<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1998.
REGISTRATION NO. 333-49397
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FOCAL COMMUNICATIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 4812 36-4167094
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
200 NORTH LASALLE STREET, SUITE 800, CHICAGO, ILLINOIS 60601
(312) 895-8400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JOSEPH A. BEATTY
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, AND TREASURER
FOCAL COMMUNICATIONS CORPORATION
200 NORTH LASALLE STREET, SUITE 800
CHICAGO, ILLINOIS 60601
(312) 895-8400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
SCOTT HODES, ESQ.
DAVID S. GUIN, ESQ.
ROSS & HARDIES
150 NORTH MICHIGAN AVENUE
CHICAGO, ILLINOIS 60601
(312) 558-1000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE 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, please check the following box. [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION--DATED JULY 31, 1998
PROSPECTUS
$270,000,000
FOCAL COMMUNICATIONS CORPORATION
OFFER TO EXCHANGE ITS 12.125% SENIOR DISCOUNT NOTES DUE 2008, SERIES B FOR ANY
AND ALL OF ITS OUTSTANDING 12.125% SENIOR DISCOUNT NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1998, UNLESS EXTENDED.
Focal Communications Corporation, a Delaware corporation ("Focal" or the
"Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus (as the same may be amended or supplemented from time
to time) and in the accompanying Letter of Transmittal (the "Letter of
Transmittal") (which together constitute the "Exchange Offer"), to exchange
$1,000 stated principal amount at maturity of its 12.125% Senior Discount
Notes due February 15, 2008, Series B (the "Exchange Notes") which have been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), for each $1,000 principal amount at maturity of its outstanding
unregistered 12.125% Senior Discount Notes due February 15, 2008, of which
$270,000,000 in aggregate principal amount at maturity is outstanding as of
the date hereof (the "Senior Notes" and, together with the Exchange Notes, the
"Notes").
The form and terms of the Exchange Notes will be identical in all material
respects to the form and terms of the Senior Notes, except that (i) the
Exchange Notes will have been registered under the Securities Act and
therefore will not be subject to certain restrictions on transfer applicable
to the Senior Notes and (ii) holders of the Exchange Notes will not be
entitled to certain rights of holders of the Senior Notes under the
Registration Agreement dated February 15, 1998 (the "Registration Agreement")
among the Company and Salomon Brothers Inc, Morgan Stanley & Co. Incorporated
and NationsBanc Montgomery Securities LLC (the "Initial Purchasers"). The
Exchange Notes will evidence the same indebtedness as the Senior Notes (which
they replace) and will be issued pursuant to, and entitled to the benefits of,
an indenture dated as of February 18, 1998 between the Company and the Harris
Trust and Savings Bank, as trustee (the "Trustee"), governing the Senior Notes
and the Exchange Notes (the "Indenture").
The Exchange Notes will mature on February 15, 2008. In the period prior to
February 15, 2003, interest at a rate of 12.125% per annum will accrue on the
Exchange Notes but will not be payable in cash ("Deferred Interest"). From
February 15, 2003, interest at a rate of 12.125% per annum ("Current
Interest") on the stated principal amount at maturity of the Exchange Notes
will be payable in cash semiannually on August 15 and February 15 of each
year, beginning on August 15, 2003. For U.S. federal income tax purposes, the
Exchange Notes will be considered to bear original issue discount.
Accordingly, holders of the Notes will be required to report income for tax
purposes in advance of the receipt of current payments to which such income is
attributable. See "Description of the Exchange Notes" and "Certain United
States Federal Income Tax Considerations."
The Exchange Notes will be redeemable, at the option of the Company at any
time, in whole or in part, on or after February 15, 2003, at the redemption
prices set forth herein plus accrued and unpaid Current Interest, if any, to
the redemption date. In the event of one or more Public Equity Offerings (as
defined herein), following which there is a Public Market (as defined herein),
on or before February 15, 2001, the Company may, at its option, use all or a
portion of the net cash proceeds therefrom to redeem up to 35% of the
aggregate stated principal amount at maturity of the Exchange Notes at a
redemption price equal to 112.125% of the Accreted Value (as defined herein)
thereof plus accrued and unpaid Current Interest, if any, and Additional
Interest (as defined herein), if any, to the redemption date. See "Description
of the Exchange Notes--Optional Redemption." In the event of a Change of
Control (as defined herein) each holder of Exchange Notes will have the right
to require the Company to repurchase all or any part of such holder's Exchange
Notes at a purchase price equal to 101% of the Accreted Value thereof plus
accrued and unpaid Current Interest, if any, to the repurchase date (the
"Change of Control Purchase Price"). If after giving effect to a Change of
Control Offer (as defined herein) at least 95% of the original aggregate
stated principal amount at maturity of the Exchange Notes has been redeemed or
repurchased, the Company shall have the right to redeem the balance of the
Exchange Notes at a redemption price equal to 101% of the Accreted Value
thereof plus accrued and unpaid Current Interest, if any, and Additional
Interest, if any, to the redemption date. See "Description of the Exchange
Notes--Repurchase at the Option of Holders upon a Change of Control." There
can be no assurance that the Company will have the financial resources
necessary to repurchase the Exchange Notes in such circumstances.
