outbound international traffic), three
wireless carriers and 14 multinational carriers that originate traffic in more
than one of the Company's existing markets.
To offer high quality international services and to control its termination
and network costs, FCI seeks to invest in undersea fiber optic cable systems
and international gateway switches in locations and on routes where customer
demand justifies such fixed asset investments. As of March 31, 1998, FCI had
implemented an international network comprising (i) four NorTel and two
Ericsson international gateway switches located in
5
<PAGE>
New York City; Jersey City, New Jersey; Malmo, Sweden; Copenhagen; Amsterdam
and London; (ii) owned and leased capacity in seven undersea fiber optic cable
systems connecting the Company's international gateway switches in the U.S. and
Europe: CANTAT-3, CANUS-1, TAT 12/13, Kattegatt, Odin, the Fiber-optic Link
Around the Globe ("FLAG") and DKS-18; and (iii) points of presence ("PoPs") in
three U.S. and two European cities for origination and termination of
international traffic. During 1998, the Company plans to install 12 additional
switches in Australia, Austria, Belgium, France, Germany, Italy, Japan, Norway,
Spain, Switzerland and the U.S. (Los Angeles and Miami). In addition, the
Company plans to invest in fiber optic transmission capacity connecting North
America, Europe, Latin America, Asia and the Pacific Rim, including the Trans
Pacific Cable ("TPC-5"), Americas-1, Gemini, APCN(A) and Southern Cross fiber
optic cables, and to acquire additional capacity in the FLAG system during
1998. FCI had invested $66.2 million in network facilities as of March 31,
1998, and plans to invest an additional $150.0 million during the next two
calendar years.
FCI currently has operating agreements with 18 foreign carriers, 15 of which
are the PTTs in their respective countries. The Company's operating agreements
permit it to terminate traffic directed to correspondent carriers in these
countries and provide for the Company to receive return traffic. For the six
months ended March 31, 1998 and for the fiscal year ended September 30, 1997,
return traffic generated under such operating agreements accounted for
approximately 1.4% and 2.3%, respectively, of consolidated revenues. The
Company is currently negotiating additional operating agreements with carriers
in Europe, Latin America, Asia and the Pacific Rim.
STRATEGY
FCI's objective is to become a leading provider of high quality,
competitively priced, dedicated and switched wholesale international
telecommunications services to established and emerging carriers worldwide. To
achieve this objective, the Company intends to continue to expand its carrier-
grade international network and to offer competitively priced network services
comparable in quality to that of major PTTs and first-tier carriers while
providing highly responsive technical support and customer service. The key
elements of the Company's strategy are as follows:
. Increase multinational presence. FCI seeks to expand its operations by
cultivating relationships with PTTs in strategic locations worldwide and
establishing operations in markets with significant international
traffic as soon as deregulation enables facilities-based carriers to
enter such markets. The Company believes that its ability to originate
traffic from multiple markets will allow it to benefit from the
relatively high growth of non-U.S. originated traffic, to serve
multinational carriers and to optimize the use of its facilities. As
part of its business strategy, the Company may enter into strategic
alliances with, acquire assets or businesses from, or invest in,
companies that are complementary to its current operations. The Company
has a dedicated Business Development Group which focuses on developing
relationships with correspondent carriers and which facilitates new
market entry.
. Expand carrier-grade international infrastructure. FCI intends to expand
its carrier-grade international network. The Company uses switches
similar to those used by first-tier carriers and PTTs, and continues to
implement advanced features, such as asynchronous transfer mode ("ATM")
technology, which will permit the Company to transmit voice and data
services over a single platform. The Company believes that increasing
the percentage of minutes of traffic it carries end-to-end over its
facilities and international transmission capacity owned or leased on a
fixed-cost basis ("on-net") will enable it to increase margins and
profitability and ensure quality of service. By the end of 1998, the
Company expects to have such on-net capability on 25 of the top 50
international traffic routes and facilities in countries representing
over 60.0% of total international traffic.
. Focus on wholesale market. FCI's customer base consists primarily of
established and emerging competitive carriers and PTTs that purchase the
Company's services on a wholesale basis. The Company believes that the
wholesale telecommunications market will offer significant growth
opportunities as traditional international traffic settlement mechanisms
are replaced by competitive
6
<PAGE>
cost-based systems. In addition, liberalization of telecommunications
markets worldwide is expected to lead to the establishment of new carriers
and resellers that require high quality international connectivity at
competitive rates. FCI believes that its wholesale strategy enables it to
generate the high traffic volumes required to justify investments in
network infrastructure, while controlling selling, general and
administrative expenses.
. Continue to leverage Tele8 status. Tele8's status as an established
carrier in Sweden has enabled FCI to enter into operating agreements with
a number of major European PTTs. The Company intends to continue to
leverage Tele8's carrier status and brand name to negotiate additional
operating agreements, acquire additional customers and obtain preferential
pricing on leased fiber and satellite transmission capacity worldwide.
. Maintain efficient operations and low cost base. The Company seeks to
maintain efficient operations and a low cost base through a disciplined
incremental approach to investments in fixed assets, strict control over
selling, general and administrative expenses and the operation of a
centralized, highly efficient network control center for its global
network, which enable the Company to be price competitive.
MANAGEMENT
The six members of the Company's senior management have over 140 years of
combined experience in the telecommunications industry. The breadth of
experience of FCI's management team has enabled it to establish correspondent
relationships, obtain customers and attract skilled management personnel.
Walter Burmeister, co-founder, Chief Executive Officer and President of the
Company, has over 36 years of experience in the industry, including serving as
Vice President and Chief Financial Officer of Bell Atlantic International.
Anand Kumar, co-founder and Executive Vice President of Business Development
of the Company, has more than 30 years of experience with Washington
International Teleport, GTE Corp. ("GTE") and AT&T Corp. ("AT&T"). Jeffrey
Guzy, co-founder and Executive Vice President of Marketing, Sales & Product
Development of the Company, has more than 13 years of experience with
telecommunications and technology companies, including Interferometrics,
Sprint Communications, Inc. ("Sprint"), Bell Atlantic Corp. ("Bell Atlantic")
and Overseas Telecommunications Inc. Christopher King, the Company's Chief
Financial Officer and Vice President of Finance and Administration, has more
than 10 years of finance experience with Bell Atlantic. Donald Dodd, the
Company's Managing Director of Operations & Engineering, has over 40 years of
experience with telecommunications companies, including Tekelec Incorporated,
Bell Atlantic and Northern Telecom. Peter Gardener, the Managing Director of
the Company's U.K. subsidiary, has more than 20 years of experience in the
industry, including working as a management consultant with Commslogic for 10
years.
RECENT DEVELOPMENTS
On December 22, 1997, the Company and its stockholders, Armstrong
International Telecommunications, Inc. ("AIT"), a subsidiary of Armstrong
Holdings, Inc. ("Armstrong"), and FCI Management Group, a Pennsylvania general
partnership ("FMG"), effected a reorganization to convert their ownership
interests in the Company from limited liability company interests to shares in
a corporation. AIT and FMG contributed their membership interests in FaciliCom
International, L.L.C. ("FCI LLC") to the Company in exchange for all of the
outstanding shares of the Company's common stock on a pro rata basis (the
"Reorganization"). As a result of the Reorganization, FCI LLC is a wholly owned
subsidiary of the Company. Concurrently, AIT invested an additional $20.0
million in the Company in exchange for an additional equity interest (the
"Equity Investment" and together with the Reorganization, the
"Recapitalization") by contributing cash and canceling indebtedness. Giving
effect to the Recapitalization, AIT and FMG own 84% and 16% of the outstanding
stock of the Company. See "Certain Relationships and Related Transactions."
On January 28, 1998, the Company issued $300,000,000 aggregate principal
amount of Old Notes pursuant to an Indenture (as defined herein). Interest on
the Old Notes is payable semiannually in arrears on January 15 and July 15 of
each year, commencing on July 15, 1998.
7
<PAGE>
The Old Notes are redeemable at the option of the Company in whole or in part
at any time on or after January 15, 2003, at specified redemption prices plus
accrued and unpaid interest and Liquidated Damages (as defined in the
Indenture), if any, thereon to the date of redemption. In addition, at any time
prior to January 15, 2001, the Company may redeem from time to time up to 35.0%
of the originally issued aggregate principal amount of the Notes at the
specified redemption prices plus accrued interest and Liquidated Damages, if
any, to the date of redemption with the Net Cash Proceeds (as defined in the
Indenture) of one or more Public Equity Offerings (as defined in the
Indenture); provided that at least 65.0% of the originally issued aggregate
principal amount of the Notes remains outstanding after such redemption. In the
event of a Change in Control (as defined in the Indenture), each holder of the
Notes has the right to require the Company to purchase all or any of such
holder's Old Notes at a purchase price in cash equal to 101.0% of the aggregate
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, to the date of purchase.
The Company used approximately $86.5 million of the proceeds from the
offering of the Old Notes to purchase a portfolio of Pledged Securities (as
defined in the Indenture) consisting of U.S. Governmental Obligations (as
defined in the Indenture), which are pledged as security and restricted for the
first six scheduled interest payments on the Notes. In addition, approximately
$16.9 million of existing indebtedness was paid off with the proceeds from the
offering of the Old Notes.
The Old Notes are unsecured obligations of the Company, rank senior in right
of payment to any existing and future obligations of the Company expressly
subordinated in right of payment to the Old Notes and will be pari passu in
right of payment with all other existing and future unsecured and
unsubordinated obligations of the Company.
The Notes require maintenance of certain financial and nonfinancial
covenants, including limitations on additional indebtedness, restricted
payments (including dividends), transactions with affiliates, liens and asset
sales. See "Description of Notes--Covenants."
On March 31, 1998, the Company's Board of Directors approved an amendment to
the Company's Certificate of Incorporation to create a new class of non-voting
common stock, and adopted the FaciliCom International, Inc. 1998 Stock Option
Plan (the "1998 Stock Option Plan"). The Stock Option Plan provides for the
grant of options to purchase shares of the Company's non-voting common stock to
certain directors, officers, key employees and advisors of the Company. Also on
March 31, 1998, all of the phantom shares previously granted to employees and
directors of the Company under the FaciliCom International, Inc. 1997 Phantom
Stock Rights Plan (the "Phantom Stock Plan") were converted to options under
the 1998 Stock Option Plan, and the Company granted additional options to
purchase 6,448 shares of non-voting stock to employees, directors and advisors
under the 1998 Stock Option Plan. The stock-based compensation arrangements
resulted in a charge to operations for the six months ended March 31, 1998 of
$5.5 million.
On April 27, 1998, the Company entered into an agreement to purchase 100% of
the issued and outstanding capital stock of Oy Teleykkanen AB ("Tele 1"), a
corporation formed under the laws of Finland, for $4.0 million in cash. Tele 1
is a Finnish provider of local and long distance international
telecommunication services and has a carrier agreement to exchange customer
traffic with Telecom Finland, the dominant carrier in Finland.
----------------
The Company's headquarters are located at 1401 New York Avenue, NW,
Washington, D.C. 20005 and its telephone number is (202) 496-1100.
8
<PAGE>
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The Exchange Offer.......... The Company is offering to exchange up to
$300,000,000 aggregate principal amount of
Exchange Notes for up to $300,000,000 aggregate
principal amount of Old Notes that are properly
tendered and accepted. The Company will issue
Exchange Notes on or promptly after the
Expiration Date. The terms of the Exchange Notes
are substantially identical in all respects to
the terms of the Old Notes for which they may be
exchanged pursuant to the Exchange Offer, except
that (i) the Exchange Notes are freely
transferable by holders thereof (other than as
provided herein), and are not subject to any
covenant restricting transfer absent registration
under the Securities Act and (ii) the holders of
the Exchange Notes will not be entitled to
certain rights under the Registration Rights
Agreement, including the terms providing for an
increase in the interest rate on the Old Notes
under certain circumstances relating to the
timing of the Exchange Offer, all of which rights
will terminate when the Exchange Offer is
consummated. See "The Exchange Offer." The
Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes
being tendered for exchange.
Based on an interpretation by the Commission set
forth in no-action letters issued to third
parties, the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale,
resold and otherwise transferred by a holder
thereof (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the
Company to resell pursuant to Rule 144A under the
Securities Act or any other available exemption
under the Securities Act or (ii) a person that is
an affiliate (as defined in Rule 405 under the
Securities Act) of the Company), without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that the holder is acquiring the
Exchange Notes in the ordinary course of its
business and is not participating, and has no
arrangement or understanding with any person to
participate, in the distribution of the Exchange
Notes. Each broker-dealer that receives the
Exchange Notes for its own account in exchange
for the Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of
market-making activities or other trading
activities, must acknowledge that it will deliver
a prospectus in connection with any resale of
such Exchange Notes. The Company has agreed that
for a period of 180 days after the Expiration
Date, it will make this Prospectus available to
any broker-dealer for use in connection with any
such resale. See "Plan of Distribution."
Registration Rights......... The Old Notes were issued in transactions exempt
from the registration requirements of the
Securities Act by the Company on January 28, 1998
to Lehman Brothers Inc. and BT Alex. Brown
Incorporated (the "Initial Purchasers") pursuant
to a purchase
9
<PAGE>
agreement dated as of January 23, 1998 by and
among the Company and the Initial Purchasers (the
"Purchase Agreement"). The Initial Purchasers
subsequently sold the Old Notes to (a) qualified
institutional buyers in reliance on Rule 144A
under the Securities Act and (b) outside the U.S.
to certain persons in reliance on Regulation S
under the Securities Act. In connection
therewith, the Company executed and delivered for
the benefit of the holders of the Notes a
registration rights agreement (the "Registration
Rights Agreement") which grants the holders of
the Old Notes certain exchange and registration
rights. Pursuant to the Registration Rights
Agreement, the Company is obligated to (i) file
the Exchange Offer Registration Statement with
the Commission with respect to the Exchange Offer
on or prior to 60 days after January 28, 1998
("the Closing Date"), (ii) use its reasonable
best efforts to cause the Exchange Offer
Registration Statement to be declared effective
by the Commission within 120 days after the
Closing Date, (iii) file all necessary amendments
to the Exchange Offer Registration Statement and
make other necessary filings pursuant to state
securities laws to permit consummation of the
Exchange Offer and (iv) use its reasonable best
efforts to cause the Exchange Offer to be
consummated on or prior to 30 days after the date
on which the Exchange Offer Registration
Statement is declared effective by the
Commission. In the event that applicable law or
Commission policy do not permit the Company to
effect the Exchange Offer, the Exchange Offer is
not consummated by June 1, 1998, or certain
holders of the Old Notes notify the Company they
are not permitted to participate in, or would not
receive freely tradable Exchange Notes pursuant
to, the Exchange Offer, the Company will use its
reasonable best efforts to cause to be declared
effective a registration statement (the "Shelf
Registration Statement") with respect to resale
of the Old Notes on or prior to the 120th day
after such obligation arises and to keep the
Shelf Registration Statement continuously
effective until up to two years after the date on
which the Old Notes were sold. If the Company
fails to satisfy these registration obligations,
it will be required to pay Liquidated Damages (as
defined herein) to the holders of the Notes under
certain circumstances. The holders of the
Exchange Notes are not entitled to any exchange
or registration rights with respect to the
Exchange Notes, except as described herein.
Holders of Old Notes do not have any appraisal or
dissenters' rights under the Indenture in
connection with the Exchange Offer. See "The
Exchange Offer--Purposes and Effects of the
Exchange Offer."
Expiration Date............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on . , 1998, unless the Exchange
Offer is extended, in which case the term
"Expiration Date" means the date and time to
which the Exchange Offer is extended.
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain
customary conditions, which may be waived by the
Company. See "The Exchange Offer--Conditions to
Exchange Offer." The Company reserves the right
to terminate or amend the Exchange Offer at any
time prior to the Expiration Date upon the
occurrence of any such conditions.
10
<PAGE>
Procedures for Tendering
Old Notes.................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile,
together with the Old Notes and any other
required documentation to the exchange agent (the
"Exchange Agent") at the address set forth
herein. Old Notes may be physically delivered,
but physical delivery is not required if a
confirmation of a book-entry transfer of such Old
Notes to the Exchange Agent's account at the
Depository Trust Company ("DTC" or the
"Depository") is delivered in a timely fashion.
By executing the Letter of Transmittal, each
holder will represent to the Company, among other
things, that (i) the Exchange Notes acquired
pursuant to the Exchange Offer by the holder and
any beneficial owners of Old Notes are being
obtained in the ordinary course of business of
the person receiving such Exchange Notes, (ii)
neither the holder nor such beneficial owner is
participating in, intends to participate in or
has an arrangement or understanding with any
person to participate in the distribution of such
Exchange Notes and (iii) neither the holder nor
such beneficial owner is an "affiliate," as
defined under Rule 405 of the Securities Act, of
the Company. Each broker-dealer that receives
Exchange Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired
by such broker or dealer as a result of market-
making activities or other trading activities
(other than Old Notes acquired directly from the
Company), may participate in the Exchange Offer
but may be deemed an "underwriter" under the
Securities Act and, therefore, must acknowledge
in the Letter of Transmittal that it will deliver
a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering
a prospectus, a broker or dealer will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. See
"The Exchange Offer--Procedures for Tendering"
and "Plan of Distribution."
Interest on the Exchange
Notes...................... The Exchange Notes will bear interest at the rate
of 10 1/2% per annum, payable semiannually in
arrears on January 15 and July 15 of each year,
commencing on July 15, 1998. Holders of the
Exchange Notes will receive interest from the
date of initial issuance of the Exchange Notes,
plus an amount equal to the accrued interest on
the Old Notes from the later of (i) the most
recent date to which interest has been paid
thereon and (ii) the date of issuance of the Old
Notes, to the date of exchange thereof.
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such owner
must, prior to completing and executing the
Letter of Transmittal and delivering his Old
Notes, either make appropriate arrangements to
register ownership of the Old Notes in such
owner's name or obtain a properly completed bond
power from the registered holder. The
11
<PAGE>
transfer of registered ownership may take
considerable time and may not be completed prior
to the Expiration Date. See "The Exchange Offer--
Procedures for Tendering."
Guaranteed Delivery
Procedures................. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date must
tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Acceptance of the Old Notes
and Delivery of the
Exchange Notes............. Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company
will accept for exchange any and all Old Notes
which are properly tendered in the Exchange Offer
prior to the Expiration Date.
Withdrawal Rights........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date. See "The Exchange Offer--Withdrawal of
Tenders."
U.S. Federal Income Tax
Considerations............. The exchange of Old Notes for Exchange Notes by
tendering holders should not be a taxable
exchange for U.S. federal income tax purposes,
and such holders should not recognize any taxable
gain or loss or any interest income for U.S.
federal income tax purposes as a result of such
exchange. See "Certain United States Federal
Income Tax Considerations."
Use of the Proceeds......... There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Effect on Holders of Old
Notes...................... As a result of making this Exchange Offer, and
upon acceptance for exchange of all validly
tendered Old Notes pursuant to the terms of this
Exchange Offer, the Company will have fulfilled a
covenant contained in the terms of the Old Notes
and the Registration Rights Agreement and,
accordingly, a holder of the Old Notes will have
no further registration or other rights under the
Registration Rights Agreement, except under
certain limited circumstances. Holders of the Old
Notes who do not tender their Notes in the
Exchange Offer will continue to hold such Old
Notes and will be entitled to all the rights and
limitations applicable thereto under the
Indenture. All untendered, and tendered, but
unaccepted, Old Notes will continue to be subject
to the restrictions on transfer provided for in
the Old Notes and the Indenture. To the extent
that Old Notes are tendered and accepted in the
Exchange Offer, the trading market, if any, for
the Old Notes not so tendered could be adversely
affected. See "Risk Factors--Consequences of
Failure to Exchange."
Exchange Agent.............. State Street Bank and Trust Company is serving as
Exchange Agent in connection with the Exchange
Offer. The address and telephone number of the
Exchange Agent are set forth in "The Exchange
Offer--Exchange Agent."
12
<PAGE>
THE NOTES
The Exchange Offer applies to $300,000,000 aggregate principal amount of Old
Notes. The terms of the Exchange Notes are identical in all material respects
to the Old Notes, except that the Exchange Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting their transfer
and the holders of the Exchange Notes will not be entitled to certain rights
under the Registration Rights Agreement, including the terms providing for an
increase in the interest rate on the Old Notes under certain circumstances
relating to the timing of the Exchange Offer, all of which rights will
terminate when the Exchange Offer is consummated. The Exchange Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits of
the Indenture, under which both the Old Notes were, and the Exchange Notes will
be, issued. See "Description of Notes."
Issue....................... $300,000,000 aggregate principal amount of 10
1/2% Series B Senior Notes due 2008.
Maturity Date............... January 15, 2008.
Interest Payment Dates...... January 15 and July 15, commencing on July 15,
1998.
Security.................... The Indenture requires the Company to purchase
and pledge to the Trustee, as security for the
benefit of the holders of the Notes, the Pledged
Securities in such amount as will be sufficient
upon receipt of scheduled interest and/or
principal payments of such securities to provide
for the payment in full of the first six
scheduled interest payments due on the Notes. The
Company used approximately $86.5 million of the
net proceeds of the offering of the Old Notes to
acquire the Pledged Securities. Under the Pledge
Agreement, assuming that the Company makes the
first six scheduled interest payments on the
Notes in a timely manner, any remaining Pledged
Securities will be released to the Company from
the Pledge Account and the Notes will be
unsecured. See "Description of Notes--Security."
Ranking..................... The Indebtedness evidenced by the Notes will be
unsecured (except as described) obligations of
the Company, will rank senior in right of payment
to any existing and future obligations of the
Company expressly subordinated in right of
payment to the Notes and will be pari passu in
right of payment with all other existing and
future unsecured and unsubordinated obligations
of the Company, including trade payables. As of
March 31, 1998, the Company had approximately
$309.5 million of Indebtedness. Because the
Company is a holding company that conducts its
business through its subsidiaries, all existing
and future Indebtedness and other liabilities and
commitments of the Company's subsidiaries,
including trade payables, will be effectively
senior to the Notes. The Company's subsidiaries
will not be guarantors of the Notes. The
Indenture limits, but does not prohibit, the
incurrence of certain additional Indebtedness by
the Company and its Restricted Subsidiaries and
does not limit the amount of Indebtedness
Incurred (as defined herein) to finance the cost
of Telecommunications Assets (as defined herein).
As of March 31, 1998, the Company's consolidated
subsidiaries had aggregate liabilities of $380.1
million, which includes $309.5 million of
Indebtedness.
13
<PAGE>
Absence of Public Trading
Market for the Exchange
Notes...................... There is no public market for the Exchange Notes
and the Company does not intend to apply for
listing of the Exchange Notes on any national
securities exchange or for quotation of the
Exchange Notes through Nasdaq. Although the
Initial Purchasers have informed the Company that
they currently intend to make a market in the
Notes, they are not obligated to do so and any
such market-making may be discontinued at any
time without notice. In addition, such market-
making activity may be limited during the
pendency of the Exchange Offer or the
effectiveness of a shelf registration statement
in lieu thereof. Accordingly, there can be no
assurance as to the development or liquidity of
any market for the Notes.
Optional Redemption......... The Notes are not redeemable at the option of the
Company prior to January 15, 2003. Thereafter,
the Notes will be redeemable, in whole or in
part, at the option of the Company, at the
redemption prices set forth herein plus accrued
and unpaid interest and Liquidated Damages, if
any, thereon to the date of redemption.
Notwithstanding the foregoing, prior to January
15, 2001, the Company may redeem from time to
time up to 35.0% of the originally issued
aggregate principal amount of Notes at a
redemption price equal to 110.5% of the aggregate
principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, thereon
to the date of redemption with the Net Cash
Proceeds of one or more Public Equity Offerings;
provided, that at least 65.0% of the originally
issued aggregate principal amount of the Notes
remains outstanding immediately after such
redemption; and provided further that notice of
such redemption shall be given within 60 days of
the closing of any such Public Equity Offering.
See "Description of Notes--Optional Redemption."
Change of Control........... In the event of a Change of Control, each holder
of the Notes will have the right to require the
Company to purchase all or any part of such
holder's Notes at a purchase price in cash equal
to 101.0% of the aggregate principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of
purchase. See "Description of Notes--Repurchase
of Notes upon a Change of Control." There can be
no assurance that the Company will be able to
fund these repurchase obligations in the event of
a Change of Control.
Covenants................... The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its Restricted Subsidiaries to Incur
additional Indebtedness, pay dividends or make
other distributions, repurchase Capital Stock or
subordinated Indebtedness or make certain other
Restricted Payments, create certain liens, enter
into certain transactions with stockholders and
affiliates, sell assets, issue or sell Capital
Stock of the Company's Restricted Subsidiaries or
enter into certain mergers and consolidations.
See "Description of Notes--Covenants."
14
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes pursuant to this Prospectus. In consideration for issuing the
Exchange Notes as contemplated herein, the Company will receive in exchange Old
Notes in like principal amount. The Old Notes surrendered in exchange for the
Exchange Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any change in
the Indebtedness of the Company. The net proceeds to the Company from the
offering of the Old Notes, after deducting the underwriting discounts and
commissions and estimated expenses, were approximately $290.0 million. The
Company applied approximately $86.5 million of the net proceeds to purchase the
Pledged Securities and approximately $16.9 million to repay amounts outstanding
under its existing vendor financing agreements. The Company intends to apply
approximately $150.0 million to fund capital expenditures to expand and develop
the Company's network, and the balance to fund operating losses and working
capital requirements and other general corporate purposes, including potential
acquisitions and investments in joint ventures and strategic alliances.
RISK FACTORS
Holders of the Notes should consider carefully the information set forth
under the caption "Risk Factors," and all other information set forth in this
Prospectus, in evaluating the Exchange Offer.
15
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA
The summary financial data for FCI presented below for the fiscal years ended
September 30, 1997 and September 30, 1996, and have been derived from the
financial statements of FCI, which have been audited by Deloitte & Touche LLP,
independent public accountants. The summary financial and certain other data
for the six months ended March 31, 1998 and 1997, and actual balance sheet data
have been derived from unaudited financial statements of FCI. The information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations" and the financial statements of FCI included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED FISCAL YEAR ENDED
MARCH 31, SEPTEMBER 30,
----------------- -------------------
1998 1997 1997 1996
-------- ------- --------- --------
(IN THOUSANDS, EXCEPT SWITCH DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues........................ $ 70,954 $27,094 $ 70,187 $ 11,891
Cost of revenues...................... 66,486 25,425 65,718 12,742
-------- ------- --------- --------
Gross margin (deficit)................ 4,468 1,669 4,469 (851)
Operating expenses:
Selling, general and administrative
(including related party)............ 12,708 5,852 13,511 7,582
Stock-based compensation.............. 5,514 -- -- --
Depreciation and amortization......... 2,854 1,090 2,318 1,143
-------- ------- --------- --------
Total operating expenses.............. 21,076 6,942 15,829 8,725
-------- ------- --------- --------
Loss from operations.................. (16,608) (5,273) (11,360) (9,576)
Interest expense (including related
party)............................... (6,429) (463) (1,336) (312)
Interest income....................... 2,505 -- -- --
Foreign exchange gain (loss).......... (394) (1,323) (1,335) 226
-------- ------- --------- --------
Loss before income taxes.............. (20,926) (7,059) (14,031) (9,662)
Income tax benefit.................... 3,226 -- -- --
-------- ------- --------- --------
Net loss.............................. $(17,700) $(7,059) $ (14,031) $ (9,662)
======== ======= ========= ========
REVENUE DATA:
Wholesale............................. $ 66,394 $25,775 $ 66,422 $ 11,664
Retail................................ 4,560 1,319 3,765 227
-------- ------- --------- --------
Total revenues........................ $ 70,954 $27,094 $ 70,187 $ 11,891
======== ======= ========= ========
OTHER DATA:
EBITDA(/1/)........................... $(13,754) $(4,183) $ (9,042) $ (8,433)
Cash flows from operating activities.. (13,565) (3,192) (8,361) (5,413)
Cash flows from investing activities.. (153,778) (819) (1,664) (1,074)
Cash flows from financing activities.. 291,367 2,878 7,914 8,572
Capital expenditures.................. 46,752 3,741 12,282 8,404
Number of switches (at period end).... 6 2 4 2
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $125,423
Short-term marketable securities................. 80,964
Long-term marketable securities.................. 57,470
Working capital (excluding cash and marketable
securities)..................................... (39,677)
Property and equipment, net...................... 64,890
Total assets..................................... 375,815
Total long-term obligations (including current
portion)........................................ 309,541
Total capital accounts........................... (4,280)
</TABLE>
- --------
(1) EBITDA consists of earnings (loss) before interest expense, interest
income, income taxes, depreciation, amortization and foreign exchange gain
(loss). EBITDA should not be considered as a substitute for operating
earnings, net income, cash flow or other combined statement of income or
cash flow data computed in accordance with generally accepted accounting
principles or as a measure of a company's results of operations or
liquidity. EBITDA is widely used as a measure of a company's operating
performance and its ability to service its indebtedness because it assists
in comparing performance on a consistent basis across companies, which can
vary significantly.
16
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the risk factors set forth
below, as well as the other information appearing in this Prospectus, before
making an investment in the Notes.
SUBSTANTIAL INDEBTEDNESS; LIQUIDITY; NEGATIVE RATIO OF EARNINGS TO FIXED
CHARGES
The Company has substantial indebtedness as a result of the offering of the
Old Notes. As of March 31, 1998, the Company's total indebtedness was
approximately $309.5 million, including $9.5 million of secured indebtedness,
its stockholders' equity was approximately ($4.3) million and the Company had
total assets of approximately $375.8 million. For the six months ended March
31, 1998 and for the fiscal year ended September 30, 1997, after giving pro
forma effect to the offering of the Old Notes and the application of the net
proceeds therefrom as if the offering of the Old Notes had been consummated on
October 1, 1996, the Company's EBITDA would have been insufficient to cover
fixed charges by approximately $29.5 million and $40.5 million, respectively.
Cash flows from operating, investing and financing activities were
insufficient to cover fixed charges. Historical earnings for the six months
ended March 31, 1998 (unaudited), the periods ended September 30, 1997, 1996
and 1995 for the period from January 1, 1995 through June 30, 1995
(Predecessor), were insufficient to cover fixed charges by $20.9 million,
$14.0 million, $9.7 million, $1.7 million and $1.3 million, respectively. The
Indenture limits, but does not prohibit, the incurrence of certain additional
indebtedness by the Company and certain of its subsidiaries and does not limit
the amount of Indebtedness that may be incurred to finance the cost of
Telecommunications Assets. Consequently, in the event of a bankruptcy,
liquidation, dissolution, reorganization or similar proceeding with respect to
the Company, the holders of any secured indebtedness will be entitled to
proceed against the collateral that secures such secured indebtedness and such
collateral will not be available for satisfaction of any amounts owed under
the Notes. The Company anticipates that it and its subsidiaries will incur
substantial additional Indebtedness in the future. See "Selected Consolidated
Financial and Other Data" and the Company's Consolidated Financial Statements
elsewhere in the Prospectus, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of Notes."
The level of the Company's indebtedness could have important consequences to
holders of the Notes, including the following: (i) the debt service
requirements of any additional indebtedness could make it more difficult for
the Company to make payments of interest on the Notes; (ii) the ability of the
Company to obtain any necessary financing in the future for working capital,
capital expenditures, debt service requirements or other purposes may be
limited; (iii) a substantial portion of the Company's cash flow from
operations, if any, must be dedicated to the payment of principal and interest
on its indebtedness and other obligations and will not be available for use in
its business; (iv) the Company's level of indebtedness could limit its
flexibility in planning for, or reacting to, changes in its business; (v) the
Company may become more highly leveraged than some of its competitors, which
may place it at a competitive disadvantage; and (vi) the Company's high degree
of indebtedness will make it more vulnerable in the event of a downturn in its
business.
The Company must substantially increase its net cash flow in order to meet
its debt service obligations, and there can be no assurance that the Company
will be able to meet such obligations, including its obligations under the
Notes. If the Company is unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments, or if it otherwise fails to
comply with the various covenants under its indebtedness, it would be in
default under the terms thereof, which would permit the holders of such
indebtedness to accelerate the maturity of such indebtedness and could cause
defaults under other indebtedness of the Company. Such defaults could result
in a default on the Notes and could delay or preclude payments of interest or
principal thereon.
HISTORICAL AND FUTURE OPERATING LOSSES; NEGATIVE CASH FLOW AND EBITDA; NET
LOSSES
Since its inception through March 31, 1998, the Company had cumulative
negative cash flow from operating activities of $29.0 million and cumulative
EBITDA of ($32.6) million. In addition, the Company incurred a net loss for
the six months ended March 31, 1998 and for the fiscal year ended September
30, 1997 of ($17.7) million and ($14.0) million, respectively, and had an
accumulated deficit of $47.6 million as of March 31, 1998. The
17
<PAGE>
Company expects to incur negative EBITDA, negative cash flow from operating,
financing and investing activities and significant operating losses and net
losses for at least its next two fiscal years as it incurs additional costs
associated with the development and expansion of its network, the expansion of
its marketing and sales organization and the introduction of new
telecommunications services. Furthermore, the Company expects that operations
in new target markets will experience negative cash flows until an adequate
customer base and related revenues have been established. The Company must
substantially increase its net cash flow in order to meet its debt service
obligations, including its obligations on the Notes, and there can be no
assurance that the Company will achieve or, if achieved, will sustain
profitability or positive cash flow from operating activities in the future.
If the Company cannot achieve and sustain operating profitability or positive
cash flow from operations, it may not be able to meet its debt service or
working capital requirements (including its obligations with respect to the
Notes), which could have a material adverse effect on the business, operations
and financial condition of the Company. See "--Future Capital Needs;
Uncertainty of Additional Funding" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDIARIES FOR DISTRIBUTIONS TO REPAY
NOTES
FCI is a holding company, the principal assets of which are its operating
subsidiaries in the U.S., Sweden, Denmark and the U.K. As a holding company,
the Company's internal sources of funds to meet its cash needs, including
payment of expenses and principal and interest on the Notes, are dividends,
intercompany loans and other permitted payments from its direct and indirect
subsidiaries, as well as its own credit arrangements. The subsidiaries of the
Company are legally distinct from the Company and have no obligation,
contingent or otherwise, to pay amounts due with respect to the Notes or to
make funds available for such payments and will not be guarantors of the
Notes. Additionally, some of the Company's subsidiaries are organized in
jurisdictions outside the U.S. The ability of the Company's operating
subsidiaries to pay dividends, repay intercompany loans or make other
distributions to FCI may be restricted by, among other things, the
availability of funds, the terms of various credit arrangements entered into
by such operating subsidiaries, as well as statutory and other legal
restrictions, and such payments may have adverse tax consequences. The failure
to pay any such dividends, repay intercompany loans or make any such other
distributions would restrict FCI's ability to repay principal and interest on
the Notes and its ability to utilize cash flow from one subsidiary to cover
shortfalls in working capital at another subsidiary, and could otherwise have
a material adverse effect upon the Company's business, financial condition and
results of operations.
Because the Company is a holding company that conducts its business through
its subsidiaries, claims of creditors of such subsidiaries will generally have
priority over the assets of such subsidiaries over the claims of the Company
and the holders of the Company's indebtedness (including the Notes).
Accordingly, the Notes will be effectively subordinated to all existing and
future indebtedness and other liabilities and commitments of the Company's
subsidiaries, including trade payables. As of March 31, 1998, the Company's
consolidated subsidiaries had aggregate liabilities of $380.1 million, which
included $309.5 million of Indebtedness. Any right of the Company to receive
assets of any subsidiary upon the liquidation or reorganization of such
subsidiary (and the consequent rights of the holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
such subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor, in which case the claims of the Company would still
be subordinate to any security in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held by the Company. In
addition, holders of secured indebtedness of the Company would have a claim on
the assets securing such indebtedness that is prior to the holders of the
Notes and would have a claim that is pari passu with the holders of the Notes
to the extent such security did not satisfy such indebtedness. The Company has
no significant assets other than its ownership interests in FCI LLC and it is
expected that such ownership interests and the equity interests in the
Company's other subsidiaries may be pledged in the future to secure one or
more credit facilities.
DEPENDENCE ON KEY CUSTOMERS; BAD DEBT EXPOSURE
The Company's primary business as a wholesale long distance provider makes
it highly dependent upon traffic delivered to the Company by other long
distance providers pursuant to arrangements that can generally be terminated
on short notice. The Company's carrier customers tend to be extremely price
sensitive, rely on low margin business and frequently choose to move their
business based solely on incremental price changes. Such
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customers may and frequently do elect to divert a portion of their service
requirements to alternative providers on short notice based solely on price.
Traffic volume lost through service terminations or diversions must be
replaced through the addition of new customers or incremental business from
existing customers to realize revenue growth.
While the list of the Company's most significant customers varies from
quarter to quarter, for the quarter ended March 31, 1998 the Company's ten
largest customers accounted for 37.6% of the Company's revenues. For the
fiscal year ended September 30, 1996, North American Gateway Inc. and Cherry
Communications, Inc. accounted for 30.0% and 11.0%, respectively, of the
Company's total revenues. For the fiscal year ended September 30, 1997, North
American Gateway Inc. and Telegroup, Inc. accounted for 14.0% and 10.3%,
respectively, of the Company's total revenues. The loss or substantial
reduction in the level of service to the Company's large customers would have
an immediate and material adverse effect on the Company's business. The
Company's customer concentration also amplifies the risk of non-payment by
customers. If the Company experiences difficulties in the collection of
accounts receivable from its major customers, the Company's financial
condition and results of operations could be materially adversely affected.
See "Business--Customers" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The development and expansion of the Company's network facilities, funding
of operating losses and working capital needs and investment in the Company's
management information systems will require significant investment. The
Company expects that the net proceeds from the offering of the Old Notes and
cash flow from operations will provide the Company with sufficient capital to
fund planned capital expenditures and anticipated losses and to make interest
payments on the Notes. There can be no assurance, however, that the Company
will not need additional financing sooner than anticipated. In addition, the
Company may be required to obtain additional financing in order to repay the
Notes at the Maturity Date. The need for additional financing depends on
factors such as the rate and extent of the Company's international expansion,
increased investment in ownership rights in fiber optic cable and increased
sales and marketing expenses. In addition, the amount of the Company's actual
future capital requirements also will depend upon many factors that are not
within the Company's control, including competitive conditions (particularly
with respect to the Company's ability to attract incremental traffic) and
regulatory or other government actions. In the event that the Company's plans
or assumptions change or prove to be inaccurate or the net proceeds of the
offering of the Old Notes, together with internally generated funds, prove to
be insufficient to fund the Company's growth and operations, then some or all
of the Company's development and expansion plans could be delayed or
abandoned, or the Company may be required to seek additional financing.
The Company may seek to raise such additional capital from public or private
equity or debt sources. There can be no assurance that the Company will be
able to obtain the additional financings or, if obtained, that it will be able
to do so on a timely basis or on terms favorable to the Company. The Indenture
contains certain restrictive covenants that will affect, and in many respects
will significantly limit or prohibit, among other things, the ability of the
Company to incur additional indebtedness and to create liens on its assets. If
the Company is able to raise additional funds through the incurrence of debt,
and it does so, it would likely become subject to additional restrictive
financial covenants. In the event that the Company is unable to obtain such
additional capital or is unable to obtain such additional capital on
acceptable terms, the Company may be required to reduce the scope of its
expansion, which could adversely affect the Company's business, results of
operations and financial condition, its ability to compete and its ability to
meet its obligations on the Notes.
LIMITED OPERATING HISTORY; ENTRY INTO NEW MARKETS
FCI LLC was founded in May 1995, acquired Tele8, the Company's principal
international subsidiary, in July 1995 and began generating revenues in the
U.S. in February 1996. The Company has generated only limited revenues and has
a limited operating history. In addition, the Company intends to enter markets
where it has limited or no operating experience and where services have
previously been provided primarily by the local PTTs. Accordingly, there can
be no assurance that the Company's future operations will generate operating
or net income, and the Company's prospects must therefore be considered in
light of the risks, expenses, problems and delays inherent in establishing a
new business in a rapidly changing industry.
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DEPENDENCE ON OPERATING AGREEMENTS WITH FOREIGN OPERATORS
The Company's strategy is substantially based on its ability to enter into:
(i) operating agreements with PTTs in countries that have yet to become
deregulated so the Company can terminate traffic in, and receive return
traffic from, that country; (ii) operating agreements with PTTs and emerging
carriers in foreign countries whose telecommunications markets have
deregulated so it can terminate traffic in such countries; and (iii)
interconnection agreements with the PTT in each of the countries where the
Company has operating facilities (e.g., the U.K.) so it can terminate traffic
in that country. The Company believes that it would not be able to serve its
customers at competitive prices without such operating or interconnection
agreements. Termination of such operating agreements by certain of the
Company's foreign carriers or PTTs would have a material adverse effect on the
Company's business. Moreover, there can be no assurance that the Company will
be able to enter into additional operating or interconnection agreements in
the future. The failure to enter into additional agreements could limit the
Company's ability to increase its revenues on a profitable basis. See
"Business--Network."
INTENSE COMPETITION
The international telecommunications industry is intensely competitive and
subject to rapid change precipitated by advances in technology and regulation.
The Company's success depends upon its ability to compete with a variety of
other telecommunications providers in each of its markets, including the
respective PTT in each country in which the Company operates. Other
competitors of the Company include large, facilities-based, multinational
carriers and smaller facilities-based wholesale long distance service
providers in the U.S. and overseas that have emerged as a result of
deregulation, switched-based resellers of international long distance services
and global alliances among some of the world's largest telecommunications
carriers. International telecommunications providers such as the Company
compete on the basis of price, customer service, transmission quality, breadth
of service offerings and value-added services, and the Company's carrier
customers are especially price sensitive. In addition, many of the Company's
competitors enjoy economies of scale that can result in a lower cost structure
for termination and network costs, which could cause significant pricing
pressures within the international communications industry. Several long
distance carriers in the U.S. have introduced pricing strategies that provide
for fixed, low rates for both international and domestic calls originating in
the U.S. Such a strategy, if widely adopted, could have an adverse effect on
the Company's business, operations and financial condition if increases in
telecommunications usage do not result or are insufficient to offset the
effects of such price decreases. In recent years, prices for international
long distance services have decreased substantially, and are expected to
continue to decrease, in most of the markets in which the Company currently
competes. The intensity of such competition has recently increased, and the
Company expects that such competition will continue to intensify as the number
of new entrants increases as a result of the new competitive opportunities
created by the U.S. Telecommunications Act of 1996 (the "1996
Telecommunications Act"), implementation by the Federal Communications
Commission (the "FCC") of the U.S. commitment to the World Trade Organization
and changes in legislation and regulation in various foreign target markets.
There can be no assurance that the Company will be able to compete
successfully in the future.
Competition from Domestic and International Companies. The U.S.-based
international telecommunications services market is dominated by AT&T, MCI
Communications, Inc. ("MCI"), Sprint and WorldCom, Inc. ("WorldCom"). The
Company also competes with second-tier international carriers including ACC
Corporation, Pacific Gateway Exchange, Inc., Primus Telecommunications Group,
Inc., Star Telecommunications, Inc., TresCom International, Inc. and other
U.S. and foreign long distance providers, a number of which have considerably
greater financial and other resources and more extensive domestic and
international communications networks than the Company. A recent FCC order
implementing the United States' open market commitments in the WTO Agreement
may also make it easier for certain foreign carriers to enter the U.S. market,
thereby increasing competition. See "Business--Industry--Regulatory and
Competitive Environment." In addition, the Company anticipates that it will
encounter additional competition from global alliances among large long
distance telecommunications providers and from new entrants in its recently
deregulated target markets outside the U.S. Recent examples of such alliances
include AT&T's alliance with Unisource, known as "Uniworld;" AT&T's recent
alliance with Italy's STET/Telecom Italia to serve
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international customers with a primary focus on the Latin American and
European regions; WorldCom's proposed merger with MCI; and Sprint's alliance
with Deutsche Telekom and France Telecom, known as "Global One." Consolidation
in the telecommunications industry may create even larger competitors with
greater financial and other resources. The effect of the proposed mergers and
alliances could create increased competition in the telecommunications
services market and potentially reduce the number of customers that purchase
wholesale international long distance services from the Company. Because many
of the Company's current competitors are also the Company's customers, the
Company's business would be materially adversely affected to the extent that a
significant number of such customers limit or cease doing business with the
Company for competitive or other reasons.
Increased Competition as a Result of a Changing Regulatory Environment. The
1996 Telecommunications Act, which substantially revises the Communications
Act of 1934, as amended (the "Communications Act"), promotes additional
competition in the intrastate, interstate and international telecommunications
markets by both U.S.-based and foreign companies, including the Regional Bell
Operating Companies ("RBOCs") in the U.S. Moreover, the Company believes that
the FCC's recently released order implementing the United States' commitments
under the WTO Agreement (as defined) will make it easier for certain foreign
carriers to enter the U.S. market, thereby increasing competition in the U.S.
market for the Company. The Company believes that competition in non-U.S.
markets is likely to follow the intense competition in the U.S. market as non-
U.S. markets continue to deregulate.
Competition from New Technologies. The telecommunications industry is in a
period of rapid technological evolution, marked by the introduction of new
product and service offerings and increasing satellite and undersea cable
transmission capacity for services similar to those provided by the Company.
Such technologies include satellite-based systems, such as those proposed by
Iridium LLC and Globalstar, L.P., utilization of the Internet for
international voice and data communications and digital wireless communication
systems such as Personal Communications Systems ("PCS"). The Company is unable
to predict which of many possible future product and service offerings will be
important to maintain its competitive position or what expenditures will be
required to develop and provide such products and services.
For a more detailed discussion of competition in the international
telecommunications industry, see "Business--Competition."
EXPANSION AND OPERATION OF THE NETWORK
The long-term success of the Company is dependent upon its ability to
operate, expand, manage and maintain its network. In particular, the Company's
ability to increase revenues will be dependent on its ability to expand the
capacity of, and eliminate bottlenecks that have developed from time to time
on, the Company's network. The continued expansion, operation and development
of the network will depend on, among other factors, the Company's ability to
accomplish the following: (i) attract and retain customers; (ii) attract and
retain experienced and qualified personnel; (iii) obtain one or more switch
sites in each country; (iv) obtain interconnectivity to the local Public
Switched Telecommunications Network ("PSTN") and/or other carriers; (v) obtain
necessary licenses permitting termination and origination of traffic; (vi)
obtain access to or ownership of transmission facilities linking a switch to
other network switches; and (vii) open new offices in target markets. By
expanding its network, the Company will incur additional fixed operating costs
that typically exceed, particularly with respect to international transmission
lines, the revenues attributable to the transmission capacity funded by such
costs until the Company generates additional traffic volume for such expanded
capacity. There can be no assurance that the Company will be able to expand
its network in a cost effective manner or to operate the network efficiently.
Although the Company has not experienced quality problems to date, the
Company may from time to time experience general problems affecting the
quality of the voice and data transmission of some calls transmitted over its
network due to its anticipated expansion, which could result in poor quality
transmission and interruptions in service. To provide redundancy in the event
of technical difficulties with the network and to the extent the Company
purchases transit and termination capacity from other carriers, the Company
relies upon
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other carriers' networks. Whenever the Company is required to route traffic
over a non-primary choice carrier due to technical difficulties or capacity
shortages with its network or the primary choice carrier, those calls will be
more costly to the Company and can result in lower transmission quality. Any
failure by the Company to operate, expand, manage or maintain its network
properly could result in customers diverting all or a portion of their calls
to other carriers, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations."
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
As part of its business strategy, the Company may enter into strategic
alliances with, acquire assets or businesses from, or make investment in,
companies that are complementary to its current operations. Although the
Company has no current plans or proposals to acquire assets or businesses
other than its pending acquisition of Tele 1, any such future strategic
alliances, investments or acquisitions would be accompanied by the risks
commonly encountered in such transactions. See "Prospectus Summary--Recent
Developments." Such risks include, among other things, the difficulty of
assimilating the operations and personnel of the companies, the potential
disruption of the Company's ongoing business, costs associated with the
development and integration of such operations, the inability of management to
maximize the financial and strategic position of the Company by the successful
incorporation of licensed or acquired technology into the Company's service
offerings, the maintenance of uniform standards, controls, procedures and
policies, the impairment of relationships with employees and customers as a
result of changes in management and higher customer attrition with respect to
customers obtained through acquisitions. Financial risks involved in
acquisitions include the incurrence of Indebtedness by the Company in order to
finance such acquisitions and the consequent need to service such
Indebtedness.
Expansion through joint ventures entails additional potential risks for the
Company. The Company may not have a majority interest or control of the board
of directors of any such local operating project entity or its operations or
assets. There is also a risk that the Company's joint venture partner or
partners may not have economic, business or legal interests or goals that are
consistent with those of the joint venture or the Company. In addition, there
is a risk that a joint venture partner may be unable to meet its economic or
other obligations and that the Company may be required to fulfill those
obligations.
MANAGEMENT OF GROWTH
The Company's strategy of continuing its growth and expansion has placed,
and is expected to continue to place, a significant strain on the Company's
management, operational and financial resources and increased demands on its
systems and controls. The Company's growth has resulted in increased
responsibilities for management personnel. The Company's ability to continue
to manage its growth successfully will require it to further expand its
network and infrastructure, enhance its management, financial and information
systems and controls and expand, train and manage its employee base
effectively. Inaccuracies in the Company's forecasts of traffic could result
in insufficient or excessive transmission facilities and disproportionately
high fixed expenses. In addition, as the Company increases its service
offerings and expands its target markets, there will be additional demands on
its customer service support and sales, marketing and administrative
resources. There can be no assurance that the Company will be able to manage
successfully its expanding operations. If the Company's management is unable
to manage growth effectively or maintain the quality of its service, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A key component of the Company's strategy is its expansion in international
markets. In many international markets, the PTT controls access to the local
networks, enjoys better brand name recognition and customer loyalty and
possesses significant operational economies, including a larger backbone
network and operating agreements with other PTTs. Moreover, PTTs generally
have certain competitive advantages due to their close ties with national
regulatory authorities, which have, in certain instances, shown reluctance to
adopt policies and grant regulatory approvals that would result in increased
competition for the local PTT. Pursuit of international growth opportunities
may require significant investments for extended periods of time before
returns, if any, on
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such investments are realized. Obtaining licenses in certain target countries
may require the Company to commit significant financial resources, which
investments may not yield positive net returns in such markets for extended
periods of time or ever. In addition, there can be no assurance that the
Company will be able to obtain the permits and licenses required for it to
operate, obtain access to local transmission facilities or markets or to sell
and deliver competitive services in these markets.
In addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks associated with conducting
business internationally that could have a material adverse effect on the
Company's international operations, including its strategy to open additional
offices in foreign countries and its ability to repatriate net income from
foreign markets. Such risks may include unexpected changes in regulatory
requirements, value added tax, tariffs, customs, duties and other trade
barriers, difficulties in staffing and managing foreign operations, problems
in collecting accounts receivable, political risks, fluctuations in currency
exchange rates, foreign exchange controls which restrict or prohibit
repatriation of funds, technology export and import restrictions or
prohibitions, delays from customs brokers or government agencies, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world and potentially adverse tax consequences resulting
from operating in multiple jurisdictions with different tax laws. In addition,
the Company's business could be adversely affected by a reversal in the
current trend toward deregulation of telecommunications carriers. In certain
countries, particularly in Asia, into which the Company may choose to expand
in the future, the Company may need to enter into a joint venture or other
strategic relationship with one or more third parties (possibly with a PTT or
other dominant carrier) in order to enter the market and/or conduct its
operations successfully. There can be no assurance that such factors will not
have a material adverse effect on the Company's future operations and,
consequently, on the Company's business, results of operations and financial
condition, or that the Company will not have to modify its current business
practices. In addition, there can be no assurance that laws or administrative
practices relating to taxation, foreign exchange or other matters of countries
within which the Company operates will not change. Any such change could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Although the Company's reporting currency is the U.S. dollar, the Company
expects to derive an increasing percentage of its revenues from international
operations. Accordingly, changes in currency exchange rates may have a
significant effect on the Company's results of operations. The Company
experienced a foreign currency loss for the 12 months ended September 30, 1997
of $1.3 million and may, in the future, continue to experience losses due to
fluctuations in foreign currency exchange rates. The Company does not
currently engage in exchange rate hedging strategies, although it may choose
to limit its exposure to foreign currency fluctuations in the future by
purchasing forward foreign exchange contracts or engaging in other similar
hedging strategies. The failure by the Company to hedge its foreign currency
exchange exposure may result in continued foreign exchange losses to the
Company from its non-U.S. operations. In addition, there can be no assurance
that any currency hedging strategy that the Company decides to employ, if any,
would be successful in avoiding currency exchange-related losses. Exchange-
related losses could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON TELECOMMUNICATIONS FACILITIES PROVIDERS AND AVAILABILITY OF
TRANSMISSION FACILITIES
The Company's success will continue to depend, in part, on its ability to
obtain and utilize transmission capacity on a cost-effective basis. For the
six months ended March 31, 1998, 23.2% of the Company's wholesale
international traffic was terminated on-net by the Company and 76.8% was
terminated by other long distance carriers pursuant to resale and operating
agreements between the Company and such carriers ("off-net"). Traffic routed
by the Company may be transmitted via one or more of the following types of
circuit capacity: (i) capacity owned by the Company on an indefeasible right
of use ("IRU") or ownership basis (such as a Minimum Assignable Ownership
Unit, "MAOU"); (ii) capacity leased on a fixed-cost basis from another
carrier; or (iii) capacity purchased from another carrier on a per minute
basis under a simple resale agreement. In addition, the Company requires
leased circuit capacity to provide interconnectivity with the local PSTN in
each country and from its PoPs to its gateway switches. As of March 31, 1998,
the Company had invested $14.3 million in IRUs and $3.8 million in MAOUs.
While the Company has no current commitments to purchase additional IRU or
MAOU capacity, the Company expects to invest approximately $50.0 million in
IRUs and MAOUs through December 31, 1999.
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The Company leases transmission facilities under a variety of arrangements
with facilities-based long distance carriers, many of which are, or may
become, competitors of the Company. The Company's ability to maintain and
expand its business is dependent upon whether the Company continues to
maintain favorable relationships with the transmission facilities-based
carriers from which the Company leases transmission facilities. Although the
Company believes that its relationships with these carriers generally are
satisfactory, the deterioration or termination of the Company's relationships
with one or more of these carriers could have a material adverse effect on the
Company's cost structure, service quality, network diversity, results of
operations and financial condition.
The Company also owns IRUs and MAOUs on several undersea fiber optic cable
systems, and has committed to investments in several more. Because undersea
fiber optic cables typically take several years to plan and construct,
carriers generally make investments in such systems based on a forecast of
anticipated traffic. The Company does not always control the planning or
construction of undersea fiber optic transmission facilities and must seek
access to such facilities through partial ownership positions. If partial
ownership positions are not available, the Company must seek access to such
facilities through lease arrangements on negotiated terms that may vary with
industry and market conditions. The Company's strategy of purchasing or
leasing capacity on its principal fiber optic cable lines creates a particular
risk in regions and on routes in which capacity is limited relative to call
volume, such as on certain U.S. domestic and trans-Atlantic routes at the
present time. There can be no assurance of continued availability of
transmission facilities on economically viable terms. See "Business--Network"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
RISK OF DEFAULT UNDER EXISTING FINANCING AGREEMENTS; DEPENDENCE ON KEY
SUPPLIERS
The Company has entered into financing agreements with Ericsson I.F.S.
("Ericsson") and Northern Telecom in connection with the Company's purchase of
switches produced by these manufacturers. These agreements permit Ericsson and
Northern Telecom, upon the occurrence of certain events of default, to
accelerate the entire unpaid balance of amounts loaned to the Company, if any,
for the purchase of switches and to foreclose on the equipment purchased from
Ericsson and Northern Telecom. These suppliers also provide the Company with
system monitoring services. Accordingly, any failure by the Company to make
payments when due on such loans or to comply with certain affirmative and
negative covenants set forth in the agreements could adversely affect the
Company's business, financial condition and results of operation as well as
its ability to provide services through the use of these switches. For a more
detailed discussion of these agreements, see "Summary of Other Indebtedness."
SUBSTANTIAL GOVERNMENT REGULATION
The Company's business is subject to various federal laws, regulations,
regulatory actions and court decisions that may adversely affect the Company.
The Company's interstate and international facilities-based and resale
services are subject to regulation by the FCC. The Company is also subject to
FCC rules that regulate the manner in which international services may be
provided, including, for example, the circumstances under which carriers may
provide international switched services by using private lines or transit
agreements to route traffic through third countries. The Company may also be
subject to regulation in foreign countries in connection with certain of its
business activities. There can be no assurance that future regulatory,
judicial and legislative changes will not have a material adverse effect on
the Company, that domestic or international regulators or third parties will
not raise material issues with regard to the Company's compliance or
noncompliance with applicable regulations or that regulatory activities will
not have a material adverse effect on the Company.
United States. In the U.S., the provision of the Company's services is
subject to the provisions of the Communications Act, the 1996
Telecommunications Act and the FCC's regulations thereunder, as well as the
applicable laws and regulations of the various states administered by the
relevant state public service commission ("PSC"). Despite recent trends
towards deregulation, the FCC and relevant state PSCs continue to regulate
ownership of transmission facilities, provision of services and the terms and
conditions under which the Company's services are provided. Non-dominant
carriers such as the Company are required by federal and state law and
regulations to file tariffs listing the rates, terms and conditions of the
services they provide. Failure to
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maintain proper federal and state tariffs or certification or any finding by
the federal or state agencies that the Company is not operating under
permissible terms and conditions may result in an enforcement action or
investigation, either of which could have a material adverse effect on the
Company.
The FCC and certain state agencies also impose prior approval requirements
on transfers of control. Such requirements may delay, prevent or deter a
change in control of the Company. With regard to international services, the
FCC administers a variety of international service regulations, including the
International Settlements Policy ("ISP"), that govern the settlements between
U.S. carriers and their foreign correspondents of the cost of terminating
traffic over each other's networks, the accounting rates for such settlement
and permissible deviations from these policies. As a consequence of the
increasingly competitive global telecommunications market, the FCC has adopted
a number of policies that permit carriers to deviate from the ISP under
certain circumstances that promote competition. The FCC also requires carriers
such as the Company to report any affiliations, as defined by the FCC, with
foreign carriers. Failure to comply with the FCC's rules could result in
fines, penalties and/or forfeiture of the Company's FCC authorizations, each
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Regulatory requirements pertinent to the Company's operations will continue
to evolve as a result of the WTO Agreement, federal legislation, court
decisions and new and revised policies of the FCC and state PSCs. For a
description of the WTO Agreement, see "Business--Industry--Regulatory and
Competitive Environment." In particular, the FCC continues to refine its
international service regulations to promote competition, reflect and
encourage deregulation in foreign countries and reduce international
accounting rates toward cost. Among other things, such changes may increase
competition and alter the ability of the Company to compete with other service
providers that provide the same services or to introduce services currently
planned for the future. Any change in applicable regulatory requirements may
impact the Company's operations in a manner that cannot be predicted.
Non-U.S. Markets. To the extent that it seeks to provide telecommunications
services in non-U.S. markets, the Company will be subject to the developing
laws and regulations governing the competitive provision of telecommunications
services in those markets. The Company currently plans to provide a limited
range of services in certain countries in Europe, Asia, the Pacific Rim and
Latin America, as permitted by regulatory conditions in those markets, and to
expand its operations as these markets liberalize to permit competition in the
full range of telecommunications services. The nature, extent and timing of
the opportunity for the Company to compete in these markets will be
determined, in part, by the actions taken by the governments in these
countries to implement competition and the response of incumbent carriers to
these efforts. There can be no assurance that any of these countries will
implement competition in the near future or at all, that the Company will be
able to take advantage of any such liberalization in a timely manner or that
the Company's operations in any such country will be successful. For a more
detailed discussion of how government regulation impacts the Company, see
"Business--Licenses and Regulation."
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL
The Company's success depends in significant part upon the continued service
of its senior management personnel, including, in particular, Walter
Burmeister, the Company's President and Chief Executive Officer, and certain
other employees with longstanding industry relationships and technical
knowledge of the Company's operations. In addition, several of the Company's
key personnel have joined the Company within the past twelve months. The
Company does not maintain any "key person" insurance. None of the Company's
executive officers is bound by an employment agreement. An equipment loan
agreement with one of the vendors from which the Company purchases switching
equipment provides that the termination, resignation, death or permanent
disability of Walter Burmeister is an event of default under the agreement if
the Company does not, within 180 days, replace Mr. Burmeister with a successor
acceptable to the vendor.
The Company's future success also depends on its ability to attract, train,
retain and motivate highly skilled personnel. Competition for qualified, high-
level telecommunications personnel is intense and there can be no
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assurance that the Company will be successful in attracting and retaining such
personnel. In particular, the Company is seeking to expand its middle-
management personnel in certain target markets in Western Europe in which the
number of available qualified managers is extremely limited. The loss of the
services of one or more of the Company's key individuals, or the failure to
attract and retain additional key personnel, could have a material adverse
effect on the Company's business, operating results and financial condition.
See "Management."
DEPENDENCE ON EFFECTIVE MANAGEMENT INFORMATION SYSTEMS
To complete its billing, the Company must record and process massive amounts
of data quickly and accurately. The Company has entered into a contract with
Armstrong pursuant to which Armstrong will provide billing and management
information systems ("MIS") support for the Company and its subsidiaries
through September 30, 2002, on terms that the Company believes are competitive
with similar services offered in the industry. The contract may be terminated
by Armstrong or the Company upon 180 days' notice to the other party. See
"Business--Operations and Systems" and "Certain Relationships and Related
Transactions--Relationship with Armstrong."
In addition, the Company has entered into agreements with other contractors,
including certain of its equipment suppliers, to provide facilities and
services required for its operations, including monitoring its network
transmission equipment. These agreements are subject to termination after
notice. The Company's reliance upon others to provide essential services on
behalf of the Company may result in relative inability to control the
efficiency, timeliness and quality of such contracted services. Management
expects that the Company will be required to rely on independent contractors
for some time in the future.
RISK OF NETWORK FAILURE
The success of the Company is largely dependent upon its ability to deliver
high quality, uninterrupted telecommunications services and on its ability to
protect its software and hardware against damage. Any failure of the Company's
network or other systems or hardware that causes interruptions in the
Company's operations could have a material adverse effect on the Company. As
the Company expands its network and the volume of call traffic grows, there
will be increased stress on hardware, circuit capacity and traffic management
systems. There can be no assurance that the Company will not experience system
failures. The Company's operations are also dependent on its ability to expand
the network successfully and integrate new and emerging technologies and
equipment into the network, which could increase the risk of system failure
and result in further strains upon the network. The Company attempts to
minimize customer inconvenience in the event of a system disruption by routing
traffic to other circuits and switches which may be owned by other carriers.
However, significant or prolonged system failures of, or difficulties for
customers in accessing and maintaining connection with, the Company's network
could damage the reputation of the Company and result in customer attrition
and financial losses.
CONTROL BY PRINCIPAL STOCKHOLDERS
AIT, a wholly owned subsidiary of Armstrong, is the record owner of 84.0% of
the outstanding shares of the Company's capital stock. AIT's controlling
interest in the Company provides it with the power to exercise voting and
management control of the Company. Because certain material corporate actions
cannot be taken by the Company without the approval of the holders of a
majority of the outstanding shares of the Company's common stock, AIT will
have the power to approve or disapprove significant corporate transactions
regardless of the wishes of the other stockholders of the Company. Such power
may have the effect of delaying or preventing a change in control of the
Company, including a merger, consolidation or other business combination or
takeover, and allows AIT to otherwise direct the Company's business and
affairs without the agreement of the Company's other stockholders. In
addition, AIT, FMG and the Company entered into an Investment and Shareholders
Agreement dated December 22, 1997 (the "Stockholders Agreement") that
restricts the transferability of shares of the Company's common stock.
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LACK OF PUBLIC MARKET; RESTRICTIONS ON TRANSFERABILITY
The Exchange Notes are new securities for which there currently is no
market. The Company does not intend to apply for listing of the Exchange Notes
on any national securities exchange or for quotation of the Exchange Notes
through Nasdaq. Although the Initial Purchasers have informed the Company that
they currently intend to make a market in the Notes, they are not obligated to
do so and any such market-making may be discontinued at any time without
notice. In addition, such market-making activity may be limited during the
pendency of the Exchange Offer or the effectiveness of a shelf registration
statement in lieu thereof. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes have not been registered under the Securities Act and are
subject to substantial restrictions on transfer. Old Notes that are not
tendered in exchange for Exchange Notes or are tendered but not accepted will,
following consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof. The Company does not currently
anticipate that it will register the Old Notes under the Securities Act. To
the extent that Old Notes are tendered and accepted in the Exchange Offer, the
trading market for untendered and tendered but unaccepted Old Notes could be
adversely affected. In addition, although the Old Notes have been designated
for trading in the Private Offerings, Resale and Trading through Automatic
Linkages ("PORTAL") market, to the extent that Old Notes are tendered and
accepted in connection with the Exchange Offer, any trading market for Old
Notes that remain outstanding after the Exchange Offer could be adversely
affected.
FAILURE TO COMPLY WITH EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
such Old Notes, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, holders of the Old Notes desiring
to tender such Old Notes in exchange for Exchange Notes should allow
sufficient time to ensure timely delivery. The Company is under no duty to
give notification of defects or irregularities with respect to tenders of Old
Notes for exchange. Holders of Old Notes who do not exchange their Old Notes
for Exchange Notes pursuant to the Exchange Offer will continue to be subject
to the restrictions on transfer of such Old Notes as set forth in the legend
thereon. See "The Exchange Offer."
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs having been written
using two digits rather than four to define the applicable year, resulting in
date-sensitive software having the potential to recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. Neither management nor Armstrong
has developed a plan to review software that was internally developed or
externally purchased or licensed. Management has not reviewed with its key
vendors and service providers their software, for compliance with Year 2000
processing requirements. If the systems of other companies on whose services
the Company depends, including Armstrong, or with whom the Company's systems
interface are not Year 2000 compliant, there could be a material adverse
effect on the Company's business, financial condition and results of
operation.
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THE EXCHANGE OFFER
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The Company entered into the Registration Rights Agreement with the Initial
Purchasers, pursuant to which the Company is obligated to file with the
Commission, subject to the provisions described below, the Exchange
Offer Registration Statement on an appropriate form permitting the Exchange
Notes to be offered in exchange for the Transfer Restricted Securities and to
permit resales of Exchange Notes held by broker-dealers as contemplated by the
Registration Rights Agreement. The Registration Rights Agreement provides that
unless the Exchange Offer would not be permitted by applicable law or
Commission policy, the Company will (i) file the Exchange Offer Registration
Statement with the Commission on or prior to 60 days after the Closing Date,
(ii) use its reasonable best efforts to cause the Exchange Offer Registration
Statement to be declared effective by the Commission within 120 days after the
Closing Date, (iii) (A) file all pre-effective amendments to such Exchange
Offer Registration Statement as may be necessary in order to cause such
Exchange Offer Registration Statement to become effective, (B) file if
applicable, a post-effective amendment to such Exchange Offer Registration
Statement pursuant to Rule 430A under the Securities Act and (C) cause all
necessary filings in connection with the registration and qualifications of
the Exchange Notes to be made under the blue sky laws of such jurisdictions as
are necessary to permit consummation of the Exchange Offer and (iv) use its
reasonable best efforts to cause the Exchange Offer to be consummated on or
prior to 30 days after the date on which the Exchange Offer Registration
Statement is declared effective by the Commission.
For purposes of the foregoing, "Transfer Restricted Securities" means each
Note until the earliest to occur of (i) the date on which such Note has been
exchanged by a person other than a broker-dealer for Exchange Notes in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of such Note for one or more Exchange Notes, the date on which such
Exchange Notes are sold to a purchaser who receives from such broker-dealer on
or prior to the date of such sale a copy of the prospectus contained in the
Exchange Offer Registration Statement, (iii) the date on which such Note has
been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iv) the date on which
such Note is eligible for distribution to the public pursuant to Rule 144
under the Securities Act.
Under existing Commission interpretations, the Exchange Notes would, in
general, be freely transferable after the Exchange Offer without further
registration under the Securities Act; provided, however, that, in the case of
broker-dealers participating in the Exchange Offer, a prospectus meeting the
requirements of the Securities Act must be delivered by such broker-dealers in
connection with resales of the Exchange Notes. The Company has agreed, for a
period of 180 days after consummation of the Exchange Offer, to make available
a prospectus meeting the requirements of the Securities Act to any such
broker-dealer for use in connection with any resale of any Exchange Notes
acquired in the Exchange Offer. A broker-dealer that delivers such a
prospectus to purchasers in connection with such resales will be subject to
certain of the civil liability provisions under the Securities Act and will be
bound by the provisions of the Registration Rights Agreement (including
certain indemnification rights and obligations).
Holders of Old Notes that desire to exchange such Old Notes for Exchange
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any Exchange Notes to be received by it
will be acquired in the ordinary course of its business, (ii) it has no
arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes and (iii) it is not an
"affiliate," as defined in Rule 405 of the Securities Act, of the Company, or
if it is an affiliate, it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of
the Exchange Notes. If the holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Notes that were acquired as
a result of market-making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with
any resale of such Exchange Notes.
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The Company has agreed to pay all expenses incident to the Exchange Offer
and will indemnify the Initial Purchasers against certain liabilities,
including liabilities under the Securities Act.
If (i) the Company is not permitted to consummate the Exchange Offer because
the Exchange Offer is not permitted by applicable law or Commission policy,
(ii) any holder of Transfer Restricted Securities that is a "qualified
institutional buyer" (as defined in Rule 144A under the Securities Act)
notifies the Company at least 20 business days prior to the consummation of
the Exchange Offer that (a) applicable law or Commission policy prohibits the
Company from participating in the Exchange Offer, (b) such holder may not
resell the Exchange Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and this Prospectus is not appropriate or
available for such resales by such Holder or (c) such holder is a broker-
dealer and holds Notes acquired directly from the Company or an affiliate of
the Company, (iii) the Exchange Offer is not for any other reason consummated
by June 1, 1998 or (iv) the Exchange Offer has been completed and in the
opinion of counsel for the Initial Purchasers a Registration Statement must be
filed and a prospectus must be delivered by the Initial Purchasers in
connection with any offering or sale of Transfer Restricted Securities, the
Company will use its reasonable best efforts to: (A) file a Shelf Registration
Statement within 60 days of the earliest to occur of (i) through (iv) above
and (B) cause the Shelf Registration Statement to be declared effective by the
Commission on or prior to the 120th day after such obligation arises. The
Company shall use its reasonable best efforts to keep such Shelf Registration
Statement continuously effective, supplemented and amended to ensure that it
is available for resales of Notes by the holders of Transfer Restricted
Securities entitled to this benefit and to ensure that such Shelf Registration
Statement conforms and continues to conform with the requirements of the
Registration Rights Agreement, the Securities Act and the policies, rules and
regulations of the Commission, as announced from time to time, until the
second anniversary of the Closing Date; provided, however, that during such
two-year period the holders may be prevented or restricted by the Company from
effecting sales pursuant to the Shelf Registration Statement as more fully
described in the Registration Rights Agreement. A holder of Notes that sells
its Notes pursuant to the Shelf Registration Statement generally will be
required to be named as a selling security holder in the related prospectus
and to deliver a prospectus to purchasers, will be subject to certain of the
civil liability provisions under the Securities Act in connection with such
sales and will be bound by the provisions of the Registration Rights Agreement
that are applicable to such Holder (including certain indemnification and
contribution obligations).
If (i) the Company fails to file with the Commission any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified therein for such filing, (ii) any of such Registration Statements is
not declared effective by the Commission on or prior to the date specified for
such effectiveness in the Registration Rights Agreement (the "Effectiveness
Target Date"), (iii) the Exchange Offer has not been consummated within 30
days after the Effectiveness Target Date with respect to the Exchange Offer
Registration Statement or (iv) any Registration Statement required by the
Registration Rights Agreement is filed and declared effective but thereafter
ceases to be effective or fails to be usable for its intended purpose without
being succeeded within five business days by a post-effective amendment to
such Registration Statement that cures such failure and that is itself
immediately declared effective (each such event referred to in clauses (i)
through (iv) above, a "Registration Default"), additional cash interest
("Liquidated Damages") shall accrue to each holder of the Notes commencing
upon the occurrence of such Registration Default in an amount equal to .50%
per annum of the principal amount of Notes held by such holder. The amount of
Liquidated Damages will increase by an additional .50% per annum of the
principal amount of Notes with respect to each subsequent 90-day period (or
portion thereof) until all Registration Defaults have been cured, up to a
maximum rate of Liquidated Damages of 1.50% per annum of the principal amount
of Notes. All accrued Liquidated Damages will be paid to holders by the
Company in the same manner as interest is paid pursuant to the Indenture.
Following the cure of all Registration Defaults relating to any particular
Transfer Restricted Securities, the accrual of Liquidated Damages with respect
to such Transfer Restricted Securities will cease.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
by reference to, all the provisions of the Registration Rights Agreement, a
copy of which has been filed with the Commission as an Exhibit to Exchange
Offer Registration Statement of which this Prospectus is a part.
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<PAGE>
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue up to $300,000,000
aggregate principal amount of Exchange Notes in exchange for up to
$300,000,000 aggregate principal amount of outstanding Old Notes accepted in
the Exchange Offer. Holders may tender some or all of their Old Notes pursuant
to the Exchange Offer. However, Old Notes may be tendered only in integral
multiples of $1,000. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Notes being tendered for exchange.
The form and terms of the Exchange Notes will be identical in all material
respect to the form and terms of the Old Notes, except that (i) the Exchange
Notes will have been registered under the Securities Act and therefore will
not bear legends restricting the transfer thereof and (ii) the holders of the
Exchange Notes will not be entitled to certain rights under the Registration
Rights Agreement, including the terms providing for an increase in the
interest rate on the Old Notes under certain circumstances relating to the
timing of the Exchange Offer, all of which rights will terminate when the
Exchange Offer is consummated. The Exchange Notes will evidence the same debt
as the Old Notes and will be entitled to the benefits of the Indenture under
which the Old Notes were, and the Exchange Notes will be, issued, such that
all outstanding Notes will be treated as a single class of debt securities
under the Indenture.
As of the date of this Prospectus, $300,000,000 aggregate principal amount
of the Old Notes was outstanding. Holders of Old Notes do not have any
appraisal or dissenters' rights under the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the provisions of the Registration Rights Agreement and the
applicable requirements of the Securities Act, the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, such unaccepted Old Notes will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commission or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer.
See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on . ,
1998, unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the term "Expiration Date" shall mean the latest date and time
to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral (promptly confirmed in writing) or written
notice and will make a public announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
expiration date of the Exchange Offer. Without limiting the manner in which
the Company may choose to make a public announcement of any delay, extension,
amendment or termination of the Exchange Offer, the Company shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement, other than by making a timely release to an appropriate news
agency.
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The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any
conditions set forth below under "--Conditions to Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer by giving oral or written
notice of such delay, extension or termination to the Exchange Agent or (iv)
to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof to the registered holders. If
the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, the Company will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered holders of Old Notes, and the Company will extend the Exchange
Offer for a period of five to ten business days, depending upon the
significance of the amendment and the manner of disclosure to such registered
holders, if the Exchange Offer would otherwise expire during such five to ten
business day period. The rights reserved by the Company in this paragraph are
in addition to the Company's rights set forth below under the caption "--
Conditions to Exchange Offer."
If the Company extends the period of time during which the Exchange Offer is
open, or if it is delayed in accepting for exchange of, or in issuing and
exchanging the Exchange Notes for, any Old Notes, or is unable to accept for
exchange of, or issue Exchange Notes for, any Old Notes pursuant to the
Exchange Offer for any reason, then, without prejudice to the Company's rights
under the Exchange Offer, the Exchange Agent may, on behalf of the Company,
retain all Old Notes tendered, and such Old Notes may not be withdrawn except
as otherwise provided below in "--Withdrawal of Tenders." The adoption by the
Company of the right to delay acceptance for exchange of, or the issuance and
the exchange of the Exchange Notes, for any Old Notes is subject to applicable
law, including Rule 14e-1(c) under the Exchange Act, which requires that the
Company pay the consideration offered or return the Old Notes deposited by or
on behalf of the holders thereof promptly after the termination or withdrawal
of the Exchange Offer.
PROCEDURES FOR TENDERING
Only a registered holder of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer, a holder must complete, sign
and date the Letter of Transmittal, or facsimile thereof, have the signature
thereon guaranteed if required by the Letter of Transmittal and mail or
otherwise deliver such Letter of Transmittal or such facsimile to the Exchange
Agent at the address set forth below under "--Exchange Agent" for receipt
prior to the Expiration Date. In addition, either (i) certificates for such
Old Notes must be received by the Exchange Agent along with the Letter of
Transmittal, or (ii) a timely confirmation of a book-entry transfer of such
Old Notes, if such procedure is available, into the Exchange Agent's account
at DTC pursuant to the procedure for book-entry transfer described below, must
be received by the Exchange Agent prior to the Expiration Date, or (iii) the
holders must comply with the guaranteed delivery procedures described below
under "--Guaranteed Delivery Procedures."
Any financial institution that is a participant in the Depository's Book-
Entry Transfer facility system may make book-entry delivery of the Old Notes
by causing the Depository to transfer such Old Notes into the Exchange Agent's
account in accordance with the Depository's procedure for such transfer.
Although delivery of Old Notes may be effected through book-entry transfer
into the Exchange Agent's account at the Depository, the Letter of Transmittal
(or facsimile thereof), with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received and
confirmed by the Exchange Agent at its addresses set forth under "--Exchange
Agent" below prior to 5:00 p.m., New York City time, on the Expiration Date.
DELIVERY OF DOCUMENTS TO THE DEPOSITORY IN ACCORDANCE WITH ITS PROCEDURES DOES
NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder which is not withdrawn prior to the Expiration Date
will constitute a binding agreement between such holder and the Company in
accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
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THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IF DELIVERY IS BY MAIL,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS
RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY REQUEST
THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner of the Old Notes whose Old Notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact the registered holder promptly and
instruct such registered holder to tender on such beneficial owner's behalf.
If such beneficial owner wishes to tender on such owner's own behalf, such
owner must, prior to completing and executing the Letter of Transmittal and
delivering such owner's Old Notes either make appropriate arrangements to
register ownership of the Old Notes in such owner's name (to the extent
permitted by the Indenture) or obtain a properly completed assignment from the
registered holder. The transfer of registered ownership may take considerable
time.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes (which term includes any participants in DTC whose
name appears on a security position listing as the owner of the Old Notes) or
if delivery of the Old Notes is to be made to a person other than the
registered holder, such Exchange Notes must be endorsed or accompanied by a
properly completed bond power, in either case signed by such registered holder
as such registered holder's name appears on such Old Notes with the signature
on the Old Notes or the bond power guaranteed by an Eligible Institution (as
defined below).
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution unless the Old Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution. In the event that signatures on a Letter
of Transmittal or a notice of withdrawal, as the case may be, are required to
be guaranteed, such guarantee must be made by a member firm of a registered
national securities exchange or of the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States, or another "Eligible Guarantor
Institution" within the meaning of Rule 17Ad-15 under the Exchange Act (any of
the foregoing an "Eligible Institution").
If the Letter of Transmittal or any Old Notes or assignments are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes, the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The
Company also reserves the right to waive any defects, irregularities or
conditions of tender as to particular Old Notes. The Company's interpretation
of the terms and conditions of the Exchange Offer (including the instructions
in the Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
must be cured within such time as the Company shall determine. Although the
Company intends to request the Exchange Agent to notify holders of defects or
irregularities with respect to tenders of Old Notes, neither the Company, the
Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Tenders of Old Notes will not be deemed to have been
made until such defects or irregularities have been cured or waived.
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While the Company has no present plan to acquire any Old Notes which are not
tendered in the Exchange Offer or to file a registration statement to permit
resales of any Old Notes which are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or
make offers for any Old Notes that remain outstanding subsequent to the
Expiration Date or, as set forth below under "--Conditions to Exchange Offer,"
to terminate the Exchange Offer and, to the extent permitted by applicable
law, purchase Old Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchase or offers could
differ from the terms of the Exchange Offer.
By tendering, each holder will represent to the Company that, among other
things, (i) the Exchange Notes to be acquired by the holder of the Old Notes
in connection with the Exchange Offer are being acquired by the holder in the
ordinary course of business of the holder, (ii) the holder has no arrangement
or understanding with any person to participate in the distribution of
Exchange Notes, (iii) if the holder is not a broker-dealer, or is a broker-
dealer but will not receive Exchange Notes for its own account in exchange for
Old Notes, neither the holder nor any such other person is engaged in or
intends to participate in the distribution of such Exchange Notes, (iv) the
holder understands that a secondary resale transaction described in clause
(iii) above and any resales of Exchange Notes obtained by such holder in
exchange for Old Notes acquired by such holder directly from the Company
should be covered by an effective registration statement containing the
selling security holder information required by Item 507 or Item 508, as
applicable, of Regulation S-K of the Commission, and (v) the holder is not an
"affiliate," as defined in Rule 405 of the Securities Act, of the Company or,
if such holder is an affiliate of the Company, that such holder will comply
with the registration and prospectus delivery requirements of the Securities
Act to the extent applicable. If the holder is a broker-dealer that will
receive Exchange Notes for its own account in exchange for Old Notes that were
acquired as a result of market-making activities or other trading activities,
the holder is required to acknowledge in the Letter of Transmittal that it
will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, the holder
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. See "Plan of Distribution."
RETURN OF OLD NOTES
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned
without expense to the tendering holder thereof (or, in the case of Old Notes
tendered by book-entry transfer into the Exchange Agent's account at the
Depository pursuant to the book-entry transfer procedures described below,
such Old Notes will be credited to an account maintained with the Depository)
as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Depository for purposes of the Exchange Offer within
two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's system may make book-
entry delivery of Old Notes by causing the Depository to transfer such Old
Notes into the Exchange Agent's account at the Depository in accordance with
the Depository's procedures for transfer. However, although delivery of Old
Notes may be effected through book-entry transfer at the Depository, the
Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under "--
Exchange Agent" on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
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GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes (or complete
the procedures for book-entry transfer), the Letters of Transmittal or any
other required documents to the Exchange Agent prior to the Expiration Date,
may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Old Notes (if
available) and the principal amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within five New York
Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or a facsimile thereof) together with the certificate(s)
representing the Old Notes in proper form (or transfer for a confirmation
of a book-entry transfer into the Exchange Agent's account at the
Depository of Old Notes delivered electronically), and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) such properly executed Letter of Transmittal (or facsimile thereof),
as well as the certificate(s) representing all tendered Old Notes in proper
form for transfer (or a confirmation of a book-entry transfer into the
Exchange Agent's account at the Depository of Old Notes delivered
electronically), and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to the holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to the Expiration Date. To withdraw a tender of Old Notes in
the Exchange Offer, a written or facsimile transmission notice of withdrawal
must be received by the Exchange Agent at its address set forth herein prior
to the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number or numbers (if applicable) and principal amount of such Old
Notes), and (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees). All questions as to the
validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company in its sole discretion, whose determination
shall be final and binding on all parties. Any Old Notes so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer
and no Exchange Notes will be issued with respect thereto unless the Old Notes
so withdrawn are validly retendered. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS TO EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Old Notes not theretofore accepted for exchange, and may terminate or amend
the Exchange Offer as provided herein before the acceptance of such Old Notes,
if any of the following conditions exist:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might impair the ability
of the Company to proceed with the Exchange Offer or have a material
adverse effect on the
34
<PAGE>
contemplated benefits of the Exchange Offer to the Company or there shall
have occurred any material adverse development in any existing action or
proceeding with respect to the Company or any of its Subsidiaries; or
(b) there shall have been any material change, or development involving a
prospective change, in the business or financial affairs of the Company or
any of its Subsidiaries which, in the reasonable judgment of the Company,
could reasonably be expected to materially impair the ability of the
Company to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to the Company; or
(c) there shall have been proposed, adopted or enacted any law, statute,
rule or regulation which, in the judgment of the Company, could reasonably
be expected to materially impair the ability of the Company to proceed with
the Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company; or
(d) any governmental approval which the Company shall, in its reasonable
discretion, deem necessary for the consummation of the Exchange Offer as
contemplated hereby shall have not been obtained.
If the Company determines in its reasonable discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration
of the Exchange Offer, subject, however, to the rights of holders to withdraw
such Old Notes (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver
by means of a prospectus supplement that will be distributed to the registered
holders of the Old Notes, and the Company will extend the Exchange Offer for a
period of five to ten business days, depending upon the significance of the
waiver and the manner of disclosure to the registered holders, if the Exchange
Offer would otherwise expire during such five to ten business day period.
Holders may have certain rights and remedies against the Company under the
Registration Rights Agreement should the Company fail to consummate the
Exchange Offer, notwithstanding a failure of the conditions stated above. See
"Description of Notes." Such conditions are not intended to modify those
rights or remedies in any respect.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
condition or may be waived by the Company in whole or in part at any time and
from time to time in the Company's reasonable discretion. The failure by the
Company at any time to exercise the foregoing rights shall not be deemed a
waiver of any such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
TERMINATION OF REGISTRATION RIGHTS
All rights under the Registration Rights Agreement (including registration
rights) of holders of the Old Notes eligible to participate in this Exchange
Offer will terminate upon consummation of the Exchange Offer except with
respect to the Company's continuing obligations (i) to indemnify the holders
(including any broker-dealers) and certain parties related to the holders
against certain liabilities (including liabilities under the Securities Act),
(ii) to provide, upon the request of any holder of any transfer-restricted Old
Notes, certain information in order to permit resales of such Old Notes
pursuant to Rule 144A, (iii) to use its best efforts to keep the Exchange
Offer Registration Statement effective and to amend and supplement this
Prospectus in order to permit this Prospectus to be lawfully delivered by all
persons subject to the prospectus delivery requirements of the Securities Act
for such period of time as is necessary to comply with applicable law in
connection with any resale of the Exchange Notes; provided, however, that such
period shall not exceed 180 days after the Exchange Offer has been
consummated. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted pursuant to the foregoing provisions, the
Company has been informed that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
35
<PAGE>
EXCHANGE AGENT
State Street Bank and Trust Company has been appointed as Exchange Agent for
the Exchange Offer. All questions and requests for assistance as well as
correspondence in connection with the Exchange Offer and the Letter of
Transmittal should be addressed to the Exchange Agent, as follows:
State Street Bank and Trust Company
Corporate Trust Department
4th Floor
Two International Place
Boston, MA 02110
Attn: Sandra Szczponik
(617) 664-5587
Requests for additional copies of this Prospectus, the Letter of Transmittal
or the Notice of Guaranteed Delivery should be directed to the Exchange Agent.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager or other soliciting agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptance of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$1,000,000. Such expenses include fees and expenses of the Exchange Agent and
Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder of Old Notes.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Old
Notes as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the term
of the Notes.
36
<PAGE>
CAPITALIZATION
The following table sets forth FCI's capitalization as of March 31, 1998.
The information set forth in the following table should be read in conjunction
with the Company's financial statements and notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
-------------------------
ACTUAL
-------------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C>
Cash and cash equivalents ....................... $125,423
========
Short-term marketable securities................. $ 80,964
========
Long-term marketable securities.................. $ 57,470
========
Current maturities of long-term
obligations(/1/)................................ $ 4,027
Long-term debt (less current portion):
Other debt obligations(/1/).................... 5,514
10 1/2% Senior Notes due 2008.................. 300,000
--------
Total debt................................... 309,541
Capital accounts:
Common stock, par value $0.01 per share--
300,000 shares authorized; 225,741 shares
issued and outstanding........................ 2
Additional paid-in capital..................... 36,534
Stock option compensation...................... 5,802
Holding loss on marketable securities.......... (118)
Cumulative translation adjustment.............. 1,067
Accumulated deficit............................ (47,567)
--------
Total capital accounts....................... (4,280)
--------
Total capitalization......................... $305,261
========
</TABLE>
- --------
(1) Represents obligations outstanding under financing arrangements that the
Company entered into in connection with its acquisition of IRU and MAOU
capacity on certain fiber circuits.
37
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected financial data for FCI presented below for the period from the
Company's inception on May 5, 1995 to September 30, 1995 and for the fiscal
years ended September 30, 1997 and 1996 have been derived from the financial
statements of FCI, which have been audited by Deloitte & Touche LLP,
independent public accountants. The financial data for the Company for the six
months ended March 31, 1998 and 1997 have been derived from the Company's
unaudited financial statements which, in the opinion of Management, include
all significant normal and recurring adjustments necessary for fair
presentation of the financial position and results of operations for such
unaudited period. The statements of operations data for Tele8 for the period
January 1, 1995 through June 30, 1995, have been derived from the financial
statements of Tele8, which have been audited by Deloitte & Touche, independent
chartered accountants. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations" and the financial statements
of FCI included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
FISCAL YEAR JANUARY 1,
SIX MONTHS ENDED ENDED PERIOD FROM 1995 TO
MARCH 31, SEPTEMBER 30, MAY 5, 1995 TO JUNE 30, 1995
----------------- ----------------- SEPTEMBER 30, TELE8--
1998 1997 1997 1996 1995 PREDECESSOR(/1/)
-------- ------- -------- ------- -------------- ----------------
(DOLLARS IN THOUSANDS, EXCEPT OTHER DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Wholesale revenues..... $ 66,394 $25,775 $ 66,422 $11,664 $ 547 $ 367
Retail revenues........ 4,560 1,319 3,765 227 -- --
-------- ------- -------- ------- ------- -------
Total revenues......... 70,954 27,094 70,187 11,891 547 367
Cost of revenues........ 66,486 25,425 65,718 12,742 1,022 938
-------- ------- -------- ------- ------- -------
Gross margin
(deficit)............. 4,468 1,669 4,469 (851) (475) (571)
Operating expenses:
Selling, general and
administrative
(including related
party)................ 12,708 5,852 13,511 7,582 943 537
Stock-based
compensation.......... 5,514 -- -- -- -- --
Depreciation and
amortization.......... 2,854 1,090 2,318 1,143 142 197
-------- ------- -------- ------- ------- -------
Total operating
expenses.............. 21,076 6,942 15,829 8,725 1,085 734
-------- ------- -------- ------- ------- -------
Loss from operations.... (16,608) (5,273) (11,360) (9,576) (1,560) (1,305)
Interest expense
(including related
party)................. (6,429) (463) (1,336) (312) (80) (44)
Interest income......... 2,505 -- -- -- -- --
Foreign exchange (loss)
gain................... (394) (1,323) (1,335) 226 (85) 8
-------- ------- -------- ------- ------- -------
Loss before income
taxes.................. (20,926) (7,059) (14,031) (9,662) (1,725) (1,341)
Income tax benefit...... 3,226 -- -- -- -- --
-------- ------- -------- ------- ------- -------
Net loss................ $(17,700) $(7,059) $(14,031) $(9,662) $(1,725) $(1,341)
======== ======= ======== ======= ======= =======
Ratio of earnings to
fixed charges(/2/)..... -- --
======== ========
OTHER FINANCIAL DATA:
Gross margin (deficit)
as a percentage of
revenue (%)............ 6.3 6.2 6.4 (7.2) (86.8) (155.6)
SG&A as a percentage of
revenue (%)............ 25.7 21.6 19.3 63.8 172.4 146.3
EBITDA ($)(/3/)......... (13,754) (4,183) (9,042) (8,433) (1,418) (1,108)
Cash flows from
operating activities... (13,565) (3,192) (8,361) (5,413) (1,624) 563
Cash flows from
investing activities... (153,778) (819) (1,664) (1,074) (1,055) (545)
Cash flows from
financing activities... 291,367 2,878 7,914 8,572 2,788 --
Capital expenditures
($).................... 46,752 3,741 12,282 8,404 1,105 1,213
OTHER DATA:
Wholesale customers (at
period end)............ 97 34 53 17 3 N/A
Retail customers
(Sweden) (at period
end)................... 19,345 5,736 12,365 1,615 -- N/A
Billed minutes of use
(in thousands)......... 292,587 93,359 252,290 41,276 2,725 N/A
Revenue per billed
minute of use ($)...... 0.243 0.290 0.278 0.288 0.201 N/A
Number of employees (at
period end)............ 163 74 93 63 16 N/A
Number of switches (at
period end)............ 6 2 4 2 1 N/A
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
MARCH 31, -------------------------
1998 1997 1996 1995
--------- -------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .............. $ 125,423 $ 1,016 $ 2,198 $ 109
Short-term marketable securities........ 80,964 -- -- --
Long-term marketable securities......... 57,470 -- -- --
Working capital (excluding cash and
marketable securities) ................ (39,677) (11,243) (7,377) (1,852)
Property and equipment, net............. 64,890 20,244 10,144 2,661
Total assets............................ 375,815 44,017 21,008 5,664
Total long-term obligations (including
current portion)....................... 309,541 22,589 9,795 1,906
Capital accounts........................ (4,280) (9,421) (1,715) 1,109
</TABLE>
- --------
(1) Data for periods prior to January 1, 1995 have not been presented because
amounts were insignificant and not meaningful. Cumulative revenue and
losses from inception through December 31, 1994 were $35,758 and $287,564,
respectively, and both total assets and liabilities at December 31, 1994
were $2.6 million.
(2) The ratio of earnings to fixed charges is computed by dividing pretax
income from operations before fixed charges by fixed charges. Fixed
charges consist of interest charges and that portion of rental expense the
Company believes to be representative of interest. For the period January
1, 1995 through June 30, 1995 (Predecessor), the periods ended September
30, 1995, 1996 and 1997 and the six months ended March 31, 1998
(unaudited), earnings were insufficient to cover fixed charges by $1.3
million, $1.7 million, $9.7 million, $14.0 million and $20.9 million,
respectively.
(3) EBITDA consists of earnings (loss) before interest expense, interest
income, income taxes, depreciation, amortization and foreign exchange gain
(loss). EBITDA should not be considered as a substitute for operating
earnings, net income, cash flow or other combined statement of income or
cash flow data computed in accordance with generally accepted accounting
principles or as a measure of a company's results of operations or
liquidity. EBITDA is widely used as a measure of a company's operating
performance and its ability to service its indebtedness because it assists
in comparing performance on a consistent basis across companies, which can
vary significantly.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto contained elsewhere in this Prospectus.
Certain information contained below and elsewhere in this Prospectus, including
information with respect to the Company's plans and strategy for its business,
are forward-looking statements. See "Risk Factors" for a discussion of important
factors which could cause actual results to differ materially from the forward-
looking statements contained herein.
OVERVIEW
FCI is a rapidly growing multinational carrier focused on providing
international wholesale telecommunications services to other carriers worldwide.
As a facilities-based carrier, the Company seeks primarily to provide service
over its facilities and international transmission capacity owned or leased on a
fixed-cost basis ("on-net"). The Company believes that it is better able to
control the quality and the termination costs of on-net traffic and that
increasing the proportion of on-net traffic significantly improves the Company's
gross margins. For the six months ended March 31, 1998, 23.2% of the Company's
wholesale international traffic was terminated on-net and 76.8% was terminated
by other long distance carriers pursuant to resale and operating agreements
between the Company and such carriers ("off-net"). The Company plans to expand
its facilities to increase the percentage of on-net traffic.
FCI LLC, the Company's predecessor, was formed as a Delaware limited liability
company in May 1995 by AIT and FMG, with AIT and FMG contributing $180,000 and
$60,000, respectively, in exchange for ownership interests of 75.0% and 25.0% in
the Company, respectively. As the Company's majority stockholder, AIT has
supplied substantially all of the Company's capital. In September 1996, AIT
provided FCI LLC with working capital of $10.2 million in the form of an
additional capital contribution (the "Additional Capital"). As a result of the
Additional Capital, AIT was entitled to a guaranteed return through September
30, 1997 for the use of the Additional Capital, pursuant to the terms of FCI
LLC's limited liability company agreement. In November 1996, AIT provided FCI
LLC a $5.0 million convertible line of credit, at a rate of 10.0% per annum, due
October 31, 1999, and also guaranteed a $10.0 million letter of credit facility
for the benefit of FCI LLC (collectively, the "Convertible Debenture").
In September 1997, AIT increased its equity ownership in the Company from
75.0% to 81.0% by converting into permanent equity (1) the Convertible Debenture
(which, together with accrued interest, totaled $5.4 million) and (2) capital
contributions of $10.9 million (representing the $10.2 million furnished by AIT
in September 1996 plus a guaranteed return of $724,000 related thereto). Also in
September 1997, AIT established a bridge loan for the benefit of the Company,
pursuant to which AIT advanced funds to the Company for working capital purposes
at a rate equal to the prime rate plus 1.0% per annum.
In November 1997, the Company's stockholders, AIT and FMG, formed FaciliCom
International, Inc. On December 22, 1997, as a result of the Reorganization, FCI
LLC became a wholly owned subsidiary of the Company. Also on December 22, 1997,
AIT made the Equity Investment of $20.0 million by making a cash contribution of
$13.7 million and a noncash contribution of $6.3 million in the form of
cancellation of amounts outstanding under the bridge loan, thereby increasing
AIT's equity ownership in the Company from 81.0% to 84.0%.
The Company provides its services over a carrier-grade international network
consisting of international gateway switches, transmission capacity owned or
leased on a fixed-cost basis and various multinational termination agreements
and resale arrangements with other long distance providers. FCI generates
revenues in Sweden primarily via an international gateway switch in Malmo
operated through Tele8. In February 1996, the Company installed its first U.S.
international gateway switch in New York City and began providing international
long distance services in the U.S. In January 1997, the Company began operation
of its second U.S. international gateway switch in Jersey City, New Jersey. In
April 1997, the Company generated its first revenues in the U.K. through resale
agreements, and in August 1997, installed its fourth international gateway
switch in London. In July 1997, the Company generated its first revenues in
Denmark through resale arrangements, and in December 1997, the Company began
operating its fifth international gateway switch in Copenhagen. In March 1998,
the Company began operating its sixth international gateway switch in Amsterdam.
40
<PAGE>
The Company's strategy is to invest in network facilities as it expands its
customer base, allowing it to enhance service quality and increase gross
margins on particular routes. However, this approach also causes the Company's
gross margins to fluctuate with changes in network utilization due to the
Company's fixed-cost investment in its network. The Company intends to expand
its international presence significantly during 1998 by installing 12
additional switches in Australia, Austria, Belgium, France, Germany, Italy,
Japan, Norway, Spain, Switzerland and the U.S. (Los Angeles and Miami). The
Company believes that expansion into these additional markets will provide the
Company with an opportunity to increase its traffic volume.
Currently, the Company's revenues are generated through the sale of
international long distance services on a wholesale basis to
telecommunications carriers and through the sale of domestic and international
long distance services on a retail basis in Sweden. The Company records
revenues from the sale of telecommunications services at the time of customer
usage. The Company earns revenue based on the number of minutes it bills to
and collects from its customers. The Company's agreements with its wholesale
customers are short-term in duration and are subject to significant traffic
variability. The rates charged to customers are subject to change from time to
time, generally requiring seven days' notice to the customer. However, the
Company is beginning to offer longer-term, fixed-price arrangements to select
customers who historically have generated large volumes of traffic,
specifically on routes where the Company provides on-net service. Consolidated
revenues grew to $71.0 million for the six months ended March 31, 1998, from
$27.1 million for the six months ended March 31, 1997, and to $70.2 million
for the fiscal year ended September 30, 1997, from $11.9 million for the
fiscal year ended September 30, 1996. For the six months ended March 31, 1998
and for the fiscal year ended September 30, 1997, 93.6% and 94.6%,
respectively, of the Company's consolidated revenues were generated from the
sale of services to wholesale customers and 6.4% and 5.4%, respectively, were
generated from the sale of services to retail customers. For the six months
ended March 31, 1998, the Company's U.S., Swedish, Danish, Dutch and U.K.
business units generated 72.8%, 17.0%, 3.6%, 0.3% and 6.3% of consolidated
revenues, respectively.
The Company believes its services are competitively priced in each country
in which the Company offers its services. Prices for wholesale and retail
telecommunications services in many of the Company's markets have declined in
recent years as a result of deregulation and increased competition. The
Company believes that worldwide deregulation and increased competition are
likely to continue to reduce the Company's wholesale and retail revenues per
billed minute of use. The Company believes, however, that any decrease in
wholesale and retail revenues per minute will be at least partially offset by
an increase in billed minutes by the Company's wholesale and retail customers,
and by a decreased cost per billed minute as a result of the expansion of the
Company's network and the Company's ability to use least cost routing.
The Company currently has operating agreements with established long
distance providers in Belgium, Denmark, the Dominican Republic, Estonia,
Finland, Germany, Hungary, Iceland, Italy, Nicaragua, Norway, Poland,
Portugal, Slovenia, the U.K. and Venezuela, and is in the process of
negotiating additional operating agreements with carriers in other countries.
Under its operating agreements, FCI typically agrees to send traffic to its
foreign partners who agree to send a proportionate amount of return traffic
via the Company's network at negotiated rates. The Company and its foreign
partners typically settle the amounts owed to each other in cash on a net
basis, subsequent to the receipt of return traffic. FCI records the amount due
to each foreign partner as an expense in the period during which the Company's
traffic is delivered. FCI recognizes revenue on return traffic in the period
in which it is received. For the six months ended March 31, 1998 and for the
fiscal year ended September 30, 1997, the Company received 11.3 million and
16.1 million minutes of return traffic, respectively, which accounted for 1.4%
and 2.3%, respectively, of the Company's consolidated revenues. See "Risk
Factors--Dependence on Operating Agreements with Foreign Operators."
Cost of revenues includes those costs associated with the transmission and
termination of international long distance and domestic telecommunications
services. Historically, this expense has been variable, based upon minutes of
use, consisting largely of payments to other long distance providers and, to a
lesser extent, customer/carrier interconnect charges, leased fiber circuit
charges and switch facility costs. For the six months ended March 31, 1998,
76.8% of the Company's traffic was terminated off-net and 23.2% of the
Company's traffic was terminated on-net. The Company's resale agreements with
its carriers provide for fluctuating rates with rate change notice periods
varying from seven days to several months. To reduce termination costs for
off-net traffic, the Company is currently negotiating with
41
<PAGE>
several large carriers for longer-term arrangements that are based on minimum
usage commitments. The variability and short-term nature of many of its
existing contracts subject the Company to the possibility of unanticipated
cost increases and the loss of cost-effective routing alternatives.
Selling, general and administrative expenses consist primarily of personnel
costs, facilities costs, travel, commissions, consulting fees, professional
fees and advertising and promotion expenses. Consistent with the Company's
recent growth, these expenses increased from $5.9 million for the six months
ended March 31, 1997 to $18.2 million for the six months ended March 31, 1998
and from $7.6 million for the fiscal year ended September 30, 1996, to $13.5
million for the fiscal year ended September 30, 1997. As a percentage of
revenues, selling, general and administrative expenses increased from 21.6%
for the six months ended March 31, 1997 to 25.7% for the six months ended
March 31, 1998, and decreased from 63.8% for the fiscal year ended September
30, 1996, to 19.3% for the fiscal year ended September 30, 1997. Included
within selling, general and administrative expenses for the six months ended
March 31, 1998, is approximately $5.5 million of expense associated with
stock-based compensation arrangements. Although selling, general and
administrative expenses are expected to increase on an absolute basis in order
to support expansion of the Company's operations, the Company expects that
selling, general and administrative expenses as a percentage of revenues will
continue to decrease.
42
<PAGE>
The Company has made since its inception, and expects to continue to make,
significant investments to expand its network. Increased capital expenditures
in the future can be expected to affect the Company's operating results due to
increased depreciation charges and interest expense in connection with
borrowings to fund such expenditures.
Although the Company's reporting currency is the U.S. dollar, the Company
expects to derive an increasing percentage of its revenues from international
operations. Accordingly, changes in currency exchange rates may have a
significant effect on the Company's results of operations. For example, the
accounting rate under operating agreements is often defined in monetary units
other than U.S. dollars, such as "special drawing rights" or "SDRs." To the
extent that the U.S. dollar declines relative to units such as SDRs, the
dollar equivalent accounting rate would increase. In addition, as the Company
expands into foreign markets, its exposure to foreign currency rate
fluctuations is expected to increase. Although the Company does not currently
engage in exchange rate hedging strategies, it may choose to limit such
exposure by purchasing forward foreign exchange contracts or other similar
hedging strategies. The Company's board of directors (the "Board of
Directors") periodically reviews and approves the overall interest rate and
foreign exchange risk management policy and transaction authority limits.