(continued on next page)
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SEE "RISK FACTORS" COMMENCING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE 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.
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(continued from previous page)
The Exchange Notes will be senior unsecured obligations of the Company
ranking pari passu in right of payment with the Senior Notes and all other
existing and future senior unsecured indebtedness of the Company, if any, and
will rank senior in right of payment to all existing and future subordinated
indebtedness of the Company, if any. Holders of secured indebtedness of the
Company, however, will have claims that are prior to the claims of the holders
of the Exchange Notes with respect to the assets securing such indebtedness.
The Company is a holding company that conducts all of its operations through
its subsidiaries. The Notes will therefore be effectively subordinated to the
claims of creditors and holders of preferred stock of the Company's
subsidiaries. See "Risk Factors--Holding Company Structure; Effective
Subordination of the Exchange Notes" and "Description of the Exchange Notes--
Ranking." As of December 31, 1997, on a pro forma basis after giving effect to
the Offering (as defined herein) and the application of the net proceeds
therefrom, the Company would have had no outstanding indebtedness other than
the Notes.
The Senior Notes were originally issued and sold on February 18, 1998 in a
transaction not registered under the Securities Act (the "Offering").
Accordingly, the Senior Notes may not be offered for resale, resold or
otherwise transferred unless so registered or unless an applicable exemption
from the registration requirements of the Securities Act is available. Based
on interpretations by the staff of the Securities and Exchange Commission (the
"Commission"), as set forth in no-action letters issued to third parties
unrelated to the Company, the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer may be offered for resale, resold or otherwise
transferred by holders thereof (other than any holder that is (i) a broker-
dealer that acquired Senior Notes as a result of market-making activities or
other trading activities, or (ii) a broker-dealer that acquired Senior Notes
directly from the Company for resale pursuant to Rule 144A under the
Securities Act ("Rule 144A") or another available exemption under the
Securities Act) without compliance with the registration or prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holders' business, such holders
have no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes and such holders are not "affiliates" of
the Company (within the meaning of Rule 405 under the Securities Act).
However, the staff of the Commission has not considered the Exchange Offer in
the context of a no-action letter, and there can be no assurance that the
staff of the Commission would make a similar determination with respect to the
Exchange Offer as in such other circumstances.
By tendering Senior Notes in exchange for Exchange Notes, each holder will
represent to the Company, among other things, that: (i) any Exchange Notes to
be received by such holder will be acquired in the ordinary course of such
holder's business; (ii) at the time of the commencement of the Exchange Offer,
such holder has no arrangement or understanding with any person to participate
in the distribution (within the meaning of the Securities Act) of the Exchange
Notes; and (iii) such holder is not an "affiliate" of the Company (within the
meaning of Rule 405 under the Securities Act). Each broker-dealer that
receives Exchange Notes for its own account in exchange for Senior Notes,
where such Senior 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 Senior Notes where such Senior Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, starting on the Expiration Date (as
defined herein) and ending on the close of business 90 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."
The Company does not intend to apply for listing of the Exchange Notes for
trading on any securities exchange or for inclusion of the Exchange Notes in
any automated quotation system. The Senior Notes, however, have been
designated for trading in the Private Offerings, Resales and Trading through
Automatic Linkages ("PORTAL") Market of the National Association of Securities
Dealers, Inc. Any Senior Notes not tendered and
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<PAGE>
accepted in the Exchange Offer will remain outstanding. To the extent that
Senior Notes remain outstanding, a holder's ability to sell such Senior Notes
could be adversely affected. Following consummation of the Exchange Offer, the
holders of Senior Notes will continue to be subject to the existing
restrictions on transfer thereof and the Company will have no further
obligation to such holders to provide for the registration under the
Securities Act of the Senior Notes, except under limited circumstances. See
"Description of the Exchange Notes--Exchange Offer; Registration Rights." No
assurance can be given as to the liquidity of either the Senior Notes or the
Exchange Notes.