Specific hedging contracts, if any, will be subject to approval by certain
specified officers of FCI acting within the Board of Directors' overall
policies and limits. The Company intends to limit its hedging activities to
the extent of its foreign currency exposure. There can be no assurance that
any currency hedging strategy would be successful in avoiding currency
exchange-related losses. For the fiscal years ended September 30, 1996 and
September 30, 1997, the Company realized a foreign currency exchange gain
(loss) of $226,000 and ($1.3 million), respectively, as a result of currency
exchange fluctuations. For the six months ended March 31, 1997 and March 31,
1998, the Company realized a foreign exchange loss of $1.3 million and
$394,000, respectively, as a result of currency exchange fluctuations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of revenues:
<TABLE>
<CAPTION>
SIX MONTHS PERIOD FROM
ENDED MAY 5, 1995
MARCH 31, FISCAL YEAR ENDED SEPTEMBER 30, TO
-------------------------------- ------------------------------------- SEPTEMBER 30,
1998 1997 1997 1996 1995
--------------- -------------- ------------------ ----------------- ---------------
$ % $ % $ % $ % $ %
-------- ----- ------- ----- --------- ------- -------- ------- ------- ------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Wholesale.............. $ 66,394 93.6 % $25,775 95.1 % $ 66,422 94.6 % $ 11,664 98.1 % $ 547 100.0 %
Retail................. 4,560 6.4 1,319 4.9 3,765 5.4 227 1.9 -- --
-------- ----- ------- ----- --------- ------ -------- ------ ------- ------
Total revenues....... 70,954 100.0 27,094 100.0 70,187 100.0 11,891 100.0 547 100.0
Cost of revenues........ 66,486 93.7 25,425 93.8 65,718 93.6 12,742 107.2 1,022 186.8
-------- ----- ------- ----- --------- ------ -------- ------ ------- ------
Gross margin............ 4,468 6.3 1,669 6.2 4,469 6.4 (851) (7.2) (475) (86.8)
Operating expenses:
Selling, general and
administrative
(including related
party)................ 12,708 17.9 5,852 21.6 13,511 19.3 7,582 63.8 943 172.4
Stock-based
compensation.......... 5,514 7.8 -- -- -- -- -- -- -- --
Depreciation and
amortization.......... 2,854 4.0 1,090 4.0 2,318 3.3 1,143 9.6 142 26.0
-------- ----- ------- ----- --------- ------ -------- ------ ------- ------
Total operating
expenses............ 21,076 29.7 6,942 25.6 15,829 22.6 8,725 73.4 1,085 198.4
-------- ----- ------- ----- --------- ------ -------- ------ ------- ------
Loss from operations.... (16,608) (23.4) (5,273) (19.5) (11,360) (16.2) (9,576) (80.6) (1,560) (285.2)
Interest expense
(including related
party)................. (6,429) (9.0) (463) (1.7) (1,336) (1.9) (312) (2.6) (80) (14.6)
Interest income......... 2,505 3.5 -- -- -- -- -- -- -- --
Foreign exchange gain
(loss)................. (394) (0.6) (1,323) (4.9) (1,335) (1.9) 226 1.9 (85) (15.5)
-------- ----- ------- ----- --------- ------ -------- ------ ------- ------
Loss before income
taxes.................. (20,926) (29.5) (7,059) (26.1) (14,031) (20.0) (9,662) (81.3) (1,725) (315.3)
Income tax benefit ..... 3,226 (4.6) -- -- -- -- -- -- -- --
-------- ----- ------- ----- --------- ------ -------- ------ ------- ------
Net loss................ $(17,700) (25.0)% $(7,059) (26.1)% $ (14,031) (20.0)% $ (9,662) (81.3)% $(1,725) (315.3)%
======== ===== ======= ===== ========= ====== ======== ====== ======= ======
</TABLE>
43
<PAGE>
FOR THE SIX MONTHS ENDED MARCH 31, 1998, AS COMPARED TO THE SIX MONTHS ENDED
MARCH 31, 1997
Revenues increased by $43.9 million to $71.0 million for the six months
ended March 31, 1998, from $27.1 million for the six months ended March 31,
1997. The growth in revenue resulted primarily from an increase in billed
customer minutes of use resulting from an increase in wholesale customers in
the U.S., U.K., Netherlands and Scandinavia and an increase in retail
customers in Sweden, as well as usage increases from existing wholesale
customers. Offsetting the growth in revenue during this period was a decrease
in the price per billed minute to $0.243 for the six months ended March 31,
1998, from $0.290 for the six months ended March 31, 1997, as a result of
increased competition and increased on-net traffic. For the six months ended
March 31, 1998, U.S. revenues totaled $51.7 million or 72.8% of the Company's
consolidated revenues. Swedish revenues totaled $12.1 million, or 17.0% of
consolidated revenues, Danish revenues totaled $2.5 million, or 3.6% of
consolidated revenues, U.K. revenues totaled $4.5 million, or 6.3% of
consolidated revenues and Dutch revenues totaled $200,000, or 0.3% of
consolidated revenues.
Wholesale customers increased by 63 or 185.3%, to 97 wholesale customers at
March 31, 1998, from 34 at March 31, 1997. Retail customers in Sweden and
Denmark increased by 13,609, to 19,345 retail customers at March 31, 1998,
from 5,736 at March 31, 1997. Billed minutes of use increased by 199.2
million, to 292.6 million minutes of use for the six months ended March 31,
1998, from 93.4 million minutes of use for the six months ended March 31,
1997.
Cost of revenues increased by $41.1 million, to $66.5 million for the six
months ended March 31, 1998, from $25.4 million for the six months ended March
31, 1997. As a percentage of revenues, cost of revenues declined to 93.7% for
the six months ended March 31, 1998, from 93.8% for the six months ended March
31, 1997, primarily as a result of increased minutes of use on the Company
network, improved efficiencies of network fiber facilities due to higher
traffic volumes and reductions in rates charged by the Company's carrier
suppliers. Cost of revenues as a percentage of revenues is expected to
decrease as a result of higher traffic volumes generated by the Company, which
are expected to result in volume discounts for off-net traffic, as well as
from an anticipated increase in the percentage of on-net traffic.
Gross margin increased by $2.8 million to $4.5 million for the six months
ended March 31, 1998, from $1.7 million for the six months ended March 31,
1997. As a percentage of revenues, gross margin increased to 6.3% for the six
months ended March 31, 1998, from 6.2% for the six months ended March 31,
1997.
Selling, general and administrative expenses increased by $12.3 million to
$18.2 million for the six months ended March 31, 1998, from $5.9 million for
the six months ended March 31, 1997, primarily as a result of the Company's
increased sales, an increase in customer service, billing, collections and
accounting staff required to support revenue growth, approximately $708,000 in
settlement expenses related to litigation arising from an international
telephone services agreement and related billing, collection and factoring
services agreements with third parties and approximately $5.5 million of
expenses related to stock-based compensation arrangements. Staff levels grew
by 89, or 120.3%, to 163 employees at March 31, 1998. As a percentage of
revenues, selling, general and administrative expenses increased to 25.7% for
the six months ended March 31, 1998, from 21.6% for the six months ended March
31, 1997. Bad debt expense was $828,000 for the six months ended March 31,
1998, or 1.2% of revenues.
Depreciation and amortization increased by $1.8 million to $2.9 million for
the six months ended March 31, 1998, from $1.1 million for the six months
ended March 31, 1997, primarily due to increased capital expenditures incurred
in connection with the deployment and expansion of the Company's network.
Interest expense increased by $6.0 million to $6.4 million for the six
months ended March 31, 1998, from $463,000 for the six months ended March 31,
1997, primarily due to the offering of $300 million Senior Notes.
Interest income for the six months ended March 31, 1998, was $2.5 million
and related principally to interest on proceeds from the $300 million Senior
Notes offering which were invested in Marketable Securities (as defined).
Foreign exchange loss decreased by $929,000 to $394,000 for the six months
ended March 31, 1998, from $1.3 million for the six months ended March 31,
1997.
44
<PAGE>
Income tax benefit of $3.2 million was recorded for the six months ended
March 31, 1998.
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997, AS COMPARED TO THE FISCAL YEAR
ENDED SEPTEMBER 30, 1996
Revenues increased by $58.3 million to $70.2 million in the fiscal year
ended September 30, 1997, from $11.9 million in the fiscal year ended
September 30, 1996. The growth in revenue resulted primarily from an increase
in billed customer minutes of use resulting from an increased number of
wholesale customers in the U.S., the U.K. and Scandinavia and an increased
number of retail customers in Sweden, as well as usage increases from existing
wholesale customers. Offsetting the growth in revenue during this period was a
decrease in the price per billed minute of 3.5%, to $0.278 for the fiscal year
ended September 30, 1997 from $0.288 for the fiscal year ended September 30,
1996, as a result of increased competition. In the fiscal year ended September
30, 1997, U.S. revenues totaled $53.7 million, or 76.5% of the Company's
consolidated revenues, Swedish revenues totaled $15.5 million, or 22.1% of
consolidated revenues and U.K. revenues totaled $1.0 million, or 1.4% of
consolidated revenues.
Wholesale customers increased by 36, or 211.8%, to 53 wholesale customers at
September 30, 1997, from 17 at September 30, 1996. Retail customers in Sweden
increased by 10,750, to 12,365 retail customers at September 30, 1997, from
1,615 at September 30, 1996. Billed minutes of use increased by 211.0 million,
to 252.3 million minutes of use in the fiscal year ended September 30, 1997,
from 41.3 million minutes of use in the fiscal year ended September 30, 1996.
Cost of revenues increased by $53.0 million, to $65.7 million in the fiscal
year ended September 30, 1997, from $12.7 million in the fiscal year ended
September 30, 1996. As a percentage of revenues, cost of revenues declined to
93.6% in the fiscal year ended September 30, 1997, from 107.2% in the fiscal
year ended September 30, 1996, primarily as a result of increased minutes of
use on the Company's network, improved efficiencies of network facilities due
to higher traffic volumes and reductions in rates charged by the Company's
carrier suppliers. Cost of revenues as a percentage of revenues is expected to
continue to decrease as a result of higher traffic volumes, which are expected
to result in volume discounts for off-net traffic, as well as from an
anticipated increase in the percentage of on-net traffic.
Gross margin increased to $4.5 million in the fiscal year ended September
30, 1997, from ($851,000) in the fiscal year ended September 30, 1996. As a
percentage of revenues, gross margin increased to 6.4% in the fiscal year
ended September 30, 1997, from (7.2%) in the fiscal year ended September 30,
1996.
Selling, general and administrative expenses increased by $5.9 million to
$13.5 million in the fiscal year ended September 30, 1997, from $7.6 million
in the fiscal year ended September 30, 1996, primarily as a result of the
Company's increased sales, and an increase in customer service, billing,
collections and accounting staff required to support revenue growth. Staff
levels grew by 30, or 47.6%, to 93 employees at September 30, 1997, from 63
employees at September 30, 1996. As a percentage of revenues, selling, general
and administrative expenses decreased to 19.3% in the fiscal year ended
September 30, 1997, from 63.8% in the fiscal year ended September 30, 1996, as
a result of improved efficiencies. Bad debt expense was $1.3 million for the
fiscal year ended September 30, 1997, or 1.8% of revenues.
Depreciation and amortization expenses increased by $1.2 million to $2.3
million in the fiscal year ended September 30, 1997, from $1.1 million in the
fiscal year ended September 30, 1996, primarily due to increased capital
expenditures incurred in connection with the deployment and expansion of the
Company's network.
Interest expense, net increased by $1.0 million to $1.3 million in the
fiscal year ended September 30, 1997, from $312,000 in the fiscal year ended
September 30, 1996, primarily due to increased levels of vendor financing and
loans from AIT.
Foreign exchange gain (loss) decreased by $1.5 million to ($1.3) million in
the fiscal year ended September 30, 1997, from $226,000 in the fiscal year
ended September 30, 1996.
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996, AS COMPARED TO THE PERIOD FROM
MAY 5, 1995 (INCEPTION) TO SEPTEMBER 30, 1995
45
<PAGE>
Revenues increased by $11.4 million to $11.9 million in the fiscal year
ended September 30, 1996, from $547,000 for the period from May 5, 1995
(inception) to September 30, 1995. The growth in revenue resulted primarily
from an increase in billed customer minutes of use resulting from an increased
number of wholesale customers in the U.S. and Sweden and an increased number
of retail customers in Sweden, as well as usage increases from existing
wholesale customers. Contributing to the growth in revenue during this period
was an increase in the price per billed minute of 43.3%, to $0.288 for the
fiscal year ended September 30, 1996 from $0.201 for the fiscal year ended
September 30, 1995, as a result of the commencement of the Company's
operations in the U.S.
Wholesale customers increased by 14, or 466.7%, to 17 wholesale customers at
September 30, 1996, from 3 at September 30, 1995. Retail customers in Sweden
at September 30, 1996 totaled 1,615. Billed minutes of use increased by 38.6
million, to 41.3 million minutes of use in the fiscal year ended September 30,
1996, from 2.7 million minutes of use for the period from May 5, 1995
(inception) to September 30, 1995.
Cost of revenues increased by $11.7 million, to $12.7 million in the fiscal
year ended September 30, 1996, from $1.0 million for the period from May 5,
1995 (inception) to September 30, 1995.
Gross margin decreased by $376,000, to ($851,000) in the fiscal year ended
September 30, 1996, from ($475,000) for the period from May 5, 1995
(inception) to September 30, 1995. As a percentage of revenues, gross margin
increased to (7.2%) in the fiscal year ended September 30, 1996, from (86.8%)
for the period from May 5, 1995 (inception) to September 30, 1995.
Selling, general and administrative expenses increased by $6.6 million to
$7.6 million in the fiscal year ended September 30, 1996, from $943,000 for
the period from May 5, 1995 (inception) to September 30, 1995, primarily as a
result of the Company's increased sales, and an increase in customer service,
billing, collections and accounting staff required to support revenue growth.
Staff levels grew by 47, or 293.8%, to 63 employees at September 30, 1996,
from 16 employees at September 30, 1995. As a percentage of revenues, selling,
general and administrative expenses decreased to 63.8% in the fiscal year
ended September 30, 1996, from 172.4% for the period from inception (May 5,
1995) to September 30, 1995.
Depreciation and amortization expenses increased by $1.0 million to $1.1
million in the fiscal year ended September 30, 1996, from $142,000 for the
period from May 5, 1995 (inception) to September 30, 1995, primarily due to
increased capital expenditures incurred in connection with the deployment and
expansion of the Company's network.
Interest expense increased by $232,000 to $312,000 in the fiscal year ended
September 30, 1996, from $80,000 for the period from May 5, 1995 (inception)
to September 30, 1995, primarily due to increased levels of vendor financing.
Foreign exchange gain increased by $311,000 to $226,000 in the fiscal year
ended September 30, 1996, from a foreign exchange loss of $85,000 for the
period from May 5, 1995 (inception) to September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating losses and negative cash
flows as a result of the development and operation of its network, including
the acquisition and maintenance of switches and undersea fiber optic capacity.
The Company has financed its growth primarily through equity and a credit
facility provided by AIT, credit facilities with two equipment vendors and
capital lease financing. The Company expects to require additional capital to
fund network expansion, operating losses and other general corporate purposes.
Net cash provided by (used in) operating activities was ($13.6) million for
the six months ended March 31, 1998, ($3.2) million for the six months ended
March 31, 1997, ($8.4) million in the fiscal year ended September 30, 1997,
($5.4) million in the fiscal year ended September 30, 1996 and ($1.6) million
for the period from May 5, 1995 (inception) to September 30, 1995. The ($10.4)
million year-over-year change in net cash used in operating activities for the
six months ended March 31, 1998 was principally the result of an increase in
net loss of $10.6 million. The year-over-year change in net cash used in
operating activities in the fiscal year ended September 30, 1997 was primarily
the result of an increase in net loss of $4.4 million. This change was
46
<PAGE>
offset by an increase in cash resulting from year-over-year increases in
accounts payable exceeding year-over-year increases in accounts receivable. In
the fiscal year ended September 30, 1996, net cash provided by (used in)
operating activities of ($5.4) million resulted from a net loss of $9.7
million, offset in part by $1.1 million in depreciation and amortization
expenses and an increase in cash of $4.4 million resulting from year-over-year
increases in accounts payable exceeding year-over-year increases in accounts
receivable. For the period from May 5, 1995 (inception) to September 30, 1995,
net cash provided by (used in) operating activities of ($1.6) million resulted
primarily from a net loss of $1.7 million.
Net cash provided by (used in) investing activities was ($153.8) million for
the six months ended March 31, 1997, ($819,000) for the six months ended March
31, 1997, ($1.7) million in the fiscal year ended September 30, 1997, ($1.1)
million in the fiscal year ended September 30, 1996 and ($1.1) million for the
period from May 5, 1995 (inception) to September 30, 1995. Net cash utilized
by investing activities in each period resulted from an increase in capital
expenditures to expand the Company's network and the purchase of Marketable
Securities.
Net cash provided by (used in) financing activities was $291.4 million for
the six months ended March 31, 1998, $2.9 million for the six months ended
March 31, 1997, $7.9 million in the fiscal year ended September 30, 1997, $8.6
million in the fiscal year ended September 30, 1996 and $2.8 million for the
period from May 5, 1995 (inception) to September 30, 1995. Net cash provided
by financing activities for the six months ended March 31, 1998 resulted from
the $20.0 million equity investment by AIT, including a noncash conversion of
debt to equity of $6.3 million as a result of loans made by AIT to the Company
and the issuance of $300 million of Senior Notes. Net cash provided by
financing activities in fiscal year ended September 30, 1997 resulted from
$9.7 million of borrowings from AIT offset by $1.8 million of repayments of
long-term obligations. On September 30, 1997, the Company converted $5.4
million of convertible debt held by AIT to permanent equity. In addition, on
September 30, 1997, $724,000 of guaranteed return for the year ended September
30, 1997 was recognized as excess capital contributions and the guaranteed
return feature for the excess capital contributions made by AIT was eliminated
as part of the FaciliCom International, L.L.C. First Amended and Restated
Limited Liability Company Agreement. For the fiscal year ended September 30,
1996, net cash provided by financing activities of $8.6 million resulted from
$7.1 million of capital contributions and $2.0 million of borrowings from AIT
offset by $540,000 of repayments of long-term obligations. For the period from
May 5, 1995 (inception) to September 30, 1995, net cash provided by financing
activities of $2.8 million resulted from $2.8 million of capital
contributions.
Non-cash financing activities for the six months ended March 31, 1998 and
March 31, 1997, for the fiscal years ended September 30, 1997 and 1996 and for
the period from May 5, 1995 (inception) to September 30, 1995 resulted from
the financing of network equipment provided by NTFC Capital Corp. ("NTFC") and
Ericsson I.F.S., and financing of undersea fiber circuits provided by
Teleglobe Cantat-3 Inc. and Telecom A/S (collectively "Globesystems").
The Ericsson IFS loan agreement requires maintenance of certain financial
and nonfinancial covenants. FCI received a waiver of certain covenant
violations of the original and amended and restated loan agreements. The
covenants were then modified. The covenants violated were related to the
requirement of mandatory prepayments of the loan, revisions to the Company's
limited liability company agreement, limitations on distribution to owners and
patents, licenses and franchises, earnings before interest, taxes,
depreciation and amortization ("EBITDA") coverage ratio, minimum tangible net
worth, current ratio, debt to annualized EBITDA ratio, and limitation on
capital expenditures. The Company repaid all outstanding indebtedness under
the Ericsson loan agreement with a portion of the net proceeds from the
Offering and the Ericsson loan agreement was terminated.
The NTFC loan agreement requires maintenance of certain financial and
nonfinancial covenants. FCI received a waiver of certain covenant violations
for the year ended September 30, 1997 and maintenance of those covenants was
also waived through and including the year ended September 30, 1998. The
covenants violated were related to the delinquent payment of current
liabilities, the debt service coverage ratio, the debt to net worth ratio, the
prohibition of business changes, the limitation of investments and the
limitation on transactions with affiliates. The Company repaid all outstanding
indebtedness under the NTFC loan agreement with a portion of the net proceeds
from the Offering and terminated the agreement.
47
<PAGE>
The Company's business strategy contemplates aggregate capital expenditures
of $150.0 million through December 31, 1999. Such capital expenditures are
expected to be used primarily for international gateway switches, PoPs,
transmission equipment, undersea and international fiber circuits (including
IRUs and MAOUs) for new and existing routes and other support systems. During
1998, the Company plans to install 12 additional switches in Australia,
Austria, Belgium, France, Germany, Italy, Japan, Norway, Spain, Switzerland
and the U.S. (Los Angeles and Miami). In addition, the Company plans to invest
in fiber optic transmission capacity connecting North America, Europe, Latin
America, Asia and the Pacific Rim, including the Americas-1, Gemini, TPC-5,
APCN (A) and Southern Cross fiber optic cables, and to acquire additional
capacity in the FLAG system during 1998.
On December 22, 1997, the Company received the Equity Investment from AIT,
which consisted of a contribution of cash and the cancellation of
indebtedness. See "Certain Relationships and Related Transactions." Following
the Recapitalization, AIT owned approximately 84.0% of the outstanding shares
of common stock of the Company.
On January 28, 1998, FCI issued $300,000,000 aggregate principal amount of
Old Notes. Interest on the Old Notes is payable semiannually in arrears on
January 15 and July 15 of each year, commencing on July 15, 1998.
The Notes are redeemable at the option of FCI, in whole or in part at any
time on or after January 15, 2003, at specified redemption prices plus accrued
and unpaid interest and Liquidated Damages (as defined in the Indenture), if
any, thereon to the date of redemption. In addition, at any time prior to
January 15, 2001, FCI may redeem from time to time up to 35.0% of the
originally issued aggregate principal amount of the Notes at the specified
redemption prices plus accrued interest and Liquidated Damages, if any, to the
date of redemption with the Net Cash Proceeds (as defined in the Indenture) of
one or more Public Equity Offerings (as defined in the Indenture); provided
that at least 65.0% of the originally issued aggregate principal amount of the
Notes remains outstanding after such redemption. In the event of a Change in
Control (as defined in the Indenture), each holder of the Notes has the right
to require FCI to purchase all or any of such holder's Notes at a purchase
price in cash equal to 101% of the aggregate principal amount thereof, plus
accrued and paid interest and Liquidated Damages, if any, to the date of
purchase.
FCI used approximately $86.5 million of the proceeds from the offering of
the Old Notes to purchase a portfolio of Pledged Securities (as defined in the
Indenture) consisting of U.S. Government Obligations (as defined in the
Indenture), which are pledged as security and restricted for the first six
scheduled interest payments on the Notes. In addition, approximately $16.9
million of existing indebtedness was paid off with the proceeds from the
offering of the Old Notes.
The Company continuously reviews opportunities to further its business
strategy through strategic alliances with, investments in, or acquisitions of
companies that are complementary to the Company's operations. The Company may
finance such alliances, investments or acquisitions with cash flow from
operations or through additional bank debt, vendor financing or one or more
public offerings or private placements of securities.
The Company believes that the net proceeds from the offering of the Old
Notes will provide the Company with sufficient capital to fund planned capital
expenditures and anticipated losses and to make interest payments on the
Notes. There can be no assurance, however, that the Company will achieve or,
if achieved, will sustain profitability or positive cash flow from operating
activities in the future.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 129, "Disclosure of
Information about Capital Structure," which establishes standards for
disclosing information about an entity's capital structure and is to be
implemented for fiscal years ending after December 15, 1997; in June 1997 the
FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements and is to be implemented for fiscal years beginning after
December 15, 1997; in June 1997 the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders and is to be implemented for
fiscal years beginning after December 15, 1997. The implementation of such
standards will not have a material impact on the Company's financial position
or results of operations.
48
<PAGE>
BUSINESS
THE COMPANY
FCI is a rapidly growing multinational carrier focused on providing
international wholesale telecommunications services to other carriers
worldwide. FCI provides these services over a carrier-grade international
network consisting of five international gateway switches in the U.S., Sweden,
Denmark and the U.K., as well as transmission capacity owned and leased on a
fixed-cost basis that connects its switches in the U.S. and Europe. FCI's
network and its operating agreements with PTTs enable it to offer high quality
services to its carrier customers at competitive rates. In addition to
wholesale services, as of March 31, 1998, FCI provided domestic and
international long distance services on its network to over 19,345 retail
customers in Sweden and Denmark through Tele8. FCI believes that its
multinational, facilities-based approach and its established carrier status in
Europe through Tele8 provide it with significant competitive advantages
including control over transmission quality and reduced termination and
network costs, as well as high quality local sales and customer service.
FCI was founded to capitalize on opportunities that have developed for
facilities-based carriers as a result of (i) the increasing demand for
international telecommunications services worldwide, (ii) the rapid pace of
deregulation of the approximately $61 billion international telecommunications
market and (iii) the erosion of the international ARM. Demand for
international telecommunications services is expected to increase as a result
of a number of factors, including worldwide economic growth, global
deregulation, technological advancements and the introduction of new services.
FCI believes that, as in the U.S., deregulation in Europe, Latin America, Asia
and the Pacific Rim will accelerate demand for international
telecommunications services and lead to the establishment of new carriers in
these markets. FCI believes that it is well positioned to capture
international traffic from established and emerging carriers seeking carrier-
grade network quality, competitively priced network services and flexible,
responsive technical support and customer service.
The Company's target customer base consists primarily of PTTs and other
first-tier carriers, emerging carriers and wireless carriers with
international traffic. PTTs and other first-tier carriers generally have their
own international networks, but will use carriers such as FCI for overflow
traffic and least-cost routing. Emerging carriers and wireless carriers
constitute rapidly growing industry segments that generally rely on PTTs and
wholesale carriers such as the Company to provide international connectivity.
As of March 31, 1998, the Company provided service to 97 carriers, including
nine of the ten largest U.S. carriers (based on outbound international
traffic), three wireless carriers and 14 multinational carriers that originate
traffic in more than one of the Company's existing markets.
To offer high quality international services and to control its termination
and network costs, FCI seeks to invest in undersea fiber optic cable systems
and international gateway switches in locations and on routes where customer
demand justifies such fixed asset investments. As of March 31, 1998, FCI had
implemented an international network comprising (i) four NorTel and two
Ericsson international gateway switches located in New York City; Jersey City,
New Jersey; Malmo, Sweden; Amsterdam; Copenhagen and London; (ii) owned and
leased capacity in seven undersea fiber optic cable systems connecting the
Company's international gateway switches in the U.S. and Europe: CANTAT-3,
CANUS-1, TAT 12/13, Kattegatt, Odin, FLAG and DKS-18; and (iii) PoPs in three
U.S. and two European cities for origination and termination of international
traffic. During 1998, the Company plans to install 12 additional switches in
Australia, Austria, Belgium, France, Germany, Italy, Japan, Norway, Spain,
Switzerland and the U.S. (Los Angeles and Miami). In addition, the Company
plans to invest in fiber optic transmission capacity connecting North America,
Europe, Latin America, Asia and the Pacific Rim, including the Americas-1,
Gemini, TPC-5, APCN(A) and Southern Cross fiber optic cables, and to acquire
additional capacity in the FLAG system during 1998. FCI had invested $66.2
million in network facilities as of March 31, 1998, and plans to invest an
additional $150.0 million during the next two calendar years.
FCI currently has operating agreements with 18 foreign carriers, 15 of which
are the PTTs in their respective countries. The Company's operating agreements
permit it to terminate traffic directed to correspondent carriers
49
<PAGE>
in these countries and provide for the Company to receive return traffic. For
the six months ended March 31, 1998 and for the fiscal year ended September
30, 1997, return traffic generated under such operating agreements accounted
for approximately 1.4% and 2.3%, respectively, of consolidated revenues. The
Company is currently negotiating additional operating agreements with carriers
in Europe, Latin America, Asia and the Pacific Rim.
INDUSTRY
Overview. The international long distance industry, which principally
consists of the transport of voice and data traffic from one country to
another, is undergoing a period of fundamental change that has resulted, and
is expected to continue to result, in significant growth in usage of
international telecommunications services. According to TeleGeography, in 1996
the international long distance telecommunications industry accounted for
approximately $61 billion in revenues and 70 billion minutes of use, up from
approximately $22 billion in revenues and 17 billion minutes of use in 1986.
According to TeleGeography, it is estimated that by the year 2000 this market
will have expanded to $86 billion in revenues and 122 billion minutes of use,
representing compound annual growth rates from 1996 of 9.0% and 15.0%,
respectively.
The Company believes that growth in international long distance services is
being driven by (i) the globalization of the world's economies and the
worldwide trend toward deregulation of the telecommunications sector, (ii)
declining prices and a wider selection of products and services driven by
greater competition resulting from deregulation, (iii) increased telephone
accessibility resulting from technological advances and greater investment in
telecommunications infrastructure, including deployment of wireless networks
and (iv) increased international business and leisure travel. The Company
believes that growth of traffic originated in markets outside the U.S. will be
higher than growth in traffic originated within the U.S. due to recent
deregulation in many foreign markets and increasing access to
telecommunications facilities in emerging markets.
Deregulation has encouraged competition, which in turn has prompted carriers
to offer a wider selection of products and services at lower prices. In recent
years, prices for international long distance services have decreased
substantially and are expected to continue to decrease in most of the markets
in which the Company currently competes. Several long distance carriers in the
U.S. have introduced pricing strategies that provide for fixed, low rates for
both domestic and international calls originating in the U.S. The Company
believes that revenue losses resulting from competition-induced price
decreases have been more than offset by cost decreases, as well as an increase
in telecommunications usage. For example, based on FCC data for the period
1989 through 1995, per minute settlement payments by U.S.-based carriers to
foreign PTTs fell 31.4%, from $0.70 per minute to $0.48 per minute. Over this
same period, however, per minute international billed revenues fell only
13.7%, from $1.02 in 1989 to $0.88 in 1995. The Company believes that as
settlement rates and costs for leased capacity continue to decline,
international long distance will continue to provide high revenues and gross
margin per minute. See "Risk Factors--Intense Competition."
The Company believes that the market opportunity for facilities-based
international wholesale carriers will continue to be attractive due to a
number of factors, including (i) the increasing demand for international
telecommunications services worldwide, (ii) the rapid pace of deregulation of
the approximately $61 billion international telecommunications market and
(iii) the erosion of the international ARM.
Regulatory and Competitive Environment. Prior to deregulation, long distance
carriers were generally government-owned monopoly carriers such as British
Telecom plc in the U.K., Tele Danmark AS ("Tele Danmark") in Denmark and Telia
AB in Sweden. Deregulation of a particular telecommunications market has
typically started with the introduction of a second long distance carrier,
followed by the governmental authorization of multiple carriers. In the U.S.,
one of the first deregulated markets, deregulation began in the 1960s with
MCI's authorization to provide long distance service and was followed in 1984
by AT&T's divestiture of the RBOCs and, most recently, by the passage of the
1996 Telecommunications Act. Deregulation has occurred elsewhere, such as the
U.K., Sweden and Denmark, and is currently being implemented in other
countries, including most EU countries, several Latin American countries and
selected Asian countries.
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<PAGE>
In addition, on February 15, 1997, the U.S. and 68 other countries signed
the World Trade Organization Basic Telecom Agreement ("WTO Agreement") and
agreed to open their telecommunications markets to competition and foreign
ownership starting January 1, 1998. These 69 countries represent approximately
90% of worldwide telecommunications traffic. The Company believes that the WTO
Agreement will provide FCI with significant opportunities to compete in
markets where it did not previously have access, and to provide end-to-end
facilities-based services to and from these countries.
The FCC recently released an order that significantly changes U.S.
regulation of international services in order to implement the United States'
"open market" commitments under the WTO Agreement (the "Foreign Participation
Order"). Among other measures, the FCC's order (i) eliminated the FCC's
Effective Competitive Opportunities ("ECO") test for applicants affiliated
with carriers in WTO member countries, while imposing new conditions on
participation by dominant foreign carriers, (ii) allowed nondominant U.S.
carriers to enter into exclusive arrangements with nondominant foreign
carriers and scaled back the prohibition on exclusive arrangements with
dominant carriers and (iii) adopted rules that will facilitate approval of
flexible alternative settlement payment arrangements.
The Company believes that the Foreign Participation Order will have the
following effects on U.S. carriers: (i) fewer impediments to investments in
U.S. carriers by foreign entities; (ii) increased opportunities to enter into
innovative traffic arrangements with foreign carriers located in WTO member
countries; (iii) new opportunities to engage in international simple resale
("ISR") to additional foreign countries; and (iv) modified settlement rates
offered by foreign affiliates of U.S. carriers to U.S. carriers to comply with
the FCC's settlement rate benchmarks. In accordance with the recent criteria
set forth in its recent order, on April 22, 1998 the FCC authorized ISR to a
number of additional foreign countries, specifically, France, Belgium,
Denmark, Germany, Luxembourg, and Norway.
While the Foreign Participation Order is expected to increase competition
for international telecommunications services, and reduce prices for such
services, the Company believes that the order will provide it with
opportunities to enter into innovative and potentially more advantageous
traffic arrangements with foreign carriers from WTO member countries, thereby
allowing the Company to provide an increased volume of service in a more cost
effective manner. Moreover, the Company believes that the opportunities to
enter into innovative arrangements as well as the creation of new
opportunities for carriers to engage in ISR to additional foreign countries
likely will result in an increasing amount of international traffic and,
therefore, an increasing demand for services provided by international
wholesale carriers such as the Company. See "Risk Factors--Intense
Competition" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations Overview."
International Traffic Dynamics. A long distance telephone call consists of
three parts--origination, transport and termination. Generally, a domestic
long distance call originates on a local network and is transported to the
network of a long distance carrier, which in many countries is the same as the
local carrier. The call is then carried over the long distance network to
another local exchange network where the call is terminated. An international
long distance call is similar to a domestic long distance call, but typically
involves at least two long distance carriers: the first carrier transports the
call from the country of origination, and the second carrier terminates the
call in the country of termination. These long distance telephone calls are
classified as one of three types of traffic. For example, a call made from the
U.S. to the U.K. is referred to as outbound traffic for the U.S. carrier and
inbound traffic for the U.K. carrier. The third type of traffic, international
transit traffic, originates and terminates outside a particular country, but
is transported through that country on a carrier's network. Since most major
international fiber optic cable systems are connected to the U.S. and
international long distance prices are substantially lower in the U.S. than in
other countries, a large volume of international transit traffic is routed
through the U.S.
International calls are transported by land-based or undersea cable or via
satellites. A carrier can obtain voice circuits on cable systems either
through ownership or leases. Ownership in cables is acquired either through
IRUs or MAOUs. The fundamental difference between an IRU holder and an owner
of MAOUs is that the IRU holder is not entitled to participate in management
decisions relating to the cable system. Between two countries,
51
<PAGE>
a carrier from each country owns a "half-circuit" of a cable, essentially
dividing the ownership of the cable into two equal components. Additionally,
any carrier may generally lease circuits on a cable from another carrier.
Unless a carrier owns a satellite, capacity also must be leased from one of
several existing satellite systems.
Accounting Rate Mechanism. Under the ARM, which has been the traditional
model for handling traffic between international carriers, traffic is
exchanged under bilateral carrier agreements, or operating agreements, between
carriers in two countries. Operating agreements generally are three to five
years in length and provide for the termination of traffic in, and return of
traffic to, the carriers' respective countries at a negotiated accounting
rate, known as the Total Accounting Rate ("TAR"). In addition, operating
agreements provide for network coordination and accounting and settlement
procedures between the carriers. Both carriers are responsible for costs and
expenses related to operating their respective halves of the end-to-end
international connection.
Settlement costs, which typically equal one-half of the TAR, are the fees
owed to another international carrier for transporting traffic on its
facilities. Settlement costs are reciprocal between each party to an operating
agreement at a negotiated rate (which must be the same for all U.S.-based
carriers, unless the FCC approves an exception). For example, if a foreign
carrier charges a U.S. carrier $0.30 per minute to terminate a call in the
foreign country, the U.S. carrier would charge the foreign carrier the same
$0.30 per minute to terminate a call in the U.S. Additionally, the TAR is the
same for all carriers transporting traffic into a particular country, but
varies from country to country. The term "settlement costs" arises because
carriers essentially pay each other on a net basis determined by the
difference between inbound and outbound traffic between them. The following
chart illustrates an international long distance call originating in the U.S.
using the ARM:
[CHART APPEARS HERE]
Operating agreements typically provide that a carrier will return
terminating traffic ("return traffic") to a carrier in proportion to the
traffic it receives from that carrier. Return traffic generally is more
profitable than outgoing traffic because the settlement rate per minute is
substantially greater than the incremental cost of terminating a call in the
country due to the lack of marketing expense and billing costs, as well as the
lower cost structure associated with terminating calls within the country.
Generally, there is a six-month lag between outbound traffic and the
allocation of the corresponding return traffic and, in certain instances, a
minimum volume commitment must be achieved before qualifying for receipt of
return traffic.
Alternative Calling Procedures. As the international long distance market is
being deregulated, long distance companies have devised alternative calling
procedures ("ACPs") in order to complete calls more economically than under
the ARM. Some of the more significant ACPs include (i) transit, (ii) refiling
or "hubbing" and (iii) ISR. The most common method is transit, which allows
traffic between two countries to be carried through a third country on another
carrier's network. This procedure, which requires agreement among the
particular long distance companies and the countries involved, generally is
used either for overflow traffic during peak periods or where the direct
circuit may not be available or justified based on traffic volume. Refiling
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<PAGE>
or "hubbing" of traffic, which takes advantage of disparities in settlement
rates between different countries, allows traffic to a potential country to be
treated as if it originated in another country that enjoys lower settlement
rates with the destination country, thereby resulting in lower overall costs
on an end-to-end basis. U.S.-based carriers generally are beneficiaries of
refiling on behalf of other carriers because of low international rates in the
U.S. The difference between transit and refiling is that, with respect to
transit, the carrier in the destination country has a direct relationship with
the originating carrier, while with refiling, the carrier in the destination
country is likely not to even know the identity of the originating carrier.
The choice between transit and refiling is determined primarily by cost. With
ISR, a carrier may completely bypass the settlement system by connecting an
international leased line to the PSTN of a foreign country or directly to
customers' premises, which may be expected to result in reduced costs for such
carrier. It may be anticipated that routes where ISR is permitted will benefit
from increased competition, reduced prices, and increased demand. As discussed
above, it is anticipated that the Foreign Participation Order will create new
opportunities for carriers to engage in ISR to additional foreign countries.
As noted above, the FCC has recently authorized ISR to additional foreign
countries, specifically, France, Belgium, Denmark, Germany, Luxembourg, and
Norway.
Description of Operating Markets. As of March 31, 1998, FCI terminated
traffic through a combination of operating agreements, refiling, resale and
ISR to over 200 countries worldwide and originated traffic in the U.S.,
Sweden, Denmark, the Netherlands and the U.K. The Company intends to establish
facilities that will permit it to originate traffic in 12 additional markets
by the end of 1998.
United States. With a population of approximately 268 million people, the
U.S. has a telecommunications services market that generated revenues of
approximately $222.3 billion in 1996 according to the FCC. The U.S. long
distance market is highly deregulated and is the largest in the world.
According to the FCC, in 1996 long distance telephone revenues were
approximately $99.7 billion, including approximately $17.1 billion from
international services (representing 17.2% of the total market). According to
TeleGeography, AT&T is the largest international long distance carrier in the
U.S. market, with market share of approximately 50.2% of international
outgoing minutes in 1996, while MCI and Sprint had market shares of 28.4% and
13.2%, respectively. AT&T, MCI, WorldCom and Sprint constitute what generally
is regarded as the first-tier in the U.S. long distance market. Other large
long distance companies with more limited ownership of transmission capacity,
such as Frontier and LCI, constitute the second-tier of the industry. The
remainder of the U.S. long distance market is comprised of several hundred
smaller companies, largely resellers, which are known as third-tier carriers.
Sweden. With a population of approximately nine million people, Sweden has a
telecommunications market that generated approximately $6.0 billion in
revenues in 1996 according to the International Telecommunications Union (the
"ITU"). Sweden has fully liberalized its telecommunications market and Tele8,
together with its established competitor Tele-2 AB, accounted for
approximately 30.0% of the market for international outgoing minutes in 1996
according to TeleGeography. Telia AB, the PTT in Sweden, is a member of the
Unisource consortium and is also authorized to provide facilities-based end-
to-end services between the U.S. and Sweden.
Denmark. With a population of approximately five million people, Denmark has
a telecommunications market that generated approximately $3.6 billion in
revenues in 1996 according to the ITU. The Danish Parliament recently approved
legislation to liberalize its telecommunications industry. The new law allows
carriers to provide public voice services and to build and lease networks.
Most services, including voice telephony, may be provided under a general
class license. The international telecommunications market in Denmark has been
historically dominated by the PTT, Tele Danmark, which, according to
TeleGeography, accounted for approximately 92.5% of the international market
in 1996.
United Kingdom. With a population of over 58 million people, the U.K. has a
telecommunications market that generated approximately $25.4 billion in
revenues in 1995 according to the ITU. According to Oftel, the U.K.'s
international and domestic long distance services market accounted for
approximately $6.6 billion in revenues in the 12 months ended March 31, 1997.
In addition to British Telecom plc and Mercury
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Communications Ltd. there are over 50 companies in the U.K. that presently
hold licenses authorizing the operation of systems which may be connected to
foreign systems.
Other Markets. As liberalization occurs in other European countries and in
Asia and the Pacific Rim, the Company intends to establish operating
facilities and/or obtain licenses to provide telecommunications services as
market conditions permit. The combined population of other European markets in
which the Company intends to install facilities during 1998, including
Belgium, France, Germany, Italy, the Netherlands, Norway and Switzerland, is
approximately 235 million people with combined international
telecommunications traffic, according to TeleGeography, of 15.5 billion
minutes, which represented 22.0% of worldwide international traffic in 1996.
The combined population of Australia, Japan and New Zealand, other countries
in which the Company intends to install facilities during 1998, is
approximately 148 million people and, according to TeleGeography, the combined
international telecommunications traffic generated in those markets in 1996
was approximately 3.4 billion minutes.
STRATEGY
FCI's objective is to become a leading provider of high quality,
competitively priced, dedicated and switched wholesale international
telecommunications services to established and emerging carriers worldwide. To
achieve this objective, the Company intends to continue to expand its carrier-
grade international network and to offer competitively priced network services
comparable in quality to that of major PTTs and first-tier carriers while
providing highly responsive technical support and customer service. The key
elements of the Company's strategy are as follows:
. Increase multinational presence. FCI seeks to expand its operations by
cultivating relationships with PTTs in strategic locations worldwide and
establishing operations in markets with significant international
traffic as soon as deregulation enables facilities-based carriers to
enter such markets. The Company believes that its ability to originate
traffic from multiple markets will allow it to benefit from the
relatively high growth of non-U.S. originated traffic, to serve
multinational carriers and to optimize the use of its facilities. As
part of its business strategy, the Company may enter into strategic
alliances with, acquire assets or businesses from, or invest in,
companies that are complementary to its current operations. The Company
has a dedicated Business Development Group which focuses on developing
relationships with correspondent carriers and which facilitates new
market entry.
. Expand carrier-grade international infrastructure. FCI intends to expand
its carrier-grade international network. The Company uses switches
similar to those used by first-tier carriers and PTTs, and continues to
implement advanced features, such as ATM technology, which will permit
the Company to transmit voice and data services over a single platform.
The Company believes that increasing the percentage of minutes of
traffic it carries on-net will enable it to increase margins and
profitability and ensure quality of service. By the end of 1998, the
Company expects to have such on-net capability on 25 of the top 50
international traffic routes and facilities in countries representing
over 60.0% of total international traffic.
. Focus on wholesale market. FCI's customer base consists primarily of
established and emerging competitive carriers and PTTs that purchase the
Company's services on a wholesale basis. The Company believes that the
wholesale telecommunications market will offer significant growth
opportunities as traditional international traffic settlement mechanisms
are replaced by competitive cost-based systems. In addition,
liberalization of telecommunications markets worldwide is expected to
lead to the establishment of new carriers and resellers that require
high quality international connectivity at competitive rates. FCI
believes that its wholesale strategy enables it to generate the high
traffic volumes required to justify investments in network
infrastructure, while controlling selling, general and administrative
expenses.
. Continue to leverage Tele8 status. Tele8's status as an established
carrier in Sweden has enabled FCI to enter into operating agreements
with a number of major European PTTs. The Company intends to continue to
leverage Tele8's carrier status and brand name to negotiate additional
operating
54
<PAGE>
agreements, acquire additional customers and obtain preferential pricing
on leased fiber and satellite transmission capacity worldwide.
. Maintain efficient operations and low cost base. The Company seeks to
maintain efficient operations and a low cost base through a disciplined
incremental approach to investments in fixed assets, strict control over
selling, general and administrative expenses and the operation of a
centralized, highly efficient network control center for its global
network, which enable the Company to be price competitive.
NETWORK
General. In its first two years of operation, the Company has successfully
installed an international facilities-based network comprised of international
gateway switches, related peripheral equipment and undersea fiber optic cable
systems, as well as leased satellite and cable capacity. FCI believes its
installation of a facilities-based network will permit it to terminate an
increasing percentage of traffic on-net, allowing the Company to control both
the quality and cost of telecommunications services it provides to its
customers. To provide high quality telecommunications services, the Company's
network employs digital switching and fiber optic technologies, uses SS7
signaling and is supported by comprehensive monitoring and technical services.
In addition, the Company is implementing an ATM network that will permit the
Company to transmit voice and data services over a single platform, enabling
the Company to diversify its service offerings.
The Company currently operates two major gateway switches in the U.S. and
similar switches in Sweden, Denmark and the U.K. These international gateway
switches are connected by undersea fiber optic cable systems. The Company
operates three additional PoPs in the U.S. and two additional PoPs in Sweden
which allow it to originate and terminate traffic outside of the international
gateway cities. The Company also operates an earth station in Sweden which
provides satellite coverage of all of Africa and most of Asia through INTELSAT,
to which the Company is a signatory. Using a combination of owned network
facilities, capacity leased on a fixed-cost basis and the resale of third party
capacity, the Company is able to provide service to any country in the world.
The Company carries international traffic traditionally carried between U.S.
and foreign international long distance carriers over its own network. In
addition, FCI's international gateway switches and European hubs allow the
Company to terminate traffic within countries, thereby ensuring quality and
minimizing termination costs. The following chart illustrates a typical on-net
international long distance call originating in the U.S.
[CHART APPEARS HERE]
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<PAGE>
Operating Agreements. The Company's strategy is substantially based on its
ability to enter into: (i) operating agreements with PTTs in countries that
have yet to become deregulated so the Company can terminate traffic in, and
receive return traffic from, that country; (ii) operating agreements with PTTs
and emerging carriers in foreign countries whose telecommunications markets
have deregulated so it can terminate traffic in such countries; and (iii)
interconnection agreements with the PTT in each of the countries where the
Company has operating facilities (e.g., the U.K.) so it can terminate traffic
in that country. The Company believes that Tele8's status as an established
carrier in Sweden has been a significant factor in enabling the Company to
enter into operating agreements with first-tier carriers in Europe. As of
March 31, 1998, FCI had operating agreements with 15 PTTs and three
alternative carriers. The Company believes that it has more operating
agreements with European PTTs than most other emerging carriers. These
operating agreements allow the Company to terminate traffic at lower rates
than by resale in markets where it cannot establish an on-net connection due
to the current regulatory environment. The Company believes that it would not
be able to serve its customers at competitive prices without such operating or
interconnection agreements. Termination of such operating agreements by
certain of the Company's foreign carriers or PTTs would have a material
adverse effect on the Company's business. In addition, these operating
agreements provide a source of profitable return traffic for the Company. See
"Risk Factors--Dependence on Operating Agreements with Foreign Operators."
<TABLE>
<CAPTION>
COUNTRY CARRIER CARRIER STATUS
------- ------- --------------
<S> <C> <C>
Belgium.................... Belgacom N.V. PTT
Denmark.................... Tele Danmark PTT
Dominican Republic......... Tricom, S.A. Alternative carrier
Estonia.................... Eesti Tele Fon PTT
Finland.................... Telecom Finland PTT
Tele 1 Alternative carrier
Germany.................... Deutsche Telekom A.G. PTT
Hungary.................... MATAV PTT
Iceland.................... Post & Telecom Iceland PTT
Italy...................... Telecom Italia S.p.A. PTT
Nicaragua.................. ENITEL PTT
Norway..................... Telenor Carrier Services A.S. PTT
Poland..................... Telekomunikacja Polska S.A. PTT
Portugal................... Telecom Portugal PTT
Slovenia................... Telekom Slovenije PTT
United Kingdom............. British Telecom plc PTT
Mercury Communications Ltd. Alternative carrier
Venezuela.................. CANTV PTT
</TABLE>
Undersea Fiber Optic Cable Systems. The Company seeks ownership positions in
undersea fiber optic cable systems where it believes its customers' demand
will justify the investment in those fixed assets. To link its switches in the
U.S., Denmark, Sweden and the U.K., the Company currently either owns or
leases capacity on a number of undersea fiber optic cable systems, including
purchased capacity on the CANTAT-3, CANUS-1, TAT 12/13, Kattegatt and Odin
undersea fiber optic cable systems on an IRU basis, and on the CANTAT-3 and
DKS-18 undersea fiber optic cable systems on a MAOU basis. The Company
believes that its current and projected volume of wholesale international
traffic makes its investment in these fiber optic cable systems cost-
effective. Tele8 recently participated in a consortium that included Tele
Danmark, TeleNordia and Swedish Rail, which constructed and currently operates
a fiber cable (DKS-18) between Sweden and Denmark.
In addition, the Company is one of the signatory members of the FLAG
project, which, when completed, will be the world's longest undersea fiber
optic cable, originating in the U.K. and terminating in Japan. FLAG will
enable the Company to (i) target markets in Bangladesh, China, Hong Kong,
India, Italy, Japan, Malaysia, Pakistan, Singapore and Spain and (ii) provide
high quality seamless services over Company-owned fiber optic cable to those
regions by connecting to the Company's facilities in the U.K. and Sweden. The
Company's ability
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<PAGE>
to provide seamless telecommunications services to the countries served by
FLAG is contingent upon its ability to enter into operating agreements with
PTTs or other carriers in such countries. The Company plans to invest in the
Americas-1, Gemini, TPC-5, APCN(A) and Southern Cross cables, and acquire
additional capacity in the FLAG system to provide access to other markets,
including countries in Europe, Latin America, Asia and the Pacific Rim, and to
expand capacity to existing markets. The Company may also seek ownership
positions in digital microwave systems that link major sources and
destinations of international traffic to (i) lower the cost of its
international connections to a particular country or region and/or (ii) bypass
a transmission facility "bottleneck" that constrains the Company's ability to
enter the international market in that country or region.
INTERNATIONAL FIBER OPTIC CIRCUITS
<TABLE>
<CAPTION>
READY FOR
FIBER CIRCUIT MAOU/IRU/LEASE SERVICE DATE
------------- -------------- ------------
<S> <C> <C>
TRANSATLANTIC:
CANTAT-3
U.S.-Denmark................................... MAOU In Service
U.S.-Denmark................................... IRU In Service
U.S.-U.K....................................... IRU In Service
CANUS-1, U.S.-Canada............................. IRU In Service
TAT 12/13, U.S.-U.K.............................. IRU In Service
MFS, New York-London............................. Lease In Service
Gemini, U.S.-Europe.............................. IRU 1998
INTRAEUROPEAN:
CANTAT-3
U.K.-Denmark................................... Lease In Service
Germany-Denmark................................ IRU Q2/98
FLAG
U.K.-Spain..................................... MAOU Q2/98
Spain-Italy.................................... MAOU Q2/98
DKS-18, Denmark-Sweden........................... MAOU In Service
Kattegatt, Denmark-Sweden........................ IRU In Service
Hermes, Amsterdam-U.K............................ Lease In Service
Odin, Amsterdam-Denmark.......................... IRU In Service
OTHER ROUTES:
TPC-5, U.S.-Pacific Rim.......................... IRU 1998
Southern Cross, New Zealand-Australia............ IRU 1998
APCN(A), Australia-Japan......................... IRU 1998
Americas-1, U.S.-Latin America................... IRU 1998
FLAG
U.K.-India..................................... MAOU Q2/98
Japan-Hong Kong................................ MAOU Q2/98
Japan-China.................................... MAOU Q2/98
</TABLE>
International Gateway and Domestic Switches. As of March 31, 1998, the
Company operated four NorTel DMS 250/300 international gateway switches
located in Jersey City, New Jersey, Copenhagen, Amsterdam and London, and two
Ericsson AXE-10 international gateway switches located in New York City and
Malmo, Sweden. Traffic from North America to Europe is generally routed
through either the New York City or Jersey City, New Jersey gateway to London
or Malmo, Sweden. The Company also operates smaller Ericsson switches in
Sweden for aggregating regional and domestic traffic and is considering the
installation of similar switches in other European countries for the same
purpose. In addition, the Company has PoPs to terminate and originate traffic
in Miami and Tampa, Florida and Washington, D.C.
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The Company intends to expand its switching network in the U.S. by adding
international gateway switches during 1998 in Los Angeles and Miami that will
generally serve as the Company's international gateways to Asia and the
Pacific Rim, and Latin America, respectively. The Company's plans for
expanding its switching network in Europe include the addition of switches in
Belgium, France, Germany, Italy, Norway and Switzerland during 1998. The
Company also intends to install switches in Australia, Japan and New Zealand
during 1998. FCI is also considering installing switches in Latin American,
Asian and other Pacific Rim countries, as well as additional European
locations.
Backbone Transmission Network. The Company connects its switches over a
frame relay backbone network, which the Company intends to upgrade to ATM in
early 1998. ATM will enable the Company to combine switched voice, private
line and data traffic on the same international circuits. For example, the
Company will be able to add Internet capability and integrate Internet traffic
with its existing traffic.
Satellite Facilities. The Company owns and operates the Swedish
International Teleport, an INTELSAT, Standard B, 13-meter earth station in
Malmo, Sweden that connects to an INTELSAT satellite over the Indian Ocean.
Through its signatory status, the Company can acquire satellite transmission
capacity on a preferential basis worldwide. The earth station and INTELSAT
satellite, which provide coverage to Africa and most of Asia, currently
connect customers on the Indian subcontinent with locations in Europe and
North America on a private line basis. The Company uses this facility to
provide connectivity with carriers in developing countries before
international cable capacity becomes available in such countries and on low-
volume international routes. The Company is negotiating agreements with
several Asian carriers to interconnect with Sweden for the transmission of
public switched-voice traffic through the Company's earth station.
Network Monitoring and Technical Support. The Company's resilient network
has diverse switching and routing capabilities. For example, on the high
volume North America to Europe routes the Company splits customer traffic
between its New York City and Jersey City, New Jersey international gateway
switches, over two transatlantic cable routes and over its two European
gateways in London and Malmo, Sweden. All gateway switches have backup power
systems, and each cable has built-in redundancies that reroute traffic in the
event of an interruption in cable service.
The Company has technical staff located in Sweden, the U.S. and the U.K. to
provide support for the network. The Company's technical staff located in
Sweden provides network management and operations support for the Company's
Ericsson switches. The Company has entered into a one year agreement with
Northern Telecom to provide network management and operations services for the
Company's NorTel switches. The agreement also gives FCI the right to request
full-time on-site support at a new switch location. The agreement obligates
Northern Telecom to accept service calls on behalf of the Company 24 hours per
day, seven days per week, and to dispatch service personnel when necessary.
The Company believes that its network management arrangement with Northern
Telecom is a cost effective alternative to the Company providing such services
itself, which allows the Company to direct its resources toward expanding its
network while providing its customers with network support. The Company
expects to develop an internal network monitoring capability during 1998.
SERVICES
FCI offers high quality international telecommunications services over its
own international network and by interconnecting its network with the networks
of other carriers. The Company operates under the name FaciliCom
International(R) in the U.S. and the U.K., and the name "Tele8" in
Scandinavia. The Company provides primarily wholesale international
telecommunications services and, to a limited extent, retail domestic and
international long distance services in Sweden. For the six months ended March
31, 1998 and for the fiscal year ended September 30, 1997, wholesale services
represented approximately 93.6% and 94.6%, respectively, of the Company's
consolidated revenues and retail services represented approximately 6.4% and
5.4%, respectively, of such consolidated revenues.
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Wholesale Services. The Company provides wholesale international long
distance voice services to carrier customers located in the U.S., Sweden,
Denmark and the U.K. FCI provides wholesale termination to over 200 countries
using a mix of owned facilities, operating agreements and by resale
agreements. The Company terminates international network traffic to the U.S.,
the U.K., Sweden and Denmark over its own network, and traffic to 16 countries
using operating agreements. In addition to wholesale voice services, the
Company also intends to offer value-added, back office and billing services to
its wholesale customers in Europe. The Company believes that offering
additional services on a wholesale basis will increase customer loyalty and
lead to higher margins. Wholesale value-added services are expected to include
international toll-free numbers, pre-paid calling cards, data services and
network access through FCI/Tele8 carrier access codes.
Retail Services. FCI provides international and domestic long distance voice
services to retail customers within Sweden using Tele8's carrier access codes
and service through pre-paid calling cards. The Company plans to provide pre-
selected long distance services in Sweden, as soon as regulations prescribe
equal access. In addition, FCI provides international private line service to
business customers, and intends to offer international toll-free services and
data services to business customers.
CUSTOMERS
The Company's wholesale marketing strategy is to offer wholesale
international telecommunications services to the broadest range of carriers,
focusing on carriers that originate traffic in multiple locations. The
Company's wholesale customers include first-tier carriers and PTTs as well as
emerging facilities-based, switched-based, switchless and wireless carriers
that purchase the Company's services for resale to their own customers. As of
March 31, 1998, the Company provided service to 97 carriers, including nine of
the ten largest U.S. carriers based on outbound international traffic, three
European wireless carriers and 14 multinational carriers that originate
traffic in more than one of the Company's existing markets. For the quarter
ended March 31, 1998, the Company's 10 largest customers accounted for 37.6%
of the Company's revenues. For the fiscal year ended September 30, 1996, North
American Gateway Inc. and Cherry Communications, Inc. accounted for 30.0% and
11.0%, respectively, of the Company's total revenues. For the fiscal year
ended September 30, 1997, North American Gateway Inc. and Telegroup, Inc.
accounted for 14.0% and 10.3%, respectively, of the Company's total revenues.
The Company anticipates that the percentage of revenues attributable to its
largest customers will decrease as its customer base grows. The Company's
agreements with its customers do not currently establish minimum term or usage
requirements.
The Company uses a comprehensive credit screening process when identifying
new customers, which the Company believes has resulted in a bad debt expense
ratio below the industry average. For the six months ended March 31, 1998 and
for the fiscal year ended September 30, 1997, FCI's bad debt expenses
represented approximately 1.2% and 1.8%, respectively, of its consolidated
revenues. The Company rates its potential customers' creditworthiness based on
several factors, including: (i) traditional bank and trade (e.g., Dun &
Bradstreet) reports; (ii) internal assessments of the Company's exposure based
on the costs of terminating international traffic in certain countries and the
capacity requested by the proposed carrier; and (iii) references provided by
the potential customer. Depending on the results of the Company's credit
analysis, a customer's payment terms and/or billing cycle may be adjusted to
shorten the length of time the Company's receivables are outstanding (and the
corresponding risk to the Company). In addition, the Company may require a
customer to post collateral in the form of a security deposit or an
irrevocable letter of credit.
The Company's target market for retail services in Sweden is primarily
small- and medium-size businesses, residential customers, travelers and
marketing organizations.
SALES AND MARKETING
FCI's approach to marketing and selling wholesale services consists of local
sales staff, who are responsible for day-to-day relationships with local
carrier representatives and who have experience in the industry and long
standing relationships with such carriers. In addition to local direct sales,
the Company has a multinational
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Global Account Group, which coordinates sales to major international accounts
in multiple locations and is responsible for client relationships at the
senior management level. The Company has several international carrier
customers which use FCI to transport traffic from multiple locations. FCI
focuses on hiring and retaining experienced marketing and sales people with
extensive knowledge of the industry and who have existing relationships with
decision makers at carrier customers. As of March 31, 1998, the Company's
sales and marketing staff included 52 employees.
The Company believes that its success in entering into customer agreements
in its target markets is due largely to (i) network quality which is
equivalent to that provided by PTTs and first-tier carriers, (ii)
responsiveness that is superior to that of PTTs and first-tier carriers and
(iii) pricing that is generally below the wholesale market price of the PTTs
and first-tier carriers.
The Company's sales and marketing employees utilize extensive, customer
specific usage reports and network utilization data generated daily by the
Company's customized information systems to negotiate agreements with
customers and prospective customers more effectively and to respond rapidly to
changing market conditions. The Company believes that it has been able to
compete more effectively as a result of the high quality personalized service
that is given to each customer. The Company supports its wholesale marketing
efforts in many ways, including direct mail campaigns, publishing articles in
industry journals, sponsoring and giving presentations at industry events,
networking through its membership in industry associations and advertising in
industry publications and at industry events.
FCI conducts retail sales and marketing in Sweden through agents and a
direct sales force.
BUSINESS DEVELOPMENT
The Company's Business Development Group is responsible for creating and
implementing an effective long-term growth strategy for the Company. The
Business Development Group's objective is to establish relationships with PTTs
and regulatory authorities in strategic markets worldwide in order to expedite
the execution of operating agreements and the grant of licenses to own,
operate and/or lease transmission facilities from such regulatory authorities.
The Business Development Group may pursue joint ventures, strategic alliances
or acquisitions to expand the Company's global presence or to establish a
strategic presence in markets with high telecommunications traffic volume. It
also seeks to optimize the Company's investment in fiber optic cable in order
to support the current and future operational requirements of the Company.
OPERATIONS AND SYSTEMS
The Company provides customer service and support, 24 hours per day network
monitoring, trouble reporting and response procedures, service implementation
coordination, billing assistance and problem resolution. The Company provides
a single point of contact for each customer and accepts total responsibility
for installation, maintenance and problem resolution.
The need to bill customers timely and accurately, and to monitor and manage
network traffic profitability, requires the accurate operation of management
information systems ("MIS"). To accommodate these needs, the Company currently
contracts with Armstrong for its billing and MIS services.
Armstrong provides billing, financial accounting and specialized information
technology ("IT") services to its subsidiary companies, including the Company,
from its data processing center headquartered in Butler, Pennsylvania.
Armstrong's subsidiaries include domestic local exchange telephone companies
and cable television companies. Based on its knowledge of billing in the
telecommunications industry, Armstrong has developed customized systems to
provide call collection, processing, rating, reporting and bill rendering for
the Company. These customized systems enable the Company to (i) analyze
accurately its traffic, revenues and margins by customer and by route on a
daily basis, (ii) validate carrier settlements and (iii) monitor least cost
routing of customer traffic. See "Certain Relationships and Related
Transactions."
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Armstrong and the Company are in the process of converting their respective
billing and computer systems to make them Year 2000 compliant. The Company
does not expect that the cost of converting its systems will be material to
its financial condition or results of operations. Each of Armstrong and the
Company believes that it will be able to achieve Year 2000 compliance by the
end of 1999. Neither Armstrong nor the Company currently has any information
concerning the Year 2000 compliance status of its suppliers and customers.
The Company believes that contracting with Armstrong for these customized
systems gives the Company a strategic advantage over many emerging carriers
because the Company receives timely and accurate reporting of its customer
traffic, revenues and margins without incurring the significant costs
associated with developing and maintaining its own data center. The Armstrong
data center utilizes an IBM AS/400 with full disaster recovery and back-up
facilities and provides 24 hours per day, seven days per week data center
support. Armstrong provides the Company with experienced IT professionals and
programmers to further customize and support the Company's growing and
changing MIS needs. To date, the Company has not experienced any significant
delays in billing customers. The Company attempts to bill its customers within
five business days after a billing cycle has been completed. The Company
believes that its arrangement with Armstrong enables it to most effectively
and efficiently manage the Company's growing IT requirements.
Pursuant to a contract it recently signed with the Company, Armstrong will
continue to provide billing and MIS support for the Company and its
subsidiaries on terms that the Company believes are competitive with similar
services offered in the industry. This contract extends through September 30,
2002 and may be terminated by Armstrong or the Company upon 180 days' notice
to the other party.
In consultation with Armstrong's IT staff, the Company is currently
considering advanced billing and MIS software solutions to provide billing for
enhanced products and services and to further enhance the Company's ability to
monitor its growing operations.
COMPETITION
The international telecommunications industry is intensely competitive and
subject to rapid change precipitated by advances in technology and regulation.
The Company's competitors in the international wholesale switched long
distance market include large facilities-based multinational carriers and
PTTs, smaller facilities-based wholesale long distance service providers in
the U.S. and overseas that have emerged as a result of deregulation, switched-
based resellers of international long distance services and international
joint ventures and global alliances among many of the world's largest
telecommunications carriers. International telecommunications providers such
as the Company compete on the basis of price, customer service, transmission
quality, breadth of service offerings and value-added services, and the
Company's carrier customers are especially price sensitive.
Within the U.S.-based international telecommunications services market, the
Company competes with AT&T, MCI, Sprint and WorldCom, and to a lesser extent,
with other emerging international carriers. Many of these providers have
considerably greater financial and other resources and more extensive domestic
and international communications networks than the Company. The Company
anticipates that it will encounter additional competition as a result of the
formation of global alliances among large long distance telecommunications
providers. Recent examples of such alliances include AT&T's alliance with
Unisource, known as "Uniworld;" AT&T's recent alliance with Italy's
STET/Telecom Italia to serve international customers with a primary focus on
the Latin American and European regions; WorldCom's proposed merger with MCI;
and Sprint's alliance with Deutsche Telekom and France Telecom, known as
"Global One." Consolidation in the telecommunications industry may create even
larger competitors with greater financial and other resources. The effect of
the proposed mergers and alliances could create increased competition in the
telecommunications services market and potentially reduce the number of
customers that purchase wholesale international long distance services from
the Company. Because many of the Company's current competitors are also the
Company's customers, the Company's business would be materially adversely
affected to the extent that
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a significant number of such customers limit or cease doing business with the
Company for competitive or other reasons.
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing satellite and undersea cable transmission capacity for services
similar to those provided by the Company. Such technologies include satellite-
based systems, such as those proposed by Iridium LLC and Globalstar, L.P.,
utilization of the Internet for international voice and data communications
and digital wireless communication systems such as PCS. The Company is unable
to predict which of many possible future product and service offerings will be
important to maintain its competitive position or what expenditures will be
required to develop and provide such products and services.
The 1996 Telecommunications Act permits, and is designed to promote,
additional competition in the intrastate, interstate and international
telecommunications markets by both U.S.-based and foreign companies, including
the RBOCs. RBOCs, as well as other existing or potential competitors of the
Company, have significantly more resources than the Company. The Company also
expects that competition from carriers will increase in the future as
deregulation increases in telecommunications markets worldwide. In addition,
the Company believes that the FCC's recently released order implementing the
United States' "open market" commitments under the WTO Agreement will make it
easier for certain foreign carriers to enter the U.S. market, thereby
increasing competition in the U.S. market for the Company. As a result of
these and other factors, there can be no assurance that the Company will
continue to compete favorably in the future. See "Risk Factors--Substantial
Government Regulation" and "Risk Factors--Intense Competition."
The Company believes that it competes favorably on the basis of price,
transmission quality and customer service. The number of the Company's
competitors is likely to increase as a result of the new competitive
opportunities created by the WTO Agreement. FCI believes, however, that its
focus on providing wholesale international services will enable it to benefit
from the emergence of new carriers as it will be able to provide them with
switched international telecommunications services. FCI believes that Tele8,
its Swedish subsidiary, provides the Company with a competitive advantage
because of Tele8's existing relationships with European PTTs. Tele8's
relationships with other PTTs allow the Company to accelerate its in-country
presence in certain markets, to obtain administrative leases in Europe and to
negotiate operating agreements.
LICENSES AND REGULATION
United States. In the U.S., provision of the Company's services is subject
to the provisions of the Communications Act, as amended by the 1996
Telecommunications Act, and the FCC regulations thereunder, as well as the
applicable laws and regulations of the various states administered by the
relevant state PSCs. The FCC and relevant state PSCs continue to regulate
ownership of transmission facilities, provision of services and the terms and
conditions under which the Company's services are provided. Non-dominant
carriers, such as the Company, are required by federal and state law and
regulations to file tariffs listing the rates, terms and conditions of the
services they provide.
For domestic services, the FCC and certain state agencies also impose prior
approval requirements on transfers of control. With regard to international
services, the FCC administers a variety of international service regulations,
including the ISP. The ISP governs the permissible arrangements between U.S.
carriers and their foreign correspondents to settle the cost of terminating
traffic over each other's networks, the rates for such settlement and
permissible deviations from these policies. As a consequence of the
increasingly competitive global telecommunications market, the FCC has adopted
a number of policies that permit carriers to deviate from the ISP under
certain circumstances that promote competition. The FCC also requires carriers
such as the Company to report any affiliations, as defined by the FCC, with
foreign carriers.
Regulatory requirements pertinent to the Company's operations will continue
to evolve as a result of the WTO Agreement, federal legislation, court
decisions, and new and revised policies of the FCC and state PSCs. The FCC
continues to refine its international service rules to promote competition,
reflect and encourage
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liberalization in foreign countries and reduce international accounting rates
toward cost. The FCC recently adopted new lower accounting rate "benchmarks"
that became effective January 1, 1998. Under the FCC's new benchmarks, after a
transition period of one to four years depending on a country's income level,
U.S. carriers will be required to pay foreign carriers significantly lower
rates for the termination of international services.
International Service Regulation. International common carriers, such as the
Company, are required to obtain authority under Section 214 of the
Communications Act and file a tariff containing the rates, terms and
conditions applicable to their services prior to initiating their
international telecommunications services. The Company has obtained "global"
Section 214 authority from the FCC to use, on a facilities and resale basis,
various transmission media for the provision of international switched and
private line services. Non-dominant international carriers, such as the
Company, must file their international tariffs and any revisions thereto with
one day's notice. The Company has filed international tariffs for switched and
private line services with the FCC. Additionally, international
telecommunications service providers are required to file copies of their
contracts with other carriers, including foreign carrier agreements, with the
FCC within 30 days of execution. The Company has filed each of its foreign
carrier agreements with the FCC. The FCC's rules also require that the Company
periodically file a variety of reports regarding the volume of its
international traffic and revenues and use of international facilities. In
addition to the general common carrier principles, the Company is also
required to conduct its facilities-based international business in compliance
with the FCC's ISP, or an FCC-approved alternative accounting rate
arrangement.
The FCC has decided to allow U.S. carriers, subject to certain competitive
safeguards, to propose methods to pay for international call termination that
deviate from traditional bilateral accounting rates and the ISP. The Company's
FCC authorizations also permit the Company to resell international private
lines interconnected to the PSTNs for the provision of switched services in
those countries that have been found by the FCC to offer "equivalent
opportunities" to U.S. carriers. To date, the FCC has found that only Canada,
Australia, the U.K., Sweden, the Netherlands and New Zealand offer such
opportunities. The FCC currently imposes certain restrictions upon the use of
the Company's private lines between the U.S. and "equivalent" countries. The
Company may not route traffic to or from the U.S. over a private line between
the U.S. and an "equivalent" country (e.g., the U.K.) if such traffic
originates or terminates in a third country and such third country has not
been found by the FCC to offer "equivalent" resale opportunities. Following
implementation of the Full Competition Directive by EU member states, and the
WTO Agreement by the signatories, the FCC may authorize the Company to
originate and terminate traffic over its private line between the U.S. and the
U.K. and (pursuant to ISR authority) over additional private lines to
additional member states if the FCC finds that such additional member states
provide equivalent resale opportunities or that such authority would otherwise
promote competition. The FCC recently adopted rules to permit U.S. carriers to
provide ISR to WTO member countries without a finding of equivalency. These
rules became effective on February 9, 1998. Among other rules, the FCC's new
rules provide that ISR will be permitted to any WTO member country if
settlement rates for at least 50% of the settled U.S.-billed traffic on the
route or routes in question are at or below the settlement rate benchmark or
the destination country offers equivalent resale opportunities. Once a carrier
makes such a showing and the FCC approves ISR on a route, all carriers holding
a global section 214 authorization will be permitted to offer ISR on that
route. On April 22, 1998, the FCC granted the application of Unisource USA,
Inc. for ISR authority to France, Germany, Belgium, Norway, Denmark, and
Luxembourg. As a result, the Company and all other carriers holding global
section 214 authorizations will be permitted to offer ISR to these additional
foreign countries. The Company anticipates that these new opportunities to
engage in ISR will result in reduced costs and prices, increased competition
and increased demand on these routes.
The FCC's Policies on Transit and Refile. The FCC is currently considering
whether to limit or prohibit the practice whereby a carrier routes, through
its facilities in a third country, traffic originating from one country and
destined for another country. The FCC has permitted third country calling
where all countries involved consent to the routing arrangements (referred to
as "transiting"). Under certain arrangements referred to as "refiling," the
carrier in the destination country does not consent to receiving traffic from
the originating country and does not realize the traffic it receives from the
third country is actually originating from a different country.
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To date, the FCC has made no pronouncement as to whether refiling arrangements
are inconsistent with U.S. or ITU regulations, although it is considering
these issues in connection with MCI's 1995 petition to the FCC for declaratory
ruling regarding Sprint's FONACCESS service. It is possible that the FCC will
determine that refiling violates U.S. and/or international law.
Domestic Service Regulation. The Company's provision of domestic long
distance service in the U.S. is subject to regulation by the FCC and relevant
state PSCs, which regulate interstate and intrastate rates, respectively. The
majority of the states require the Company to register or apply for
certification prior to initiating intrastate interexchange telecommunications
services. Fines and other penalties also may be imposed for such violations.
Europe. In Europe, each country regulates its telecommunications industry.
The member states of the European Union (consisting of the following
countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the
U.K.) are obligated to implement legislation issued by the European
Commission, which is responsible for creating pan-European policies and
developing a regulatory framework to ensure an open, competitive
telecommunications market.
In 1990, the European Commission issued the Services Directive requiring
each EU member state to abolish existing monopolies in telecommunications
services with the exception of voice telephony. The intended effect of the
Services Directive was to permit the competitive offering of all services,
other than voice telephony, including value-added services and voice services
to closed user groups ("CUGs"). However, as a consequence of local
implementation of the Services Directive through the adoption of national
legislation, there are differing interpretations of the definition of
prohibited voice telephony and permitted value-added and CUG services. Voice
services accessed by customers through leased lines are permissible in all EU
member states. The European Commission has generally taken a narrow view of
the services classified as voice telephony, declaring that voice services may
not be reserved to the PTTs if (i) dedicated customer access is used to
provide the service, (ii) the service confers new value-added benefits on
users (such as alternative billing methods) or (iii) calling is limited by a
service provider to a group having legal, economic or professional ties.
In March 1996, the EU adopted the Full Competition Directive containing two
provisions which required EU member states to allow the creation of
alternative telecommunications infrastructures by July 1, 1996, and which
reaffirmed the obligation of EU member states to abolish the PTTs' monopolies
in voice telephony by 1998. The Full Competition Directive encouraged EU
member states to accelerate liberalization of voice telephony. To date,
Denmark, Finland, the Netherlands, Sweden and the U.K. have liberalized
facilities-based competition. Certain EU countries may delay the abolition of
the voice telephony monopoly based on exemptions established in the Full
Competition Directive. These countries include Luxembourg (July 1, 1998),
Spain (November 30, 1998), Portugal and Ireland (January 1, 2000) and Greece
(December 31, 2000).
Each EU member state in which the Company currently conducts or plans to
conduct its business has a different regulatory regime and such differences
are expected to continue beyond January 1998. The requirements for the Company
to obtain necessary approvals vary considerably from country to country and
are likely to change as competition is permitted in new service sectors.
Asia and the Pacific Rim. The extent and timing of liberalization, and the
scope and nature of regulation varies among the Pacific Rim and Asian
countries. The Company's ability to provide voice telephony services is
restricted in some Asian and Pacific Rim countries e.g., China which remains
largely closed to competition. The Company has a pending application to
provide international telecommunications services in Hong Kong, where the
regulator has encouraged limited competition. On July 1, 1997, the People's
Republic of China resumed sovereignty over Hong Kong, and there can be no
assurance that China will continue the existing licensing regime with respect
to the Hong Kong telecommunications industry. In New Zealand, regulation of
the Company's proposed provision of telecommunications services is relatively
permissive, and the Company has been granted registration as an international
services operator.
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The Company's services in Japan are or will be subject to regulation by the
Ministry of Post and Telecommunications (the "Japanese Ministry") under the
Telecommunications Business Law (the "Japanese Law"). In Japan, the Company
must obtain a license as a Type I facilities-based business before it provides
telecommunications services over its own facilities. It must register as a
Special Type II business before it provides telecommunications services over
international circuits leased from another carrier, or provides domestic
service in Japan over leased circuits if the volume of traffic exceeds a
certain amount. A registered Special Type II business may provide over leased
lines value-added and/or basic telecommunications services, and/or services to
closed user groups. The Company must notify the Japanese Ministry as a General
Type II business only if it provides domestic service in Japan over leased
circuits and does not exceed the traffic threshhold applicable to Special Type
II businesses. Although the Japanese government until recently prohibited
greater than 33.0% foreign ownership of a Type I business, as well as the
resale of international private lines interconnected to the PSTN at both ends,
the Japanese Ministry recently has begun awarding authorizations to foreign-
affiliated carriers to provide telecommunications services using their own
facilities and to resell interconnected international private lines. The
Japanese Ministry also regulates the interconnection charges imposed by Type I
businesses, and must approve intercarrier agreements between Type I carriers
or between Type I and Special Type II carriers. The Company has also filed an
application in Japan requesting a Type I (facilities-based) telecommunications
license requesting authorization to allow the Company to construct and operate
its own network facilities, as well as to originate and terminate traffic over
resold lines. The Type I license process is onerous and involves extensive
consultation with the Japanese Ministry. To date, WorldCom is the only U.S.-
based carrier to have successfully completed the process and been awarded a
Type I license.
Licenses. Consistent with its global strategy, the Company or its local
operating subsidiary has received facilities-based and resale authorization to
provide telecommunications services in Sweden, Denmark, the Netherlands,
Germany and the U.K. The Company also participates in the numbering plans of
Sweden, Denmark and the U.K. The Company is also licensed in Belgium as a
provider of non-reserved services, including voice services for CUGs and
value-added services, and has requested additional authorization to provide
ISR. The Company has been awarded an access code in El Salvador to allow the
Company to operate as a facilities-based provider of international
telecommunications services. The Company has been granted registration by the
New Zealand Ministry of Commerce as an operator under the Telecommunications
(International Services) Regulation 1994.
The Company has pending applications for various authorizations in Belgium,
France and Hong Kong. The Company also anticipates filing requests for
authorization to provide services open to competition in Australia, Italy,
Japan, Guatemala, Norway, Spain and Switzerland, where it is engaging in
discussions with foreign regulators, as well as in other countries as
appropriate in furtherance of its strategic goal of establishing a
multinational presence.
In the U.S., the Company has obtained facilities and resale licenses from
the FCC. In addition, the Company is certified or registered to provide
intrastate interexchange telecommunications services or may provide such
services based upon its unregulated status in 25 states. Applications for
registration or certification have been filed in an additional 17 states.
Applications for certification are pending in 25 states. State issued
certificates of authority to provide intrastate interexchange
telecommunications services generally can be conditioned, modified, canceled,
terminated or revoked by state PSCs for failure to comply with state law
and/or the rules, regulations and policies of the state PSCs.
EMPLOYEES
As of March 31, 1998, the Company had 163 employees. None of the Company's
employees are covered by a collective bargaining agreement. Management
believes that the Company's relationship with its employees is good.
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LEGAL PROCEEDINGS
The Company makes routine filings and is a party to customary regulatory
proceedings with the FCC relating to its operations. The Company is not a
party to any lawsuit or proceeding which, in the opinion of management, is
likely to have a material adverse effect on the Company's business, financial
condition and results of operations.
INTELLECTUAL PROPERTY AND PROPRIETARY INFORMATION
Intellectual Property. The Company owns U.S. registration number 2,107,157
for the service mark FaciliCom International(R) for international long
distance telecommunications services. The Company relies primarily on common
law rights to establish and protect its intellectual property, its name,
products and long distance services. There can be no assurance that the
Company's measures to protect its intellectual property will deter or prevent
the unauthorized use of the Company's intellectual property. If the Company is
unable to protect its intellectual property rights, including existing
trademarks and service marks, it could have a material adverse effect upon the
Company's business, financial condition and results of operations.
Proprietary Information. To protect rights to its proprietary know-how and
technology, the Company requires certain of its employees and consultants to
execute confidentiality and invention agreements that prohibit the disclosure
of confidential information to anyone outside the Company. These agreements
also require disclosure and assignment to the Company of discoveries and
inventions made by such persons while employed by the Company. There can be no
assurance that these agreements will not be breached, that the Company will
have adequate remedies for any such breach or that the Company's confidential
information will not otherwise become known or be independently developed by
competitors or others.
PROPERTY
The Company leases certain office space under operating leases and subleases
that expire at various dates through November 2008, including the Company's
principal headquarters in Washington, D.C. The principal offices currently
leased or subleased by the Company as of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE LEASE EXPIRATION
-------- ------- ----------------
<S> <C> <C>
Washington, DC (Corporate Headquarters)........... 49,602 March 2008
New York, NY (Switch Location).................... 1,500 September 2000
Jersey City, NJ (Switch Location)................. 1,404 July 1999
Los Angeles, CA (Switch Location)................. 5,350 November 2002
Miami, FL (Switch Location)....................... 3,578 November 2008
London, U.K. (Switch Location).................... 838 April 2002
London, U.K. (Sales Office)....................... 3,839 December 2002
Amsterdam, the Netherlands (Switch Location)...... 1,122 May 2003
Amsterdam, the Netherlands (Sales Office)......... 3,264 December 2002
Copenhagen, Denmark (Sales & Switch Location)..... 5,870 August 2007
Malmo, Sweden (Sales Office)...................... 8,160 December 1999
Malmo, Sweden (Switch Location)................... 8,302 September 2000
Brussels, Belgium (Sales Office and Switch
Location......................................... 10,196 April 2001
Milan, Italy (Sales Office and Switch Location)... 6,279 May 2004
Paris, France (Sales Office and Switch Location).. 5,250 February 2008
Frankfurt, Germany (Sales Office and Switch
Location)........................................ 2,783 February 2003
Oslo, Norway (Switch Location).................... 42 May 1999
</TABLE>
The Company's switches in New York City, Jersey City, New Jersey, Malmo,
Sweden, London and Copenhagen are located in various facilities pursuant to
separate agreements. The Company's aggregate rent expense for its domestic and
international operations was $856,200 and $889,380, respectively, for the six
months ended March 31, 1998 and for the fiscal year ended September 30, 1997.
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MANAGEMENT
For purposes of this "Management" section, unless the context otherwise
requires, (i) references to offices held by certain individuals with the
Company prior to December 1997 reflect officer positions held by those
individuals with FCI LLC prior to the Recapitalization and (ii) references to
directorships held by certain individuals with the Company prior to December
1997 reflect positions held by those individuals as members of the management
committee of FCI LLC prior to the Recapitalization. For a discussion of the
Recapitalization, see "Prospectus Summary--Recent Developments," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" and "Certain Relationships and Related Transactions--Relationship
with Armstrong."
OFFICERS AND DIRECTORS
The officers and directors of the Company, and their ages as of January 1,
1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Walter J. Burmeister...... 58 Chief Executive Officer, President, Director
Anand Kumar............... 54 Executive Vice President--Business Development
Jeffrey J. Guzy........... 46 Executive Vice President--Marketing, Sales &
Product Development
Juan Carlos Valls......... 43 Executive Vice President--Latin America
Christopher S. King....... 36 Vice President--Finance and Administration,
Chief Financial Officer
Donald Dodd............... 64 Managing Director--Operations & Engineering
Peter Gardener............ 46 Managing Director--FCI-U.K.
Robert M. Trehin.......... 53 Managing Director--FCI-France
Ronald L. Honselaar....... 43 Managing Director--FCI-Netherlands
Rainer L. Zettl........... 33 Managing Director--FCI-Germany
Kirby J. Campbell......... 50 Treasurer, Vice President, Director
Dru A. Sedwick............ 33 Secretary, Vice President, Director
Bryan Cipoletti........... 37 Director
Robert L. Reed............ 46 Director
Jay L. Sedwick............ 62 Director
William C. Stewart........ 58 Director
</TABLE>
WALTER J. BURMEISTER is a co-founder of the Company and has served as its
Chief Executive Officer, President, and as a Director of the Company since its
inception in May 1995. Prior to co-founding the Company, Mr. Burmeister
founded Telecommunications Management Group, Inc. ("TMG"), a
telecommunications consulting firm, and has served as its Chairman from 1992
to present. Prior to founding TMG, Mr. Burmeister served as Vice President and
Chief Financial Officer of Bell Atlantic International from 1989 to 1992. In
these positions, Mr. Burmeister was responsible for overseeing business
development in Central and South America, the Middle East and Africa, as well
as managing that company's financial affairs. During his 31 years with Bell
Atlantic, Mr. Burmeister served as Vice President of Bell of Pennsylvania and
Diamond State Telephone sales organization and headed the C&P Telephone
Operations Staff. Mr. Burmeister has served as a director of Skysat
Communications Network Corp. since 1992.
ANAND KUMAR is a co-founder of the Company and has served as its Executive
Vice President--Business Development since its inception in May 1995. Prior to
co-founding the Company, Mr. Kumar founded and served as President of
Communications Strategy Group, a technology consulting firm, from 1980 to
1996. Mr. Kumar was founder and, from 1986 to 1992, President of Washington
International Teleport ("WIT"), a privately held transport facility with more
than 25 earth stations. Prior to founding WIT, Mr. Kumar served in various
positions with GTE and AT&T.
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JEFFREY J. GUZY is a co-founder of the Company and has served as its
Executive Vice President-- Marketing, Sales of Product Development since its
inception in May 1995. Prior to co-founding the Company, Mr. Guzy served as
Vice President of Business Development at Interferometrics from 1993 to 1995,
a scientific organization dedicated to low earth orbit satellite technology.
Mr. Guzy served as Director of Information Services at Bell Atlantic from 1991
to 1993. Before joining Bell Atlantic, Mr. Guzy served as Marketing Director
at Sprint International from 1989 to 1991 and as a Vice President at Overseas
Telecommunications Inc., an international private line carrier, from 1983 to
1989.
JUAN CARLOS VALLS has served as the Company's Executive Vice President--
Latin America since January 1997. Prior to joining the Company, Mr. Valls co-
founded TMG and has served as its President from 1992 to present. Prior to
founding TMG, Mr. Valls served as Director of Business Development for Bell
Atlantic International and held various positions with Bell Atlantic.
CHRISTOPHER S. KING has served as the Company's Vice President--Finance and
Administration and Chief Financial Officer since July 1996. Prior to joining
the Company, Mr. King was employed by Bell Atlantic from 1987 to 1996 where he
served in a variety of management positions in corporate finance, business
planning, marketing and new product development. In his last position at Bell
Atlantic, Mr. King served as Director of Public Calling Services and Director
of Video Services. Before joining Bell Atlantic, Mr. King served as Assistant
Comptroller for Creative Technologies Incorporated, a manufacturer of graphic
arts and video presentation products.
DONALD DODD has served as the Company's Managing Director--Operations and
Engineering since April 1996. Prior to joining the Company, Mr. Dodd served as
Senior Director of Marketing from 1994 to 1996 at Tekelec Incorporated, an
equipment manufacturer. From 1992 to 1994, Mr. Dodd served as a consultant
with TMG. Prior to that time, Mr. Dodd held a number of positions with Bell
Atlantic and Northern Telecom, where he was General Manager of Operations for
the eastern region from 1984 to 1992.
PETER GARDENER has served as Managing Director--FCI-U.K. since July 1996.
Prior to joining FCI-U.K., Mr. Gardener was a managing consultant with
Commslogic, a leading communications consulting company, from 1986 to 1996.
Before working at Commslogic, Mr. Gardener held a number of senior management
positions with National Westminster Bank and British Telecom plc.
ROBERT M. TREHIN has served as Managing Director--FCI-France since December
1997. Prior to joining FCI-France, Mr. Trehin served as Managing Director of
Cable & Wireless France from 1993 to 1997. Mr. Trehin served as Director for
Sales and Support for Quest Standard Telematique from 1989 to 1993 and in
various management positions at Tymnet, a global data communications company,
for over 10 years.
RONALD L. HONSELAAR has served as Managing Director--FCI-Netherlands since
December 1997. Prior to joining FCI-Netherlands, Mr. Honselaar served in
various management positions, including Business Unit Manager, at Racal
Datacom B.V., a data communications company, from 1995 to 1997. Prior to that
time, Mr. Honselaar served in various sales and management positions at
Memorex Telex from 1986 to 1995.
RAINER L. ZETTL has served as Managing Director--FCI-Germany since December
1997. Prior to joining FCI-Germany, Mr. Zettl served in various management
positions, including Sales Office Manager, at Viag Interkom, from 1993 to
1997. Prior to that time, Mr. Zettl served as Product Manager for Markt &
Technik, a software company, from 1991 to 1992.
KIRBY J. CAMPBELL has served as a Vice President, Treasurer and as Director
of the Company since its inception in May 1995. Mr. Campbell has served since
June 1997 as Chief Executive Officer of Armstrong Holdings, Inc., the
Company's indirect majority stockholder and previously served as Executive
Vice President of Armstrong Holdings, Inc. Mr. Campbell also holds various
executive and board positions with Armstrong's affiliated companies.
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<PAGE>
DRU A. SEDWICK has served as Vice President, Secretary and as a Director of
the Company since its inception in May 1995. Mr. Sedwick has served since June
1997 as President of Armstrong Holdings, Inc., the Company's indirect majority
stockholder, and previously served as Senior Vice President of Armstrong
Holdings, Inc. Mr. Sedwick also holds various executive and board positions
with Armstrong's affiliated companies.
BRYAN CIPOLETTI has served as a Director of the Company since September
1997. Mr. Cipoletti has served as Vice President of Finance of Armstrong
Holdings Inc., the Company's indirect majority stockholder, since 1993. Mr.
Cipoletti also holds various executive and board positions with Armstrong's
affiliated companies.
ROBERT L. REED has served as a Director of the Company since its inception
in May 1995. In 1987, Mr. Reed founded EPIC Capital Corp., an investment
banking firm that specializes in the privately-held business market, and has
served as its Chairman since that time.
JAY L. SEDWICK has served as a Director of the Company since its inception
in May 1995. Since 1992, Mr. Sedwick has served as the Chairman of the Board
of Armstrong Holdings, Inc., the Company's indirect majority stockholder. Mr.
Sedwick also serves as Chairman of many of Armstrong's affiliated companies
and has served as a director of North Pittsburgh Systems, Inc. since 1980.
WILLIAM C. STEWART has served as a Director of the Company since September
1997. Mr. Stewart has served as President and Chief Executive Officer of
Armstrong Utilities, Inc., an affiliate of the Company's majority stockholder,
since June 1997 and previously served as Executive Vice President and Chief
Operating Officer of Armstrong Utilities, Inc. Mr. Stewart also holds various
executive and board positions for Armstrong's affiliated companies.
Members of the Company's Board of Directors hold office for the term for
which they are elected. Currently, each director has been elected to serve
until the next annual stockholders meeting or until his death, resignation or
removal. Officers of the Company serve at the discretion of the Board of
Directors.
Jay L. Sedwick is a brother-in-law of William C. Stewart. Jay L. Sedwick is
the father of Dru A. Sedwick. There are no other family relationships among
any of the directors and executive officers of the Company.
MANAGEMENT RELATIONSHIP WITH ARMSTRONG
Kirby J. Campbell and Dru A. Sedwick devote approximately 10% of their
working time to activities related to the Company. Other than the Company,
Armstrong owns six independent local telephone companies. These local
telephone companies provide primarily local exchange services and long
distance access to residential and business customers in defined service
areas. The activities of these independent local telephone companies are
neither competitive with, nor complementary to, the activities of the Company.
The Company believes that this avoids any potential conflicts of interest.
MANAGEMENT RELATIONSHIP WITH TELECOMMUNICATIONS MANAGEMENT GROUP
TMG, co-founded by Messrs. Burmeister and Valls, provides international
telecommunications consulting services. TMG has provided consulting services
to the Company since the Company's inception in May 1995, principally with
respect to business development opportunities in Latin America. Since the
Company's inception, Mr. Burmeister has devoted less than 5% of his working
time to performing services for TMG. Prior to January 1, 1998, at which time
he was hired as an executive officer of the Company, Mr. Valls devoted all of
his working time to performing services for TMG. Since January 1, 1998, Mr.
Valls has devoted less than 5% of his working time to performing services for
TMG. To avoid possible conflicts of interest, TMG has refused several requests
from competitors of the Company to provide consulting services for such
competitors. The majority of TMG's revenues are generated from providing
consulting services to governmental entities in Latin America and the Middle
East as well as to non-governmental organizations worldwide. Although Messrs.
Burmeister and Valls could be subject to conflicts of interest in the future,
TMG intends to continue to decline requests for consulting services from the
Company's direct competitors. See "Certain Relationships and Related
Transactions."
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
FCI LLC's Management Committee did not have a compensation committee in the
fiscal year ended September 30, 1997. Messrs. Burmeister, Campbell and Dru
Sedwick, each an executive officer of FCI LLC and the Company, comprised all
of the members of the Management Committee in 1997. The Management Committee
is responsible for reviewing executive officer compensation matters, including
Mr. Burmeister's compensation. Other than members of the Management Committee,
no other directors, officers or employees of the Company or FCI LLC performed
functions equivalent to those discharged by a compensation committee during
1997. Messrs. Campbell and Dru Sedwick did not receive compensation from FCI
LLC in the fiscal year ended September 30, 1997 for their participation on the
Management Committee or their service as officers of FCI LLC. During fiscal
year 1997, Messrs. Campbell, Dru Sedwick, Jay Sedwick, Cipoletti and Stewart,
directors of the Company, served on the board of directors and as executive
officers of various Armstrong entities.
Management Relationships with Armstrong
Financing Transactions. FCI LLC, the Company's predecessor, was formed as a
Delaware limited liability company in May 1995 by AIT and FMG, with AIT and
FMG contributing $180,000 and $60,000, respectively, in exchange for ownership
interests of 75.0% and 25.0% in the Company, respectively.
As the Company's majority stockholder, AIT has supplied substantially all of
the Company's capital. In September 1996, AIT provided FCI LLC with the
Additional Capital in the amount of $10.2 million. As a result of the
Additional Capital, AIT was entitled to a guaranteed return through September
30, 1997 for the use of the Additional Capital, pursuant to the terms of FCI
LLC's limited liability company agreement. In November 1996, AIT provided FCI
LLC with additional working capital in the form of a $5.0 million convertible
line of credit and a guaranteed $10.0 million letter of credit facility for
the benefit of FCI LLC.
In September 1997, AIT increased its equity ownership in the Company from
75.0% to 81.0% by converting into permanent equity (1) the Convertible
Debenture (which, together with accrued interest, totaled $5.4 million) and
(2) capital contributions of $10.9 million (representing the $10.2 million
furnished by AIT in September 1996 plus a guaranteed return of $724,000
related thereto). Also in September 1997, AIT established a bridge loan for
the benefit of the Company, pursuant to which AIT advanced funds to the
Company for working capital purposes at a rate equal to the prime rate plus
1.0% per annum.
In November 1997, the Company's stockholders, AIT and FMG, formed FaciliCom
International, Inc. On December 22, 1997, as a result of the Reorganization,
FCI LLC became a wholly owned subsidiary of the Company. Also, on December 22,
1997, AIT made the Equity Investment of $20.0 million by making a cash
contribution of $13.7 million and a noncash contribution of $6.3 million in
the form of cancellation of amounts outstanding under the bridge loan, thereby
increasing AIT's equity ownership in the Company from 81.0% to 84.0%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
On March 31, 1998, the Company granted options to purchase 3,401 shares of
non-voting common stock, under the 1998 Stock Option Plan, to non-employee
directors and advisors of the Company who are related to the non-employee
directors. The options were granted at an exercise price of $1.00, and as a
result, the Company recognized compensation cost of $2,112,640 as of March 31,
1998.
MIS Services Agreement. The Company has entered into a contract with
Armstrong pursuant to which Armstrong will provide billing and MIS support
services, including, but not limited to, call collection, processing, rating
and reporting for the Company and its subsidiaries. In addition, Armstrong
will also provide the Company with access to experienced MIS professionals and
programmers on an as-needed basis. The costs for such services are as follows:
(i) professional services are billed at up to $75 per hour, (ii) data center
management, operations and hardware services are billed at a rate of $40 per
megasecond (iii) AS/400 disk storage services are billed at a rate of $25 per
gigabyte, (iv) software applications and direct hardware purchased by the
Company are billed at actual cost and (v) telecommunications facilities are
billed based on actual facilities used by the Company. Armstrong has reserved
the right to increase the cost of its services upon thirty days'
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<PAGE>
written notice. During the fiscal years ended September 30, 1997, 1996 and
1995, the Company paid $431,000, $0 and $0, respectively, to Armstrong for MIS
services provided under this agreement. The agreement may be terminated by the
Company or Armstrong upon 180 days' notice to the other party. Armstrong
provides similar services to other telecommunications companies with which it
is affiliated. The Company believes that the terms of its MIS Services
Agreement with Armstrong are competitive with those offered by other providers
of MIS services. The agreement expires on September 30, 2002.
Financial Accounting Services Agreement. The Company also has entered into
an agreement with Armstrong whereby Armstrong provides to the Company certain
financial accounting services, such as payroll, accounts payable, general
ledger services and income tax return preparation services. The costs for
these services are as follows: (i) payroll processing is billed at $2.75 per
check, (ii) accounts payable processing is billed at $2.75 per check, (iii)
income tax return preparation is billed at $75 per hour and (iv) paralegal
services are billed at $40 per hour. Armstrong has reserved the right to
increase the cost of its services upon thirty days' written notice. During the
fiscal years ended September 30, 1997, 1996 and 1995, the Company paid $7,800,
$7,400 and $0, respectively, to Armstrong for financial accounting services
provided under this agreement. The agreement may be terminated by the Company
or Armstrong upon 180 days' notice to the other party. Armstrong provides
similar services to other telecommunications companies with which it is
affiliated. The Company believes that the terms of its Financial Accounting
Services Agreement with Armstrong are competitive with those offered by other
providers of financial accounting services in the industry. The agreement
expires on June 30, 2002.
In December 1997, the Company adopted a tax sharing agreement with
Armstrong, whereby the Company is obligated to file a consolidated federal
income tax return with Armstrong and its subsidiaries. Under the agreement,
the Company is obligated to pay, with certain exceptions, its share of the
consolidated tax liability to Armstrong, and the Company will not be paid by
Armstrong for tax benefits realized in the consolidated returns. To date, the
Company has not made any payment to Armstrong under the tax sharing agreement.
Management Relationships with Telecommunications Management Group
Messrs. Burmeister and Valls are the co-founders, sole shareholders and
directors of TMG. TMG is an international telecommunications consulting
company. During 1997, the Company utilized the consulting services of TMG
principally for business development opportunities in Latin America. Since the
Company's inception in May 1995, Mr. Burmeister has devoted less than 5% of
his working time to performing services for TMG. Prior to January 1, 1998, at
which time he was hired as an executive officer of the Company, Mr. Valls
devoted all of his working time to performing services for TMG. Since January
1, 1998, Mr. Valls has devoted less than 5% of his working time to performing
services for TMG. Since becoming employees of the Company, neither Mr.
Burmeister nor Mr. Valls has provided any of the services provided by TMG to
the Company. Pursuant to its arrangements with TMG, the Company paid TMG fees
of $21,692 and $85,097 in the six months ended March 31, 1998 and the fiscal
year ended September 30, 1997, respectively. During the six months ended March
31, 1997 and the fiscal years ended September 30, 1996 and 1995, the Company
paid TMG fees of $39,628, $58,274 and $14,843, respectively. The Company
believes that the fees paid to TMG for the services rendered are competitive
with those charged for comparable services by other companies in the industry.
DIRECTOR COMPENSATION
Members of the Management Committee of FCI LLC did not, and members of the
Company's Board of Directors currently do not, receive any compensation for
their participation at meetings of the Management Committee or the Board of
Directors, respectively, or any committees thereof. Directors are not
currently reimbursed for out-of-pocket expenses incurred in connection with
their attendance at meetings of the Board of Directors or any committee
thereof. The Company may, from time to time and in the sole discretion of the
Company's Board of Directors, grant options and/or phantom stock rights to
directors under the Company's Stock option plans and Phantom Stock Plan. See
"--Phantom Stock Plan" and "--Stock Option Plans."
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PHANTOM STOCK PLAN
The Board of Directors adopted the Phantom Stock Plan on December 22, 1997.
The Phantom Stock Plan provides for the grant of phantom stock rights
("Phantom Shares") to certain directors, officers and key employees of the
Company and its subsidiaries. Each Phantom Share entitles the holder thereof
(the "participant") to receive a cash payment upon the occurrence of (i) the
retirement of the participant from the Company or a subsidiary if the
participant is over 65 years old and has been continuously employed by the
Company or a subsidiary for not fewer than ten years, (ii) the Company's
written agreement that the termination of the participant's employment with
the Company or a subsidiary will not result in such forfeiture or (iii) the
death or total disability of the participant (the "Triggering Event") equal to
the excess of the fair market value of the Phantom Share (as determined in
good faith by the Board of Directors) less the value assigned to that Phantom
Share on the date the Phantom Share is granted. The total number of Phantom
Shares which may be granted pursuant to the Phantom Stock Plan is 6,175,
subject to adjustments for stock splits and stock dividends. The plan is
administered by persons who have been designated by the Board of Directors to
serve as administrator (the "administrator"). The administrator is charged
with determining, among other things, the eligibility of directors, officers
and employees to receive Phantom Shares under the plan, how many Phantom
Shares will be granted to directors, officers and employees, and the rules,
regulations and procedures in connection with the operation of the plan.
In determining the eligibility of a director, officer or employee to receive
Phantom Shares, the administrator will consider the position and
responsibilities of such director, officer or employee, the nature and value
to the Company or a subsidiary of his or her services and accomplishments, his
or her present and potential contribution to the success of the Company or its
subsidiaries and such other factors as the administrator may deem relevant.
Phantom Shares that have not vested may be forfeited upon the termination of
the participant's employment for a reason other than a Triggering Event. In
addition, the Board of Directors may terminate all rights in Phantom Shares
held by a participant, whether or not they have vested, if the participant (i)
actively competes with the Company or a subsidiary, (ii) is terminated from
the Company or a subsidiary for the commission of any crime, (iii) is
terminated from the Company or a subsidiary for cause or (iv) is terminated
from the Company or a subsidiary for gross negligence or willful misconduct.
Phantom Shares granted under the Phantom Stock Plan may not be transferred
by a participant other than by operation of a will or by the laws of descent
and distribution. Phantom Shares will immediately vest upon the occurrence of
certain events, including a merger or consolidation in which the Company is
not the surviving entity, the acquisition of 50% or more of the combined
voting power of the Company (other than by AIT or FMG) or a transaction
requiring stockholder approval involving the disposition of all or
substantially all of the Company's assets.
STOCK OPTION PLANS
1998 Stock Option Plan
The Board of Directors adopted the FaciliCom International, Inc. 1998 Stock
Option Plan ( the "1998 Stock Option Plan") on March 31, 1998. The 1998 Stock
Option Plan provides for the grant of options to purchase shares of the
Company's non-voting common stock to certain directors, officers, key
employees and advisors of the Company and its subsidiaries. The purpose of the
1998 Stock Option Plan is to promote the growth and profitability of the
Company by enabling it to attract and retain the best available personnel for
positions of substantial responsibility, to provide directors, officers, key
employees and advisors with an opportunity for investment in the Company's
non-voting common stock and to give them an additional incentive to increase
their efforts on behalf of the Company. The aggregate number of shares of
Common Stock as to which options may be granted pursuant to the 1998 Stock
Option Plan is 22,574, subject to adjustments for stock splits and stock
dividends, and no option may be granted under the plan after March 31, 2008.
The plan is administered by persons who have been designated by the Board of
Directors to serve as administrator, consisting of one or more, but no more
than three, members of the Board of Directors. The administrator is charged
with, among other things, granting options and determining the purchase price
of the shares of common stock covered by each
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option, determining the term of each option, determining the persons to whom
(and the times at which) options are granted, and determining the number of
shares of common stock to be covered by each option, interpreting the plan,
determining the rules, regulations and procedures in connection with the
operation of the plan, and determining the provisions of stock option
agreements. In determining the eligibility of a director, officer or employee
to receive options, the administrator will consider the position and
responsibilities of such director, officer or employee, the nature and value
to the Company or a subsidiary of his or her services and accomplishments, his
or her present and potential contribution to the success of the Company or its
subsidiaries and such other factors as the administrator may deem relevant.
The exercise price for options is determined by the administrator in its
discretion. The exercise price for options may be paid in full in cash, or in
an combination of cash and installment payments, and/or in shares of common
stock. Options immediately vest upon the occurrence of certain events,
including a merger or consolidation in which the Company is not the surviving
entity, the acquisition of 50% or more of the combined voting power of the
Company (other than by AIT or FMG) or a transaction requiring stockholder
approval involving the disposition of all or substantially all of the
Company's assets. Options granted under the 1998 Stock Option Plan may not be
transferred by an optionee other than by operation of a will or by the laws of
descent and distribution.
If the employment or status as an optionee director or officer terminates
for any reason other than voluntary termination with the consent of the
Company or subsidiary, retirement under any retirement plan of the Company or
subsidiary, death or involuntary termination without cause, the rights of the
optionee under any option shall terminate at the time of such termination. In
addition, the administrator may terminate all rights in options held by an
optionee, whether or not they have vested, if the optionee actively competes
with the Company or subsidiary.