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF SENIOR NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER
THEIR SENIOR NOTES PURSUANT TO THE EXCHANGE OFFER.
Senior Notes may be tendered for exchange prior to 5:00 p.m., New York City
time, on , 1998 (such time on such date being hereinafter called the
"Expiration Date"), unless the Exchange Offer is extended by the Company (in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended). See "The Exchange Offer--Expiration
Date; Extensions; Amendments." Tenders of Senior Notes may be withdrawn at any
time prior to the Expiration Date. The Exchange Offer is not conditioned upon
any minimum aggregate principal amount of Senior Notes being tendered for
exchange. The Exchange Offer is, however, subject to certain events and
conditions and to the terms of the Registration Agreement. Senior Notes may be
tendered only in integral multiples of aggregate stated principal amount at
maturity of $1,000. The Company has agreed to pay all expenses of the Exchange
Offer. This Prospectus, together with the Letter of Transmittal, is being sent
to all registered holders of Senior Notes as of , 1998.
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. No underwriter is being used in connection with
the Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
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The Company has registered or applied to register the following trademarks
which may appear in this Prospectus: Focal(TM) and its logo, Focal
Communications Corporation(TM), Focused on Local Communications(TM),
Functionally Equivalent, Technically Superior, Low Cost(TM), The Third
Generation CLEC(TM), and Multi-Exchange Service(TM).
----------------
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, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such state.
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PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus. Reference is made to, and this Summary is qualified in its entirety
by, the more detailed information, including the Company's Consolidated
Financial Statements and notes thereto, contained herein. Unless otherwise
indicated, references to "Focal" or the "Company" include Focal Communications
Corporation, a Delaware corporation, and its consolidated subsidiaries.
THE COMPANY
Focal began operations during 1996 and has operated in Chicago since May 1997
and New York since January 1998, currently serving a total of 6 MSAs
(metropolitan statistical areas). The Company plans to offer services in 37
additional MSAs by the end of 1999, reaching a total of 43 MSAs in ten
metropolitan markets. As of March 31, 1998, the Company had 21,082 access lines
sold, of which 14,528 were installed and in service. This compares to 13,411
lines sold and 7,394 lines installed as of December 31, 1997.
FOCAL'S NETWORK
The Company has chosen to pursue a network design approach which involves
purchasing and maintaining its own switches while leasing fiber optic
transmission facilities on an incremental basis as demand dictates. This
approach is made possible by the availability of fiber optic transmission
facilities from multiple vendors in each of the markets it serves or intends to
serve. The Company's network design allows it to (i) reduce the capital
investments necessary to provide services to its customers by focusing capital
expenditures on switches and related technology (the most critical component of
its network), (ii) avoid the construction of fiber optic facilities and the
"stranded" capital sometimes associated with such construction, (iii) better
match the commitment of capital to the acquisition of revenue generating
customers and (iv) generate revenue and cash flow more quickly than if the
Company constructed its own fiber optic transmission facilities. The Company
leases transmission facilities from at least three vendors in each market in
which it conducts business, providing the Company with added negotiating
leverage and allowing the Company to offer its customers enhanced redundancy
and diversity. To satisfy the needs of its high-volume corporate customer base
the Company has engineered its network to be virtually non-blocking, thereby
maximizing call completion.
FOCAL'S MARKETS
Focal selects its target geographical markets based on several primary
criteria: sufficient market size; favorable state regulatory environment; the
pre-existence of well-developed interconnection agreements and processes with
the incumbent local exchange carrier ("ILEC"); and the existence of multiple
fiber providers with extensive networks. Based primarily on these factors, the
Company began offering service in Chicago and New York and intends to expand
into eight additional Tier I metropolitan markets by the end of 1999,
including: Los Angeles, San Francisco, Washington, D.C., Philadelphia, Boston,
Detroit, Miami and Seattle. Focal expects to generate incremental business from
its existing customer base as it expands into new markets. Many of the
Company's existing customers have operations in Focal's targeted cities and the
Company believes the opportunity to leverage its relationships with these
customers is significant. Management estimates total expenditures for local
telecommunications service in the business segment for its ten target markets
to be approximately $12.2 billion per year.
The Company believes a significant demand for its services exists because the
telecommunications-intensive users in Tier I markets are inadequately served
with regard to highly reliable, local switched telecommunications services. The
Company believes that large telecommunications-intensive users will
increasingly demand diversity in providers of local telecommunications service
as they have already done in long distance and private-
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line telecommunications services. Most second generation CLECs initially chose
to compete in Tier II and Tier III markets, effectively ceding the Tier I
markets to the first generation CLECs (i.e., MFS Communications Company, Inc.