1997 Stock Option Plan No. 1
The Board of Directors adopted the Facilicom International, Inc. 1997 Stock
Option Plan No. 1 ("Stock Option Plan No. 1") on December 22, 1997. Stock
Option Plan No. 1 provides for the grant of options to purchase shares of the
Company's common stock to certain directors, officers and key employees of the
Company and its subsidiaries. The purpose of Stock Option Plan No. 1 is to
provide to the Company the discretionary ability to grant options in
replacement and substitution of Phantom Shares which have been granted
pursuant to the Phantom Stock Plan. The aggregate number of shares of Common
Stock as to which options may be granted pursuant to Stock Option Plan No. 1
is 6,175, subject to adjustments for stock splits and stock dividends, and no
option may be granted under the plan after December 22, 2007. The plan is
administered by persons who have been designated by the Board of Directors to
serve as administrator, consisting of one or more, but no more than three,
members of the Board of Directors. The administrator is charged with, among
other things, granting options and determining the purchase price of the
shares of common stock covered by each option, determining the term of each
option, determining the persons to whom (and the times at which) options are
granted, and determining the number of shares of common stock to be covered by
each option, interpreting the plan, determining the rules, regulations and
procedures in connection with the operation of the plan, and determining the
provisions of stock option agreements. In determining the eligibility of a
director, officer or employee to receive options, the administrator will
consider the position and responsibilities of such director, officer or
employee, the nature and value to the Company or a subsidiary of his or her
services and accomplishments, his or her present and potential contribution to
the success of the Company or its subsidiaries and such other factors as the
administrator may deem relevant.
The exercise price for options is determined by the administrator in its
discretion. The exercise price for options may be paid in full in cash, or in
an combination of cash and installment payments, and/or in shares of common
stock. Subject to certain limited exceptions for death and disability during
the first six months of an option term and those discussed in the following
sentence, no option is exercisable during the first six months of its term and
no option is exercisable after the expiration of ten years and six months from
the date of grant. Options immediately vest upon the occurrence of certain
events, including a merger or consolidation in which
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the Company is not the surviving entity, the acquisition of 50% or more of the
combined voting power of the Company (other than by AIT or FMG) or a
transaction requiring stockholder approval involving the disposition of all or
substantially all of the Company's assets. Options granted under Stock Option
Plan No. 1 may not be transferred by an optionee other than by operation of a
will or by the laws of descent and distribution.
If the employment or status as a director or officer of an optionee
terminates for any reason other than voluntary termination with the consent of
the Company or subsidiary, retirement under any retirement plan of the Company
or subsidiary, death or involuntary termination without cause, the rights of
the optionee under any option shall terminate at the time of such termination.
In addition, the administrator may terminate all rights in options held by an
optionee, whether or not they have vested, if the optionee actively competes
with the Company or subsidiary.
1997 Stock Option Plan No. 2
On December 22, 1997, the Board of Directors also adopted the Facilicom
International, Inc. 1997 Stock Option Plan No. 2 ("Stock Option Plan No. 2"),
which, like Stock Option Plan No. 1, provides for the grant of options to
purchase shares of common stock to certain directors, officers and key
employees of the Company and its subsidiaries. The principal terms of Stock
Option Plan No. 1 and Stock Option Plan No. 2 are substantially identical with
the following exceptions: (i) the aggregate number of shares of common stock
as to which options may be granted pursuant to Stock Option Plan No. 2 is
5,135, subject to adjustments for stock splits and stock dividends; (ii)
options under Stock Option Plan No. 2 are intended to be granted for reasons
other than replacement and substitution of Phantom Shares that have been
granted pursuant to the Phantom Stock Plan; and (iii) the exercise price for
options granted under Stock Option Plan No. 2 is determined by the
administrator but, except as may be approved by the Board of Directors, such
price may not be less than 100% of the fair market value per share of the
common stock on the date of grant.
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EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation for services in all capacities awarded to, earned by or paid to,
the Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company, whose aggregate cash and cash
equivalent compensation exceeded $100,000 (collectively, the "Named
Officers"), with respect to the fiscal year ended September 30, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1997 ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS(/1/)
NAME OF INDIVIDUAL AND --------------------- ------------------------
PRINCIPAL POSITION SALARY BONUS RESTRICTED STOCK AWARDS
- ---------------------- -------- ------- ------------------------
<S> <C> <C> <C>
Walter J. Burmeister.......... $191,857(/2/) $54,000 $949,981(/3/)(/7/)
Chief Executive Officer,
President
Anand Kumar................... 139,539 52,628 237,495(/4/)(/7/)
Executive Vice President--
Business Development
Jeffrey J. Guzy............... 100,154 66,845 189,996(/5/)(/7/)
Executive Vice President--
Marketing,
Sales & Product Development
Christopher S. King........... 96,962 41,836 90,060(/6/)(/7/)
Vice President--Finance and
Administration, Chief
Financial Officer
Donald Dodd................... 88,261 16,553 --
Managing Director--Operations
& Engineering
</TABLE>
- --------
(1) For accounting purposes, the Company recognizes expense under the Phantom
Stock Plan over the employee's respective service period. The fair market
value of the phantom units granted pursuant to FCI LLC's Amended and
Restated Performance Unit Plan (the "Performance Unit Plan") and Phantom
Shares granted pursuant to the Phantom Stock Plan was determined, in each
case at the time of grant, by the Board of Directors. The fair market
value for Phantom Shares granted for the fiscal year ended September 30,
1997, and the value of Phantom Shares at that date, was based on a value
of $500 per share, as determined by the Board of Directors. The Board's
determination of such fair market value was based primarily on the
Company's operating results for the quarter ended September 30, 1997,
using a multiple of revenues for such quarter that the Board believed to
be consistent with companies whose business and financial position were
similar to those of the Company. This valuation was further supported by a
valuation that was determined by arms'-length negotiation between the
Company and an unaffiliated third party in connection with a proposed
private equity investment by such party in November 1997. The transaction
was not consummated for reasons unrelated to the valuation of the Company.
(2) Mr. Burmeister owns 50% of the equity interests in TMG, an international
telecommunications consulting company which provides consulting services
to the Company. For the fiscal year ended September 30, 1997, the Company
paid fees totaling $85,097 to TMG. Mr. Burmeister's salary for the fiscal
year ended September 30, 1997, includes $42,549, reflecting Mr.
Burmeister's 50% interest in such fees.
(3) Represents the fair market value of 190,000 phantom units granted pursuant
to the Performance Unit Plan in the fiscal year ended September 30, 1997,
at an exercise price of $.01 per phantom unit, which units were exchanged
for 1,900 Phantom Shares under the Phantom Stock Plan. All 1,900 Phantom
Shares vested immediately. No prior grants of Phantom Shares were received
by him.
(4) Represents the fair market value of 47,500 phantom units granted pursuant
to the Performance Unit Plan in the fiscal year ended September 30, 1997
at an exercise price of $.01 per phantom unit, which units were exchanged
for 475 Phantom Shares under the Phantom Stock Plan. Of the 475 Phantom
Shares granted in the fiscal year ended September 30, 1997, 50% vest one
year after the date of grant and the remaining 50% vest two years after
the date of grant. Together with prior grants of Phantom Shares received
by him, Mr. Kumar's aggregate holdings are 1,330 Phantom Shares with an
aggregate dollar value of $664,987, of which 617.5 Phantom Shares had
vested as of September 30, 1997.
(5) Represents the fair market value of 38,000 phantom units granted pursuant
to the Performance Unit Plan in the fiscal year ended September 30, 1997
at an exercise price of $.01 per phantom unit, which units were exchanged
for 380 Phantom Shares under the Phantom Stock Plan. Of the 380 Phantom
Shares granted in the fiscal year ended September 30, 1997, 50% vest one
year after the date of grant and the remaining 50% vest two years after
the date of grant. Together with prior grants of Phantom Shares received
by him, Mr. Guzy's aggregate holdings are 1,045 Phantom Shares with an
aggregate dollar value of $522,489, of which 475 Phantom Shares had vested
as of September 30, 1997.
(6) Represents the fair market value of 38,000 phantom units granted pursuant
to the Performance Unit Plan in the fiscal year ended September 30, 1997
at an exercise price of $2.63 per phantom unit, which units were exchanged
for 380 Phantom Shares under the Phantom Stock Plan. Of the 380 Phantom
Shares granted in the fiscal year ended September 30, 1997, 50% vest one
year after the date of grant and the remaining 50% vest two years after
the date of grant. Together with prior grants of Phantom Shares received
by him, Mr. King's aggregate holdings are 570 Phantom Shares with an
aggregate dollar value of $135,090, of which 190 Phantom Shares had vested
as of September 30, 1997.
(7) No dividends will be paid on the Phantom Shares.
75
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of April 30, 1998, by (i) each
person known by the Company to beneficially own five percent or more of any
class of the Company's capital stock, (ii) each director of the Company, (iii)
each executive officer of the Company that is a Named Officer and (iv) all
directors and executive officers of the Company as a group. All information
with respect to beneficial ownership has been furnished to the Company by the
respective shareholders of the Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PERCENT AS OF
COMMON STOCK APRIL 30,
BENEFICIAL OWNER BENEFICIALLY OWNED 1998
- ---------------- ------------------- -------------
<S> <C> <C>
Armstrong International Telecommunications,
Inc./(1)/.................................. 189,641 82.8%
Jay L. Sedwick/(2)/......................... 189,641 82.8
Walter J. Burmeister/(3)/................... 38,000 16.6
Juan Carlos Valls/(4)/...................... 36,100 15.8
Robert L. Reed/(5)/......................... 36,100 15.8
Anand Kumar/(6)/............................ 618 *
Jeffrey J. Guzy/(7)/........................ 475 *
Christopher S. King/(8)/.................... 190 *
Donald Dodd................................. 0 0
Kirby J. Campbell........................... 0 0
Bryan Cipoletti............................. 0 0
Dru A. Sedwick.............................. 0 0
William C. Stewart.......................... 0 0
All directors and executive officers as a
group (16 persons)......................... 228,924 100.0%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of common stock.
(1) The address for Armstrong International Telecommunications, Inc. is One
Armstrong Place, Butler, PA 16001.
(2) Represents shares of common stock owned by AIT, a wholly owned subsidiary
of Armstrong. Mr. Sedwick, a director of the Company, is the Chairman of
the Board of, and controls, Armstrong. The address for Mr. Sedwick is One
Armstrong Place, Butler, PA 16001.
(3) Represents 36,100 shares of common stock owned beneficially by Mr.
Burmeister through FMG, in which Mr. Burmeister has a 33.3% ownership
interest, and 1,900 shares of common stock that were issued upon the
conversion of Phantom Shares granted pursuant to the 1998 Stock Option
Plan. Mr. Burmeister shares with Messrs. Valls and Reed voting and
investment control with respect to 36,100 shares of common stock owned by
FMG. The address for Mr. Burmeister is c/o FaciliCom International, 1401
New York Avenue, NW, Washington, D.C. 20005.
(4) Represents shares of common stock owned beneficially by Mr. Valls through
FMG, in which Mr. Valls has a 33.3% ownership interest. The address for
Mr. Valls is c/o FaciliCom International, 1401 New York Avenue, NW,
Washington, D.C. 20005. Mr. Valls shares with Messrs. Burmeister and Reed
voting and investment control with respect to 36,100 shares of common
stock owned by FMG.
(5) Represents shares of common stock owned beneficially by Mr. Reed through
FMG, in which Mr. Reed has a 33.3% ownership interest. The address for Mr.
Reed is c/o FaciliCom International, 1401 New York Avenue, NW, Washington,
D.C. 20005. Mr. Reed shares with Messrs. Burmeister and Valls voting and
investment control with respect to 36,100 shares of common stock owned by
FMG.
(6) Represents shares of common stock that were issued upon the conversion of
Phantom Shares granted pursuant to the 1998 Stock Option Plan. The address
for Mr. Kumar is c/o FaciliCom International, 1401 New York Avenue, NW,
Washington, D.C. 20005.
(7) Represents shares of common stock that were issued upon the conversion of
Phantom Shares granted pursuant to the 1998 Stock Option Plan. The address
for Mr. Guzy is c/o FaciliCom International, 1401 New York Avenue, NW,
Washington, D.C. 20005.
(8) Represents shares of common stock that were issued upon the conversion of
Phantom Shares granted pursuant to the 1998 Stock Option Plan. The address
for Mr. King is c/o FaciliCom International, 1401 New York Avenue, NW,
Washington, D.C. 20005.
THE ARMSTRONG GROUP OF COMPANIES
The Armstrong Group of Companies, headquartered in Butler, Pennsylvania, is
a diversified, privately held group of companies that own and operate cable
television systems, independent telephone companies, real estate companies, a
residential and commercial security company and various other businesses. AIT,
a wholly owned subsidiary of Armstrong, is the Company's majority stockholder.
76
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH ARMSTRONG
FCI LLC, the Company's predecessor, was formed as a Delaware limited
liability company in May 1995 by AIT and FMG, with AIT and FMG contributing
$180,000 and $60,000, respectively, in exchange for ownership interests of
75.0% and 25.0% in the Company, respectively. In July 1995, FCI LLC acquired
66.5% of Tele8, an established competitive carrier based in Sweden. In October
1997, FCI LLC acquired additional equity from a minority stockholder in Tele8,
thereby increasing its total ownership interest in Tele8 to approximately
98.9%.
As the Company's majority stockholder, AIT has supplied substantially all of
the Company's capital. In September 1996, AIT provided FCI LLC with the
Additional Capital in the amount of $10.2 million for working capital
purposes. As a result of the Additional Capital, AIT was entitled to a
guaranteed return through September 30, 1997 for the use of the Additional
Capital, pursuant to the terms of FCI LLC's limited liability company
agreement. In November 1996, AIT provided FCI LLC the Convertible Debenture in
the form of a $5.0 million convertible line of credit and a guaranteed $10.0
million letter of credit facility for the benefit of FCI LLC.
In September 1997, AIT increased its equity ownership in the Company from
75.0% to 81.0% by converting into permanent equity (1) the Convertible
Debenture (which, together with accrued interest, totaled $5.4 million) and
(2) capital contributions of $10.9 million (representing the $10.2 million
furnished by AIT in September 1996 plus a guaranteed return of $724,000
related thereto). Also in September 1997, AIT established a bridge loan for
the benefit of the Company, pursuant to which AIT advanced funds to the
Company for working capital purposes at a rate equal to the prime rate plus
1.0% per annum.
In November 1997, the Company's stockholders, AIT and FMG, formed FaciliCom
International, Inc. On December 22, 1997, as a result of the Reorganization,
FCI LLC became a wholly owned subsidiary of the Company. Also, on December 22,
1997, AIT made the Equity Investment of $20.0 million by making a cash
contribution of $13.7 million and a noncash contribution of $6.3 million in
the form of cancellation of amounts outstanding under the bridge loan, thereby
increasing AIT's equity ownership in the Company from 81.0% to 84.0%.
On March 31, 1998, the Company granted options to purchase 3,401 shares of
non-voting common stock to non-employee directors and advisors of the Company
who are related to the non-employee directors. The options were granted at an
exercise price of $1.00, and as a result, the Company recognized compensation
cost of $2,112,640 as of March 31, 1998.
MIS Services Agreement. The Company has entered into a contract with
Armstrong pursuant to which Armstrong will provide billing and MIS support
services, including, but not limited to, call collection, processing, rating
and reporting for the Company and its subsidiaries. In addition, Armstrong
will also provide the Company with access to experienced MIS professionals and
programmers on an as-needed basis. The costs for such services are as follows:
(i) professional services are billed at up to $75 per hour, (ii) data center
management, operations and hardware services are billed at a rate of $40 per
megasecond, (iii) AS/400 disk storage services are billed at a rate of $25 per
gigabyte, (iv) software applications and direct hardware purchased by the
Company are billed at actual cost and (v) telecommunications facilities are
billed based on actual facilities used by the Company. Armstrong has reserved
the right to increase the cost of its services upon thirty days' written
notice. During the fiscal years ended September 30, 1997, 1996 and 1995, the
Company paid $431,000, $0 and $0, respectively, to Armstrong for MIS services
provided under this agreement. The agreement may be terminated by the Company
or Armstrong upon 180 days' notice to the other party. Armstrong provides
similar services to other telecommunications companies with which it is
affiliated. The Company believes that the terms of its MIS Services Agreement
with Armstrong are competitive with those offered by other providers of MIS
services. The agreement expires on September 30, 2002.
77
<PAGE>
Financial Accounting Services Agreement. The Company also has entered into
an agreement with Armstrong whereby Armstrong provides to the Company certain
financial accounting services, such as payroll, accounts payable, general
ledger services and income tax return preparation services. The costs for
these services are as follows: (i) payroll processing is billed at $2.75 per
check, (ii) accounts payable processing is billed at $2.75 per check, (iii)
income tax return preparation is billed at $75 per hour and (iv) paralegal
services are billed at $40 per hour. Armstrong has reserved the right to
increase the cost of its services upon thirty days' written notice. During the
fiscal years ended September 30, 1997, 1996 and 1995, the Company paid $7,800,
$7,400 and $0, respectively, to Armstrong for financial accounting services
provided under this agreement. The agreement may be terminated by the Company
or Armstrong upon 180 days' notice to the other party. Armstrong provides
similar services to other telecommunications companies with which it is
affiliated. The Company believes that the terms of its Financial Accounting
Services Agreement with Armstrong are competitive with those offered by other
providers of financial accounting services in the industry. The agreement
expires on June 30, 2002.
In December 1997, the Company and Armstrong entered into a tax sharing
agreement to define the method by which the federal income tax liability will
be allocated between the Company and Armstrong and the manner in which such
allocated tax liability will be paid. To date, the Company has not made any
payment to under the tax sharing agreement.
Management Relationship with Telecommunications Management Group
Messrs. Burmeister and Valls are the co-founders, sole shareholders and
directors of TMG. TMG is an international telecommunications consulting
company. During 1997, the Company utilized the consulting services of TMG
principally for exploring business development opportunities in Latin America.
Since the Company's inception in May 1995, Mr. Burmeister has devoted less
than 5% of his working time to performing services for TMG. Prior to January
1, 1998, at which time he was hired as an executive officer of the Company,
Mr. Valls devoted all of his working time to performing services for TMG.
Since January 1, 1998, Mr. Valls has devoted less than 5% of his working time
to performing services for TMG. Since becoming employees of the Company,
neither Mr. Burmeister nor Mr. Valls has provided any of the services provided
by TMG to the Company. Pursuant to its arrangements with TMG, the Company paid
TMG fees of $21,692 and $85,097 in the six months ended March 31, 1998 and the
fiscal year ended September 30, 1997, respectively. During the six months
ended March 31, 1997 and the fiscal years ended September 30, 1996 and 1995,
the Company paid TMG fees of $39,628, $58,274 and $14,843, respectively. The
Company believes that the fees paid to TMG for the services rendered are
competitive with those charged for comparable services by other companies in
the industry.
78
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 300,000 shares of
common stock, par value $.01 per share ("Common Stock"). As of March 1, 1998,
after giving effect to the Recapitalization, there were 225,741 shares of
Common Stock issued and outstanding.
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders and are entitled to receive such
dividends as the Company's Board of Directors may declare in its discretion
out of funds legally available therefor. In the event of a liquidation,
dissolution or winding up of the Company, the holders of shares of Common
Stock are entitled to a distribution of any remaining assets of the Company.
Holders of shares of Common Stock have no cumulative voting or preemptive
rights. All outstanding shares of Common Stock are fully paid and
nonassessable.
STOCKHOLDERS AGREEMENT
Pursuant to the Stockholders Agreement, FMG and AIT agreed to certain rights
and restrictions with respect to the shares of Common Stock they hold,
including the following:
Transfer Restrictions. The parties agreed that no shares of Common Stock may
be issued by the Company or sold, exchanged, pledged, encumbered, given,
bequeathed or otherwise disposed of by AIT or FMG unless and until the
proposed transferee agrees to be bound by the provisions of the Stockholders
Agreement.
Designation of Directors by AIT and FMG. The parties agreed that the Board
of Directors will be comprised of seven persons, five of whom will be
designated by AIT and two of whom will be designated by FMG.
Board Approval of Significant Actions. The parties agreed that certain
actions may not be taken by officers of the Company without the prior approval
of the Board of Directors. Such actions include: (a) issuance or sale of any
securities of the Company other than securities issued pursuant to the 1997
Stock Option Plan No. 1, the 1997 Stock Option Plan No. 2 and the Phantom
Stock Plan; (b) sale, lease or transfer of a material portion of the assets of
the Company or transfer of any material governmental permit or license
relating to the business of the Company; (c) adoption of budgets, modification
of any approved budgets or expenditure of funds in excess of then-current
budgets; (d) guarantee indebtedness, extension of credit, incurrence of
certain types of indebtedness or the pledge of any assets of the Company; (e)
certain of management personnel decisions, including paying annual
compensation to an employee in excess of $100,000 or paying a bonus to an
employee; (f) execution of a contract obligating the Company for amounts in
excess of $500,000; (g) modification of any employee benefit plan; or (h)
certain transactions with affiliates of the Company.
79
<PAGE>
SUMMARY OF OTHER INDEBTEDNESS
THE ERICSSON EQUIPMENT FINANCING
On November 1, 1995, the Company entered into a loan agreement (the
"Ericsson Facility") pursuant to which Ericsson agreed to finance the purchase
price of certain telecommunications equipment and installation services
purchased by the Company in an amount not to exceed approximately $1.2
million. The Ericsson Facility has been amended three times. The Ericsson
Facility was first amended to, among other things, increase the maximum amount
that could be advanced thereunder to $7.0 million. Subsequently, the Ericsson
Facility was amended to delete the limited guaranty and to increase the
security with an additional letter of credit of $1.0 million. A third
amendment extended the termination date for advances under the Ericsson
Facility to June 29, 1998, amended various financial covenants as well as
security provisions relating to an adjustable letter of credit of $1.75
million, removed the limitation on capital expenditures and added an Event of
Default. All outstanding advances are secured by the telecommunications system
equipment purchased with the proceeds thereof.
Interest on the outstanding balance under the Ericsson Facility is payable
quarterly in arrears at an annual rate, which is reset quarterly, equal to the
lesser of (i) a rate equal to LIBOR (measured at the beginning of such
quarterly period) plus 4.0% and (ii) an applicable statutory maximum rate.
The Ericsson Facility contains certain financial covenants which require the
Company to attain certain financial targets for each quarter, including with
respect to (i) EBITDA (as defined in the Ericsson Facility), (ii) reserves,
(iii) net worth, (iv) the ratio of current assets to current liabilities and
(v) the ratio of debt to net worth. The Ericsson Facility also includes
covenants which limits the Company's ability to, among other things, (i)
effect certain mergers and other corporate transactions, (ii) distribute
earnings or capital or make payments on debts owed by the Company to its
shareholders, (iii) engage in certain transactions with affiliates, (iv)
prepay, redeem or otherwise satisfy prior to stated maturities any
indebtedness except as otherwise permitted, (v) agree with a party other than
Ericsson not to create liens on its assets, (vi) materially change the nature
of its business, (vii) materially alter any agreement between the Company and
its affiliates and (viii) become a general partner in a general or limited
partnership or joint venture. The Ericsson Facility requires maintenance of
certain financial and nonfinancial covenants. FCI received a waiver of certain
covenant violations of the original and amended and restated loan agreements.
The covenants were then modified. The covenants violated were related to the
requirement of mandatory prepayments of the loan, revisions to the Company's
limited liability company agreement, limitations on distribution to owners and
patents, licenses and franchises, earnings before interest, taxes,
depreciation and amortization ("EBITDA") coverage ratio, minimum tangible net
worth, current ratio, debt to annualized EBITDA ratio, and limitation on
capital expenditures. The Company repaid all outstanding indebtedness under
the Ericsson Facility with a portion of the net proceeds from the Offering and
the Ericsson Facility was terminated.
THE NTFC EQUIPMENT FINANCING
On March 27, 1997, the Company entered into an equipment loan and security
agreement (the "NTFC Facility") with NTFC, under which NTFC agreed to loan the
Company up to $5.0 million for the purchase from Nortel of certain
telecommunications equipment and related software and services (of which up to
$1.0 million may be located in the U.K. and Sweden). All outstanding advances
are secured by a lien on the equipment and software purchased with the
proceeds of the NTFC Facility and certain related assets.
Interest on the outstanding balance under the NTFC Facility is payable
quarterly in arrears at an annual rate equal to LIBOR (measured at the
beginning of such quarterly period) plus 4.0%.
The NTFC Facility contains certain financial covenants which require the
Company to attain certain financial targets for each quarter, including with
respect to (i) the ratio of the Company's reported EBITDA (as
80
<PAGE>
defined in the NTFC Facility) to aggregate principal and interest payments on
certain specified indebtedness and (ii) the ratio of total liabilities
(excluding the liabilities of certain subsidiaries) to net worth. The NTFC
Facility also includes covenants which restrict the Company's ability to,
among other things, (i) incur indebtedness above $50,000, (ii) create certain
liens on, or dispose of, its assets, (iii) effect certain mergers and other
corporate transactions, (iv) change its name, structure or fiscal year, (v)
enter into a new business or materially change its business, (vi) make capital
expenditures in excess of projected levels, (vii) remove collateral and (viii)
engage in certain transactions with affiliates. The NTFC Facility requires
maintenance of these financial and nonfinancial covenants. FCI received a
waiver of certain covenant violations for the year ended September 30, 1997
and maintenance of those covenants was also waived through and including the
year ended September 30, 1998. The covenants violated were related to the
delinquent payment of current liabilities, the debt service coverage ratio,
the debt to net worth ratio, the prohibition of business changes, the
limitation of investments and the limitation on transactions with affiliates.
The Company repaid all outstanding indebtedness under the NTFC Facility with a
portion of the net proceeds from the Offering and terminated the agreement.
FCI used a portion of the net proceeds from the offering of the Old Notes to
pay-off the amounts outstanding under these vendor financing agreements. See
"Use of Proceeds."
81
<PAGE>
DESCRIPTION OF NOTES
The Old Notes were and the Exchange Notes will be issued pursuant to an
Indenture, dated as of January 28, 1998 (the "Indenture"), between the
Company, and State Street Bank and Trust Company, as trustee (the "Trustee").
Upon issuance of the Exchange Notes or the effectiveness of a Shelf
Registration Statement, the Indenture will be subject to and governed by the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
following summary of certain provisions of the Notes, the Indenture and the
Pledge Agreement does not purport to be complete and is subject to, and is
qualified by reference to, all the provisions of the Notes, the Indenture and
the Pledge Agreement, including the definitions of certain terms therein and
those terms made a part thereof by the Trust Indenture Act. Whenever
particular sections or defined terms of the Indenture not otherwise defined
herein are referred to, such sections or defined terms are incorporated herein
by reference. Copies of the Indenture, the Registration Rights Agreement and
the Pledge Agreement have been filed with the Commission as Exhibits to the
Exchange Offer Registration Statement of which this Prospectus is a part. The
definitions of certain terms used in the following summary are set forth below
under "--Certain Definitions."
GENERAL
The Old Notes were and the Exchange Notes will be senior obligations of the
Company, limited to $300,000,000 million aggregate principal amount, and will
mature on January 15, 2008. The Notes bear interest at the rate of 10 1/2% per
annum, payable semiannually in arrears on January 15 and July 15 of each year,
commencing July 15, 1998, to the Person in whose name the Note (or any
predecessor Note) is registered at the close of business on the preceding
January 1 or July 1, as the case may be. Interest will be computed on the
basis of a 360-day year of twelve 30-day months.
Principal of, premium, if any, interest and Liquidated Damages, if any, on
the Notes will be payable, and the Notes may be exchanged or transferred, at
the office or agency of the Company (which initially will be the corporate
trust operations office of the Trustee at State Street Bank and Trust Company,
N.A., 61 Broadway, 15th Floor, New York, New York 10006, Attention: Corporate
Trust Department); or, at the option of the Company, payment of interest may
be made by check mailed to the address of the holders as such address appears
in the Register; provided that all payments with respect to Global Notes and
Certificated Notes (as such terms are defined below under the caption "--Book-
Entry, Delivery and Form") the holders of which have given wire transfer
instructions to the Company will be required to be made by wire transfer of
immediately available funds to the accounts specified by the holders thereof.
(Section 202)
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
See "--Book-Entry, Delivery and Form." No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith. (Section 203)
OPTIONAL REDEMPTION
Except as otherwise provided, the Notes will not be redeemable at the option
of the Company prior to January 15, 2003. At any time on or after that date,
the Notes may be redeemed at the Company's option, in whole or in part, at any
time or from time to time, on or after January 15, 2003 and prior to maturity,
upon not less than 30 nor more than 60 days' prior notice mailed by first
class mail to each holder's last address as it appears in the Register, at the
following Redemption Prices (expressed in percentages of principal amount
thereof), plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the Redemption Date (subject to the right of holders of record on
the relevant Regular Record Date to receive interest due on an
82
<PAGE>
Interest Payment Date that is on or prior to the Redemption Date), if redeemed
during the 12-month period commencing on January 15, of the years set forth
below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2003.............................. 105.25%
2004.............................. 103.50%
2005.............................. 101.75%
2006 (and thereafter)............. 100.00%
</TABLE>
Notwithstanding the foregoing, prior to January 15, 2001, the Company may on
any one or more occasions redeem up to 35.0% of the originally issued
aggregate principal amount of Notes at a redemption price of 110.5% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the Redemption Date, with the Net Cash
Proceeds of one or more Public Equity Offerings; provided, that at least 65.0%
of the originally issued principal amount of the Notes remains outstanding
immediately after the occurrence of such redemption; and provided further that
notice of such redemptions shall be given within 60 days of the closing of any
such Public Equity Offering. (Sections 203 and 1101)
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed
or, if the Notes are not listed on a national securities exchange, on a pro
rata basis, by lot or by such other method as the Trustee in its sole
discretion shall deem to be fair and appropriate; provided that no Note of
$1,000 or less in principal amount at maturity shall be redeemed in part. If
any Note is to be redeemed in part only, the notice of redemption relating to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original Note.
SECURITY
The Indenture requires the Company to purchase and pledge to the Trustee as
security for the benefit of the holders of the Notes the Pledged Securities in
such amount as will be sufficient upon receipt of scheduled interest and/or
principal payments of such securities to provide for payment in full of the
first six scheduled interest payments due on the Notes. The Company used
approximately $86.5 million of the net proceeds of the offering of the Old
Notes to acquire the Pledged Securities. The Pledged Securities were pledged
by the Company to the Trustee for the benefit of the holders of the Notes
pursuant to the Pledge Agreement and will be held by the Trustee in the Pledge
Account pending disposition pursuant to the Pledge Agreement. Pursuant to the
Pledge Agreement, immediately prior to one of the first six scheduled interest
payments on the Notes, the Company may either deposit with the Trustee from
funds otherwise available to the Company cash sufficient to pay the interest
scheduled to be paid on such date or the Company may direct the Trustee to
release from the Pledge Account proceeds sufficient to pay interest then due.
In the event that the Company exercises the former option, the Company may
thereafter direct the Trustee to release to the Company proceeds or Pledged
Securities from the Pledge Account in like amount. A failure by the Company to
pay interest on the Notes in a timely manner through the first six scheduled
interest payment dates will constitute an immediate Event of Default under the
Indenture, with no grace or cure period.
Interest earned on the Pledged Securities will be added to the Pledge
Account. In the event that the funds or Pledged Securities held in the Pledge
Account exceed the amount sufficient, in the opinion of a nationally
recognized firm of independent public accountants selected by the Company, to
provide for payment in full of the first six scheduled interest payments due
on the Notes (or, in the event an interest payment or payments have been made,
an amount sufficient to provide for payment in full of any interest payments
remaining, up to and including the sixth scheduled interest payment) the
Trustee will be permitted to release to the Company, at the Company's request,
any such excess amount.
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The Notes are secured by a first priority security interest in the Pledged
Securities and in the Pledge Account and, accordingly, the Pledged Securities
and the Pledge Account will also secure repayment of the principal amount of
the Notes to the extent of such security.
Under the Pledge Agreement, assuming that the Company makes the first six
scheduled interest payments on the Notes in a timely manner, any remaining
Pledged Securities will be released from the Pledge Account and the Notes will
be unsecured.
RANKING
The Notes will be unsecured (except as described above) obligations of the
Company and will rank senior in right of payment to any existing and future
obligations of the Company expressly subordinated in right of payment to the
Notes and pari passu in right of payment with all other existing and future
unsecured and unsubordinated obligations of the Company, including trade
payables. As of March 31, 1998, the Company had approximately $309.5 million of
Indebtedness. Because the Company is a holding company that conducts its
business through its subsidiaries, all existing and future Indebtedness and
other liabilities and commitments of the Company's subsidiaries, including
trade payables, will be effectively senior to the Notes. The Indenture limits,
but does not prohibit, the incurrence of certain additional Indebtedness by the
Company and its Restricted Subsidiaries and does not limit the amount of
Indebtedness Incurred to finance the cost of Telecommunications Assets. The
Company anticipates that it and its Subsidiaries will Incur substantial
additional Indebtedness in the future. As of March 31, 1998, the Company's
consolidated subsidiaries had aggregate liabilities of $380.1 million, which
included $309.5 million of Indebtedness.
COVENANTS
Limitation on Indebtedness.
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; provided, however, that the
Company may Incur Indebtedness if immediately thereafter the ratio of (i)
the aggregate principal amount (or accreted value, as the case may be) of
Indebtedness of the Company and its Restricted Subsidiaries on a
consolidated basis outstanding as of the Transaction Date to (ii) the Pro
Forma Consolidated Cash Flow for the preceding two full fiscal quarters
multiplied by two, determined on a pro forma basis as if any such
Indebtedness had been Incurred and the proceeds thereof had been applied
at the beginning of such two fiscal quarters, would be greater than zero
and less than 5.0 to 1.
(b) The foregoing limitations of paragraph (a) of this covenant will not apply
to any of the following Indebtedness ("Permitted Indebtedness"), each of
which shall be given independent effect:
(i) Indebtedness of the Company evidenced by the Notes;
(ii) Indebtedness of the Company or any Restricted Subsidiary outstanding
on the Issue Date;
(iii) Indebtedness of the Company or any Restricted Subsidiary under one
or more Credit Facilities, in an aggregate principal amount at any
one time outstanding not to exceed the greater of (x) $35.0 million
and (y) 80.0% of Eligible Accounts Receivable at any one time
outstanding, subject to any permanent reductions required by any
other terms of the Indenture;
(iv) Indebtedness of the Company or any Restricted Subsidiary Incurred to
finance the cost (including the cost of design, development,
construction, acquisition, installation or integration) of
Telecommunications Assets;
(v) Indebtedness of a Restricted Subsidiary owed to and held by the
Company or another Restricted Subsidiary, except that (A) any
transfer of such Indebtedness by the Company or a Restricted
Subsidiary (other than to the Company or another Restricted
Subsidiary) and (B) the sale, transfer or
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other disposition by the Company or any Restricted Subsidiary of
Capital Stock of a Restricted Subsidiary which is owed Indebtedness of
another Restricted Subsidiary shall, in each case, be an incurrence of
Indebtedness by such Restricted Subsidiary, subject to the other
provisions of the Indenture;
(vi) Indebtedness of the Company owed to and held by a Restricted Subsidiary
which is unsecured and subordinated in right to the payment and
performance to the obligations of the Company under the Indenture and
the Notes, except that (A) any transfer of such Indebtedness by a
Restricted Subsidiary (other than to another Restricted Subsidiary) and
(B) the sale, transfer or other disposition by the Company or any
Restricted Subsidiary of Capital Stock of a Restricted Subsidiary which
is owed Indebtedness of the Company shall, in each case, be an
incurrence of Indebtedness by the Company, subject to other provisions
of the Indenture;
(vii) Indebtedness of the Company or a Restricted Subsidiary issued in
exchange for, or the net proceeds of which are used to refinance
(whether by amendment, renewal, extension or refunding), then
outstanding Indebtedness of the Company or a Restricted Subsidiary,
other than Indebtedness Incurred under clauses (iii), (v), (vi),
(viii), (ix), (xi) and (xii) of this paragraph, and any refinancings
thereof in an amount not to exceed the amount so refinanced or refunded
(plus premiums, accrued interest, and reasonable fees and expenses);
provided that such new Indebtedness shall only be permitted under this
clause (vii) if: (A) in case the Notes are refinanced in part or the
Indebtedness to be refinanced is pari passu with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made pari passu with, or subordinate in right
of payment to, the remaining Notes, (B) in case the Indebtedness to be
refinanced is subordinated in right of payment to the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the
Notes at least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes and (C) such new Indebtedness, determined as
of the date of Incurrence of such new Indebtedness, does not mature
prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least
equal to the remaining Average Life of the Indebtedness to be
refinanced or refunded; and provided further that in no event may
Indebtedness of the Company be refinanced by means of any Indebtedness
of any Restricted Subsidiary pursuant to this clause (vii);
(viii) Indebtedness of (x) the Company not to exceed, at any one time
outstanding, 2.00 times the Net Cash Proceeds from the issuance and
sale, other than to a Subsidiary, of Common Stock (other than
Redeemable Stock) of the Company (less the amount of such proceeds
used to make Restricted Payments as provided in clause (iii) or (iv)
of the second paragraph of the "Limitation on Restricted Payments"
covenant) and (y) the Company or Acquired Indebtedness of a
Restricted Subsidiary not to exceed, at one time outstanding, the
fair market value of any Telecommunications Assets acquired by the
Company in exchange for Common Stock of the Company issued after the
Issue Date; provided, however, that in determining the fair market
value of any such Telecommunications Assets so acquired, if the
estimated fair market value of such Telecommunications Assets
exceeds (A) $2.0 million (as estimated in good faith by the Board of
Directors), then the fair market value of such Telecommunications
Assets will be determined by a majority of the Board of Directors of
the Company, which determination will be evidenced by a resolution
thereof, and (B) $10.0 million (as estimated in good faith by the
Board of Directors), then the Company will deliver the Trustee a
written appraisal as to the fair market value of such
Telecommunications Assets prepared by a nationally recognized
investment banking or public accounting firm (or, if no such
investment banking or public accounting firm is qualified to prepare
such an appraisal, by a nationally recognized appraisal firm); and
provided further that such Indebtedness does not mature prior to the
Stated Maturity of the Notes and the Average Life of such
Indebtedness is longer than that of the Notes;
(ix) Indebtedness of the Company or any Restricted Subsidiary (A) in respect
of performance, surety or appeal bonds or letters of credit supporting
trade payables, in each case provided in the ordinary
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course of business, (B) under Currency Agreements and Interest Rate
Agreements covering Indebtedness of the Company; provided that such
agreements do not increase the Indebtedness of the obligor outstanding
at any time other than as a result of fluctuations in foreign currency
exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder, and (C) arising from agreements
providing for indemnification, adjustment of purchase price or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of
its Restricted Subsidiaries pursuant to such agreements, in any case
Incurred in connection with the disposition of any business, assets or
Restricted Subsidiary of the Company (other than Guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of
such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition), in a principal amount not to exceed the
gross proceeds actually received by the Company or any Restricted
Subsidiary in connection with such disposition;
(x) Indebtedness of the Company, to the extent that the net proceeds
thereof are promptly (A) used to repurchase Notes tendered in a Change
of Control offer or (B) deposited to defease all of the Notes as
described below under "Defeasance and Covenant Defeasance of
Indenture";
(xi) Indebtedness of a Restricted Subsidiary represented by a Guarantee of
the Notes permitted by and made in accordance with the "Limitation on
Issuances of Guarantees of Indebtedness by Restricted Subsidiaries"
covenant; and
(xii) Indebtedness of the Company or any Restricted Subsidiary in addition
to that permitted to be incurred pursuant to clauses (i) through (xi)
above in an aggregate principal amount not in excess of $10.0 million
(or, to the extent not denominated in United States dollars, the
United States Dollar Equivalent thereof) at any one time outstanding.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, Guarantees, Liens or
obligations with respect to letters of credit supporting Indebtedness
otherwise included in the determination of such particular amount shall
not be included; provided, however, that the foregoing shall not in any
way be deemed to limit the provision of "--Limitation on Issuances of
Guarantees of Indebtedness by Restricted Subsidiaries." For purposes of
determining compliance with this "Limitation on Indebtedness" covenant, in
the event that an item of Indebtedness meets the criteria of more than one
of the types of Indebtedness described in the above clauses, the Company,
in its sole discretion may, at the time of such Incurrence, (i) classify
such item of Indebtedness under and comply with either of paragraph (a) or
(b) of this covenant (or any of such definitions), as applicable, (ii)
classify and divide such item of Indebtedness into more than one of such
paragraphs (or definitions), as applicable, and (iii) elect to comply with
such paragraphs (or definitions), as applicable in any order.
Limitation on Restricted Payments.
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) (A) declare or pay any dividend or make any
distribution in respect of the Company's Capital Stock to the holders thereof
(other than dividends or distributions payable solely in shares of Capital Stock
(other than Redeemable Stock) of the Company or in options, warrants or other
rights to acquire such shares of Capital Stock) or (B) declare or pay any
dividend or make any distribution in respect of the Capital Stock of any
Restricted Subsidiary to any Person other than dividends and distributions
payable to the Company or any Restricted Subsidiary or to all holders of Capital
Stock of such Restricted Subsidiary on a pro rata basis; (ii) purchase, redeem,
retire or otherwise acquire for value any shares of Capital Stock of the Company
(including options, warrants or other rights to acquire such shares of Capital
Stock) held by any Person or any shares of Capital Stock of any Restricted
Subsidiary (including options, warrants and other rights to acquire such shares
of Capital Stock) held by any Affiliate of the Company (other than a wholly
owned Restricted Subsidiary) or any
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holder (or any Affiliate thereof) of 5.0% or more of the Company's Capital
Stock; (iii) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of the Company that is subordinated in
right of payment to the Notes; or (iv) make any Investment, other than a
Permitted Investment, in any Person (such payments or any other actions
described in clauses (i) through (iv) being collectively "Restricted
Payments") if, at the time of, and after giving effect to, the proposed
Restricted Payment:
(A) a Default or Event of Default shall have occurred and be continuing;
(B) the Company could not Incur at least $1.00 of Indebtedness under
paragraph (a) of the "Limitation on Indebtedness" covenant; and
(C) the aggregate amount of all Restricted Payments declared or made from
and after the Closing Date would exceed the sum of:
(1) Cumulative Consolidated Cash Flow minus 200% of Cumulative
Consolidated Fixed Charges;
(2) 100% of the aggregate Net Cash Proceeds from the issue or sale to a
Person, which is not a Subsidiary of the Company, of Capital Stock of
the Company (other than Redeemable Stock) or of debt securities of the
Company which have been converted into or exchanged for such Capital
Stock (except to the extent such Net Cash Proceeds are used to Incur
new Indebtedness outstanding pursuant to clause (viii) of paragraph
(b) of the "Limitation on Indebtedness" covenant); and
(3) to the extent any Permitted Investment that was made after the Closing
Date is sold for cash or otherwise liquidated or repaid for cash, the
lesser of (i) the cash return of capital with respect to such
Permitted Investment (less the cost of disposition, if any) and (ii)
the initial amount of such Permitted Investment.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at
said date of declaration, such payment would comply with the foregoing
paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment
to the Notes including a premium, if any, and accrued and unpaid interest and
Liquidated Damages, if any, with the net proceeds of, or in exchange for,
Indebtedness Incurred under clause (viii) of paragraph (b) of the "Limitation
on Indebtedness" covenant; (iii) the repurchase, redemption or other
acquisition of Capital Stock of the Company in exchange for, or out of the Net
Cash Proceeds of a substantially concurrent (A) capital contribution to the
Company or (B) offering of, shares of Capital Stock (other than Redeemable
Stock) of the Company (except to the extent such proceeds are used to incur
new Indebtedness outstanding pursuant to clause (viii) of paragraph (b) of the
"Limitation on Indebtedness" covenant); (iv) the acquisition of Indebtedness
of the Company which is subordinated in right of payment to the Notes in
exchange for, or out of the proceeds of, a substantially concurrent (A)
capital contribution to the Company or (B) offering of, shares of the Capital
Stock of the Company (other than Redeemable Stock) (except to the extent such
proceeds are used to incur new Indebtedness outstanding pursuant to clause
(viii) of paragraph (b) of the "Limitation on Indebtedness" covenant); (v)
payments or distributions to dissenting stockholders in accordance with
applicable law, pursuant to or in connection with a consolidation, merger or
transfer of assets that complies with the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially
all of the property and assets of the Company; and (vi) other Restricted
Payments not to exceed $2.0 million; provided that, except in the case of
clause (i), no Default or Event of Default shall have occurred and be
continuing or occur as a consequence of the actions or payments set forth
therein. (Section 1012)
Each Restricted Payment permitted pursuant to the immediately preceding
paragraph (other than the Restricted Payment referred to in clause (ii)
thereof) and the Net Cash Proceeds from any capital contributions to the
Company or issuance of Capital Stock referred to in clauses (iii) and (iv) of
the immediately preceding paragraph, shall be included in calculating whether
the conditions of clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant have been met with respect to any subsequent
Restricted
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Payments. In the event the proceeds of an issuance of Capital Stock of the
Company are used for the redemption, repurchase or other acquisition of the
Notes, then the Net Cash Proceeds of such issuance shall be included in clause
(C) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of the Notes.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries.
So long as any of the Notes are outstanding, the Company will not, and will
not permit any Restricted Subsidiary to, create or otherwise cause or suffer
to exist or become effective any consensual encumbrance or restriction of any
kind on the ability of any Restricted Subsidiary to (i) pay dividends or make
any other distributions permitted by applicable law on any Capital Stock of
such Restricted Subsidiary owned by the Company or any other Restricted
Subsidiary, (ii) pay any Indebtedness owed to the Company or any other
Restricted Subsidiary, (iii) make loans or advances to the Company or any
other Restricted Subsidiary or (iv) transfer any of its property or assets to
the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements or instruments in effect on the Closing Date, and any extensions,
refinancings, renewals or replacements of such agreements; provided that the
encumbrances and restrictions in any such extensions, refinancings, renewals
or replacements are no less favorable in any material respect to the holders
than those encumbrances or restrictions that are then in effect and that are
being extended, refinanced, renewed or replaced; (ii) contained in the terms
of any Indebtedness or any agreement pursuant to which such Indebtedness was
issued if the encumbrance or restriction applies only in the event of a
default with respect to a financial covenant contained in such Indebtedness or
agreement and such encumbrance or restriction is not materially more
disadvantageous to the holders of the Notes than is customary in comparable
financings (as determined by the Company) and the Company determines that any
such encumbrance or restriction will not materially affect the Company's
ability to make principal or interest payments on the Notes; (iii) existing
under or by reason of applicable law; (iv) existing with respect to any Person
or the property or assets of such Person acquired by the Company or any
Restricted Subsidiary, existing at the time of such acquisition and not
incurred in contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other than
such Person or the property or assets of such Person so acquired; (v) in the
case of clause (iv) of the first paragraph of this "Limitation on Dividend and
Other Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A)
that restrict in a customary manner the subletting, assignment or transfer of
any property or asset that is, or is subject to, a lease, purchase mortgage
obligation, license, conveyance or contract or similar property or asset, (B)
existing by virtue of any transfer of, agreement to transfer, option or right
with respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising
or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of the Company or any Restricted Subsidiary in
any manner material to the Company or any Restricted Subsidiary; or (vi) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that
has been entered into for the sale or disposition of all or substantially all
of the Capital Stock of, or property and assets of, such Restricted
Subsidiary. Nothing contained in this "Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant shall prevent
the Company or any Restricted Subsidiary from (1) creating, incurring,
assuming or suffering to exist any Liens otherwise permitted in the
"Limitation on Liens" covenant or (2) restricting the sale or other
disposition of property or assets of the Company or any of its Restricted
Subsidiaries that secure Indebtedness of the Company or any of its Restricted
Subsidiaries. (Section 1013)
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries.
The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue, transfer, convey, sell, lease or otherwise
dispose of any shares of Capital Stock (including options, warrants or other
rights to purchase shares of such Capital Stock) of such or any other
Restricted Subsidiary (other than
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to the Company or a wholly owned Restricted Subsidiary or in respect of any
director's qualifying shares or sales of shares of Capital Stock to foreign
nationals mandated by applicable law) to any Person unless (A) the Net Cash
Proceeds from such issuance, transfer, conveyance, sale, lease or other
disposition are applied in accordance with the provisions of the "Limitation
on Asset Sales" covenant, (B) immediately after giving effect to such
issuance, transfer, conveyance, sale, lease or other disposition, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary and
(C) any Investment in such Person remaining after giving effect to such
issuance, transfer, conveyance, sale, lease or other disposition would have
been permitted to be made under the "Limitation on Restricted Payments"
covenant if made on the date of such issuance, transfer, conveyance, sale,
lease or other disposition (valued as provided in the definition of
"Investment"). (Section 1014)
Limitation on Transactions with Stockholders and Affiliates.
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale, lease or exchange of
property or assets, or the rendering of any service) with any holder (or any
Affiliate of such holder) of 5.0% or more of any class of Capital Stock of the
Company or any Restricted Subsidiary or with any Affiliate of the Company or
any Restricted Subsidiary, unless (i) such transaction or series of
transactions is on terms no less favorable to the Company or such Restricted
Subsidiary than those that could be obtained in a comparable arm's-length
transaction with a Person that is not such a holder or an Affiliate, (ii) if
such transaction or series of transactions involves aggregate consideration in
excess of $2.0 million, then such transaction or series of transactions is
approved by a majority of the Board of Directors of the Company and is
evidenced by a resolution therein and (iii) if such transaction or series of
transactions involves aggregate consideration in excess of $10.0 million, then
the Company or such Restricted Subsidiary will deliver to the Trustee a
written opinion as to the fairness to the Company or such Restricted
Subsidiary of such transaction from a financial point of view from a
nationally recognized investment banking firm (or, if an investment banking
firm is generally not qualified to give such an opinion, by a nationally
recognized appraisal firm or accounting firm).
The foregoing limitation does not limit, and will not apply to (i) any
transaction between the Company and any of its Restricted Subsidiaries or
between Restricted Subsidiaries; (ii) the payment of reasonable and customary
regular fees to directors of the Company who are not employees of the Company;
(iii) any Restricted Payments not prohibited by the "Limitation on Restricted
Payments" covenant; (iv) loans and advances to officers or employees of the
Company and its Subsidiaries not exceeding at any one time outstanding $1.5
million in the aggregate, made in the ordinary course of business; and (v)
arrangements with TMG, Armstrong and/or its subsidiaries existing on the date
of the Indenture and listed on a schedule attached thereto as such arrangement
may be extended or renewed; provided that the terms of any arrangement altered
by any such extension or renewal may not be altered in a manner adverse to the
Company or the holders of the Notes. (Section 1015)
Limitation on Liens.
Under the terms of the Indenture, the Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Lien (other than Permitted Liens) on any of its assets or
properties of any character (including, without limitation, licenses and
trademarks), or any shares of Capital Stock or Indebtedness of any Restricted
Subsidiary, whether owned at the date of the Indenture or thereafter acquired,
or any income, profits or proceeds therefrom, or assign or otherwise convey
any right to receive income thereof, without making effective provision for
all of the Notes and all other amounts ranking pari passu with the Notes to be
directly secured equally and ratably with the obligation or liability secured
by such Lien, or, if such obligation or liability is subordinated to the Notes
and other amounts ranking pari passu with the Notes, without making provision
for the Notes and such other amounts to be directly secured prior to the
obligation or liability secured by such Lien. (Section 1016)
Limitation on Sale-Leaseback Transactions.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, enter into any Sale-Leaseback Transaction with respect to any property of
the Company or any of its Restricted Subsidiaries.
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Notwithstanding the foregoing, the Company may enter into Sale-Leaseback
Transactions; provided, however, that (a) the Attributable Value of such Sale-
Leaseback Transaction shall be deemed to be Indebtedness of the Company and
(b) after giving pro forma effect to any such Sale-Leaseback Transaction and
the foregoing clause (a), the Company would be able to incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant described under "--Limitation on Indebtedness."
Limitation on Asset Sales.
The Company will not, and will not permit any Restricted Subsidiary to, make
any Asset Sale, unless (i) the Company or the Restricted Subsidiary, as the
case may be, receives consideration at the time of such sale or other
disposition at least equal to the fair market value of the assets sold or
disposed of as determined by the good faith judgment of the Board of Directors
evidenced by a Board Resolution and (ii) at least 80.0% of the consideration
received for such sale or other disposition consists of cash or cash
equivalents or the assumption of unsubordinated Indebtedness.