("MFS") and Teleport Communications Group ("TCG")). Moreover, the vast majority
of CLECs, both first and second generation, have more expertise in providing
leased transport facilities, as opposed to switched services, and provide
bundled communications services to small and medium sized business customers.
Focal is The Third Generation CLEC(TM) that focuses on providing value-added,
switched local services to large telecommunications-intensive users in Tier I
markets. Management believes that the Company's focus on providing a limited
number of services to a defined market allows it to outperform its competitors
in terms of service quality, reliability, and responsiveness.
MANAGEMENT AND SPONSORSHIP
Focal believes that its management and operations team is a critical
component of its initial success and will continue to be a key element of
differentiation. The Company has built a skilled and experienced management
team headed by the Company's Chief Executive Officer, Robert C. Taylor, Jr.,
and Chief Operating Officer, John R. Barnicle, who were most recently senior
executives at MFS. Overall, the founding management team has extensive prior
work experience at well known ILECs, CLECs and other telecommunications
companies. See "Management." Furthermore, Madison Dearborn Capital Partners,
L.P. ("MDCP"), Frontenac VI, L.P. ("Frontenac") and Battery Ventures III, L.P.
("Battery," with MDCP, Frontenac and Battery being hereinafter sometimes
individually referred to as an "Equity Investor" and collectively referred to
as the "Equity Investors") have invested, together with management and certain
other investors, an aggregate of $26.1 million of equity in the Company. As a
result of such investments, the Equity Investors own, in the aggregate,
approximately 80% of the Company's outstanding equity and each Equity Investor
has appointed one or more representatives to the Company's board of directors.
See "Security Ownership of Certain Beneficial Owners and Management."
STRATEGY
The Company's objective is to become the local provider of choice to
telecommunications-intensive customers in Tier I markets. Key strategies in the
development and fulfillment of the Company's objective are discussed below.
BUSINESS STRATEGY
Principal Focus on Local Service. The Company offers a focused set of value-
added local switched services to its customers, which management believes
differentiates the Company from a majority of competitors who are seeking to
provide "one-stop" telecommunications services. See "Business--Business
Strategy."
Design and Install a Highly Capital-Efficient Network. Management believes
the Company can generate a substantially greater return on invested capital by
concentrating its investment in switching, information, billing and support
systems, while leasing its transport facilities. See "Business--Business
Strategy."
Build a More Robust Network than ILECs or CLECs. The Company has designed and
built its network to meet the demanding traffic and reliability requirements of
its target customers. Focal utilizes Nortel, DMS-500 SuperNode central office
switches that have been engineered by the Company to be virtually non-blocking,
thereby maximizing call completion. Focal also designs its leased fiber
facilities to avoid blocking. See "Business--Business Strategy."
Minimize Dependence on Deregulation. While the Telecommunications Act of 1996
(the "Telecom Act") is likely to benefit CLECs in the long-term, Focal believes
the tangible benefits from the Telecom Act are limited in the short-term.
Accordingly, Focal's business strategy allows it to minimize its reliance on
provisions of the Telecom Act to achieve its objectives. See "Business--
Business Strategy."
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MARKETING STRATEGY
Penetrate Corporate Accounts. The Company emphasizes the diversity,
reliability and sophistication of its network and services in order to earn its
selection as the local provider of choice for its customers. Focal has
developed a number of products and services which it believes provide it with a
competitive advantage when attempting to penetrate new corporate accounts,
including Focal Virtual Office and 800 service. See "Business--Products and
Services." See "Business--Business Strategy."
Take Advantage of the Significant and Growing ISP Opportunity. The dramatic
increase in dial-up access to the Internet has created a particularly strong
demand for local access lines by ISPs. CLECs are generally well-positioned to
satisfy this demand as the only alternative source of access lines. Focal
offers advantages to ISPs that certain of its competitors are currently unable
to provide, such as environmentally conditioned colocation space, virtually
non-blocking switching and transport facilities, guaranteed installation times
and modified foreign exchange service (which allows certain calls which would
otherwise be toll calls to be made as local calls). See "Business--Business
Strategy."
Maximize Network Utilization through VAR and Other Wholesale Arrangements. To
further maximize network utilization while minimizing cost of sales, Focal
distributes service to other customer segments through VARs and other wholesale
arrangements. See "Business--Business Strategy."
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The Company's principal executive offices are located at 200 North LaSalle
Street, Suite 800, Chicago, Illinois 60601 and its phone number is (312) 895-
8400.