The Company shall, or shall cause the relevant Restricted Subsidiary to,
within 270 days after the date of receipt of the Net Cash Proceeds from an
Asset Sale, (i) (A) apply an amount equal to such Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company or Indebtedness
of any Restricted Subsidiary, in each case owing to a Person other than the
Company or any of its Restricted Subsidiaries or (B) invest an equal amount,
or the amount not so applied pursuant to clause (A), in property or assets of
a nature or type or that are used in a business (or in a company having
property and assets of a nature or type, or engaged in a business) similar or
related to the nature or type of the property and assets of, or the business
of, the Company and its Restricted Subsidiaries existing on the date of such
investment (as determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) and
(ii) apply (no later than the end of the 270-day period referred to above)
such excess Net Cash Proceeds (to the extent not applied pursuant to clause
(i)) as provided in the following paragraphs of this "Limitation on Asset
Sales" covenant. The amount of such Net Cash Proceeds required to be applied
(or to be committed to be applied) during such 270-day period referred to
above in the preceding sentence and not applied as so required by the end of
such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as
defined below) totals at least $10.0 million, the Company must, not later than
the 30th Business Day thereafter, make an offer (an "Excess Proceeds Offer")
to purchase from the holders on a pro rata basis an aggregate principal amount
of Notes equal to the Excess Proceeds on such date, at a purchase price equal
to 100% of the principal amount of the Notes, plus, in each case, accrued and
unpaid interest and Liquidated Damages, if any, to the date of purchase (the
"Excess Proceeds Payment").
The Company shall commence an Excess Proceeds Offer by mailing a notice to
the Trustee and each holder stating: (i) that the Excess Proceeds Offer is
being made pursuant to this "Limitation on Asset Sales" covenant and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is
mailed), (the "Excess Proceeds Payment Date"); (iii) that any Note not
tendered will continue to accrue interest pursuant to its terms; (iv) that,
unless the Company defaults in the payment of the Excess Proceeds Payment, any
Note accepted for payment pursuant to the Excess Proceeds Offer shall cease to
accrue interest and Liquidated Damages, if any, on and after the Excess
Proceeds Payment Date; (v) that holders electing to have a Note purchased
pursuant to the Excess Proceeds Offer will be required to surrender the Note,
together with the form entitled "Option of the Holder to Elect Purchase" on
the reverse side of the Note completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the Business Day
immediately preceding the Excess Proceeds Payment Date; (vi) that holders will
be entitled to withdraw their election if the Paying Agent receives, not later
than the close of business on the third Business Day immediately preceding the
Excess Proceeds Payment Date, a telegram, facsimile transmission or letter
setting forth the name of such holder, the principal amount of Notes delivered
for purchase and a statement that such holder is withdrawing his election to
have such Notes purchased; and (vii) that holders whose Notes are being
purchased
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only in part will be issued new Notes equal in principal amount to the
unpurchased portion of the Notes surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof.
On the Excess Proceeds Payment Date, the Company shall (i) accept for
payment on a pro rata basis Notes or portions thereof tendered pursuant to the
Excess Proceeds Offer; (ii) deposit with the Paying Agent money sufficient to
pay the purchase price of all Notes or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the Trustee all Notes or portions
thereof so accepted together with an Officers' Certificate specifying the
Notes or portions thereof accepted for payment by the Company. The Paying
Agent shall promptly mail to the holders of Notes so accepted payment in an
amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. To the extent that the aggregate principal amount
of Notes tendered is less than the Excess Proceeds, the Company may use any
remaining Excess Proceeds for general corporate purposes. The Company will
publicly announce the results of the Excess Proceeds Offer as soon as
practicable after the Excess Proceeds Payment Date. For purposes of this
"Limitation on Asset Sales" covenant, the Trustee shall act as the Paying
Agent.
The Company will comply with Rule 14e-1 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that such Excess Proceeds are received by the Company under this
"Limitation on Asset Sales" covenant and the Company is required to repurchase
Notes as described above. (Section 1017)
Limitation on Issuances of Guarantees of Indebtedness by Restricted
Subsidiaries.
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee, assume or in any other manner become liable with
respect to any Indebtedness of the Company, other than Indebtedness under
Credit Facilities incurred under clause (iii) of paragraph (b) in the
"Limitation on Indebtedness" covenant, unless (i) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Guarantee of the Notes on terms substantially similar to the
guarantee of such Indebtedness, except that if such Indebtedness is by its
express terms subordinated in right of payment to the Notes, any such
assumption, Guarantee or other liability of such Restricted Subsidiary with
respect to such Indebtedness shall be subordinated in right of payment to such
Restricted Subsidiary's assumption, Guarantee or other liability with respect
to the Notes substantially to the same extent as such Indebtedness is
subordinated to the Notes and (ii) such Restricted Subsidiary waives, and will
not in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Guarantee.
Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary may
provide by its terms that it will be automatically and unconditionally
released and discharged upon (i) any sale, exchange or transfer, to any Person
not an Affiliate of the Company, of all of the Company's and each Restricted
Subsidiary's Capital Stock in, or all or substantially all of the assets of,
such Restricted Subsidiary (which sale, exchange or transfer is not prohibited
by the Indenture) or (ii) the release or discharge of the guarantee which
resulted in the creation of such Guarantee, except a discharge or release by
or as a result of payment under such Guarantee. (Section 1018)
Business of the Company; Restriction on Transfers of Existing Business.
The Company will not, and will not permit any Restricted Subsidiary to, be
principally engaged in any business or activity other than a Permitted
Business. In addition, the Company and any Restricted Subsidiary will not be
permitted to, directly or indirectly, transfer to any Unrestricted Subsidiary
(i) any of the licenses, material agreements or instruments, permits or
authorizations used in the Permitted Business of the Company and any
Restricted Subsidiary on the Closing Date or (ii) any material portion of the
"property and equipment" (as such term is used in the Company's consolidated
financial statements) of the Company or any Restricted
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Subsidiary used in the licensed service areas of the Company and any
Restricted Subsidiary as they exist on the Closing Date. (Section 1019)
Limitation on Investments in Unrestricted Subsidiaries.
The Company will not make, and will not permit any of its Restricted
Subsidiaries to make, any Investments in Unrestricted Subsidiaries if, at the
time thereof, the aggregate amount of such Investments would exceed the amount
of Restricted Payments then permitted to be made pursuant to the "Limitation
on Restricted Payments" covenant. Any Investments in Unrestricted Subsidiaries
permitted to be made pursuant to this covenant (i) will be treated as the
making of a Restricted Payment in calculating the amount of Restricted
Payments made by the Company or a Subsidiary and (ii) may be made in cash or
property (if made in property, the Fair Market Value thereof as determined by
the Board of Directors of the Company (whose determination shall be conclusive
and evidenced by a Board Resolution) shall be deemed to be the amount of such
Investment for the purpose of clause (i)). (Section 1020)
Provision of Financial Statements and Reports.
After the Company has completed the Exchange Offer, the Company will file on
a timely basis with the Commission, to the extent such filings are accepted by
the Commission and whether or not the Company has a class of securities
registered under the Exchange Act, the annual reports, quarterly reports and
other documents that the Company would be required to file if it were subject
to Section 13 or 15 of the Exchange Act. All such annual reports shall include
the geographic segment financial information required to be disclosed by the
Company under Item 101(d) of Regulation S-K under the Securities Act. The
Company will also be required (a) to file with the Trustee, and provide to
each holder, without cost to such holder, copies of such reports and documents
within 15 days after the date on which the Company files such reports and
documents with the Commission or the date on which the Company would be
required to file such reports and documents if the Company were so required
and (b) if filing such reports and documents with the Commission is not
accepted by the Commission or is prohibited under the Exchange Act, to supply
at the Company's cost copies of such reports and documents to any prospective
holder promptly upon request. (Section 1009)
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder shall have the right
to require the Company to repurchase all or any part of its Notes at a
purchase price in cash pursuant to the offer described below (the "Change of
Control Offer") equal to 101.0% of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any, to the date of purchase
(subject to the right of holders of record to receive interest on the relevant
Interest Payment Date) (the "Change of Control Payment").
Within 30 days of the Change of Control, the Company will mail a notice to
the Trustee and each holder stating, among other things: (i) that a Change of
Control has occurred, that the Change of Control Offer is being made pursuant
to this "Repurchase of Notes upon a Change of Control" covenant and that all
Notes validly tendered will be accepted for payment; (ii) the circumstances
and relevant facts regarding such Change of Control; (iii) the purchase price
and the date of purchase (which shall be a Business Day no earlier than 30
days nor later than 60 days from the date such notice is mailed) (the "Change
of Control Payment Date"); (iv) that any Note not tendered will continue to
accrue interest pursuant to its terms; (v) that, unless the Company defaults
in the payment of the Change of Control Payment, any Note accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest and
Liquidated Damages, if any, on and after the Change of Control Payment Date;
(vi) that holders electing to have any Note or portion thereof purchased
pursuant to the Change of Control Offer will be required to surrender such
Note, together with the form entitled "Option of the Holder to Elect Purchase"
on the reverse side of such Note completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the Business Day
immediately preceding the Change of Control Payment Date; (vii) that holders
will be entitled to withdraw their election if the Paying Agent receives, not
later
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than the close of business on the third Business Day immediately preceding the
Change of Control Payment Date, a telegram, facsimile transmission or letter
setting forth the name of such holder, the principal amount of Notes delivered
for purchase and a statement that such holder is withdrawing his election to
have such Notes purchased; and (viii) that holders whose Notes are being
purchased only in part will be issued new Notes equal in principal amount to
the unpurchased portion of the Notes surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof.
On the Change of Control Payment Date, the Company shall: (i) accept for
payment Notes or portions thereof tendered pursuant to the Change of Control
Offer; (ii) deposit with the Paying Agent money sufficient to pay the purchase
price of all Notes or portions thereof so accepted; and (iii) deliver, or
cause to be delivered, to the Trustee, all Notes or portions thereof so
accepted together with an Officer's Certificate specifying the Notes or
portions thereof accepted for payment by the Company. The Paying Agent shall
promptly mail, to the holders of Notes so accepted, payment in an amount equal
to the purchase price, and the Trustee shall promptly authenticate and mail to
such holders a new Note equal in principal amount to any unpurchased portion
of the Notes surrendered; provided that each Note purchased and each new Note
issued shall be in a principal amount of $1,000 or integral multiples thereof.
The Company will publicly announce the results of the Change of Control Offer
on or as soon as practicable after the Change of Control Payment Date. For
purposes of this "Repurchase of Notes upon a Change of Control" covenant, the
Trustee shall act as Paying Agent.
The Company shall not be required to make a Change of Control Offer upon a
Change of Control if a third party makes a Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements
applicable to a Change of Control Offer made by the Company and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
The Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in the event that a Change of Control occurs and
the Company is required to repurchase the Notes under this "Repurchase of
Notes upon a Change of Control" covenant. (Section 1010)
If the Company is unable to repay all of its Indebtedness that would
prohibit repurchase of the Notes or is unable to obtain the consents of the
holders of Indebtedness, if any, of the Company outstanding at the time of a
Change of Control whose consent would be so required to permit the repurchase
of Notes, then the Company will have breached such covenant. This breach will
constitute an Event of Default under the Indenture if it continues for a
period of 30 consecutive days after written notice is given to the Company by
the Trustee or the holders of at least 25.0% in aggregate principal amount of
the Notes outstanding. In addition, the failure by the Company to repurchase
Notes at the conclusion of the Change of Control Offer will constitute an
Event of Default without any waiting period or notice requirements.
There can be no assurances that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well
as may be contained in other securities or Indebtedness of the Company which
might be outstanding at the time). The above covenant requiring the Company to
repurchase the Notes will, unless the consents referred to above are obtained,
require the Company to repay all indebtedness then outstanding which by its
terms would prohibit such Note repurchase, either prior to or concurrently
with such Note repurchase.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company and the Company will not permit any
of its Restricted Subsidiaries to enter into any such transaction or series of
transactions if such transaction or series of transactions, in the aggregate,
would result in the sale, assignment, conveyance, transfer, lease or other
disposition of all or substantially all of the properties and assets
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of the Company or the Company and its Restricted Subsidiaries, taken as a
whole, to any other Person or Persons, unless: (i) either the Company will be
the continuing Person, or the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or that acquired or
leased such property and assets of the Company will be a corporation organized
and validly existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, all of the obligations of the Company
with respect to the Notes and under the Indenture; (ii) immediately after
giving effect to such transaction on a pro forma basis, no Default or Event of
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction on a pro forma basis, the Company, or any Person
becoming the successor obligor of the Notes, shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a pro forma basis, the Company, or any Person becoming the
successor obligor of the Notes, as the case may be, could Incur at least $1.00
of Indebtedness under paragraph (a) of the "Limitation on Indebtedness"
covenant; and (v) the Company delivers to the Trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with clauses
(iii) and (iv)) and an Opinion of Counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture complies
with this provision and that all conditions precedent provided for herein
relating to such transaction have been complied with; provided, however, that
clauses (iii) and (iv) above do not apply if, in the good faith determination
of the Board of Directors of the Company, whose determination shall be
evidenced by a Board Resolution, the principal purpose of such transaction is
to change the state of incorporation of the Company; and provided further that
any such transaction shall not have as one of its purposes the evasion of the
foregoing limitations. (Section 801)
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (a) default in the payment of interest or Liquidated Damages, if
any, on the Notes when due and payable as to any Interest Payment Date falling
on or prior to January 15, 2001; (b) default in the payment of interest or
Liquidated Damages, if any, on the Notes when due and payable as to any
Interest Payment Date following after January 15, 2001, and any such failure
continued for a period of 30 days; (c) default in the payment of principal of
(or premium, if any, on) any Note when the same becomes due and payable at
maturity, upon acceleration, redemption or otherwise; (d) default in the
payment of principal or interest or Liquidated Damages, if any, on Notes
required to be purchased pursuant to an Excess Proceeds Offer as described
under "Limitation on Asset Sales" or pursuant to a Change of Control Offer as
described under "Repurchase of Notes upon a Change of Control"; (e) failure to
perform or comply with the provisions described under "Consolidation, Merger
and Sale of Assets"; (f) default in the performance of or breach of any other
covenant or agreement of the Company in the Indenture or under the Notes and
such default or breach continues for a period of 30 consecutive days after
written notice by the Trustee or the holders of 25.0% or more in aggregate
principal amount of the Notes then outstanding; (g) there occurs with respect
to any issue or issues of Indebtedness of the Company or any Restricted
Subsidiary having an outstanding principal amount of $5.0 million or more in
the aggregate for all such issues of all such Persons, whether such
Indebtedness now exists or shall hereafter be created, (I) an event of default
that has caused the holder thereof to declare such Indebtedness to be due and
payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled by
expiration of any applicable grace period and/or (II) the failure to make a
principal payment at the final (but not any interim) fixed maturity date
thereon and such defaulted payment shall not have been made, waived or
extended by the expiration of any applicable grace period; (h) any final
judgment or order (not covered by insurance) for the payment of money in
excess of $5.0 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or
retention as not so covered) shall be rendered against the Company or any
Restricted Subsidiary and shall not be paid or discharged, and there shall be
any period of 30 consecutive days following entry of the final judgment or
order that causes the aggregate amount for all such final judgments or orders
outstanding and not paid or discharged against all such Persons to exceed $5.0
million during which a stay of enforcement of such final judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect; (i) a court
having jurisdiction in the premises enters a decree or order
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for (A) relief in respect of the Company or any of its Significant
Subsidiaries in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, (B) appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Company or any of its Significant Subsidiaries or for all or
substantially all of the property and assets of the Company or any of its
Significant Subsidiaries or (C) the winding up or liquidation of the affairs
of the Company or any of its Significant Subsidiaries and, in each case, such
decree or order shall remain unstayed and in effect for a period of 30
consecutive days; (j) the Company or any of its Significant Subsidiaries (A)
commences a voluntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, or consents to the entry of an
order for relief in an involuntary case under any such law, (B) consents to
the appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any of
its Significant Subsidiaries or for all or substantially all of the property
and assets of the Company or any of its Significant Subsidiaries or (C)
effects any general assignment for the benefit of creditors; or (k) the
Company asserts in writing that the Pledge Agreement ceases to be in full
force and effect before payment in full of the obligations thereunder.
(Section 501)
If an Event of Default (other than an Event of Default specified in clause
(i) or (j) above) occurs and is continuing under the Indenture, the Trustee or
the holders of at least 25% in aggregate principal amount of the Notes then
outstanding, by written notice to the Company (and to the Trustee if such
notice is given by the holders), may, and the Trustee at the request of such
holders shall, declare the principal of, premium, if any, accrued and unpaid
interest and Liquidated Damages, if any, on the Notes to be immediately due
and payable. Upon a declaration of acceleration, such principal of, premium,
if any, accrued interest and Liquidated Damages, if any, shall become
immediately due and payable. In the event of a declaration of acceleration
because an Event of Default set forth in clause (g) above has occurred and is
continuing, such declaration of acceleration shall be automatically rescinded
and annulled if the default triggering such Event of Default pursuant to
clause (g) shall be remedied or cured by the Company and/or the relevant
Significant Subsidiaries or waived by the holders of the relevant Indebtedness
within 60 days after the declaration of acceleration with respect thereto. If
an Event of Default specified in clause (i) or (j) above occurs, the principal
of, premium, if any, accrued interest and Liquidated Damages, if any, on the
Notes then outstanding shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
holder. The holders of at least a majority in aggregate principal amount of
the outstanding Notes, by written notice to the Company and to the Trustee,
may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if (i) all existing Events of Default, other
than the nonpayment of the principal of, premium, if any, accrued and unpaid
interest and Liquidated Damages, if any, on the Notes that have become due
solely by such declaration of acceleration, have been cured or waived (subject
to certain limitations) and (ii) the rescission, in the opinion of counsel,
would not conflict with any judgment or decree of a court of competent
jurisdiction. For information as to the waiver of defaults, see "--
Modification and Waiver." (Section 502)
The holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the
Trustee in personal liability, or that the Trustee determines in good faith
may be unduly prejudicial to the rights of holders of Notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from holders of Notes. No
holder may pursue any remedy with respect to the Indenture or the Notes
unless: (i) the holder gives the Trustee written notice of a continuing Event
of Default; (ii) the holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the remedy;
(iii) such holder or holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability or expense; (iv) the Trustee does not
comply with the request within 60 days after receipt of the request and the
offer of indemnity; and (v) during such 60-day period, the holders of a
majority in aggregate principal amount of the outstanding Notes do not give
the Trustee a direction that is inconsistent with the request. However, such
limitations do not apply to the right of any holder of a Note to receive
payment of the principal of, premium, if any, interest or Liquidated Damages,
if any, on, such Note or to bring suit for the enforcement of any such
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payment, on or after the due date expressed in the Notes, which right shall
not be impaired or affected without the consent of the holder. (Sections 507
and 508)
The Indenture will require certain officers of the Company to certify, on or
before a date not more than 120 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and the Company's
performance under the Indenture and that the Company has fulfilled all
obligations thereunder or, if there has been a default in the fulfillment of
any such obligation, specifying each such default and the nature and status
thereof. The Company will also be obligated to notify the Trustee of any
default or defaults in the performance of any covenants or agreements under
the Indenture. For these purposes, such compliance shall be determined without
regard to any grace period or notice requirement under the Indenture. (Section
1008)
DEFEASANCE AND COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company upon the Notes discharged with respect to the
outstanding Notes ("defeasance"). Such defeasance means that the Company will
be deemed to have paid and discharged the entire Indebtedness represented by
the outstanding Notes and to have satisfied all its other obligations under
such Notes and the Indenture insofar as such Notes are concerned except for
(i) the rights of holders of outstanding Notes to receive payments (solely
from monies deposited in trust) in respect of the principal of, premium, if
any, interest and Liquidated Damages, if any, on such Notes when such payments
are due, (ii) the Company's obligations to issue temporary Notes, register the
transfer or exchange of any Notes, replace mutilated, destroyed, lost or
stolen Notes, maintain an office or agency for payments in respect of the
Notes and segregate and hold such payments in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee and (iv) the defeasance
provisions of the Indenture. In addition, the Company may, at its option and
at any time, elect to have the obligations of the Company released with
respect to certain covenants and other provisions set forth in the Indenture,
and any omission to comply with such obligations will not constitute a Default
or an Event of Default with respect to the Notes ("covenant defeasance").
(Sections 1301, 1302 and 1303)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated
solely to, the benefit of the holders of the Notes, cash in United States
dollars, U.S. Government Obligations (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion of
a nationally recognized firm of independent public accountants, to pay and
discharge the principal of, premium, if any, and interest and Liquidated
Damages, if any, on the outstanding Notes on the Stated Maturity (or upon
redemption, if applicable) of such principal, premium, if any, or installment
of interest and Liquidated Damages, if any; (ii) no Default or Event of
Default with respect to the Notes will have occurred and be continuing on the
date of such deposit or, insofar as an event of bankruptcy under clause (i) or
(j) of "Events of Default" above is concerned, at any time during the period
ending on the 123rd day after the date of such deposit; (iii) such defeasance
or covenant defeasance will not result in a breach or violation of, or
constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company is a party or by which it is bound; (iv)
in the case of defeasance, the Company shall have delivered to the Trustee an
Opinion of Counsel stating that the Company has received from, or there has
been published by, the Internal Revenue Service a ruling, or since January 15,
1998, there has been a change in applicable federal income tax law, in either
case to the effect that, and based thereon such opinion shall confirm that,
the holders of the outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such defeasance had not
occurred; (v) in the case of covenant defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel to the effect that the holders
of the Notes outstanding will not recognize income, gain or loss for federal
income tax purposes as a result of such covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such covenant defeasance had not
occurred; and (vi) the Company shall have delivered to the Trustee an
Officer's Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for relating to either the defeasance or the
covenant defeasance, as the case may be, have been complied with. (Section
1304)
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SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (A) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or repaid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held by the Company and thereafter repaid to the Company or
discharged from such trust) have been delivered to the Trustee for
cancellation or (B) all Notes not theretofore delivered to the Trustee for
cancellation (except lost, stolen or destroyed Notes which have been replaced
or paid) have become due and payable and the Company has irrevocably deposited
or caused to be deposited with the Trustee funds in an amount sufficient to
pay and discharge the entire Indebtedness on the Notes not theretofore
delivered to the Trustee for cancellation, for principal of, premium, if any,
interest and Liquidated Damages, if any, on the Notes to the date of deposit
together with irrevocable instructions from the Company directing the Trustee
to apply such funds to the payment thereof at maturity or redemption, as the
case may be; (ii) the Company had paid all other sums payable under the
Indenture by the Company; and (iii) the Company has delivered to the Trustee
an officers' certificate and an opinion of counsel stating that all conditions
precedent under the Indenture relating to the satisfaction and discharge of
the Indenture have been complied with.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that
no such modification or amendment may, without the consent of each holder
affected thereby, (i) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, (ii) reduce the principal amount of, or
premium, if any, or interest on any Note or extend the time for payment of
interest on, or alter the redemption provisions of, any Note, (iii) change the
place or currency of payment of principal of, or premium, if any, or interest
on any Note, (iv) impair the right of any holder of the Notes to receive
payment of, principal of and interest on such holder's Notes on or after the
due dates therefor or to institute suit for the enforcement of any payment on
or after the Stated Maturity (or, in the case of a redemption, on or after the
Redemption Date) of any Note, (v) reduce the above-stated percentage of
outstanding Notes the consent of whose holders is necessary to modify, amend,
waive, supplement or consent to take any action under the Indenture or the
Notes, (vi) waive a default in the payment of principal of, premium, if any,
or accrued and unpaid interest or Liquidated Damages, if any, on the Notes,
(vii) reduce or change the rate or time for payment of interest on the Notes,
(viii) reduce or change the rate or time for payment of Liquidated Damages, if
any, (ix) modify any provisions of any Guarantees in a manner adverse to the
holders or (x) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose holders is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults.
GOVERNING LAW AND SUBMISSION TO JURISDICTION
The Notes and the Indenture are governed and construed in accordance with
the laws of the State of New York. The Company submits to the jurisdiction of
the U.S. federal and New York state courts located in the Borough of
Manhattan, City and State of New York for purposes of all legal actions and
proceedings instituted in connection with the Notes and the Indenture.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; provided, however, if the Trustee acquires any
conflicting interest, it must eliminate such conflict as soon as practicable,
but in any event within 90 days.
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The holders of a majority in aggregate principal amount of the outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other
capitalized term used herein for which no definition is provided.
"Acquired Indebtedness" is defined to mean Indebtedness of a Person existing
at the time such Person becomes a Restricted Subsidiary or assumed in
connection with an Asset Acquisition by the Company or a Restricted Subsidiary
and not incurred in connection with, or in anticipation of, such Person
becoming a Restricted Subsidiary or such Asset Acquisition; provided that
Indebtedness of such Person which is redeemed, defeased, retired or otherwise
repaid at the time of or immediately upon the consummation of the transactions
by which such Person becomes a Restricted Subsidiary or such Asset Acquisition
shall not be considered as Indebtedness.
"Affiliate" is defined to mean, as applied to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as applied to any Person, is defined to
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such Person, whether through
the ownership of voting securities, by contract or otherwise.
"Asset Acquisition" is defined to mean (i) an investment by the Company or
any of its Restricted Subsidiaries in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or shall be merged
into or consolidated with the Company or any of its Restricted Subsidiaries or
(ii) an acquisition by the Company or any of its Restricted Subsidiaries of
the property and assets of any Person (other than the Company or any of its
Restricted Subsidiaries) that constitute substantially all of a division or
line of business of such Person.
"Asset Disposition" is defined to mean the sale or other disposition by the
Company or any of its Restricted Subsidiaries (other than to the Company or
another Restricted Subsidiary of the Company) of (i) all or substantially all
of the Capital Stock of any Restricted Subsidiary of the Company or (ii) all
or substantially all of the assets that constitute a division or line of
business of the Company or any of its Restricted Subsidiaries.
"Asset Sale" is defined to mean any sale, transfer or other disposition
(including by way of merger, consolidation or sale-leaseback transactions) in
one transaction or a series of related transactions by the Company or any of
its Restricted Subsidiaries to any Person (other than the Company or any of
its Restricted Subsidiaries) of (i) all or any of the Capital Stock of any
Restricted Subsidiary (other than in respect of any director's qualifying
shares or investments by foreign nationals mandated by applicable law), (ii)
all or substantially all of the property and assets of an operating unit or
business of the Company or any of its Restricted Subsidiaries or (iii) any
other property and assets of the Company or any of its Restricted Subsidiaries
outside the ordinary course of business of the Company or such Restricted
Subsidiary and, in each case, that is not governed by the provisions of the
Indenture applicable to mergers, consolidations and sales of assets of the
Company and which, in the case of any of clause (i), (ii) or (iii) above,
whether in one transaction or a series of related transactions, (a) have a
fair market value in excess of $1.0 million or (b) are for net proceeds in
excess of $1.0 million; provided that sales or other dispositions of
inventory, receivables and other current assets in the ordinary course of
business shall not be included within the meaning of "Asset Sale."
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"Attributable Value" is defined to mean, as to any particular lease under
which any Person is at the time liable other than a Capitalized Lease
Obligation, and at any date as of which the amount thereof is to be
determined, the total net amount of rent required to be paid by such person
under such lease during the remaining term thereof (whether or not such lease
is terminable at the option of the lessee prior to the end of such term),
including any period for which such lease has been, or may, at the option of
the lessor, be extended, discounted from the last date of such term to the
date of determination at a rate per annum equal to the discount rate which
would be applicable to a Capitalized Lease Obligation with like term in
accordance with GAAP. The net amount of rent required to be paid under any
lease for any such period shall be the aggregate amount of rent payable by the
lessee with respect to such period after excluding amounts required to be paid
on account of insurance, taxes, assessments, utility, operating and labor
costs and similar charges. "Attributable Value" means, as to a Capitalized
Lease Obligation under which any Person is at the time liable and at any date
as of which the amount thereof is to be determined, the capitalized amount
thereof that would appear on the face of a balance sheet of such Person in
accordance with GAAP.
"Average Life" is defined to mean, with respect to any Indebtedness, as at
any date of determination, the quotient obtained by dividing (i) the sum of
the products of (a) the number of years from such date to the date or dates of
each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness and (b) the amount of each
such principal payment by (ii) the sum of all such principal payments.
"Board of Directors" is defined to mean the board of directors of the
Company or its equivalent, including managers of a limited liability company,
general partners of a partnership or trustees of a business trust, or any duly
authorized committee thereof.
"Capital Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations, rights in or other equivalents (however
designated, whether voting or non-voting) in equity of such Person, whether
now outstanding or issued after the date of the Indenture, including, without
limitation, all Common Stock and Preferred Stock.
"Capitalized Lease Obligation" is defined to mean any obligation under a
lease of (or other agreement conveying the right to use) any property (whether
real, personal or mixed) that is required to be classified and accounted for
as a capital lease obligation under GAAP, and, for the purpose of the
Indenture, the amount of such obligation at any date shall be the capitalized
amount thereof at such date, determined in accordance with GAAP.
"Change of Control" is defined to mean such time as (i) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange
Act) (other than Armstrong or FMG) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of more than 50.0% of the total
voting power of the then outstanding Voting Stock of the Company on a fully
diluted basis; (ii) individuals who at the beginning of any period of two
consecutive calendar years constituted the Board of Directors (together with
any directors who are members of the Board of Directors on the date hereof and
any new directors whose election by the Board of Directors or whose nomination
for election by the Company's stockholders was approved by a vote of at least
two-thirds of the members of the Board of Directors then still in office who
either were members of the Board of Directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the members of such board of
directors then in office; (iii) the sale, lease, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a series
of related transactions, of all or substantially all of the assets of the
Company and its Subsidiaries taken as a whole to any such "person" or "group"
(other than to the Company or a Restricted Subsidiary); (iv) the merger or
consolidation of the Company with or into another corporation or the merger of
another corporation with or into the Company in one or a series of related
transactions with the effect that immediately after such transaction any such
"person" or "group" of persons or entities shall have become the beneficial
owner of securities of the surviving corporation of such merger or
consolidation representing a
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majority of the total voting power of the then outstanding Voting Stock of the
surviving corporation; or (v) the adoption of a plan relating to the
liquidation or dissolution of the Company.
"Closing Date" is defined to mean the date on which the Notes are originally
issued under the Indenture.
"Common Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations, rights in or other equivalents (however
designated, whether voting or non-voting) of such Person's common stock,
whether now outstanding or issued after the date of the Indenture, including,
without limitation, all series and classes of such common stock.
"Consolidated Cash Flow" is defined to mean, for any period, the sum of the
amounts for such period of (i) Consolidated Net Income, (ii) Consolidated
Interest Expense, (iii) income taxes, to the extent such amount was deducted
in calculating Consolidated Net Income (other than income taxes (either
positive or negative) attributable to extraordinary and non-recurring gains or
losses or sales of assets), (iv) depreciation expense, to the extent such
amount was deducted in calculating Consolidated Net Income, (v) amortization
expense, to the extent such amount was deducted in calculating Consolidated
Net Income, and (vi) all other non-cash items reducing Consolidated Net Income
(excluding any non-cash charge to the extent that it represents an accrual of
or reserve for cash charges in any future period), less all non-cash items
increasing Consolidated Net Income, all as determined on a consolidated basis
for the Company and its Restricted Subsidiaries in conformity with GAAP.
"Consolidated Fixed Charges" is defined to mean, for any period,
Consolidated Interest Expense plus dividends declared and payable on Preferred
Stock.
"Consolidated Interest Expense" is defined to mean, for any period, the
aggregate amount of interest in respect of Indebtedness (including capitalized
interest, amortization of original issue discount on any Indebtedness and the
interest portion of any deferred payment obligation, calculated in accordance
with the effective interest method of accounting; all commissions, discounts
and other fees and charges owed with respect to letters of credit and bankers'
acceptance financing; the net costs associated with Interest Rate Agreements;
and interest on Indebtedness that is Guaranteed or secured by the Company or
any of its Restricted Subsidiaries) and all but the principal component of
rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled
to be paid or to be accrued by the Company and its Restricted Subsidiaries
during such period.
"Consolidated Net Income" means, with respect to any Person, for any period,
the consolidated net income (or loss) of such Person and its Restricted
Subsidiaries for such period as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income, by excluding, without
duplication, (i) all extraordinary gains or losses, (ii) net income (or loss)
of any Person combined in such Person or one of its Restricted Subsidiaries on
a "pooling of interests" basis attributable to any period prior to the date of
combination, (iii) gains or losses (on an after-tax basis) in respect of any
Asset Sales by such Person or one of its Restricted Subsidiaries, (iv) the net
income of any Restricted Subsidiary of such Person to the extent that the
declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulations
applicable to that Restricted Subsidiary or its stockholders, (v) any gain or
loss realized as a result of the cumulative effect of a change in accounting
principles, (vi) any amount paid or accrued as dividends on Preferred Stock of
the Company or Preferred Stock of any Restricted Subsidiary owned by Persons
other than the Company and any of its Restricted Subsidiaries and (vii) the
net income (or loss) of any Person (other than net income (or loss)
attributable to a Restricted Subsidiary) in which any Person (other than the
Company or any of its Restricted Subsidiaries) has a joint interest, except to
the extent of the amount of dividends or other distributions actually paid to
the Company or any of its Restricted Subsidiaries by such other Person during
such period.
"Consolidated Net Worth" is defined to mean, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of the Company and its Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation), less any
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amounts attributable to Redeemable Stock or any equity security convertible
into or exchangeable for Indebtedness, the cost of treasury stock and the
principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Subsidiaries, each item to be
determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Credit Facilities" is defined to mean one or more debt facilities or
commercial paper facilities with banks or other institutional lenders
providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special
purpose entities formed to borrow from such lenders against such receivables)
or letters of credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.
"Cumulative Consolidated Cash Flow" is defined to mean, for the period
beginning on the Closing Date through and including the end of the last fiscal
quarter (taken as one accounting period) preceding the date of any proposed
Restricted Payment, Consolidated Cash Flow of the Company and its Restricted
Subsidiaries for such period determined on a consolidated basis in accordance
with GAAP.
"Cumulative Consolidated Fixed Charges" are defined to mean the Consolidated
Fixed Charges of the Company and its Restricted Subsidiaries for the period
beginning on the Closing Date through and including the end of the last fiscal
quarter (taken as one accounting period) preceding the date of any proposed
Restricted Payment, determined on a consolidated basis in accordance with
GAAP.
"Cumulative Consolidated Interest Expense" is defined to mean, for the
period beginning on the Closing Date through and including the end of the last
fiscal quarter (taken as one accounting period) preceding the date of any
proposed Restricted Payment, Consolidated Interest Expense of the Company and
its Restricted Subsidiaries for such period determined on a consolidated basis
in accordance with GAAP.
"Currency Agreement" is defined to mean any foreign exchange contract,
currency swap agreement and any other arrangement and agreement designed to
provide protection against fluctuations in currency (or currency unit) values.
"Default" is defined to mean any event that is, or after notice or passage
of time or both would be, an Event of Default.
"Eligible Accounts Receivable" is defined to mean the accounts receivable
(net of any reserves and allowances for doubtful accounts in accordance with
GAAP) of any Person that are not more than 60 days past their due date and
that were entered into in the ordinary course of business on normal payment
terms as shown on the most recent consolidated balance sheet of such Person
filed with the Commission, all in accordance with GAAP.
"Eligible Institution" is defined to mean a commercial banking institution
that has combined capital and surplus of not less than $500.0 million or its
equivalent in foreign currency, and has outstanding debt with a rating of "A-
3" or higher according to Moody's Investors Service, Inc., or "A-" or higher
according to Standard & Poor's Ratings Services (or such similar equivalent
rating by at least one "nationally recognized statistical rating organization"
(as defined in Rule 436 under the Securities Act)) at the time as of which any
investment or rollover therein is made.
"Event of Default" has the meaning set forth under "Events of Default"
herein.
"Fair Market Value" is defined to mean, with respect to any asset or
property, the sale value that would be obtained in an arm's length transaction
between an informed and willing seller under no compulsion to sell and an
informed and willing buyer under no compulsion to buy.
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"GAAP" is defined to mean generally accepted accounting principles in the
United States as in effect from time to time, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or
in such other statements by such other entity as approved by a significant
segment of the accounting profession of the United States.
"Guarantee" is defined to mean any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or other obligation of such other
Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement conditions or otherwise) or
(ii) entered into for purposes of assuring in any other manner the obligee of
such Indebtedness or other obligation of the payment thereof or to protect
such obligee against loss in respect thereof (in whole or in part); provided
that the term "Guarantee" shall not include endorsements for collection or
deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"Incur" or "Incurrence" is defined to mean, with respect to any
Indebtedness, to incur, create, issue, assume, Guarantee or otherwise become
liable for or with respect to, or become responsible for, the payment of,
contingently or otherwise, such Indebtedness, including an Incurrence of
Indebtedness by reason of the acquisition of more than 50.0% of the Capital
Stock of any Person; provided that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"Indebtedness" is defined to mean, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing
such property in service or taking delivery and title thereto or the
completion of such services, except Trade Payables, (v) all obligations of
such Person as lessee under Capitalized Lease Obligations and the Attributable
Value under any Sale-Leaseback Transaction of such Person, (vi) all
Indebtedness of other Persons secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person; provided that the
amount of such Indebtedness shall be the lesser of (A) the fair market value
of such asset at such date of determination or (B) the amount of such
Indebtedness, (vii) all Indebtedness of other Persons Guaranteed by such
Person to the extent such Indebtedness is Guaranteed by such Person, (viii)
the maximum fixed redemption or repurchase price of Redeemable Stock of such
Person at the time of determination and (ix) to the extent not otherwise
included in this definition, obligations under Currency Agreements and
Interest Rate Agreements. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and, with respect to contingent obligations, the maximum
liability upon the occurrence of the contingency giving rise to the
obligation; provided (x) that the amount outstanding at any time of any
Indebtedness issued with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP and (y) that Indebtedness shall not include any liability for federal,
state, local or other taxes.
"Interest Rate Agreement" is defined to mean interest rate swap agreements,
interest rate cap agreements, interest rate insurance, and other arrangements
and agreements designed to provide protection against fluctuations in interest
rates.
"Interest Rate Protection Obligations" is defined to mean the obligations of
any Person pursuant to any Interest Rate Agreements.
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"Investment" in any Person is defined to mean any direct or indirect
advance, loan or other extension of credit (including, without limitation, by
way of Guarantee or similar arrangement; but excluding advances to customers
in the ordinary course of business that are, in conformity with GAAP, recorded
as accounts receivable on the balance sheet of the Company or its Restricted
Subsidiaries) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
bonds, notes, debentures or other similar instruments issued by, such Person.
For purposes of the definition of "Unrestricted Subsidiary," the "Limitation
on Restricted Payments" covenant and the "Limitation on Issuance and Sale of
Capital Stock of Restricted Subsidiaries" covenant described above, (i)
"Investment" shall include (a) the fair market value of the assets (net of
liabilities) of any Restricted Subsidiary of the Company at the time that such
Restricted Subsidiary of the Company is designated an Unrestricted Subsidiary
and shall exclude the fair market value of the assets (net of liabilities) of
any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary of the Company and (b) the fair market
value, in the case of a sale of Capital Stock in accordance with the
"Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant such that a Person no longer constitutes a Restricted
Subsidiary, of the remaining assets (net of liabilities) of such Person after
such sale, and shall exclude the fair market value of the assets (net of
liabilities) of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary of the Company and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer, in each case as determined
by the Board of Directors in good faith.
"Lien" is defined to mean any mortgage, charge, pledge, security interest,
encumbrance, lien (statutory or other), hypothecation, assignment for
security, claim, or preference or priority or other encumbrance upon or with
respect to any property of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof, any sale with recourse against the seller or any Affiliate of the
seller, or any agreement to give any security interest).
"Marketable Securities" is defined to mean: (i) U.S. Government Obligations
which have a remaining weighted average life to maturity of not more than one
year from the date of Investment therein; (ii) any time deposit account, money
market deposit and certificate of deposit maturing not more than 180 days
after the date of acquisition issued by, or time deposit of, an Eligible
Institution; (iii) certificates of deposit, Eurodollar time deposits and
bankers' acceptances with maturity of 90 days or less and overnight bank
deposits of any financial institution that is organized under the laws of the
United States of America or any state hereof, and which bank or trust company
has capital, surplus and undivided profits aggregating in excess of $300.0
million (or, to the extent non-United States dollar-denominated, the United
States Dollar Equivalent of such amount) and has outstanding debt which is
rated "A" (or such similar equivalent rating) or higher by at least one
"nationally recognized statistical rating organization" (as defined in Rule
436 under the Securities Act); (iv) commercial paper maturing not more than
180 days after the date of acquisition issued by a corporation (other than an
Affiliate of the Company) with a rating, at the time as of which any
investment therein is made, of "P-1" or higher according to Moody's Investors
Service, Inc., or "A-1" or higher according to Standard & Poor's Ratings
Services (or such similar equivalent rating by at least one "nationally
recognized statistical rating organization" (as defined in Rule 436 under the
Securities Act)); (v) auction rate preferred securities whose rates are reset
based on market levels for a par security not more than 90 days after the date
of acquisition with a rating, at the time as of which any investment therein
is made, of "A-3" or higher according to Moody's Investors Service, Inc., or
"A-" or higher according to Standard & Poor's Ratings Services (or such
similar equivalent rating by at least one "nationally recognized statistical
rating organization" (as defined in Rule 436 under the Securities Act)) and
issued by a corporation that is not an Affiliate of the Company; (vi) any
banker's acceptance or money market deposit accounts issued or offered by an
Eligible Institution; (vii) repurchase obligations with a term of not more
than seven days for U.S. Government Obligations entered into with an Eligible
Institution; and (viii) any fund investing exclusively in investments of the
types described in clauses (i) through (vii) above.
"Net Cash Proceeds" is defined to mean (a) with respect to any Asset Sale,
the proceeds of such Asset Sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to
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the extent corresponding to the principal, but not interest, component
thereof) when received in the form of cash or cash equivalents (except to the
extent such obligations are financed or sold with recourse to the Company or
any Restricted Subsidiary of the Company) and proceeds from the conversion of
other property received when converted to cash or cash equivalents, net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of counsel and investment bankers) related to such Asset Sale, (ii) provisions
for all taxes payable as a result of such Asset Sale without regard to the
consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole (after taking into account any available
offsetting tax credits or deductions and any tax sharing arrangements), (iii)
payments made to repay Indebtedness or any other obligation outstanding at the
time of such Asset Sale that either (A) is secured by a Lien on the property
or assets sold or (B) is required to be paid as a result of such sale and (iv)
appropriate amounts to be provided by the Company or any Restricted Subsidiary
of the Company as a reserve against any liabilities associated with such Asset
Sale, including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset Sale, all as
determined in conformity with GAAP, and (b) with respect to any issuance or
sale of Capital Stock, the proceeds of such issuance or sale in the form of
cash or cash equivalents, including payments in respect of deferred payment
obligations (to the extent corresponding to the principal, but not interest,
component thereof) when received in the form of cash or cash equivalents
(except to the extent such obligations are financed or sold with recourse to
the Company or any Restricted Subsidiary of the Company) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Permitted Business" is defined to mean any business involving voice, data
and other telecommunications services.
"Permitted Investment" is defined to mean (i) an Investment in a Restricted
Subsidiary or a Person which will, upon the making of such Investment, become
a Restricted Subsidiary or be merged or consolidated with or into or transfer
or convey all or substantially all its assets to, the Company or a Restricted
Subsidiary; (ii) any Investment in Marketable Securities or Pledged
Securities; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP; (iv) loans or advances to officers and employees made
in the ordinary course of business that do not in the aggregate exceed $1.0
million at any time outstanding; (v) stock, obligations or securities received
in satisfaction of judgments; (vi) Investments in any Person received as
consideration for Asset Sales to the extent permitted under the "Limitation on
Asset Sales" covenant; (vii) Investments in any Person at any one time
outstanding (measured on the date each such Investment was made without giving
effect to subsequent changes in value) in an aggregate amount not to exceed
the greater of (A) $15.0 million or (B) 5.0% of the Company's total
consolidated assets; (viii) Investments in deposits with respect to leases or
utilities provided to third parties in the ordinary course of business; (ix)
Investments in Currency Agreements and Interest Rate Agreements on
commercially reasonable terms entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business in connection with
the operation of the business of the Company or its Restricted Subsidiaries;
provided that such agreements do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities
and compensation payable thereunder; (x) repurchases or redemptions by the
Company of Capital Stock from officers and other employees of the Company or
any of its Subsidiaries or their authorized representatives upon the death,
disability or termination of employment of such individuals, in an aggregate
amount not exceeding $1.0 million in any calendar year and $3.0 million from
the date of the Indenture; and (xi) Investments in evidences of Indebtedness,
securities or other property received from another Person by the Company or
any of its Restricted Subsidiaries in connection with any bankruptcy
proceeding or by reason of a composition or readjustment of debt or a
reorganization of such Person or as a result of foreclosure, perfection or
enforcement of any Lien in exchange for evidences of Indebtedness, securities
or other property of such Person held by the Company or any of its
Subsidiaries, or for other liabilities or obligations of such Person to the
Company or any of its Subsidiaries that were created, in accordance with the
terms of the Indenture.
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"Permitted Liens" is defined to mean (i) Liens for taxes, assessments,
governmental charges or claims that are being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted and
for which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made; (ii) statutory Liens of
landlords and carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen or other similar Liens arising in the ordinary course of business
and with respect to amounts not yet delinquent or being contested in good
faith by appropriate legal proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made; (iii) Liens
incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security; (iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in
the ordinary course of business (exclusive of obligations for the payment of
borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances
and similar charges, encumbrances, title defects or other irregularities that
do not materially interfere with the ordinary course of business of the
Company or any of its Restricted Subsidiaries; (vi) Liens (including
extensions and renewals thereof) upon real or personal property purchased or
leased after the Closing Date; provided that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred in compliance with the
"Limitation on Indebtedness" covenant (1) to finance the cost (including the
cost of design, development, construction, acquisition, installation or
integration) of the item of property or assets subject thereto and such Lien
is created prior to, at the time of or within six months after the later of
the acquisition, the completion of construction or the commencement of full
operation of such property or (2) to refinance any Indebtedness previously so
secured, (b) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such cost and (c) any such Lien shall not extend to or
cover any property or assets other than such item of property or assets and
any improvements on such item; (vii) leases or subleases granted to others
that do not materially interfere with the ordinary course of business of the
Company and its Restricted Subsidiaries, taken as a whole; (viii) Liens
encumbering property or assets under construction arising from progress or
partial payments by a customer of the Company or its Restricted Subsidiaries
relating to such property or assets; (ix) any interest or title of a lessor in
the property subject to any Capitalized Lease Obligation or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing statements
regarding leases; (xi) Liens on property of, or on shares of stock or
Indebtedness of, any corporation existing at the time such corporation
becomes, or becomes a part of, any Restricted Subsidiary; provided that such
Liens do not extend to or cover any property or assets of the Company or any
Restricted Subsidiary other than the property or assets acquired and were not
created in contemplation of such transaction; (xii) Liens in favor of the
Company or any Restricted Subsidiary; (xiii) Liens arising from the rendering
of a final judgment or order against the Company or any Restricted Subsidiary
of the Company that does not give rise to an Event of Default; (xiv) Liens
securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and
the products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits and other Liens that are either within
the general parameters customary in the industry or incurred in the ordinary
course of business, in each case, securing Indebtedness under Interest Rate
Agreements and Currency Agreements; (xvii) Liens arising out of conditional
sale, title retention, consignment or similar arrangements for the sale of
goods entered into by the Company or any of its Restricted Subsidiaries in the
ordinary course of business in accordance with the past practices of the
Company and its Restricted Subsidiaries prior to the Closing Date; (xviii)
Liens existing on the Closing Date or securing the Notes or any Guarantee of
the Notes; (xix) Liens granted after the Closing Date on any assets or Capital
Stock of the Company or its Restricted Subsidiaries created in favor of the
holders; (xx) Liens securing Indebtedness which is incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause (viii) of
paragraph (b) of the "Limitation on Indebtedness" covenant; provided that such
Liens do not extend to or cover any property or assets of the Company or any
Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced; and (xxi) Liens securing Indebtedness under
Credit Facilities incurred in compliance with clause (iv) of paragraph (b) of
the "Limitation on Indebtedness" covenant.
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"Pledge Account" is defined to mean an account established with the Trustee
pursuant to the terms of the Pledge Agreement for the deposit of the Pledged
Securities purchased by the Company with a portion of the net proceeds from
the Offering.
"Pledge Agreement" is defined to mean the Collateral Pledge and Security
Agreement, dated as of the date of the Indenture, from the Company to the
Trustee, governing the Pledge Account and the disbursement of funds therefrom.
"Pledged Securities" is defined to mean the securities purchased by the
Company with a portion of the net proceeds from the Offering, which shall
consist of U.S. Government Obligations, to be deposited in the Pledge Account.
"Preferred Stock" is defined to mean, with respect to any Person, any and
all shares, interests, participations, rights or other equivalents (however
designated, whether voting or non-voting) of such Person's preferred or
preference stock, whether now outstanding or issued after the date of the
Indenture, including, without limitation, all series and classes of such
preferred or preference stock.
"Pro Forma Consolidated Cash Flow" is defined to mean, for any period, the
Consolidated Cash Flow of the Company for such period calculated on a pro
forma basis to give effect to any Asset Disposition or Asset Acquisition not
in the ordinary course of business (including acquisitions of other Persons by
merger, consolidation or purchase of Capital Stock) during such period as if
such Asset Disposition or Asset Acquisition had taken place on the first day
of such period.
"Public Equity Offering" is defined to mean an underwritten primary public
offering of Common Stock of the Company pursuant to an effective registration
statement under the Securities Act.
"Redeemable Stock" is defined to mean any class or series of Capital Stock
of any Person that by its terms (or by the terms of any security into which it
is exchangeable) or otherwise is (i) required to be redeemed on or prior to
the date that is 123 days after the date of the Stated Maturity of the Notes,
(ii) redeemable at the option of the holder of such class or series of Capital
Stock at any time on or prior to the date that is 123 days after the date of
the Stated Maturity of the Notes or (iii) convertible into or exchangeable for
Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity on or prior to the date that is 123 days after the date of
the Stated Maturity of the Notes; provided that any Capital Stock that would
not constitute Redeemable Stock but for provisions thereof giving holders
thereof the right to require such Person to repurchase or redeem such Capital
Stock upon the occurrence of an "asset sale" or "change of control" occurring
on or prior to the date that is 123 days after the date of the Stated Maturity
of the Notes shall not constitute Redeemable Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are no more
favorable to the holders of such Capital Stock than the provisions contained
in "Limitation on Asset Sales" and "Repurchase of Notes upon a Change of
Control" covenants described above and such Capital Stock specifically
provides that such Person will not repurchase or redeem any such stock
pursuant to such provisions on or prior to the date that is 123 days after the
date of the Company's repurchase of such Notes as are required to be
repurchased pursuant to the "Limitation on Asset Sales" and "Repurchase of
Notes upon a Change of Control" covenants described above.
"Registration Rights Agreement" is defined to mean the Registration Rights
Agreement, dated as of the date of the Indenture, by and between the Initial
Purchasers and the Company, concerning the registration and exchange of the
Notes.
"Restricted Subsidiary" is defined to mean any Subsidiary of the Company
other than an Unrestricted Subsidiary.
"Sale-Leaseback Transaction" of any person is defined to mean an arrangement
with any lender or investor or to which such lender or investor is a party
providing for the leasing by such person of any property or asset of
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such person which has been or is being sold or transferred by such person
after the acquisition thereof or the completion of construction or
commencement of operation thereof to such lender or investor or to any person
to whom funds have been or are to be advanced by such lender or investor on
the security of such property or asset. The stated maturity of such
arrangement shall be the date of the last payment of rent or any other amount
due under such arrangement prior to the first date on which such arrangements
may be terminated by the lessee without payment of a penalty.
"Significant Subsidiary" is defined to mean a Restricted Subsidiary that is
a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under
the Securities Act and the Exchange Act.
"Stated Maturity" is defined to mean, (i) with respect to any debt security,
the date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii)
with respect to any scheduled installment of principal of or interest on any
debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
"Subsidiary" is defined to mean, with respect to any Person, any
corporation, association or other business entity of which more than 50.0% of
the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Telecommunications Assets" is defined to mean, with respect to any Person,
equipment used in the telecommunications business or ownership rights with
respect to IRUs, MAOUs or minimum investment units (or similar ownership
interests) in fiber optic cable and international or domestic
telecommunications switches or other transmission facilities (or Common Stock
of a Person that becomes a Restricted Subsidiary, the assets of which consist
primarily of any such Telecommunications Assets), in each case purchased or
acquired through a Capitalized Lease Obligation by the Company or a Restricted
Subsidiary after the Closing Date.
"Trade Payables" is defined to mean any accounts payable or any other
indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by the Company or any of its Restricted Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods and
services.
"Transaction Date" is defined to mean, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date
such Indebtedness is to be Incurred and, with respect to any Restricted
Payment, the date such Restricted Payment is to be made.
"United States Dollar Equivalent" is defined to mean, with respect to any
monetary amount in a currency other than the United States dollar, at any time
for the determination thereof, the amount of United States dollars obtained by
converting such foreign currency involved in such computation into United
States dollars at the spot rate for the purchase of United States dollars with
the applicable foreign currency as quoted by Reuters at approximately 11:00
a.m. (New York City time) on the date not more than two business days prior to
such determination. For purposes of determining whether any Indebtedness can
be incurred (including Permitted Indebtedness), any Investment can be made and
any transaction described in the "Limitation on Transactions with Stockholders
and Affiliates" covenant can be undertaken (a "Tested Transaction"), the
United States Dollar Equivalent of such Indebtedness, Investment or
transaction described in the "Limitation on Transactions with Stockholders and
Affiliates" covenant will be determined on the date incurred, made or
undertaken and no subsequent change in the United States Dollar Equivalent
shall cause such Tested Transaction to have been incurred, made or undertaken
in violation of the Indenture.
"Unrestricted Subsidiary" is defined to mean (i) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Restricted Subsidiary of the Company (including any newly acquired or
newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary
unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on
any property of, the Company or any Restricted Subsidiary; provided that (A)
the Subsidiary to be
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so designated has total assets of $1,000 or less or (B) if such Subsidiary has
assets greater than $1,000, that such designation would be permitted under the
"Limitation on Restricted Payments" covenant described above, and such
Subsidiary is not liable, directly or indirectly, with respect to any
Indebtedness other than Unrestricted Subsidiary Indebtedness. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary of the Company; provided that immediately after giving effect to
such designation (x) the Company could Incur $1.00 of additional Indebtedness
under the first paragraph of the "Limitation on Indebtedness" covenant
described above and (y) no Default or Event of Default shall have occurred and
be continuing. Any such designation by the Board of Directors shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"Unrestricted Subsidiary Indebtedness" is defined to mean any Indebtedness
of any Unrestricted Subsidiary (i) as to which neither the Company nor any
Restricted Subsidiary is directly or indirectly liable (by virtue of the
Company or any such Restricted Subsidiary being the primary obligor on,
guarantor of, or otherwise liable in any respect to, such Indebtedness) and
(ii) which, upon the occurrence of a default with respect thereto, does not
result in, or permit any holder of any Indebtedness of the Company or any
Restricted Subsidiary to declare, a default of such Indebtedness of the
Company or any Restricted Subsidiary or cause the payment thereof to be
accelerated or payable prior to its Stated Maturity.
"U.S. Government Obligations" is defined to mean securities that are (x)
direct obligations of the United States for the timely payment of which its
full faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States
the timely payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States, which, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a)(2)
of the Securities Act), as custodian with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such U.S.
Government Obligation held by such custodian for the account of the holder of
such depository receipt, provided that (except as required by law) such
custodian is not authorized to make any deduction from the amount payable to
the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal of or interest on the U.S. Government Obligation evidenced by
such depository receipt.
"Voting Stock" is defined to mean with respect to any Person, Capital Stock
of any class or kind ordinarily having the power to vote for the election of
directors, managers or other voting members of the governing body of such
Person.
BOOK-ENTRY, DELIVERY AND FORM
Exchange Notes issued in exchange for the Old Notes currently represented by
one or more fully registered global notes ("Old Global Notes") will be
represented by one or more fully registered global notes (collectively, the
"Exchange Global Notes"). The Old Global Notes were deposited on the date of
the closing of the sale of the Old Notes, and the Exchange Global Notes will
be deposited on the date of the closing of the Exchange Offer with, or on
behalf of, The Depository Trust Company ("DTC") and registered in the name of
DTC or a nominee of DTC. "Global Notes" means the Old Global Notes or the
Exchange Global Notes, as the case may be.
Exchange Notes held by qualified institutional buyers (as defined in Rule
144A promulgated under the Securities Act)("QIBs") who elect to take physical
delivery of their certificates instead of holding their interest through the
Exchange Global Notes and which are thus ineligible to trade through DTC
(collectively referred to herein as the "Non-Global Purchasers") will be
issued, in registered form, without interest coupons ("Certificated Exchange
Notes"). Upon a permitted transfer to a QIB of such Certificated Exchange
Notes initially issued to a Non-Global Purchaser, such Certificated Exchange
Notes will, unless the transferee requests otherwise or the Exchange Global
Notes have previously been exchanged in whole for such Certificated
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Exchange Notes, be exchanged for an interest in the applicable Exchange Global
Notes. As described below under "--Certificated Exchange Notes," owners of
beneficial interests in an Exchange Global Note may receive physical delivery
of Certificated Exchange Notes only in the limited circumstances described
therein.
The Exchange Global Notes. The Company expects that pursuant to procedures
established by DTC (i) upon deposit of the Exchange Global Notes, DTC or its
custodian will credit, on its internal system, the corresponding principal
amount of Exchange Global Notes to the respective accounts of persons who have
accounts with such depositary and (ii) ownership of the Exchange Global Notes
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC or its nominee (with respect to interests
of participants) and the records of participants (with respect to interests of
persons other than participants). Such accounts initially will be designated
by or on behalf of the Initial Purchasers and ownership of beneficial
interests in the Exchange Global Notes will be limited to persons who have
accounts with DTC ("participants") or persons who hold interests through
participants. Qualified institutional buyers may hold their interests in the
Exchange Global Notes directly through the DTC if they are participants in
such system, or indirectly through organizations which are participants in
such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee will be considered the sole owner or holder of the
Exchange Global Notes represented by the applicable Exchange Global Notes for
all purposes under the Indenture. No beneficial owner of an interest in the
Exchange Global Notes will be able to transfer such interest except in
accordance with DTC's applicable procedures in addition to those provided for
under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any) and interest on, the Exchange
Global Notes will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. None of the Company, the Trustee or any paying agent
will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in
the Exchange Global Notes or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, premium (if any) and interest on, the Exchange Global Notes,
will credit participants' accounts with payments in amounts proportionate to
their respective beneficial interests in the principal amount of such Exchange
Global Note, as shown on the records of DTC or its nominee. The Company also
expects that payments by participants to owners of beneficial interests in any
such Exchange Global Notes held through such participants will be governed by
standing instructions and customary practice, as is now the case with
securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in clearinghouse funds. If a
holder requires physical delivery of a Certificated Note for any reason,
including to sell Notes to persons in states which require physical delivery
of such securities or to pledge such securities, such holder must transfer its
interest in the applicable Exchange Global Note in accordance with the normal
procedures of DTC and the procedures set forth in the Indenture.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more participants to whose
account the DTC interests in the applicable Exchange Global Note is credited
and only in respect of such portion of Notes, the aggregate principal amount
of Notes as to which such participant or participants has or have given such
direction. However, if there is an Event of Default under the Indenture, DTC
will exchange the applicable Exchange Global Note for Certificated Notes,
which it will distribute to its participants and which, if representing
interests in the applicable Exchange Global Note, will be legended as set
forth in the Indenture.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the
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meaning of the Uniform Commercial Code and a "Clearing Agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participants and facilitate the clearance and
settlement of securities transactions between participants through electronic
book-entry changes in accounts of its participants, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and
certain other organizations. Indirect access to the DTC system is available to
others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Exchange Global Note among participants of DTC,
it is under no obligation to perform such procedures, and such procedures may
be discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Exchange Notes. If (i) the Company notifies the Trustee in
writing that the DTC is no longer willing or able to act as a depository and
the Company does not appoint a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of Exchange Notes in definitive form under the Indenture,
then, upon surrender by the relevant registered owner of its Exchange Global
Note, Certificated Exchange Notes in such form will be issued to each person
that such registered owner and the DTC identify as the beneficial owner of the
related Notes. In addition, subject to certain conditions, any person having a
beneficial interest in the Exchange Global Note may, upon request to the
Trustee, exchange such beneficial interest for Exchange Notes in the form of
Certificated Exchange Notes. Upon any such issuance, the Trustee is required
to register such Certificated Exchange Notes in the name of, and cause the
same to be delivered to, such person or persons (or the nominee of any
thereof) in fully registered form.
Neither the Company nor Trustee shall be liable for any delay by the related
registered owner or the DTC in identifying the beneficial owners of the
related Exchange Notes and each such person may conclusively rely on, and
shall be protected in relying on, instructions from such registered owner or
of the DTC for all purposes (including with respect to the registration and
delivery, and the principal amount of the Exchange Notes to be issued).
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the principal U.S. federal income tax
consequences to beneficial owners arising from the exchange of Old Notes for
Exchange Notes. This summary is based on the Internal Revenue Code of 1986, as
amended (the "Code"), final, temporary, and proposed Treasury regulations
promulgated thereunder, administrative pronouncements and rulings, and
judicial decisions, changes to any of which subsequent to the date hereof may
affect the tax consequences described herein, possibly with retroactive
effect. In addition, the recently enacted Taxpayer Relief Act of 1997 could
affect an investment in Notes in that, among other things, it reduces the rate
of federal income tax imposed on capital gains of individual taxpayers for
capital assets held more than eighteen months (and reduces such rate even
further for capital assets acquired after the year 2000 and held more than
five years).
This summary discusses only Notes held as capital assets within the meaning
of Code section 1221. It does not discuss all of the tax consequences that may
be relevant to a Holder in light of the Holder's particular circumstances or
to Holders subject to special rules, such as certain financial institutions,
banks, insurance companies, tax-exempt organizations, U.S. Holders subject to
the alternative minimum tax, regulated investment companies, dealers in
securities or foreign currencies, persons holding Notes as part of a straddle
or hedging transaction, or U.S. Holders whose functional currency (as defined
in Code section 985) is not the U.S. dollar. Persons considering purchasing
Notes should consult their own tax advisors concerning the application of U.S.
federal tax laws to their particular situations as well as any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction.
As used in this summary, the term "U.S. Holder" means the beneficial owner
of a Note that is, for U.S. federal income tax purposes, (i) a citizen or
resident of the U.S. (including certain former citizens and former long-term
residents); (ii) a corporation, partnership or other entity created or
organized in or under the laws of the U.S. or of any political subdivision
thereof; (iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or (iv) a trust with respect to the
administration of which a court within the U.S. is able to exercise primary
supervision and one or more U.S. persons have the authority to control all
substantial decisions of the trust. As used in this summary, the term "Non-
U.S. Holder" means a beneficial owner of a Note that is not a U.S. Holder.
EXCHANGE OF NOTES
The exchange of the Old Notes for the Exchange Notes pursuant to the
Exchange Offer will not constitute a material modification of the terms of the
Old Notes or the Exchange Notes and, thus, such exchange will not constitute
an exchange for U.S. federal income tax purposes. Accordingly, such exchange
will have no U.S. federal income tax consequences to the holders of the Old
Notes or the Exchange Notes, regardless of whether such holders participate in
the Exchange Offer. Consequently, each holder will continue to be required to
include interest on the Exchange Notes, or the Old Notes, if not exchanged, in
its gross income in accordance with its method of accounting for U.S. federal
income tax purposes and will have the same tax basis and holding period in the
Exchange Notes as in the Old Notes. The Company intends to treat the Exchange
Offer for U.S. federal income tax purposes in accordance with the position
described in this paragraph.
THE FEDERAL INCOME TAX SUMMARY SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S
PARTICULAR SITUATION. PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE PRECISE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF THE NOTES.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Old
Notes, where such Old Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed that for a
period of 180 days after the Expiration Date, it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale.
The Company will not receive any proceeds from any sale of Old Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes, or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commission or concessions from any
such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such person may be deemed to be underwriting compensations under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 180 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the
Letter of Transmittal. The Company has agreed to pay all expenses incident to
the Exchange Offer other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Old Notes (including any broker-
dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Swidler & Berlin, Chartered, Washington, D.C.
EXPERTS
The consolidated financial statements of FaciliCom International, Inc. as of
September 30, 1997 and 1996 and for the years ended September 30, 1997 and
1996, and for the period from May 5, 1995 (date of incorporation) to September
30, 1995, included in this Prospectus, have been audited by Deloitte & Touche
llp, independent auditors, as stated in their report appearing herein and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of Tele8, for the period January 1, 1995 to June
30, 1995, included in this Prospectus have been audited by Deloitte & Touche,
independent chartered accountants, as stated in their report appearing herein
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
112
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Independent Auditors' Reports...................................... F-2 to F-3
Consolidated Balance Sheets as of March 31, 1998 (Unaudited),
September 30, 1997 and 1996....................................... F-4
Consolidated Statements of Operations for the six months ended
March 31, 1998 (Unaudited) and 1997 (Unaudited), the years ended
September 30, 1997 and 1996, the period from May 5, 1995
(inception) to September 30, 1995 and the period from January 1,
1995 to June 30, 1995 (Predecessor)............................... F-5
Consolidated Statements of Capital Accounts for the six months
ended March 31, 1998 (Unaudited), the years ended September 30,
1997 and 1996, the period from May 5, 1995 (inception) to
September 30, 1995 and the period from January 1, 1995 to June 30,
1995 (Predecessor)................................................ F-6
Consolidated Statements of Cash Flows for the six months ended
March 31, 1998 (Unaudited) and 1997 (Unaudited), the years ended
September 30, 1997 and 1996, the period from May 5, 1995
(inception) to September 30, 1995 and the period from January 1,
1995 to June 30, 1995 (Predecessor)............................... F-7 to F-8
Notes to Consolidated Financial Statements......................... F-9 to F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
FaciliCom International, Inc.:
We have audited the accompanying consolidated balance sheets of FaciliCom
International, Inc. and subsidiaries (formerly FaciliCom International, LLC)
(the "Company") for the years ended September 30, 1997 and 1996, and the
related consolidated statements of operations, capital accounts, and cash
flows for the years ended September 30, 1997 and 1996 and for the period from
May 5, 1995 (date of incorporation) to September 30, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of FaciliCom International, Inc.
and subsidiaries as of September 30, 1997 and 1996, and the results of their
operations and their cash flows for the years ended September 30, 1997 and
1996 and for the period from May 5, 1995 (date of incorporation) to September
30, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
March 19, 1998 (April 27, 1998 as to Note 13 and May 8, 1998 as to Note 12)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Nordiska Tele8 AB:
We have audited the accompanying statements of operations, capital accounts
and cash flows of Nordiska Tele8 AB for the period from January 1, 1995 to
June 30, 1995, all expressed in United States Dollars. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of Nordiska Tele8 AB for
the period from January 1, 1995 to June 30, 1995 in conformity with accounting
principles generally accepted in the United States.
DELOITTE & TOUCHE
Malmo, Sweden
March 19, 1998
F-3
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
MARCH 31, ----------------
1998 1997 1996
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $125,423 $ 1,016 $ 2,198
Accounts receivable--net of allowance for
doubtful accounts of $989 at March 31, 1998
(Unaudited) and $161 at September 30, 1997,
respectively................................... 29,980 19,485 5,225
Marketable securities........................... 80,964 -- --
Prepaid expenses and other current assets....... 4,924 1,737 927
-------- ------- -------
Total current assets........................... 241,291 22,238 8,350
-------- ------- -------
PROPERTY AND EQUIPMENT:
Transmission and communications equipment....... 50,731 16,593 9,030
Transmission and communications equipment--
leased......................................... 15,456 5,419 248
Construction in process......................... -- -- 1,046
Furniture, fixtures and other................... 3,735 1,266 943
-------- ------- -------
69,922 23,278 11,267
Less accumulated depreciation and amortization.. (5,032) (3,034) (1,123)
-------- ------- -------
Net property and equipment..................... 64,890 20,244 10,144
INTANGIBLE ASSETS................................ 1,809 1,535 2,015
DEBT ISSUE COSTS, net of accumulated amortization
of $209 (Unaudited)............................. 9,687 -- --
ADVANCE TO AFFILIATE............................. 668 -- 499
MARKETABLE SECURITIES............................ 57,470 -- --
-------- ------- -------
TOTAL ASSETS..................................... $375,815 $44,017 $21,008
======== ======= =======
LIABILITIES AND CAPITAL ACCOUNTS
CURRENT LIABILITIES:
Accounts payable................................ $ 25,843 $24,205 $ 8,212
Accounts payable--transmission equipment........ 26,103 -- --
Accounts payable--related party................. 110 389 --
Other current obligations....................... 18,498 6,255 4,716
Capital lease obligations due within one year... 3,461 573 40
Long-term debt due within one year.............. 566 1,043 561
-------- ------- -------
Total current liabilities...................... 74,581 32,465 13,529
-------- ------- -------
CAPITAL LEASE OBLIGATIONS........................ 4,503 1,723 120
LONG-TERM DEBT................................... 301,011 13,000 7,045
LOANS FROM OWNERS................................ -- 6,250 2,029
COMMITMENTS AND CONTINGENCIES.................... -- -- --
CAPITAL ACCOUNTS:
Common stock, $0.01 par value--300,000 shares
authorized; 225,741 issued and outstanding at
March 31, 1998 (Unaudited)..................... 2 -- --
Additional paid-in capital...................... 36,534 -- --
Class A initial capital......................... -- 180 180
Class B initial capital......................... -- 60 60
Excess capital contributions--Class A........... -- 16,296 10,176
Stock-based compensation........................ 5,802 -- --
Holding loss on marketable securities........... (118) -- --
Foreign currency translation adjustments........ 1,067 684 (245)
Accumulated deficit............................. (47,567) (26,641) (11,886)
-------- ------- -------
Total capital accounts......................... (4,280) (9,421) (1,715)
-------- ------- -------
TOTAL LIABILITIES AND CAPITAL ACCOUNTS........... $375,815 $44,017 $21,008
======== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
SIX MONTHS ENDED FROM MAY 5, PERIOD FROM
MARCH 31, YEAR ENDED SEPTEMBER 30, 1995 TO JANUARY 1, 1995 TO
------------------ -------------------------- SEPTEMBER 30, JUNE 30, 1995
1998 1997 1997 1996 1995 (PREDECESSOR)
-------- -------- ------------ ------------ ------------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES................ $ 70,954 $ 27,094 $ 70,187 $ 11,891 $ 547 $ 367
COST OF REVENUES........ (66,486) (25,425) (65,718) (12,742) (1,022) (938)
-------- -------- ------------ ------------ ------- -------
GROSS MARGIN (DEFICIT).. 4,468 1,669 4,469 (851) (475) (571)
SELLING, GENERAL AND
ADMINISTRATIVE......... (12,239) (5,725) (13,072) (7,575) (943) (537)
STOCK-BASED COMPENSATION
EXPENSE................ (5,514) --
RELATED PARTY EXPENSES.. (469) (127) (439) (7) -- --
DEPRECIATION AND
AMORTIZATION........... (2,854) (1,090) (2,318) (1,143) (142) (197)
-------- -------- ------------ ------------ ------- -------
OPERATING LOSS.......... (16,608) (5,273) (11,360) (9,576) (1,560) (1,305)
INTEREST EXPENSE-RELATED
PARTY.................. (180) (121) (462) (26) (17) (11)
INTEREST EXPENSE........ (6,249) (342) (874) (286) (63) (33)
INTEREST INCOME......... 2,505 --
EXCHANGE (LOSS) GAIN.... (394) (1,323) (1,335) 226 (85) 8
-------- -------- ------------ ------------ ------- -------
LOSS BEFORE INCOME
TAXES.................. (20,926) (7,059) (14,031) (9,662) (1,725) (1,341)
INCOME TAX BENEFIT...... 3,226 -- -- -- -- --
-------- -------- ------------ ------------ ------- -------
NET LOSS................ $(17,700) $ (7,059) $ (14,031) $ (9,662) $(1,725) $(1,341)
======== ======== ============ ============ ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITAL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
EXCESS HOLDING FOREIGN
COMMON STOCK ADDITIONAL CLASS A CLASS B CAPITAL LOSS ON CURRENCY
------------- PAID-IN INITIAL INITIAL CONTRIBUTIONS-- STOCK-BASED MARKETABLE TRANSLATION ACCUMULATED
SHARES AMOUNT CAPITAL CAPITAL CAPITAL CLASS A COMPENSATION SECURITIES ADJUSTMENTS DEFICIT
------ ------ ---------- ------- ------- --------------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY
1, 1995
(Predecessor)... 10 $123 $ 285 $ -- $ -- $ -- $ -- $ -- $ (114) $ (288)
Converted loans
from owners.... -- -- -- -- -- 1,497 -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- (1,341)
--- ---- ------- ----- ---- -------- ------ ----- ------ --------
BALANCE, JUNE 30,
1995
(Predecessor)... 10 $123 $ 285 $ -- $ -- $ 1,497 $ -- $ -- $ (114) $ (1,629)
=== ==== ======= ===== ==== ======== ====== ===== ====== ========
BALANCE, MAY 5,
1995 (Date of
Incorporation).. -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss........ -- -- -- -- -- -- -- -- -- (1,725)
Contributions... -- -- -- 180 60 2,594 -- -- -- --
--- ---- ------- ----- ---- -------- ------ ----- ------ --------
BALANCE,
SEPTEMBER 30,
1995............ -- -- -- 180 60 2,594 -- -- -- (1,725)
Net loss........ -- -- -- -- -- -- -- -- -- (9,662)
Contributions... -- -- -- -- -- 7,083 -- -- -- --
Guaranteed
return......... -- -- -- -- -- -- -- -- -- (499)
Contribution to
excess
capital--
guaranteed
return......... -- -- -- -- -- 499 -- -- -- --
Foreign currency
translation
adjustments ... -- -- -- -- -- -- -- -- (245) --
--- ---- ------- ----- ---- -------- ------ ----- ------ --------
BALANCE,
SEPTEMBER 30,
1996............ -- -- -- 180 60 10,176 -- -- (245) (11,886)
Net loss........ -- -- -- -- -- -- -- -- -- (14,031)
Converted loans
from owners.... -- -- -- -- -- 5,396 -- -- -- --
Guaranteed
return......... -- -- -- -- -- -- -- -- -- (724)
Contribution to
excess
capital--
guaranteed
return......... -- -- -- -- -- 724 -- -- -- --
Foreign currency
translation
adjustments.... -- -- -- -- -- -- -- -- 929 --
--- ---- ------- ----- ---- -------- ------ ----- ------ --------
BALANCE,
SEPTEMBER 30,
1997............ -- -- -- 180 60 16,296 -- -- 684 (26,641)
Net loss
(Unaudited).... -- -- -- -- -- -- -- -- -- (17,700)
Contributions
(Unaudited).... -- -- -- -- -- 13,750 -- -- -- --
Converted loans
from owners
(Unaudited).... -- -- -- -- -- 6,250 -- -- -- --
Reorganization
(Unaudited) ... 226 2 36,534 (180) (60) (36,296) -- -- -- --
Dividends paid
(Unaudited) -- -- -- -- -- -- -- -- -- (3,226)
Stock options
granted
(Unaudited).... -- -- -- -- -- -- 5,203 -- -- --
Phantom unit
exchange
(Unaudited).... -- -- -- -- -- -- 599 -- -- --
Holding loss on
marketable
securities
(Unaudited).... -- -- -- -- -- -- -- (118) -- --
Foreign currency
translation
adjustments
(Unaudited).... -- -- -- -- -- -- -- -- 383 --
--- ---- ------- ----- ---- -------- ------ ----- ------ --------
BALANCE, MARCH
31, 1998
(unaudited)..... 226 $ 2 $36,534 $ -- $ -- $ -- $5,802 $(118) $1,067 $(47,567)
=== ==== ======= ===== ==== ======== ====== ===== ====== ========
<CAPTION>
TOTAL
CAPITAL
ACCOUNTS
---------
<S> <C>
BALANCE, JANUARY
1, 1995
(Predecessor)... $ 6
Converted loans
from owners.... 1,497
Net loss........ (1,341)
---------
BALANCE, JUNE 30,
1995
(Predecessor)... $ 162
=========
BALANCE, MAY 5,
1995 (Date of
Incorporation).. $ --
Net loss........ (1,725)
Contributions... 2,834
---------
BALANCE,
SEPTEMBER 30,
1995............ 1,109
Net loss........ (9,662)
Contributions... 7,083
Guaranteed
return......... (499)
Contribution to
excess
capital--
guaranteed
return......... 499
Foreign currency
translation
adjustments ... (245)
---------
BALANCE,
SEPTEMBER 30,
1996............ (1,715)
Net loss........ (14,031)
Converted loans
from owners.... 5,396
Guaranteed
return......... (724)
Contribution to
excess
capital--
guaranteed
return......... 724
Foreign currency
translation
adjustments.... 929
---------
BALANCE,
SEPTEMBER 30,
1997............ (9,421)
Net loss
(Unaudited).... (17,700)
Contributions
(Unaudited).... 13,750
Converted loans
from owners
(Unaudited).... 6,250
Reorganization
(Unaudited) ... --
Dividends paid
(Unaudited) (3,226)
Stock options
granted
(Unaudited).... 5,203
Phantom unit
exchange
(Unaudited).... 599
Holding loss on
marketable
securities
(Unaudited).... (118)
Foreign currency
translation
adjustments
(Unaudited).... 383
---------
BALANCE, MARCH
31, 1998
(unaudited)..... $ (4,280)
=========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTHS
ENDED YEAR ENDED PERIOD FROM
MARCH 31, SEPTEMBER 30, PERIOD FROM JANUARY 1, 1995 TO
----------------- ----------------- MAY 5, 1995 TO JUNE 30, 1995
1998 1997 1997 1996 SEPTEMBER 30, 1995 (PREDECESSOR)
-------- ------- -------- ------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss............... $(17,700) $(7,059) $(14,031) $(9,662) $(1,725) $(1,341)
Adjustments to
reconcile net loss to
net cash (used in)
provided by operating
activities:
Depreciation and amor-
tization............. 2,854 1,090 2,318 1,143 142 197
Non-cash stock-based
compensation......... 5,514 -- -- -- -- --
Income tax benefit.... (3,226) -- -- -- -- --
Amortization of bond
discount............. (386) -- -- -- -- --
Loss on disposal of
property and
equipment............ -- -- 130 -- -- --
Changes in operating
assets and liabili-
ties:
Accounts receivable.. (10,495) (6,906) (14,260) (4,356) (525) (388)
Prepaid expenses and
other current
assets.............. (3,348) 284 (810) (770) (157) (52)
Accounts payable and
other current
liabilities......... 14,169 9,273 17,903 8,731 641 1,896
Accounts payable--re-
lated party......... (279) 126 389 -- -- 251
Advance to affili-
ate................. (668) -- -- (499) -- --
-------- ------- -------- ------- -------- -------
Net cash (used in)
provided by operating
activities............ (13,565) (3,192) (8,361) (5,413) (1,624) 563
-------- ------- -------- ------- -------- -------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of investments
in subsidiaries....... (588) -- -- -- (840) --
Purchase of investments
in available-for-sale
securities............ (51,617) -- -- -- -- --
Purchase of investments
in held-to-maturity
securities ........... (86,549) -- -- -- -- --
Purchases of property
and equipment......... (14,960) (1,027) (1,897) (2,004) (156) (512)
Intangible assets...... (64) 208 233 930 (59) (33)
-------- ------- -------- ------- -------- -------
Net cash used in in-
vesting activities.... (153,778) (819) (1,664) (1,074) (1,055) (545)
-------- ------- -------- ------- -------- -------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Advances from owners... -- 3,210 9,726 2,029 -- --
Initial capital contri-
butions............... -- -- -- -- 240 --
Excess capital contri-
butions............... 13,750 -- -- 7,083 2,594 --
Proceeds from debt is-
suance ............... 300,000 -- -- -- -- --
Payments of long-term
debt and capital
leases................ (12,487) (332) (1,812) (540) (46) --
Payment of debt issu-
ance costs............ (9,896) -- -- -- -- --
-------- ------- -------- ------- -------- -------
Net cash provided by
financing activities.. 291,367 2,878 7,914 8,572 2,788 --
-------- ------- -------- ------- -------- -------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH........ 383 (402) 929 4 -- --
-------- ------- -------- ------- -------- -------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVA-
LENTS.................. 124,407 (1,535) (1,182) 2,089 109 18
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 1,016 2,198 2,198 109 -- 9
-------- ------- -------- ------- -------- -------
CASH AND CASH
EQUIVALENTS,
END OF PERIOD.......... $125,423 $ 663 $ 1,016 $ 2,198 $ 109 $ 27
======== ======= ======== ======= ======== =======
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid.......... $ 998 $ 533 $ 747 $ 201 $ 36 $ 44
======== ======= ======== ======= ======== =======
</TABLE>
(Footnotes on following page)
F-7
<PAGE>
- --------
NONCASH TRANSACTIONS:
(a) For the six months ended March 31, 1998, the majority owner converted
$6,250 of loans into capital and a $162 receivable was forgiven as part of
the purchase of minority interest which reduced prepaid expenses and other
current assets and increased goodwill.
(b) FCI received $480 in Tele8 convertible debentures during the year ended
September 30, 1997 to satisfy an advance to affiliate, which reduced
advance to affiliate and advances from owners.
(c) During the year ended September 30, 1997, the majority owner converted
$5,396 of loans and accrued interest into capital.
(d) FCI received property and equipment under capital leases and financing
agreements, which increased property and equipment and long-term
obligations $5,689 and $2,714 in the six months ended March 31, 1998 and
1997, respectively, and $10,385, $6,400 and $949 in the periods ended
September 30, 1997, 1996 and 1995, respectively. Also, the Predecessor
had increases in property and equipment and long-term obligations of
$701. In addition, for the six months ended March 31, 1998, FCI received
equipment which increased property and equipment and accounts payable
transmission equipment by $26,103 (of which $20,445 was not yet placed in
service as of March 31, 1998.)
(e) FCI recognized a tax benefit of $3,226 for the six months ended March 31,
1998. In accordance with the tax sharing agreement with AHI entered into
on December 22, 1997, FCI recorded a dividend to AHI for the amount of the
benefit to be realized by Armstrong Holdings Inc. ("AHI") (See Note 5 to
the financial statements).
See notes to consolidated financial statements.
F-8
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.GENERAL
Organization--FaciliCom International, LLC ("FCI, LLC") is a Delaware
limited liability company that was formed on May 5, 1995 to engage in
various international telecommunications businesses. On December 22, 1997,
the owners of FCI, LLC entered into an Investment and Shareholders
Agreement ("Agreement"). Under the Agreement, the owners of FCI, LLC
transferred all of their respective units in FCI, LLC and FCI (GP), LLC, a
Delaware limited liability company, to FaciliCom International, Inc.
("FCI"), a Delaware corporation, and additionally Armstrong (as defined)
contributed $20,000,000 (in cash and assignment of indebtedness) to FCI,
all in exchange for 225,741 shares of FCI's common stock. FCI was
incorporated on November 20, 1997, and has 300,000 authorized shares of
common stock. Since the reorganization was a combination of entities under
common control, it was accounted for by combining the historical accounts
of FCI, LLC, FCI (GP), LLC and FCI in a manner similar to a pooling of
interests. FCI is authorized by the Federal Communications Commission (the
"FCC") to provide global facilities-based services as well as switched
international services through resale of the services and facilities of
other international carriers. In addition, FCI has world-wide authorization
for private line resale of noninterconnected private line services and
authorization to resell interconnected private lines for switched services
to Canada, the United Kingdom, Sweden, and New Zealand. FCI, LLC was and
FCI is a majority-owned subsidiary of Armstrong International
Telecommunications, Inc. ("Armstrong"), which is a wholly owned subsidiary
of AHI.
On July 21, 1995, FCI acquired 66.5% of the outstanding capital stock of
both Nordiska Tele8 AB ("Tele8") and FGC, Inc. ("FGC"), entities related
through common ownership. Subsequently, FCI acquired up to 99% of Tele8 and
sold all of its interest in FGC. The additional interest in Tele8 was the
result of three separate transations (see Notes 8 and 13). On March 14,
1997, $1,600,000 of Tele8 convertible debentures were converted into 7,400
shares of Tele8 common stock, on May 15, 1997, FCI paid $3,600,000 for
14,400 shares of Tele8 common stock and on October 23, 1997, FCI paid
$750,000 for substantially all of the minority interest outstanding and
recorded $750,000 of goodwill. Also, on October 23, 1997, FCI sold all of
its interest in FGC for $100 and recorded a loss of approximately $79,000
on the transaction. Tele8 is a corporation organized under the laws of
Sweden to provide national and international telecommunications services.
FGC, a Delaware corporation, provides certain marketing services for Tele8
in the United States. These acquisitions were accounted for as purchase
transactions with the purchase price being allocated to the assets and
liabilities acquired based on their fair values as of the date of
acquisition. The excess of the purchase price over the fair value of assets
acquired was recorded as goodwill and is being amortized over five years.
The operations of Tele8 are included in FCI's statement of operations
beginning July 1, 1995.
The following summarizes the allocation of the purchase price to the major
categories of assets acquired and liabilities assumed (in thousands):
<TABLE>
<S> <C>
Current assets..................................................... $ 343
Property and equipment............................................. 1,760
Excess of cost over net assets of businesses acquired.............. 1,715
Other intangibles.................................................. 32
------
3,850
Less liabilities assumed........................................... 3,010
------
Cash paid.......................................................... $ 840
======
</TABLE>
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Basis of Presentation--The accompanying consolidated financial
statements include the accounts of FCI and its majority owned and wholly
owned subsidiaries (together, the "Company"). All intercompany
transactions and balances have been eliminated in consolidation. Because
losses applicable to the minority interest exceed the minority interest
in the equity capital and the minority stockholder is not obligated to
provide additional funding with respect to the losses incurred, such
losses are recorded by the Company.
F-9
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Predecessor financial statements include the accounts for Tele8 prior
to its acquisition by FCI, from the period January 1, 1995 (beginning of
its fiscal year) to June 30, 1995. FGC operations were insignificant and
are not included therein.
b. Cash and cash equivalents--The Company considers its investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are stated at cost plus accrued interest and are highly
liquid debt instruments of the U.S. government and commercial
corporations and money market funds.
c. Property and Equipment--Property and equipment is stated at cost.
Depreciation is provided for financial reporting purposes using the
straight-line method. Depreciation expense includes the amortization of
capital leases. The estimated useful lives of property and equipment are
as follows:
<TABLE>
<S> <C>
Transmission and communications equipment.................... 5 to 25 years
Transmission and communications equipment--leased............ 5 to 25 years
Furniture, fixtures and other................................ 5 to 7 years
</TABLE>
The Company capitalizes the costs of software and software upgrades
purchased for use in its transmission and communications equipment. The
Company expenses the costs of software purchased for internal use.
Maintenance and repairs are expensed as incurred. Replacements and
betterments are capitalized.
Depreciation expense for the periods ended September 30, 1997, 1996 and
1995 was $2,052,532, $863,078 and $92,251, respectively.
The Company periodically evaluates its long-lived assets to confirm that
the carrying values have not been impaired using the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121.
d. Intangible Assets--Intangible assets, consisting primarily of goodwill,
are amortized using the straight-line method over the following useful
lives:
<TABLE>
<S> <C>
Organization costs................................................. 5 years
Licenses........................................................... 5 years
Goodwill........................................................... 5 years
</TABLE>
Accumulated amortization for intangible assets was $1,062,270 (Unaudited),
$583,158 and $317,690 at March 31, 1998, September 30, 1997 and 1996,
respectively.
The Company periodically evaluates its intangible assets to confirm that
the carrying values have not been impaired using the provisions of SFAS No.
121.
e. Income Taxes--FCI, LLC is a limited liability company and is not subject
to income tax, while Facilicom International, Inc., incorporated on
November 20, 1997 as a Delaware corporation is subject to income taxes
(see Notes 1 and 13).
Tele8 and FGC are corporations and FCI's wholly owned United Kingdom ("FCI-
UK") subsidiary is a private limited company, and, as such, are subject to
income taxes in the countries in which they operate. The Company accounts
for income taxes under the liability method in accordance with the
provisions set forth in Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," whereby deferred income
taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. In assessing realization of
deferred tax assets, the Company uses judgment in considering the relative
impact of negative and positive evidence. The weight given to the potential
effect of negative and positive evidence is commensurate with the extent to
which it can be objectively verified. Based on the weight of evidence, both
negative and positive, including the lack of historical earnings, if it is
more likely than not that some portion or all of a deferred tax asset will
not be realized, a valuation allowance is established.
F-10
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
f. Initial and Excess Capital Contributions--Excess capital contributions
are the amounts of capital an owner has contributed in excess of the
owner's initial capital commitment. The owners are credited with a
guaranteed return through September 30, 1997 for the use of their
capital, and profits and losses are allocated, in accordance with the
provisions in the FCI LLC Limited Liability Company Agreement ("LLC
Agreement").
The guaranteed return is calculated as simple interest at a rate per
annum equal to the lowest rate of interest available to Armstrong or any
of its affiliates from time-to-time under any of their respective
existing credit facilities. Upon liquidation of FCI LLC, allocations of
annual net profits are allocated first to the Class A and Class B owners
to the extent required to adjust capital accounts, then to the extent of
cumulative net losses previously allocated in accordance with certain
capital contribution priorities set forth in the LLC Agreement and
thereafter 75% to Class A and 25% to Class B owners. Allocations of
annual net losses are allocated to the extent of cumulative net profits
previously allocated and then to the extent of owner's capital
contributions and thereafter to the Class A owner. Net losses allocated
to the Class B owner may not cause such owner's account to result in a
deficit. The Company may make distributions after first paying any
unpaid guaranteed return and then in accordance with the owner's
respective capital contributions and thereafter 75% to the Class A owner
and 25% to the Class B owner. Upon dissolution, the LLC Agreement
provides for liquidation of FCI LLC's assets and any distribution to
owners will be in accordance with the balance of their respective
capital accounts. Following distribution of assets, owners having a
capital account with a deficit balance shall be required to restore the
account. The LLC Agreement provides that FCI LLC shall terminate on
December 31, 2025. In consideration of all capital contributions made
through September 30, 1997, the Class A and Class B owners owned
15,390,000 and 3,610,000 membership interests in FCI LLC, respectively,
representing 81% and 19%, respectively, of such interests.
g. Foreign Currency Translation--For non-U.S. subsidiaries, the functional
currency is the local currency. Assets and liabilities of those
operations are translated into U.S. dollars using year-end exchange
rates; income and expenses are translated using the average exchange
rates for the reporting period. Translation adjustments are reported as
a separate component of capital accounts. Exchange losses and gains
resulting from foreign currency transactions are included in the results
of operations based upon the provisions of SFAS No. 52, "Foreign
Currency Translation."
h. 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 amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
i. Revenue Recognition--The Company records revenues from the sale of
telecommunications services at the time of customer usage based upon
minutes of traffic processed at contractual fees. The Company has
entered into, and continues to enter into, operating agreements with
telecommunications carriers in several foreign countries under which
international long distance traffic is both delivered and received.
Under these agreements, the foreign carriers are contractually obligated
to adhere to the policy of the FCC, whereby traffic from the foreign
country is routed to U.S. based international carriers, such as the
Company, in the same proportion as traffic carried into the country.
Mutually exchanged traffic between the Company and foreign carriers is
settled through a formal settlement policy at an agreed upon rate which
allows for the offsetting of receivables and payables with the same
carrier (settlement on a net basis). Although the Company can reasonably
estimate the revenue it will receive under the FCC's proportional share
policy, there is no guarantee that the Company will receive return
traffic and the Company is unable to determine what impact changes in
future settlement rates will have on net payments made and revenue
received. Accordingly, the Company does not record this revenue until
the service is provided and the minutes of traffic are processed. The
Company recognizes revenues from prepaid calling cards when earned.
F-11
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
j. Cost of Revenue--Cost of revenue includes network costs which consist of
access, transport and termination costs. Such costs are recognized when
incurred in connection with the provision of telecommunication services,
including costs incurred under operating agreements.
k. Interim Financial Information--The interim financial data as of March
31, 1998 and for the six-month periods ended March 31, 1998 and 1997, is
unaudited. The information reflects all adjustments, consisting only of
normal recurring adjustments that, in the opinion of management, are
necessary to present fairly the financial position and results of
operations of the Company for the periods indicated. Results of
operations for the interim periods are not necessarily indicative of the
results of operations for the full year.
l. Stock-Based Compensation--SFAS No. 123, "Accounting for Stock-Based
Compensation," defines a fair value method of accounting for stock
options and similar equity instruments. Pursuant to the standard,
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 ("APBO") No. 25, "Accounting for
Stock Issued to Employees," but would be required to disclose in a note
to the financial statements pro forma income and earnings per share as
if the Company had applied the fair value method of accounting. The
Company has elected not to adopt the fair value method of accounting for
employee stock-based transactions and will continue to account for such
transactions under the provisions of APBO No. 25.
m. Financial Instruments--The Company has financial instruments which
include cash and cash equivalents, marketable securities, long-term debt
obligations and loans from owners. The carrying values of these
instruments in the balance sheets, except for marketable securities,
approximated their fair market value. See Note 16 for disclosure of fair
market value for marketable securities.
The fair values of the instruments were based upon quoted market prices
of the same or similar instruments or on the rate available to the
Company for instruments of similar maturities.
n. Undersea Fiber Optic Cable Arrangements--The Company obtains capacity on
certain undersea fiber optic cables under three types of arrangements.
The Indefeasible Right of Use ("IRU") basis provides the Company the
right to use an undersea fiber optic cable, with most of the rights and
duties of ownership, but without the right to control or manage the
facility and without any right to salvage or duty to dispose of the
cable at the end of its useful life. Because of this lack of control and
an IRU term approximates the estimated economic life of the asset, the
Company accounts for such leases as leased transmission and
communications equipment and as capital leases. The Minimum Assignable
Ownership Units ("MAOU") basis provides the Company an ownership
interest in the undersea fiber optic cable with the right to control and
manage the facility. Because of this ownership feature, the Company
records these undersea fiber optic cables as owned transmission and
communications equipment and as long-term debt. The Carrier Lease
Agreement basis involves a shorter term agreement which provides the
Company the right to use capacity on a cable but without any rights and
duties of ownership. The Company accounts for such leases as operating
leases.
o. Impact of Recently Issued Accounting Standards--In February 1997, the
Financial Accounting Standards Board ("FASB") issued SFAS No. 129,
"Disclosure of Information about Capital Structure," which establishes
standards for disclosing information about an entity's capital structure
and is to be implemented for fiscal years ending after December 15,
1997; in June 1997 the FASB issued SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general-purpose financial statements
and is to be implemented for fiscal years beginning after December 15,
1997; in June 1997 the FASB issued SFAS No. 131, "Disclosures about
Segments of
F-12
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
an Enterprise and Related Information," which establishes standards for
the way that public business enterprises report information about
operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments
in interim financial reports issued to shareholders and is to be
implemented for fiscal years beginning after December 15, 1997. The
implementation of such standards will not have a material impact on the
Company's financial position or results of operations.
p. Reclassifications--Certain amounts in the September 30, 1997 and 1996
consolidated financial statements have been reclassified to conform with
the presentation of the March 31, 1998 (Unaudited) consolidated
financial statements.
3.OPERATING DEFICIT AND MANAGEMENT'S PLANS
The Company had a net loss of approximately $14 million for the year ended
September 30, 1997. The owners of the Company committed to provide, make
available, or ensure the availability of the necessary cash or working
capital sufficient to sustain the operations of the Company through
September 30, 1998. Management's plans include continued growth in new
markets and existing markets and to improve sales volume. On January 28,
1998, the Company issued $300 million aggregate principal amount of 10 1/2%
Senior Notes due 2008 (the "Notes") (see Note 13). Accordingly, the Company
does not expect that it will require any additional working capital
advances from its owners.
4.LONG-TERM DEBT OBLIGATIONS
Long-Term Debt
On March 27, 1997, FCI entered into an Equipment Loan and Security
Agreement with NTFC Capital Corporation ("NTFC") to finance up to
$5,000,000 for the purchase of transmissions and communications equipment.
NTFC has advanced amounts exceeding $5,000,000 although the original
agreement has not been revised. Interest is payable quarterly and is
calculated based upon the London Interbank Offering Rate ("LIBOR") plus 4%.
Quarterly principal payments commence on June 30, 1999. The loan is
collateralized by the related equipment purchased under such agreement. The
loan requires maintenance of certain financial and nonfinancial covenants.
FCI received a waiver of certain covenant violations for the year ended
September 30, 1997 and maintenance of those covenants was also waived
through and including the year ended September 30, 1998. The covenants
violated were related to the delinquent payment of current liabilities, the
debt service coverage ratio, the debt to net worth ratio, the prohibition
of business changes, the limitation of investments and the limitation on
transactions with affiliates. The Company used a portion of the proceeds
from the offering of Notes to pay off the indebtedness under the Equipment
Loan and Security Agreement and the agreement was terminated (See Note 13).
The outstanding balance at September 30, 1997 was $7,116,482.
During 1995, FCI entered into an equipment financing agreement with
Ericsson I.F.S. to purchase certain equipment. The original agreement was
amended and restated on December 30, 1996, to increase the borrowing limit
to $7,000,000 and certain terms were further revised on June 12, 1997 and
November 21, 1997. Interest is calculated based upon LIBOR plus 4% and is
payable quarterly beginning April 1, 1997. The LIBOR rate at September 30,
1997 and 1996, respectively, was 5.8% and 5.4%. Quarterly principal
payments commence on June 30, 1998. The loan is collateralized by the
related equipment purchased under the financing agreement. The loan
requires maintenance of certain financial and nonfinancial covenants. FCI
received a waiver of certain covenant violations of the original and
amended and restated loan agreements. The covenants were then modified. The
covenants violated were related to the requirement of mandatory
F-13
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
prepayments of the loan, revisions to the Limited Liability Company
Agreement, limitations on distribution to owners and patents, licenses and
franchises, earnings before interest, taxes, depreciation and amortization
("EBITDA") coverage ratio, minimum tangible net worth, current ratio, debt
to annualized EBITDA ratio, and limitation on capital expenditures. The
Company used a portion of the proceeds from the offering of Notes to pay
off the indebtedness under the equipment financing agreement and the
agreement was terminated (see Note 13). The outstanding balance at
September 30, 1997 and 1996 was $5,093,782 and $4,327,188, respectively.
The total amounts of Property and Equipment collateralized at September 30,
1997 and 1996 approximate the outstanding loan balances.
On November 30, 1995, Tele8 entered into a five year financing agreement to
purchase, on an MAOU basis, undersea fiber optic cable capacity from
Teleglobe Cantat-3 Inc. and Telecom A/S. Interest is calculated based upon
LIBOR plus 4.5%. Quarterly interest and principal payments began December
31, 1995. The loan is collateralized by all rights, titles and interests in
the undersea fiber optic cable capacity. The outstanding balance at March
31, 1998, September 30, 1997 and 1996 was $425,560 (Unaudited), $520,135
and $709,275, respectively.
On March 15, 1996, Tele8 entered into another five year financing agreement
to purchase, on an MAOU basis, undersea fiber optic cable capacity from
Teleglobe Cantat-3 Inc. and Telecom A/S. Interest is calculated based upon
LIBOR plus 4.5%. Quarterly interest and principal payments began March 31,
1996. The loan is secured by all rights, titles and interests in the
undersea fiber optic cable capacity. The outstanding balance at March 31,
1998, September 30, 1997 and 1996 was $511,635 (Unaudited), $613,965 and
$818,625, respectively.
Tele8 has other debt instruments that bear interest at various rates. At
March 31, 1998, September 30, 1997 and 1996 $488,000 (Unaudited), $545,000
and $1,185,000, respectively, was payable to Ericsson I.F.S. for financed
equipment and is due in annual installments through 2002. In addition to
the amounts payable to Ericsson I.F.S., $152,000 (Unaudited), $154,000 and
$566,550 was payable to other creditors at March 31, 1998, September 30,
1997 and 1996, respectively.
Capital Leases
The Company leases certain undersea fiber optic cables under agreements
permitting the use of the cables over periods up to 25 years with payment
requirements over periods not exceeding five years. Payments are made
quarterly and interest is calculated at LIBOR plus 4% to 4.5%.
Future minimum payments on long-term debt and capital lease obligations at
September 30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
LONG-TERM CAPITAL
DEBT LEASES
--------- -------
<S> <C> <C>
1998..................................................... $ 1,043 $ 774
1999..................................................... 2,442 717
2000..................................................... 3,284 655
2001..................................................... 2,938 520
2002..................................................... 2,938 101
Thereafter............................................... 1,398 --
------- ------
Total future minimum payments............................ $14,043 $2,767
=======
Less: Amount representing interest (using September 30,
1997 LIBOR rate)........................................ (471)
------
$2,296
======
</TABLE>
F-14
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Predecessor
Tele8 leases property and equipment under capital leases. Interest on the
capital leases is paid quarterly at the rate of LIBOR plus 3.5% to 6%.
Tele8 had outstanding interest-bearing working capital advances from
Armstrong and its owners that accrues interest with rates ranging from 0%
to 11%.
5.INCOME TAXES
Deferred tax assets of approximately $2,830,000 and $300,000 at September
30, 1997, respectively, are related to the cumulative net operating loss
("NOL") carryforwards of Tele8 and FCI-UK totaling approximately
$10,100,000 and $1,000,000, respectively. At September 30, 1996, a deferred
tax asset of approximately $1,120,000 is principally related to cumulative
net operating loss carryforwards of Tele8 totaling approximately
$4,000,000. The NOLs do not expire under Swedish and United Kingdom tax
laws. A valuation allowance has been established for the amount of deferred
tax assets at both September 30, 1997 and 1996.
Also, on December 22, 1997, the Company adopted a tax sharing agreement
with AHI, whereby the Company is obligated to file a consolidated federal
income tax return with AHI and subsidiaries. Under the Agreement, FCI is
obligated to pay, with certain exceptions, its share of the consolidated
tax liability to AHI and FCI will not be paid by AHI for tax benefits
realized in the consolidated tax return. At December 31, 1997, FCI had
approximately $1,018,000 (Unaudited) of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and amounts used for income tax purposes that amounted to approximately
$393,000 (Unaudited) and was recorded as a deferred tax liability and
deferred income tax expense for the change in tax status for the six months
ended March 31, 1998.
From December 23, 1997 through March 31, 1998, the period after the change
in tax status, FCI recorded a tax benefit of $3.6 million based upon losses
expected to be utilized by AHI. The net benefit recorded was passed through
as a dividend to AHI.
The components of loss before income taxes for the periods ended September
30, 1997, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Domestic............................................ $ 6,978 $ 3,009 $ 368
Foreign............................................. 7,053 6,653 1,357
------- ------- ------
Total............................................. $14,031 $ 9,662 $1,725
======= ======= ======
The components of the income tax provision for the periods ended September
30, 1997, 1996 and 1995 are as follows (in thousands):
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Deferred tax asset ................................. $ 2,010 $ 1,120 $ --
Valuation allowance................................. (2,010) (1,120) --
------- ------- ------
$ -- $ -- $ --
======= ======= ======
</TABLE>
There are no pro forma income tax amounts presented giving effect to the
change in tax status for the statements of operations presented as the
Company would have been a stand alone taxpaying entity and a valuation
allowance would have been established for any net deferred tax benefit
related to net operating losses.
F-15
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Predecessor
Tele8 has deferred tax assets of approximately $955,000 at June 30, 1995
which is principally related to the cumulative net operating loss
carryforwards totaling approximately $3,400,000 at June 30, 1995. A
valuation allowance has been established for the entire deferred tax asset
and the allowance increased by $375,500 during the period from January 1,
1995 to June 30, 1995. Due to the change in ownership any net operating
losses generated in 1995 and prior years are not available for future use.
The difference between the tax provision calculated at the statutory Swedish
income tax rate and the effective tax provision for the period from January
1, 1995 to June 30, 1995 is as follows (in thousands):
<TABLE>
<S> <C>
Tax benefit at statutory rate......................................... $ 375
Increase in deferred tax asset valuation.............................. (375)
-----
Provision for income taxes............................................ $ --
=====
</TABLE>
6. OPERATING LEASES
The Company leases office facilities and certain fiber optic cables and
switching facilities under noncancelable operating leases. Rental expense
for the periods ended September 30, 1997, 1996, and 1995 was $889,380,
$355,010, and $63,041, respectively.
Future minimum lease payments under noncancelable operating leases as of
September 30, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................. $1,521
1999................................................................. 1,324
2000................................................................. 479
2001................................................................. 190
2002................................................................. 98
------
$3,612
======
</TABLE>
Predecessor
Tele8 leases office facilities and equipment under noncancelable operating
leases. Rental expense for the period from January 1, 1995 to June 30, 1995
was $102,602.