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THE EXCHANGE OFFER
The Exchange Offer........ Up to $270,000,000 aggregate stated principal
amount at maturity of Exchange Notes are being
offered in exchange for a like aggregate principal
amount at maturity of Senior Notes. Senior Notes
may be tendered for exchange in whole or in part in
integral multiples of $1,000 stated principal
amount at maturity. The Company is making the
Exchange Offer in order to satisfy its obligations
under the Registration Agreement relating to the
Senior Notes. For a description of the procedures
for tendering Senior Notes, see "The Exchange
Offer--Procedures for Tendering Senior Notes."
Expiration Date........... 5:00 p.m., New York City time, on , 1998 unless
the Exchange Offer is extended by the Company (in
which case the term "Expiration Date" shall mean
the latest date and time to which the Exchange
Offer is extended). See "The Exchange Offer--
Expiration Date; Extensions; Amendments."
Conditions to the The Exchange Offer is subject to certain
Exchange Offer........... conditions, which may be waived by the Company in
its sole discretion. The Exchange Offer is not
conditioned upon any minimum aggregate principal
amount at maturity of Senior Notes being tendered.
See "The Exchange Offer--Conditions to the Exchange
Offer."
The Company reserves the right in its sole and
absolute discretion, subject to applicable law, at
any time and from time to time: (i) to delay the
acceptance of the Senior Notes; (ii) to terminate
the Exchange Offer if certain specified conditions
have not been satisfied; (iii) to extend the
Expiration Date of the Exchange Offer and retain
all Senior Notes tendered pursuant to the Exchange
Offer, subject, however, to the right of holders of
Senior Notes to withdraw their tendered Senior
Notes; and (iv) to waive any condition or otherwise
amend the terms of the Exchange Offer in any
respect. See "The Exchange Offer--Expiration Date;
Extensions; Amendments."
Withdrawal Rights......... Tenders of Senior Notes may be withdrawn at any
time prior to the Expiration Date by delivering a
written notice of such withdrawal to the Exchange
Agent (as defined herein) in conformity with
certain procedures as set forth below under "The
Exchange Offer--Withdrawal Rights."
Procedures for Tendering
Senior Notes............. Tendering holders of Senior Notes must complete and
sign a Letter of Transmittal in accordance with the
instructions contained therein and forward the same
by mail, facsimile transmission or hand delivery,
together with any other required documents, to the
Exchange Agent, either with the Senior Notes to be
tendered or in compliance with the specified
procedures for guaranteed delivery of Senior Notes.
Certain brokers, dealers, commercial banks, trust
companies and other nominees may also effect
tenders by book-entry transfer. Holders of Senior
Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee are
urged to contact such person promptly if they wish
to tender Senior Notes pursuant to the Exchange
Offer. See "The Exchange Offer--Procedures for
Tendering Senior Notes."
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Letters of Transmittal and certificates
representing Senior Notes should not be sent to the
Company. Such documents should only be sent to the
Exchange Agent. Questions regarding how to tender
and requests for information should be directed to
the Exchange Agent. See "The Exchange Offer--
Exchange Agent."
Resales of Exchange Based on interpretations by the staff of the
Notes.................... Commission, as set forth in no-action letters
issued to third parties unrelated to the Company
(e.g., Exxon Capital Holdings Corporation, publicly
available May 13, 1988; K-III Communications
Corporation, publicly available May 14, 1993; Brown
& Wood LLP, publicly available February 7, 1997;
Warnaco, Inc., publicly available October 2, 1991;
and Mary Kay Cosmetics, Inc., publicly available
June 5, 1991), the Company believes that holders of
Senior Notes (other than any holder that is (i) a
broker-dealer that acquired Senior Notes as a
result of market-making activities or other trading
activities, or (ii) a broker-dealer that acquired
Senior Notes directly from the Company for resale
pursuant to Rule 144A or another available
exemption under the Securities Act) who exchange
their Senior Notes for Exchange Notes pursuant to
the Exchange Offer may offer for resale, resell and
otherwise transfer such Exchange Notes without
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the
ordinary course of such holders' business, such
holders have no arrangement or understanding with
any person to participate in the distribution of
such Exchange Notes and such holders are not
"affiliates" of the Company (within the meaning of
Rule 405 under the Securities Act). However, the
staff of the Commission has not considered the
Exchange Offer in the context of a no-action
letter, and there can be no assurance that the
staff of the Commission would make a similar
determination with respect to the Exchange Offer.
Each broker-dealer that receives Exchange Notes for
its own account in exchange for Senior Notes, where
such Senior 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. See "Plan of
Distribution."
Exchange Agent............ The exchange agent with respect to the Exchange
Offer is Harris Trust and Savings Bank (the
"Exchange Agent"). The address, telephone number
and facsimile number of the Exchange Agent are set
forth in "The Exchange Offer--Exchange Agent" and
in the Letter of Transmittal.
Use of Proceeds........... The Company will not receive any cash proceeds from
the issuance of the Exchange Notes offered hereby.
See "Use of Proceeds."
Certain United States
Federal Income Tax The exchange of the Exchange Notes for the Senior
Considerations........... Notes will not be a taxable exchange for U.S.
federal income tax purposes, and holders of Senior
Notes should not recognize any taxable gain or loss
of any interest income as a result of such
exchange. See "Certain United States Federal Income
Tax Considerations--The Exchange."
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THE EXCHANGE NOTES
Securities Offered........ $270,000,000 aggregate stated principal amount at
maturity of 12.125% Senior Discount Notes due
February 15, 2008. The terms of the Exchange Notes
will be identical in all material respects to the
terms of the Senior Notes, except that (i) the
Exchange Notes will have been registered under the
Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the
Senior Notes and (ii) holders of the Exchange Notes
will not be entitled to certain rights of holders
of the Senior Notes under the Registration
Agreement. The Exchange Notes will evidence the
same debt as the Senior Notes and will be issued
pursuant to and entitled to the benefits of the
Indenture.
Issue Price............... $555.6578 per $1,000 stated principal amount at
maturity.
Maturity.................. February 15, 2008.
Yield and Interest........ 12.125% per annum (computed on a semiannual bond
equivalent basis). In the period prior to February
15, 2003, interest will accrue but will not be
payable in cash. From February 15, 2003, interest
on the stated principal amount at maturity of the
Notes will be payable in cash semiannually on
August 15 and February 15 of each year, beginning
on August 15, 2003. See "Description of the
Exchange Notes."
Original Issue Discount... For U.S. federal income tax purposes, the Exchange
Notes will be considered to bear original issue
discount ("OID"). Although Current Interest on the
Notes will not be payable prior to August 15, 2003,
a U.S. Holder (as defined herein) of Exchange Notes
will be required to include OID in such holder's
gross income for U.S. federal income tax purposes
in advance of receipt of the cash payments to which
the income is attributable. See "Certain United
States Federal Income Tax Considerations."
Ranking................... The Exchange Notes will be senior unsecured
obligations of the Company ranking pari passu in
right of payment with the Senior Notes and all
other existing and future senior indebtedness of
the Company, if any, and will rank senior in right
of payment to all existing and future subordinated
indebtedness of the Company, if any. Holders of
secured indebtedness of the Company, however, will
have claims that are prior to the claims of the
holders of the Exchange Notes with respect to the
assets securing such other indebtedness. As of
March 31, 1998, the Company had no outstanding
indebtedness other than the Notes. The Exchange
Notes will be effectively subordinated to all
existing and future indebtedness and other
liabilities of the Company's subsidiaries
(including trade payables). See "Description of the
Exchange Notes--Ranking."
Optional Redemption....... The Exchange Notes will be redeemable, at the
Company's option, in whole or in part, at any time
or from time to time, on or after February
6
<PAGE>
15, 2003, at 106.063% of their stated principal
amount at maturity, plus accrued and unpaid Current
Interest, declining ratably to 100% of their stated
principal amount at maturity, plus accrued and
unpaid Current Interest, on or after 2006. In
addition, at any time and from time to time, prior
to February 15, 2001, the Company may redeem in the
aggregate up to 35% of the original aggregate
stated principal amount at maturity of the Exchange
Notes with the proceeds from one or more Public
Equity Offerings following which there is a Public
Market, at a redemption price (expressed as a
percentage of Accreted Value on the redemption
date) of 112.125%, plus Additional Interest, if
any; provided that at least 65% of the original
aggregate stated principal amount at maturity of
the Exchange Notes remains outstanding after each
such redemption. See "Description of the Exchange
Notes--Optional Redemption."