7. BORROWINGS FROM OWNERS
At September 30, 1996, the Company had outstanding interest-bearing working
capital advances from Armstrong totaling $1,549,000. On November 1, 1996,
FCI entered into a Convertible Line of Credit Agreement with Armstrong. The
outstanding advances were converted into borrowings under the line of credit
agreement. Under such agreement, FCI had a $15,000,000 credit facility of
which $5,000,000 was available in cash and $10,000,000 was available for
letter of credit needs. Armstrong had the right, at any time on or before
October 31, 1999, to convert the entire principal amount of the cash loan
into a maximum of 3.1% of additional ownership and convert the letter of
credit balance outstanding into a maximum additional 4.44% ownership. In
1997, Armstrong converted the outstanding balance of $5,396,000 under the
cash portion of the agreement into an ownership interest.
At September 30, 1997, FCI has $10,000,000 for letter of credit needs of
which it has outstanding letters of credit of $6,136,000 under the
Convertible Line of Credit Agreement.
F-16
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1997, FCI entered into a Bridge Loan Agreement with Armstrong in which
FCI can borrow up to $10,000,000. Interest is calculated based upon prime
plus 1%. The prime rate was 8.5% at September 30, 1997. The loan is due on
October 1, 1998. The outstanding balance at September 30, 1997 was
$6,250,000. During the three months ended December 31, 1997, Armstrong
converted the outstanding balance of $6,250,000 (Unaudited) into an
ownership interest (see Note 1).
Additionally, as of September 30, 1996, Tele8 had issued convertible
debentures in the amount of $480,000 to a minority stockholder of both Tele8
and FGC (the "Minority Stockholder"). Such convertible debentures accrued
interest at LIBOR plus 4%. Interest was payable annually on September 30,
with the full principal amount due on September 30, 2003 (see Note 8).
FCI's total interest expense under the above borrowings was $462,247 and
$25,527 for the years ended September 30, 1997 and 1996, respectively. At
September 30, 1997, there was $90,950 related to interest accrued.
8. OTHER RELATED PARTY TRANSACTIONS
As of September 30, 1996, FCI had an advance to the Minority Stockholder of
$499,000.
As of September 30, 1996, FCI and the Minority Stockholder held $1,120,000
and $480,000, respectively, of Tele8 debentures totaling $1,600,000 which
earned interest at LIBOR plus 4%. The holder of the debentures had the right
to convert the outstanding principal balance into Tele8 common stock at a
predetermined price ranging from $200 to $250 per share.
On December 23, 1996, the Minority Stockholder assigned its right, title and
interest in the Tele8 convertible debentures to FCI to satisfy the
outstanding advance due to FCI from the Minority Stockholder. On March 14,
1997, FCI converted all of its Tele8 convertible debentures into 7,400
shares of Tele8 common stock. On May 15, 1997, Tele8 issued 14,400
additional shares of common stock to FCI for consideration of $3,600,000.
Such transactions increased FCI's ownership in Tele8 to 89.6%.
In March 1996, Tele8 Kontakt, a subsidiary of FCI at that time, was awarded
a license agreement from the Swedish government for certain rights relating
to communications systems and technology. During October 1996, FCI
distributed its rights under such license agreement to its owners.
FCI has contracted with Armstrong, since its inception, for the performance
of certain services by Armstrong for FCI, including but not limited to
financial accounting, professional and billing services. In July 1997, two
agreements with terms of five years each were entered into for such
services. Expenses related to such contracted services of approximately
$439,000 and $7,400 are included in the statements of operations for the
year ended September 30, 1997 and 1996, respectively. At September 30, 1997,
there was approximately $298,000 for unpaid amounts related to such
contracted services.
The terms of the agreements include professional services billed at hourly
rates, check processing at an amount per check and data center services
based on usage and disk storage space. The Company believes that the terms
of the agreements are competitive with similar services offered in the
industry.
9. BENEFIT PLANS
Tele8
Tele8 contributes to the Swedish state pension fund, social insurance,
medical insurance and unemployment charters for its employees. Tele8's
contribution of $781,000, $563,003 and $88,168 for the periods ended
September 30, 1997, 1996 and 1995, respectively, represents approximately
40% of the employees' salaries for respective periods and was expensed as
incurred. For the period from January 1, 1995 to June 30, 1995 Tele8's
contribution was approximately $92,000.
F-17
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
401(k)
Employees of FCI may participate in a salary reduction (401(k)) plan
administered by Armstrong. All contributions represent employee salary
reductions.
Performance Unit Plan
Certain employees and directors are eligible to participate in a
Performance Unit Plan established by the Company, under which a maximum of
1,254,000 units may be granted. A unit is a right to receive a cash payment
equal to the excess of the fair market value of a unit on its maturity date
over the initial value of a unit. Fair market value of a unit as determined
by the management committee of the Company. At September 30, 1997 and 1996,
484,500 and 152,000 units have been granted, respectively. Participants
vest in their units over a period not to exceed two years and are entitled
to receive cash compensation equivalent to the value of the units at the
time a participant retires provided the participant has 10 years of
continuous service or, if earlier, upon the occurrence of certain events,
including a change in control of the Company. The Company accrues to
expense over the participant's service vesting period (10 years) amounts
based on the value of the unit at year end. Amounts charged to expense for
this plan for the year ended September 30, 1997 was $288,000. No amounts
were expensed in prior years (see Note 13).
10. CONCENTRATION OF RISK
Financial instruments that potentially subject the Company to concentration
of credit risk are accounts receivable. Four of the Company's customers
accounted for approximately 25.2%, 31.0% and 50.0% of gross accounts
receivable as of March 31, 1998, September 30, 1997 and 1996, respectively.
The Company performs on-going credit evaluations of its customers but does
not currently require collateral to support customer receivables. However,
many of the Company's customers, including these four, are suppliers to
whom the Company has accounts payable that mitigate this risk.
In addition, the Company is dependent upon certain suppliers for the
provision of telecommunication services to its customers. The Company has
not experienced, and does not expect, any disruption of such services.
Approximately 24% and 41% of the Company's revenues for the years ended
September 30, 1997 and 1996, respectively, were derived from two customers
each with percentages in excess of 10%.
11. COMMITMENTS
Equipment
At September 30, 1997, the Company had outstanding commitments to purchase
certain switching equipment for approximately $8.6 million. The Company
continues to acquire additional equipment and to obtain financing for some
commitments during fiscal year 1998.
12. CONTINGENCIES AND LITIGATION
The Company is involved in various claims and possible actions arising in
the normal course of its business. Although the ultimate outcome of these
claims cannot be ascertained at this time, it is the opinion of the
Company's management, based on its knowledge of the facts and advice of
counsel, that the resolution of such claims and actions will not have a
material adverse effect on the Company's financial condition or results of
operations.
F-18
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In August 1997, the Company entered into a settlement agreement relating to
litigation arising from a certain 1996 Tele8 international telephone
services agreement and related billing, collection and factoring agreements
with third parties. For the year ended September 30, 1996, selling, general
and administrative expenses includes approximately $708,000 of losses
relating to the settlement of which $500,000 represents a reserve on
advances, paid at the time of the settlement agreement, on behalf of the
telephone service company. Under the settlement agreement all of the above
amounts were paid to fully satisfy any amounts which may be owing from the
Company and the telephone services company to a company under a factoring
agreement. At the date of settlement, the management of the Company
believed the amounts advanced to the telephone services company were
uncollectible. The settlement agreement also provides for the factoring
company to assign to the Company any and all receivable claims the
factoring company may have against the billing and collection agent
("Agent"). The Company has filed a complaint against the Agent for breach
of contract and related claims pursuant to an agreement between the Company
and the Agent. The Agent has agreed to place in escrow the sum of
$1,431,324. On May 8, 1998, the balance of the escrow account was
distributed among various entities. The Company received $790,880.
13. SIGNIFICANT EVENTS AFTER SEPTEMBER 30, 1997
As discussed in Note 1, on October 23, 1997, FCI entered into a Stock
Purchase Agreement, effective October 1, 1997, with the Minority
Stockholder whereby FCI purchased all of the Minority Stockholders'
interest in Tele8 for $750,000 and sold all of its interest in FGC to the
Minority Stockholder for $100 and recorded a loss of approximately $79,000
on the transaction. As of October 23, 1997, FCI owns 99% of Tele8. FCI
recorded $750,000 of goodwill related to the purchase of the Minority
Stockholders interest.
As discussed in Note 1, FCI was incorporated on November 20, 1997. FCI is a
corporation subject to income taxes and due to the exchange the results of
operations of FCI will be subject to income taxes (see Note 5).
On December 22, 1997, the Board of Directors adopted the 1997 Phantom Stock
Rights Plan (the "Phantom Stock Plan"). The Phantom Stock Plan provides for
the granting of phantom stock rights ("Phantom Shares") to certain
directors, officers and key employees of the Company and its subsidiaries.
The total number of Phantom Shares which may be granted pursuant to the
Phantom Stock Plan is 6,175, subject to adjustments for stock splits and
stock dividends.
All of the units granted under the Company's Performance Unit Plan (see
Note 9) were exchanged for equivalent phantom rights with equivalent terms
under the new phantom rights plan. Accordingly, 4,845 Phantom Shares have
been granted of which 3,182 had vested. All of the provisions of the
Phantom Stock Plan including vesting, forfeiture and cash settlement mirror
the provisions of the Company's Performance Unit Plan.
On December 22, 1997, the Board of Directors adopted two 1997 Stock Option
Plans ("Stock Option Plan No. 1"and "Stock Option Plan No. 2"). Both plans
provide for the grant of options to purchase shares of the Company's common
stock to certain directors, officers and key employees of the Company and
its subsidiaries. The purpose of Stock Option Plan No. 1 is to provide to
the Company the discretionary ability to grant options in replacement and
substitution of Phantom Shares which have been granted pursuant to the
Phantom Stock Plan. The aggregate number of shares of Common Stock as to
which options may be granted pursuant to Stock Option Plan No. 1 is 6,175,
subject to adjustments for stock splits and stock dividends, and no options
may be granted under the plan after December 22, 2007.
The principal terms of Stock Option Plan No. 2 are substantially identical
with Stock Option Plan No. 1 with the following exceptions: (i) the
aggregate number of shares of common stock as to which options may be
granted pursuant to Stock Option Plan No. 2 is 5,135, subject to
adjustments for stock splits and
F-19
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
stock dividends; (ii) options under Stock Option Plan No. 2 are intended to
be granted for reasons other than replacement and substitution of Phantom
Shares that have been granted pursuant to the Phantom Stock Plan; and (iii)
the exercise price for options granted under Stock Option Plan No. 2 is
determined by the administrator but, except as may be approved by the Board
of Directors, such price may not be less than 100% of the fair market value
per share of the common stock on the date of grant.
No options have been authorized or granted under the stock option plans.
Subject to certain limited exceptions no option is exercisable during the
first six months of its term with expiration ten years thereafter.
On January 28, 1998, FCI issued $300 million aggregate principal amount of
Notes pursuant to an Indenture (the "Offering"). The Notes are unsecured
obligations of FCI and interest on the Notes is payable semiannually in
arrears on January 15 and July 15 of each year, commencing on July 15,
1998.
The Notes are redeemable at the option of FCI, in whole or in part at any
time on or after January 15, 2003, at specified redemption prices plus
accrued and unpaid interest. In addition, at any time prior to January 15,
2001, FCI, may redeem from time to time up to 35% of the originally issued
aggregate principal amount of the Notes at the specified redemption prices
with the net cash proceeds (as defined in the Indenture) of one or more
public equity offerings. In the event of a change in control of ownership
of FCI, Inc., each holder of the Notes has the right to require FCI, to
purchase all or any of such holder's Notes at a purchase price in cash
equal to 101% of the aggregate principal amount.
FCI used approximately $86.5 million of the proceeds from the Offering to
purchase investments consisting of U.S. Government Obligations, which are
pledged as security and restricted for the first six scheduled interest
payments on the Notes. In addition, approximately $16.9 million of existing
indebtedness was paid off with the proceeds from the Offering (see Note 4).
The Notes require maintenance of certain financial and nonfinancial
covenants, including limitations on additional indebtedness, restricted
payments including dividends, transactions with affiliates, liens and asset
sales.
FCI is required, under the terms of the Indenture, to register the Notes
under the Securities Act of 1933, as amended, within prescribed time
periods.
On March 31, 1998, the Board of Directors adopted the FaciliCom
International, Inc. 1998 Stock Option Plan (the "1998 Stock Option Plan")
and terminated the Stock Option Plan No. 1 and Stock Option Plan No. 2. By
resolution of the Board of Directors on March 31, 1998, the Company's
Certificate of Incorporation was amended to create 25,000 shares of a non-
voting class of common stock. At March 31, 1998, the Company has 300,000
authorized shares, of which 275,000 are a voting class of common stock.
The 1998 Stock Option Plan provides for the grant of options to purchase
shares of the Company's non-voting common stock to certain directors,
officers, key employees and advisors of the Company. The aggregate number
of options that may be granted under the 1998 Stock Option Plan is 22,574
and no option may be granted after March 31, 2008. No option is exercisable
within the first six months of grant and options expire after ten years.
Also on March 31, 1998, all of the Phantom Shares previously granted to
employees of the Company under the Company's Phantom Stock Plan were
converted to options under the 1998 Stock Option Plan, and the Company
granted additional options to purchase 6,448 shares of non-voting common
stock to employees, directors and advisors under the 1998 Stock Option
Plan. The exchange of employees' Phantom Shares for options resulted in
additional compensation cost for the incremental value of the new option
amortized over the vesting period of the option that is shorter than the
service period of the Phantom Shares. Total unrecognized compensation cost
approximated $1,672,375 at time of conversion.
F-20
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the stock option activity at March 31, 1998 is as follows:
<TABLE>
<CAPTION>
OPTION OPTION OPTION
SHARES SHARES SHARES
(EXERCISE PRICE $1) (EXERCISE PRICE $263) (EXERCISE PRICE $500)
------------------- --------------------- ---------------------
<S> <C> <C> <C>
Options granted and
outstanding at March 31,
1998 (unaudited)........ 9,918 670 705
</TABLE>
All of the options outstanding at March 31, 1998 have a 10 year life and an
option price range from $1.00 to $500 per option share. The options vest
over a period up to 5 years and at March 31, 1998 there were 8,826 options
granted that vested immediately. The Company recognized compensation cost
of $5,202,141 (unaudited) as of March 31, 1998 relating to options granted
and recognized compensation cost of $311,592 (unaudited) for the six months
ended March 31, 1998 relating to the Company's Phantom Stock plan. At March
31, 1998 compensation cost includes $2,112,640 (unaudited) for 3,401
(unaudited) options with an exercise price of $1.00 granted to certain non-
employee directors and advisors related to certain directors of the
Company.
The fair value of options granted at March 31, 1998 was as follows:
<TABLE>
<CAPTION>
OPTION FAIR VALUE
OPTION SHARES AT MARCH 31, 1998
EXERCISE PRICE (DATE OF GRANT)
-------------- -----------------
(unaudited)
<S> <C>
$ 1..................................................... $640
$263..................................................... $423
$500..................................................... $306
</TABLE>
The fair value of the option grant is estimated on the date of grant using
the Black-Scholes option pricing model. The assumptions used in the Black-
Scholes model are: dividend yield 0%, volatility 30%, risk free interest
rate of 6%, assumed forfeiture rate of 0% and an expected life of 3 to 5
years.
If the Company would have recorded compensation cost for the Company's
stock option plan consistent with the fair value-based method of accounting
prescribed under SFAS No. 123 it would have had an immaterial effect on the
net loss of the Company for the six months ended March 31, 1998.
On April 27, 1998, the Company entered into a Stock Purchase Agreement to
purchase 100% of the issued and outstanding capital stock of Oy Teleykkanen
AB ("Tele 1"), a corporation formed under the laws of Finland, for $4.0
million in cash. Tele 1 is a Finnish provider of local and long distance
international telecommunication services and has a carrier agreement to
exchange customer traffic with Telecom Finland, the dominant carrier in
Finland.
F-21
<PAGE>
FACILICOM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14.VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance accounts for the periods ended
September 30, 1997, 1996 and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
DOUBTFUL ACCOUNTS
--------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF PERIOD COSTS AND EXPENSE DEDUCTIONS END OF PERIOD
------------------- ----------------- ---------- -------------
<S> <C> <C> <C> <C>
1995......... $-- $ -- $ -- $--
1996......... $-- $ -- $ -- $--
1997......... $-- $1,263 $(1,102) $161
</TABLE>
<TABLE>
<CAPTION>
DEFERRED TAX ASSET VALUATION
--------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF PERIOD COSTS AND EXPENSE DEDUCTIONS END OF PERIOD
------------------- ----------------- ---------- -------------
<S> <C> <C> <C> <C>
1995......... $ -- $ -- $-- $ --
1996......... $ -- $1,120 $-- $1,120
1997......... $1,120 $2,010 $-- $3,130
</TABLE>
See Note 5 for amounts relating to Tele8 (Predecessor).
15.GEOGRAPHIC DATA
The Company operates as a provider of international long-distance
telecommunications services. The Company is a multinational company
operating in many countries including the United States, the United
Kingdom, Sweden, Denmark and the Netherlands. Sales between geographic
areas represent the providing of services through carrying and ultimately
termination of customer traffic originated in the other geographic area and
are accounted for based on established sales prices. In computing operating
loss for foreign operations, no allocations of certain general corporate
expenses have been made. Summary information with respect to the Company's
geographic operations is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED PERIOD FROM PERIOD FROM
MARCH 31, SEPTEMBER 30, MAY 5, 1995 TO JANUARY 1, 1995 TO
----------------- ----------------- SEPTEMBER 30, JUNE 30, 1995
1998 1997 1997 1996 1995 (PREDECESSOR)
-------- ------- -------- ------- -------------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NET REVENUE
North America................................. $ 56,067 $22,302 $ 56,315 $ 8,363 $ -- $ --
Europe........................................ 34,541 8,000 24,187 7,347 547 367
Eliminations.................................. (19,654) (3,208) (10,315) (3,819) -- --
-------- ------- -------- ------- ------- -------
Total....................................... $ 70,954 $27,094 $ 70,187 $11,891 $ 547 $ 367
======== ======= ======== ======= ======= =======
OPERATING LOSS
North America................................. $(12,856) $(2,050) $ (6,337) $(2,936) $ (359) $ --
Europe........................................ (3,752) (3,223) (5,023) (6,640) (1,201) (1,305)
-------- ------- -------- ------- ------- -------
Total....................................... $(16,608) $(5,273) $(11,360) $(9,576) $(1,560) $(1,305)
======== ======= ======== ======= ======= =======
ASSETS
North America................................. $315,643 $15,984 $25,035 $ 9,431 $ 387 $ --
Europe........................................ 70,364 13,283 21,824 13,042 5,353 4,422
Eliminations.................................. (10,192) (1,568) (2,842) (1,465) (76) --
--------------------------------------------------
-------- ------- -------- ------- ------- -------
Total....................................... $375,815 $27,699 $ 44,017 $21,008 $ 5,664 $ 4,422
</TABLE>
F-22
<PAGE>
ANNEX A
GLOSSARY
accounting or settlement rate--The per minute rate negotiated between
carriers in different countries for termination of international long distance
traffic in, and return traffic to, the carriers' respective countries.
CUG (Closed User Group)--A group of specified users, such as employees of a
company, permitted by applicable regulations to access a private voice or data
network, which access would otherwise be denied to them as individuals.
facilities-based carrier--A company that owns or leases its international
network facilities including undersea fiber optic cables and switching
facilities rather than reselling time provided by another facilities-based
carrier.
FCC--Federal Communications Commission.
IRU (Indefeasible Right of Use)--The rights to use a telecommunications
system, usually an undersea fiber optic cable, with most of the rights and
duties of ownership, but without the right to control or manage the facility
and, depending upon the particular agreement, without any right to salvage or
duty to dispose of the cable at the end of its useful life.
ISR (International Simple Resale)--The use of international leased lines for
the provision of switched voice services to the public, by-passing the current
system of accounting rates.
MAOU (Minimum Assignable Ownership Units)--Capacity on a telecommunications
system, usually an undersea fiber optic cable, acquired on an ownership basis.
operating agreement--An agreement that provides for the exchange of
international long distance traffic between correspondent international long
distance providers that own facilities in different countries. These
agreements provide for the termination of traffic in, and return traffic from,
the international long distance providers' respective countries at a
negotiated "accounting rate." Under a traditional operating agreement, the
international long distance provider that originates more traffic compensates
the corresponding long distance provider in the other country by paying an
amount determined by multiplying the net traffic imbalance by the latter's
share of the accounting rate.
Points of Presence (PoPs)--Switches owned or leased by an interexchange
carrier that is located near a local exchange carrier's switch and that
enables the interexchange carrier to access to the local exchange carrier's
customers and/or services.
PSTN (Public Switched Telephone Network)--A telephone network which is
accessible by the public through private lines, wireless systems and pay
phones.
PTT (Postal, Telephone and Telegraph Company)--The dominant carrier or
carriers in each country, often, but not always, government-owned or
protected.
private line--A private, dedicated telecommunications line connecting
different end user locations.
RBOC (Regional Bell Operating Company)--The seven telephone companies
established by the 1982 agreement between AT&T and the Department of Justice.
resale--Resale by a provider of telecommunications services of services sold
to it by other providers or carriers on a wholesale basis.
A-1
<PAGE>
switch--A sophisticated computer that accepts instructions from a caller in
the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits
or selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow telecommunications service providers to connect
calls directly to their destination, while providing advanced features and
recording connection information for future billing.
undersea fiber optic cable--Fiber optic cable is the medium of choice for
the telecommunications industry. Fiber is immune to electrical interference
and environment factors that affect copper wiring and satellite transmission.
Fiber optic technology involves sending laser light pulses across glass
strands in order to transmit digital information. A strand of fiber optic
cable is as thick as a human hair yet has to have more bandwidth capacity that
a copper wire the size of a telephone pole. For international service, the
fiber optic cable is placed at the bottom of the oceans in order to connect
the various continents.
A-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY SECURITY OTHER THAN THE NOTES OFFERED HEREBY NOR DOES IT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE NOTES TO
ANY PERSON IN ANY JURISDICTION IN WHICH IT WOULD BE UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION TO SUCH PERSON. 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 PRO-
SPECTUS OR INCORPORATED BY REFERENCE HEREIN OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information..................................................... 4
Disclosure Regarding Forward-Looking Statements........................... 4
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 17
The Exchange Offer........................................................ 28
Capitalization............................................................ 37
Selected Consolidated Financial and Other Data............................ 38
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 40
Business.................................................................. 49
Management................................................................ 67
Principal Stockholders.................................................... 76
Certain Relationships and Related Transactions............................ 77
Description of Capital Stock.............................................. 79
Summary of Other Indebtedness............................................. 80
Description of Notes...................................................... 82
Certain United States Federal Income Tax Considerations................... 111
Plan of Distribution...................................................... 112
Legal Matters............................................................. 112
Experts................................................................... 112
Index to Financial Statements............................................. F-1
Glossary of Terms......................................................... A-1
</TABLE>
-----------------
UNTIL . , 1998 ( . DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN SELLING
EXCHANGE NOTES RECEIVED IN EXCHANGE FOR OLD NOTES HELD FOR THEIR OWN ACCOUNT.
SEE "PLAN OF DISTRIBUTION."
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$300,000,000
[LOGO OF FCI APPEARS HERE]
FACILICOM
INTERNATIONAL, INC.
OFFER TO EXCHANGE
10 1/2% SERIES B
SENIOR NOTES
DUE 2008
FOR ANY AND ALL
10 1/2% SENIOR NOTES
DUE 2008
--------
PROSPECTUS
. , 1998
--------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's By-Laws provide, to the maximum extent provided by applicable
law, no director shall be personally liable to the Company or its stockholders
for monetary damages for any breach of fiduciary duty by such director as a
director. The foregoing sentence shall not eliminate or limit the liability of
a director, (i) for breach of the director's duty of loyalty of the Company or
its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) pursuant
to Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. No
amendment to or repeal of the relevant Article of the By-Laws of the Company
shall apply to or have any effect on the liability or alleged liability of any
director or officer of the Company for or with respect to any acts or
omissions of such director or officer occurring prior to such amendment.
Directors and officers of the Company shall be indemnified as of right to
the fullest extent now or hereafter permitted by law in connection with any
actual or threatened civil, criminal, administrative or investigative action,
suit or proceeding (whether brought by or in the name of the Company or
otherwise) arising out of their service to the Company or to another
organization at the request of the Company. Persons who are not directors or
officers of the Company may be similarly indemnified in respect of such
service to the extent authorized at any time by the Board of Directors of the
Company. The Company may purchase and maintain insurance to protect itself and
any such director, officer or other person against any liability asserted
against him and incurred by him in respect of such service whether or not the
Company would have the power to indemnify him against such liability by law or
under the provisions of the Company's By-Laws. The provisions of the Company's
By-Laws shall be applicable to actions, suits or proceedings commenced after
the adoption hereof, whether arising from acts or omissions occurring before
or after the adoption hereof, and to directors, officers and other persons who
have ceased to render such service, and shall inure to the benefit of the
heirs, executors and administrators of the directors, officers and other
persons referred to in this Article.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
*1.1 Purchase Agreement between the Company, Lehman Brothers Inc. and BT
Alex. Brown Incorporated dated January 23, 1998
*2.1 Investment and Shareholders Agreement among Armstrong International
Telecommunications, Inc., FCI Management Group and FaciliCom
International, Inc. dated December 22, 1997 (together with all
exhibits thereto)
*3.1 Certificate of Incorporation of FaciliCom International, Inc.
*3.2 Certificate of Amendment of Certificate of Incorporation of
FaciliCom International, Inc.
*3.3 By-laws of FaciliCom International, Inc.
*4.1 Indenture between the Company and State Street Bank and Trust
Company dated January 28, 1998
4.2 Reference is made to Exhibits 3.1 and 3.2
*4.3 Form of Common Stock Certificate of FaciliCom International, Inc.
5.1 Opinion of Swidler & Berlin, Chartered regarding legality
*10.1 Registration Rights Agreement between the Company, Lehman Brothers
Inc. and BT Alex. Brown Incorporated dated January 28, 1998
*10.2 FaciliCom International, Inc., 1997 Stock Option Plan No. 1
*10.3 FaciliCom International, Inc., 1997 Stock Option Plan No. 2
*10.4 FaciliCom International, Inc., 1997 Phantom Stock Rights Plan
*10.5 International Telecommunications Services Agreement between Fonetel
Global Communications AB and Telecom Finland International dated
December 15, 1994
+*10.6 Service Agreements between Fonetel Global Communications AB and
Nordnet OY dated January 26, 1995
*10.7 Services Agreements between Fonetel Global Communications AB and
Belgacom SA dated February 15, 1995
*10.8 Services Agreement between Telenor Carrier Services A/S and Nordiska
Tele8 AB dated November 14, 1995
*10.9 Operating Agreement between Nordiska Tele8 AB and Portugal Telecom
dated February 1, 1996
*10.10 Operating Agreement between Deutsche Telekom AG and Tele8 Sweden
dated May 28, 1996
*10.11 Operating Agreement between Nordiska Tele8 AB and Eesti Telefon
dated August 12, 1996
*10.12 Memorandum of Understanding between Telekon Sloveniga and Nordiska
Tele8 AB dated October 30, 1996
+10.13 Services Agreement between Telecom Italia SpA and Nordiska Tele8 AB
dated January 16, 1997
*10.14 Agreement to Operate International Telecommunications between CANTV
and FaciliCom International and Between FaciliCom International,
L.L.C. and Compania Anonima Nacional de Telefonos de Venezuela dated
June 2, 1997
*10.15 International Telecommunications Service Agreement between MATAV
Rt -- Hungary and Nordiska Tele8 AB -- Sweden
+*10.16 Agreement on Joint Traffic between TeleDanmark A/S and Nordiska
Tele8 AB dated December 18, 1997
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
*10.17 Interconnect Agreement between Telia AB and Nordiska Tele8 AB
*10.18 Services Agreement between Armstrong Holdings, Inc. and FaciliCom
International, L.L.C. dated July 1, 1997
*10.19 FaciliCom International, Inc. 1998 Stock Option Plan
*10.20 Billing and MIS Services Agreement between Armstrong Holdings, Inc.
and FaciliCom International, L.L.C. dated July 1, 1997
*10.21 Stock Purchase Agreement dated April 27, 1998 between FaciliCom
International, L.L.C. and Oy Teleykkonen AB
12.1 Schedule of Earnings to Fixed Charges
*21.1 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche llp
23.2 Consent of Deloitte & Touche
23.3 Consent of Swidler & Berlin, Chartered (to be included in Exhibit
5.1 to the Registration Statement)
*24.1 Power of Attorney (on signature page)
*25.1 Statement of eligibility of trustee
27.1 Financial Data Schedule
*99.1 Form of Letter of Transmittal
*99.2 Form of Notice of Guaranteed Delivery
*99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees
*99.4 Form of Letter to Clients
*99.5 Guides for Certification of Taxpayer Identification Number on Form
W-9
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment is being requested for portions of this document.
The redacted material has been filed separately with the Commission.
(B) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
All Schedules have been omitted because they are not applicable, not
required, or the required information is included in the Financial Statements
or the Notes thereto.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
II-3
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b)(1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of
a prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The Registrant undertakes that every prospectus: (i) that is filed
pursuant paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(d) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it becomes effective.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE DISTRICT OF COLUMBIA, ON MAY 26,
1998.
Facilicom International, Inc.
/s/ Walter J. Burmeister
By: _________________________________
WALTER J. BURMEISTER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED
ON MAY 26, 1998.
SIGNATURE TITLE
/s/ Walter J. Burmeister Chief Executive Officer,
- ------------------------------------- President and Director
WALTER J. BURMEISTER (Principal Executive
Officer)
/s/ Christopher S. King Vice President--Finance
- ------------------------------------- and Administration,
CHRISTOPHER S. KING Chief Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)
* Treasurer, Vice
- ------------------------------------- President and Director
KIRBY J. CAMPBELL
* Secretary, Vice
- ------------------------------------- President and Director
DRU A. SEDWICK
II-5
<PAGE>
SIGNATURE TITLE
--------- -----
* Director
- ------------------------------------
BRYAN CIPOLETTI
Director
- ------------------------------------
ROBERT REED
Director
- ------------------------------------
JAY SEDWICK
* Director
- ------------------------------------
WILLIAM STEWART
- --------
* By signing his name hereto, Christopher S. King signs this document on
behalf of each of the persons so indicated above pursuant to powers of
attorney duly executed by such persons and filed with the Securities and
Exchange Commission.
II-6
<PAGE>
EXHIBIT INDEX
(A) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
*1.1 Purchase Agreement between the Company, Lehman Brothers Inc.
and BT Alex. Brown Incorporated dated January 23, 1998
*2.1 Investment and Shareholders Agreement among Armstrong
International Telecommunications, Inc., FCI Management Group
and FaciliCom International, Inc. dated December 22, 1997
(together with all exhibits thereto)
*3.1 Certificate of Incorporation of FaciliCom International, Inc.
*3.2 Certificate of Amendment of Certificate of Incorporation of
FaciliCom International, Inc.
*3.3 By-laws of FaciliCom International, Inc.
*4.1 Indenture between the Company and State Street Bank and Trust
Company dated January 28, 1998
*4.2 Reference is made to Exhibits 3.1 and 3.2
*4.3 Form of Common Stock Certificate of FaciliCom International,
Inc.
5.1 Opinion of Swidler & Berlin, Chartered regarding legality
*10.1 Registration Rights Agreement between the Company, Lehman
Brothers Inc. and BT Alex. Brown Incorporated dated January 28,
1998
*10.2 FaciliCom International, Inc., 1997 Stock Option Plan No. 1
*10.3 FaciliCom International, Inc., 1997 Stock Option Plan No. 2
*10.4 FaciliCom International, Inc., 1997 Phantom Stock Rights Plan
*10.5 International Telecommunications Services Agreement between
Fonetel Global Communications AB and Telecom Finland
International dated December 15, 1994
+*10.6 Service Agreements between Fonetel Global Communications AB and
Nordnet OY dated January 26, 1995
*10.7 Services Agreements between Fonetel Global Communications AB
and Belgacom SA dated February 15, 1995
*10.8 Services Agreement between Telenor Carrier Services A/S and
Nordiska Tele8 AB dated November 14, 1995
*10.9 Operating Agreement between Nordiska Tele8 AB and Portugal
Telecom dated February 1, 1996
*10.10 Operating Agreement between Deutsche Telekom AG and Tele8
Sweden dated May 28, 1996
*10.11 Operating Agreement between Nordiska Tele8 AB and Eesti Telefon
dated August 12, 1996
*10.12 Memorandum of Understanding between Telekon Sloveniga and
Nordiska Tele8 AB dated October 30, 1996
+10.13 Services Agreement between Telecom Italia SpA and Nordiska
Tele8 AB dated January 16, 1997
*10.14 Agreement to Operate International Telecommunications between
CANTV and FaciliCom International and Between FaciliCom
International, L.L.C. and Compania Anonima Nacional de
Telefonos de Venezuela dated June 2, 1997
*10.15 International Telecommunications Service Agreement between
MATAV Rt -- Hungary and Nordiska Tele8 AB -- Sweden
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
+*10.16 Agreement on Joint Traffic between TeleDanmark Als and Nordiska
Tele8 dated December 18, 1997
*10.17 Interconnect Agreement between Telia AB and Nordiska Tele8 AB
*10.18 Services Agreement between Armstrong Holdings, Inc. and
FaciliCom International, L.L.C. dated July 1, 1997
*10.19 FaciliCom International, Inc. 1998 Stock Option Plan
*10.20 Billing and MIS Services Agreement between Armstrong Holdings,
Inc. and FaciliCom International, L.L.C. dated July 1, 1997
*10.21 Stock Purchase Agreement dated April 27, 1998 between FaciliCom
International, L.L.C. and Oy Teleykkonen AB
12.1 Schedule of Earnings to Fixed Charges
*21.1 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche llp
23.2 Consent of Deloitte & Touche
23.3 Consent of Swidler & Berlin, Chartered (to be included in
Exhibit 5.1 to the Registration Statement)
*24.1 Power of Attorney (on signature page)
*25.1 Statement of eligibility of trustee
27.1 Financial Data Schedule
*99.1 Form of Letter of Transmittal
*99.2 Form of Notice of Guaranteed Delivery
*99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees
*99.4 Form of Letter to Clients
*99.5 Guides for Certification of Taxpayer Identification Number on
Form W-9
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment is being requested for portions of this document. The
redacted material has been filed separately with the Commission.
(B) Consolidated Financial Statement Schedules;
All Schedules have been omitted because they are not applicable, not
required, or the required information is included in the Financial
Statements or the Notes thereto.
<PAGE>
EXHIBIT 5.1
[SWIDLER & BERLIN LETTERHEAD]
May 26, 1998
The Board of Directors
FaciliCom International, Inc.
1401 New York Avenue, NW
Washington, DC 20005
Re: Registration Statement on Form S-4
Gentlemen:
We have acted as counsel to FaciliCom International, Inc., a Delaware
corporation (the "Company"), with respect to the Company's Registration
Statement on Form S-4 (the "Registration Statement") filed with the Securities
and Exchange Commission, in connection with the registration under the
Securities Act of 1933, as amended (the "Securities Act"), of $300,000,000
aggregate amount outstanding of 10 1/2% Series B Senior Notes due 2008 (the
"Notes"). This opinion letter is furnished to you at your request to enable
you to fulfill the requirements of Item 601(b)(5) of Regulation S-K, 17 C.F.R.
ss. 229.601(b)(5), in connection with the Registration Statement.
As counsel to the Company, we have examined the Company's Certificate of
Incorporation, as amended (the "Certificate"), and such Company records,
certificates and other documents and relevant statutes, regulations, published
rulings and such questions of law as we considered necessary or appropriate
for the purpose of this opinion.
In our examination, we have assumed the authenticity of original documents,
the accuracy of copies and the genuineness of signatures. We have relied upon
the representations and statements of officers and other representatives of
the Company with respect to the factual determinations underlying the legal
conclusions set forth herein. We have not attempted to verify independently
such representations and statements.
This opinion letter is based as to matters of law arising solely under the
laws of the State of New York as currently in effect, and we express no
opinion herein as to any other laws, statutes, ordinances, rules or
regulations.
Based upon, subject to and limited by the foregoing and the other
qualifications herein, we are of the opinion that, when the Registration
Statement has become effective under the Securities Act, and upon issuance and
delivery of such Notes as contemplated by the Registration Statement, such
Notes will be binding obligations of the Company.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to all references to our firm in the Registration
Statement. In giving this consent, we do not admit that we come within the
category of persons whose consent is required under Section 7 of the
Securities Act or the rules promulgated thereunder.
This opinion may not be used, disclosed, quoted, filed with a governmental
agency or otherwise referred to without our express prior written consent. The
opinions expressed in this letter are limited to the matters expressly set
forth herein, and no other opinions should be inferred beyond the matters
expressly stated herein.
Very truly yours,
Swidler & Berlin, Chartered
<PAGE>
INTERNATIONAL TELECOMMUNICATION SERVICES AGREEMENT
AN AGREEMENT made the 16th of January, 1997, between Telecom Italia S.p.A.
(hereinafter called TELECOM ITALIA, which expression shall include its
successors and permitted assigns), whose registered office is et Via San
Dalmazzo 15, 10122 Torino, Italy of the one part and Nordiska Tele8,
(hereinafter called Tele8), which expression shall include its successors and
permitted assigns), whose registered office is at Hans Michelsensgatan 6, S20120
Malmo, Sweden, of the other part.
WHEREAS TELECOM ITALIA and Tele8 (hereinafter collectively called "the
Parties"), desire to furnish telecommunication services between Italy (as
hereinafter defined) and points beyond Italy, and Sweden (as hereinafter
defined) and points beyond Sweden.
NOW THEREFORE IT IS HEREBY AGREED as follows:
1.
In this Agreement, unless the context otherwise requires, "Operating Territory"
in relation to TELECOM ITALIA means Italy and in relation to Tele8 means Sweden.
The Annexes 1 through 2 to the present Agreement (hereinafter called "the
Annexes") are integral part of this Agreement:
Annex 1: Bank Instructions, Telecommunications Accounts;
Annex 2: International Public Switched Telephone Service.
2.
Subject to the terms and conditions contained herein each of the Parties
undertake to establish and provide such telecommunication services between Italy
and points beyond Italy and Sweden and points beyond Sweden as specified in the
Annexes to this Agreement and will establish such telecommunication services on
and with effect from January 16th, 1997.
3.
(a) The routes to be used by each Party to provide the telecommunication
services hereunder shall be such direct circuits as may be agreed between the
Parties from time to time and/or such switched circuits via countries other than
Italy and Sweden or a combination thereof as the Parties may from time to time
deem expedient to maintain the provision of the telecommunication services in
question.
(b) Each Party shall be responsible for the provision and maintenance of, and
payment for, the necessary interconnecting facilities in respect of its portion
of the telecommunication network hereunder located within its operating
territory.
<PAGE>
(c) Unless otherwise agreed, each Party shall be responsible for the
establishment of, and the payment for, one half of that portion of the
telecommunication facilities necessary to provide the said circuits located
outside the respective operating territories of the parties used in the
provision of the telecommunication services hereunder. Exceptions from this
general clause will be described in the Annexes regarding each particular
service.
(d) Each Party shall notify the other without undue delay of any facility
failure arising or likely to arise from a cause within its operating territory,
which is likely to result in a protracted interruption to the provision of any
or all of the telecommunication services hereunder.
4.
(a) The technical standards and methods of operation to be applied and used by
the Parties in the provision of telecommunication services hereunder shall be
agreed by the Parties in writing. However, unless the Parties otherwise agree,
technical standards will be applied which conform to the relevant ITU-TSB
recommendations.
(b) The Parties will adopt from time to time (as appropriate) written procedures
and working standards to be implemented by them in respect of order handling,
maintenance and other operational matters in respect of each of the
telecommunication services hereunder.
(c) The telecommunication services to be provided hereunder will be carried on
digital channels, which will conform to European standards, between Italy and
Sweden.
5.
Collection rates for the services covered by this Agreement shall be a national
matter to be determined by each Party, subject to appropriate governmental
approvals as necessary.
6.
The accounting rates and division of revenue derived from the services between
Italy and Sweden provided by the Parties shall be those set out in the relevant
Annexes attached to this Agreement or as the Parties may otherwise agree from
time to time and incorporate in this Agreement.
For particular services, the Parties may agree on different allocations of costs
than as set out above, such new allocations being reflected into the accounting
shares.
7. (a) The monthly account shall be sent as promptly as possible and, except in
cases of force majeure, before the end of the second month following that to
which they relate. The Parties can consider the account as accepted if no
<PAGE>
query is raised within two calendar months after the receipt of the account (ITU
Melbourne 1988).
(b) The quarterly statement showing the balances of the monthly accounts for the
period to which it relates shall be prepared as soon as possible by the creditor
operator and shall be sent in duplicate to the debtor operator, which, after
verification, shall return one of the copies with its acceptance.
Payment of balances of account shall be effected as promptly as possible, but in
no case later than two calendar months after the day on which the statement was
dispatched by the creditor operator. The balance shall be expressed in SDR.
(c) For other payments the creditor will choose the relevant currency.
The currency chosen is:
if TELECOM ITALIA is creditor: US Dollars
if TELE8 is creditor: US Dollars.
The conversion of SDR to the chosen currency shall be made by the debtor
operator using the latest conversion rate published by the IMF at the date of
the settlement.
(d) Mailing address for monthly accounts and statements of accounts:
TELECOM ITALIA S.p.A.
Divisione Servizi Internazionali
Traffico e Corrispondenti
P.O. Box AD 2420
00100 Rome
Italy
NORDISKA TELE8 AB
Hans Michelsensgatan, 6
S-20120 Malmo
Sweden
(e) Bank Instruction: see Annex 1 to this Agreement.
(f) No credit allowance shall be made in the monthly notice for uncollected
amounts. Each Party shall be responsible for its own uncollectables. The
accounting procedures for adjustments and refunds shall be in line with ITU-TSB
Rec. D.171.
8.
To ensure effective implementation and operation of the services the Parties may
wish to exchange: (a) appropriate sales and service implementation plans on an
ongoing basis, (b) information on their respective collection rates and customer
pricing as appropriate,
<PAGE>
(c) details of the numbering schemes employed to access customers in their
public switched networks in the operating territory and
(d) details of the service position/facilities and how they may be accessed by
the other Party's service position.
Regarding c) and d), the Parties may refer to ITU-TSB Rec. E.141 and E.149.
9.
Neither Party shall be liable to the other for any loss or damage whether direct
or indirect sustained by reason of any failure in or breakdown of the
communication facilities associated with the circuits used in providing the
telecommunication services, whatsoever shall be the cause of such failure,
breakdown or interruption and however long it shall last.
10.
All undertakings and obligations assumed hereunder by either Party are subject
to the issuance and continuance of all necessary governmental licenses,
authorizations, registrations, permissions and approvals.
Both Parties shall keep the other Party informed of restrictions included to
their concession rights related to this Agreement. The Parties hereby confirm
that they will respect and follow the concession rights of the other Party.
The Parties furthermore recognize and fully understand that in a case where
obligations of this agreement and concession rights of one Party are in
contradiction, the Party is not obligated to follow this Agreement.
11.
(a) Any communications by either Party to other shall, unless otherwise provided
herein, be sufficiently made if sent by post (by air mail where possible),
postage paid, or by telegraph, telex or telefax transmission to the address
hereinafter specified and shall, unless otherwise provided herein, be deemed to
ought to have been delivered in due course of postal, telegraphic, telex or
telefax transmission.
(b) Unless otherwise specified by not less than 15 day notice in writing by the
Party in question the address to which communications shall be sent shall be:
To TELECOM ITALIA:
By mail: TELECOM ITALIA
International Services Division
Viale del Campo Boario, 56 D
00153 Rome (Italy)
By telefax: No + 39 6 5734.3896
In all cases marked: "For the attention of the Director,
Carrier Relations - Northern Europe"
<PAGE>
To NORDISKA TELE8 AB
By mail: NORDISKA TELE8AB
Hans Michelsensgatan, 6
P.O. Box 88
S-20120 Malmo (Sweden)
By telefax: No + 46 40 620 0089
In all cases marked: "For the attention of the International
Relations Manager"
12.
Any of this information, which is not in the public domain, will be strictly
confidential and shall not be disclosed to any third party unless otherwise
agreed in writing. Provided that either Party may comply with such filing or
disclosure requirements under any applicable law, rule or regulation or of any
regulatory authority or governmental entity or agency having jurisdiction in
Italy and in Sweden.
13.
The relationship between the Parties hereto shall not be that of partners and
nothing herein contained shall be deemed to constitute a partnership between
them.
14.
This Agreement is drawn in English and the documents, notices and extension
shall be in the same language.
15.
The present Agreement shall enter into force from the date of its signing and
shall have an unlimited period of validity. The supplements and amendments to be
inserted in the Agreement and Annexes shall be mutually agreed by the Parties.
The Parties are entitled to terminate the Agreement by written notice. After
receiving of the written notice the present Agreement shall be terminated in six
(6) months.
<PAGE>
IN WITNESS WHEREOF THIS AGREEMENT has been entered into the day and year first
above written.
Signed for and on behalf of Signed for and on behalf of
Telecom Italia S.p.A. Nordiska Tele8
/s/ Giovanni Bonini /s/ Clause B. Nilsson
- ----------------------------- ---------------------------
Giovanni Bonini Claus B. Nilsson
Director International Relations Manager
Carrier Services - Northern Europe
Date: January 16th, 1997 Date: January 16th, 1997
<PAGE>
ANNEX 1
TELECOMMUNICATION SERVICES
--------------------------
BANK INSTRUCTIONS, TELECOMMUNICATIONS ACCOUNTS.
This Annex is attached to and incorporated into the International
Telecommunication Services Agreement between Telecom Italia S.p.A. and Nordiska
Tele8.
Payment of balances in favor of Nordiska Tele8 should be effected as follows:
a) Primary Method
By bank transfer to our primary bank connection, for payments in SEK currency
only:
Bank: SE-Banken
Ostergatan 39
20520 MALMO
Sweden
Account Holder: Nordiska Tele8 AB
Account Number: **
SWIFT CODE: ESSESESM
b) Secondary Method
By bank transfer or postal checque to our secondary bank connection, for
payments in USD only:
Bank: SE-Banken
Ostergatan 39
20520 MALMO
Sweden
Account Holder: Nordiska Tele8 AB
Account Number: **
SWIFT CODE: ESSESESM
** Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
<PAGE>
Payments of balances in favor of Telecom Italia S.p.A. should be effected as
follows
a) Primary Method
By bank transfer to our primary bank connection, for payments in USD currency
only:
Bank: CITIBANK N.A.
Via Abruzzi, 2/4
00187 Rome
Italy
Account Holder: Telecom Italia S.p.A.
Account Number: **
b) Secondary Method
By bank transfer to our primary bank connection, for payments in currencies
other than USD:
Bank: CITIBANK N.A.
Via Abruzzi, 2/4
00187 Rome
Italy
Account Holder: Telecom Italia S.p.A.
Account Number: **
-----------------------------------------------------
IMPORTANT
---------
Any payment should include sufficient reference to
our invoices for proper identification of the payment
------------------------------------------------------
** Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
<PAGE>
ANNEX 2
TELECOMMUNICATION SERVICE
-------------------------
INTERNATIONAL PUBLIC SWITCHED TELEPHONE SERVICE
between Telecom Italia S.p.A. and Nordiska Tele8
SINGLE CARRIER RELATION
EUROPEAN COUNTIES
-----------------
This Annex is attached to and incorporated into the International
Telecommunications Services Agreement made between Telecom Italia S.p.A. and
Nordiska Tele8.
1. Type of Service
a) The service shall be operated by Telecom Italia S.p.A. and Nordiska Tele8
between Italy and Sweden. the service to be provided shall be ** between Italy
and Sweden known as **. the term ** includes automatically ** and ** calls.
This type of service may be amended from time to time subject to mutual
agreement of the Parties.
b) The following ** may be later added to this Agreement:
**
2) Periods of Service
This service will be a ** hour per day continuous facility.
** Confidential Treatment Requested. The redacted material has been separately
filed with the Commission.
<PAGE>
3) Quality of Service
The Answer to Siezure Ratio (ASR) on the TELECOM ITALIA to Tele8 or TELE8 to
TELECOM ITALIA routes, shall not be lower than ** points of the yearly average
ASR measured with other European carriers. Should this limit be exceeded the
measuring carrier shall be allowed, provided that a 10-day written prior notice
has been addressed to the other Party and it has remained without effect, not to
return traffic to that party. Such conditions shall apply for as long as such
situation remains.
4) Accounting Rate and Division
a) The Unit of Account will be the **
b) The Accounting Rate per minute, will be Telecom Italia share ** and Tele8
share ** with effect form January 16th, 1997. the shares include all the costs
of the routing between Italy and Sweden.
6) Duration
Alterations or improvements of this Annex may be subject to negotiations at any
time and enter into force as agreed between the parties independently of the
main Agreement.
Signed for and on behalf of Signed for and on behalf of
Telecom Italia S.p.A. Nordiska Tele8
Giovanni Bonini/S/ Clause B. Nilsson/S/
Giovanni Bonini Claus B. Nilsson
Director International Relations Manager
Carrier Services - Northern Europe
Date: January 16th, 1997 Date: January 16th, 1997
** Confidential Treatment Requested. The redacted material has been separately
filed with the Commission
<PAGE>
EXHIBIT 12.1
SCHEDULE OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM JANUARY 1,
SIX MONTHS YEAR ENDED MAY 5, 1995 1995
ENDED SEPTEMBER 30, TO TO JUNE 30,
MARCH 31, ----------------- SEPTEMBER 30, 1995
1998 1997 1996 1995 (PREDECESSOR)
---------- -------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Actual:
Loss before income taxes........................................ $(20,926) $(14,031) $(9,662) $(1,725) $(1,341)
Consolidated fixed charges...................................... 6,617 1,532 390 94 67
-------- -------- ------- ------- -------
Earnings........................................................ $(14,309) $(12,499) $(9,272) $(1,631) $(1,274)
======== ======== ======= ======= =======
Consolidated Fixed Charges:
Interest expense................................................ $ 6,429 $ 1,336 $ 312 $ 80 44
Rental expenses................................................. 188 196 78 14 23
-------- -------- ------- ------- -------
Consolidated Fixed Charges...................................... $ 6,617 $ 1,532 $ 390 $ 94 $ 67
======== ======== ======= ======= =======
Deficiency of Earnings to Fixed Charges........................... $(20,926) $(14,031) $(9,662) $(1,725) $(1,341)
======== ======== ======= ======= =======
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Pre-Effective Amendment No. 4 to Registration
Statement No. 333-48371 of FaciliCom International, Inc. on Form S-4 of our
report dated March 19, 1998 (April 27, 1998 as to Note 13 and May 8, 1998 as
to Note 12) appearing in the Prospectus, which is part of this Registration
Statement, and to the reference to us under the headings "Summary Financial
and Other Data", "Selected Consolidated Financial and Other Data" and
"Experts" in such Prospectus.
DELOITTE & TOUCHE llp
Pittsburgh, Pennsylvania
May 26, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in this Pre-Effective Amendment No. 4 to Registration
Statement No. 333-48371 of FaciliCom International, Inc. on Form S-4 of our
report dated March 19, 1998, on the financial statements of Tele8 for the
period January 1, 1995 to June 30, 1995, appearing in the Prospectus, which is
part of this Registration Statement, and to the reference to us under the
headings "Selected Consolidated Financial and Other Data" and "Experts" in
such Prospectus.
DELOITTE & TOUCHE
Malmo, Sweden
May 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997
<PERIOD-END> MAR-31-1998 SEP-30-1997
<CASH> 125,377 1,016
<SECURITIES> 81,052 0
<RECEIVABLES> 30,969 19,646
<ALLOWANCES> 989 161
<INVENTORY> 0 0
<CURRENT-ASSETS> 241,291 22,238
<PP&E> 69,922 23,278
<DEPRECIATION> 5,032 3,034
<TOTAL-ASSETS> 375,815 44,017
<CURRENT-LIABILITIES> 74,581 32,465
<BONDS> 309,541 22,589
0 0
0 0
<COMMON> 2 0
<OTHER-SE> (4,240) (9,421)
<TOTAL-LIABILITY-AND-EQUITY> 375,815 44,017
<SALES> 70,954 70,187
<TOTAL-REVENUES> 70,954 70,187
<CGS> 66,486 65,718
<TOTAL-COSTS> 66,486 65,718
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 828 1,263
<INTEREST-EXPENSE> 6,249 1,336
<INCOME-PRETAX> (20,926) (14,031)
<INCOME-TAX> 3,226 0
<INCOME-CONTINUING> (17,700) (14,031)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (17,700) (14,031)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