Change of Control......... Upon the occurrence of a Change of Control (as
defined herein), each holder of Exchange Notes will
have the right to require the Company to repurchase
all or any part of such holder's Exchange Notes
pursuant to a Change of Control Offer (as defined
herein) at a purchase price equal to 101% of the
Accreted Value thereof plus accrued and unpaid
Current Interest, if any, to but excluding the
repurchase date. If a Change of Control Offer is
made, there can be no assurance that the Company
will have sufficient funds to pay the Change of
Control Purchase Price for all Exchange Notes
tendered by holders seeking to accept the Change of
Control Offer. Upon the occurrence of a Change of
Control, if after giving effect to a Change of
Control Offer at least 95% of the original
aggregate stated principal amount at maturity of
the Exchange Notes has been redeemed or
repurchased, the Company shall have the right to
redeem the balance of the Exchange Notes at a
redemption price equal to 101% of the Accreted
Value thereof plus accrued and unpaid Current
Interest, if any, to but excluding the Change of
Control Redemption Date (as defined herein). See
"Description of the Exchange Notes--Repurchase at
the Option of Holders upon a Change of Control."
Certain Covenants......... The Indenture contains certain covenants which,
among other things, restrict the ability of the
Company and certain of its subsidiaries to incur
additional indebtedness (and, in the case of
certain subsidiaries, issue preferred stock), pay
dividends or make distributions in respect of the
Company's or such subsidiaries' capital stock, make
other restricted payments, enter into sale and
leaseback transactions, incur liens, cause
encumbrances or restrictions to exist on the
ability of certain subsidiaries to pay dividends or
make distributions in respect of their capital
stock, issue and sell capital stock of certain
subsidiaries, enter into transactions with
affiliates, sell assets, or amalgamate,
consolidate, merge or sell or otherwise dispose of
all or substantially all of their property and
assets. These covenants are subject to important
exceptions and qualifications. See "Description of
the Exchange Notes--Certain Covenants."
For additional information regarding the Exchange Notes, see "Description of
the Exchange Notes."
7
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. However, upon the original issuance of the
Senior Notes, the net proceeds received by the Company, after deducting the
discount to the Initial Purchasers and other expenses payable by the Company,
was approximately $144 million. The Company used or will use the net proceeds
(i) to fund the cost of acquiring and installing telecommunications switches
and related infrastructure, (ii) to fund operating losses, (iii) to repay
approximately $3.5 million principal amount of outstanding indebtedness of a
subsidiary, (iv) for potential, selected acquisitions (although none have been
negotiated or contemplated), and (v) for general corporate purposes. Prior to
using the net proceeds for such purposes, the Company has invested the net
proceeds in short-term money market and other market-rate, investment-grade
instruments. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Use of
Proceeds."
RISK FACTORS
POTENTIAL PARTICIPANTS IN THE EXCHANGE OFFER SHOULD CONSIDER CAREFULLY
CERTAIN FACTORS SET FORTH UNDER THE CAPTION "RISK FACTORS." SEE "RISK FACTORS."
These risk factors are generally applicable to the Senior Notes as well as the
Exchange Notes.
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial data presented below as of and for the
seven month period ended December 31, 1996, and the year ended December 31,
1997, have been derived from the Consolidated Financial Statements of the
Company, and the notes related thereto, included elsewhere in this Prospectus.
The Financial Statements of the Company for the seven month period ended
December 31, 1996 and for the year ended December 31, 1997 have been audited by
Arthur Andersen LLP, independent auditors. The summary financial data for the
three month periods ended March 31, 1997 and 1998 have been derived from the
unaudited financial statements of the Company which, in the opinion of
management, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the financial condition and
results of operations for the Company for such periods. The results of
operations for interim periods are not necessarily indicative of a full year's
operations. The following information should be read in conjunction with
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and the Consolidated Financial
Statements of the Company and the notes related thereto, and the other
financial data appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
COMMENCEMENT
OF OPERATIONS THREE MONTHS ENDED
(MAY 31, 1996) TO YEAR ENDED -------------------------
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1998
----------------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ -- $ 4,023,690 $ -- $ 5,102,448
Expenses:
Customer service and
network operations.... -- 2,154,980 8,697 1,826,893
Selling, general
and administrative.... 421,777 2,887,372 416,492 1,307,625
Depreciation and
amortization.......... 1,150 615,817 7,337 890,871
---------- ------------ ----------- ------------
Operating income
(loss)................. (422,927) (1,634,479) (432,526) 1,077,059
Interest income
(expense), net......... 17,626 67,626 42,925 (1,093,250)
---------- ------------ ----------- ------------
Net income (loss)....... $ (405,301) $ (1,566,853) $ (389,601) $ (16,191)
========== ============ =========== ============
<CAPTION>
DECEMBER 31, MARCH 31, MARCH 31,
DECEMBER 31, 1996 1997 1997 1998
----------------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current Assets.......... $3,807,004 $ 4,737,808 $ 5,069,167 $158,404,803
Fixed Assets, net....... 81,153 11,176,774 2,318,202 18,125,851
Total Assets............ 3,888,157 15,914,582 7,387,369 182,228,022
Long-term debt.......... -- 3,536,886 -- 152,093,513
Redeemable Class A Com-
mon Stock(1)........... 4,024,653 12,403,218 8,024,653 --
Total stockholders' eq-
uity (deficit)......... (404,954) (2,075,372) 7,230,097 24,111,655
OTHER FINANCIAL DATA:
EBITDA(2)............... $ (421,777) $ (1,018,662) $ (425,189) $ 1,967,930
Capital expenditures.... 82,303 11,655,524 2,244,385 7,593,061
Deficiency of earnings
to fixed charges(3).... 405,301 1,566,853 389,601 16,191
SUMMARY CASH FLOW DATA:
Net cash provided by
(used in) operating
activities............. $ (152,576) $ (1,634,017) $ (522,595) $ 3,745,255
Net cash used in
investing activities... (82,303) (11,655,524) (2,244,385) (13,537,316)
Net cash provided by
financing activities... 4,025,000 11,755,972 3,999,514 160,294,453
OPERATING DATA:
Access lines in
service(4)............. -- 7,394 -- 14,528
Minutes of use
(millions)............. -- 281.7 -- 401.6
</TABLE>
9
<PAGE>
- --------
(1) See "Capitalization" and "Description of Capital Stock."
(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBITDA is not a measurement of financial performance under
generally accepted accounting principles, is not intended to represent cash
flow from operations, and should not be considered as an alternative to net
loss as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. The Company believes that EBITDA is widely
used by analysts, investors and other interested parties in the
telecommunications industry. EBITDA is not necessarily comparable with
similarly titled measures for other companies. See "Consolidated Statements
of Cash Flows."
(3) The ratio of earnings to fixed charges is calculated by dividing (i) income
(loss) before provision for income taxes, plus fixed charges by (ii) fixed
charges. Fixed charges consist of interest on indebtedness, plus the
estimated component of rental expense deemed by the Company to be
representative of the interest factor.
(4) Represents the number of access lines in service (at a DSO level) and
excludes the signaling channel of primary rate ISDN-based connections.
10
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, holders
of Senior Notes should carefully consider the risk factors set forth below
before tendering their Senior Notes for Exchange Notes.
LIMITED HISTORY OF OPERATIONS; NEGATIVE CASH FLOW
The Company began operations in May 1996. Accordingly, prospective
participants in the Exchange Offer have limited historical financial
information about the Company upon which to base an evaluation of the
Company's performance. Given the Company's limited operating history, there is
no assurance that it will be able to generate sufficient cash flow to service
its debt obligations (including the Senior Notes and the Exchange Notes) or to
compete successfully in the telecommunications business.
The development of the Company's businesses and the acquisition,
installation and expansion of its networks require significant expenditures, a
portion of which are made before any revenues may be realized. Such capital
expenditures are expected to increase as the Company grows its customer base
in existing markets and expands into additional markets. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Business--Market Potential." These
expenditures, together with the associated early service costs, will result in
negative cash flow and operating losses until an adequate revenue base may be
established. There can be no assurance that an adequate revenue base will be
established. Management believes the Company may produce negative consolidated
cash flow for a period of at least 18 months from the date of this Prospectus.
The Company will continue to make expenditures in connection with the
acquisition, development and expansion of its networks, services and customer
base. There can be no assurance that the Company will achieve or sustain
profitability or generate sufficient cash flow to service its debt obligations
(including the Senior Notes and the Exchange Notes), to meet working capital
requirements or to compete successfully in the telecommunications business.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
The Company is highly leveraged following the issuance of the Notes. As of
March 31, 1998, the Company had no outstanding indebtedness other than the
Notes. The Indenture permits, subject to certain conditions, the incurrence of
additional indebtedness. The Company may incur substantial additional
indebtedness (including secured indebtedness) following the issuance of the
Senior Notes and Exchange Notes for the construction or acquisition and
expansion of networks, the purchase of transmission and switching equipment,
and the introduction of new service offerings. See "--Future Capital
Requirements," and "--Holding Company Structure; Effective Subordination of
the Exchange Notes."
The Company's ability to make principal and interest payments on the Notes
will be dependent upon, among other things, the Company's future operating
performance and anticipated cash flow and its ability to obtain additional
debt or equity financing. Factors affecting the ability of the Company to
achieve the foregoing include prevailing economic, financial, competitive and
regulatory conditions and other factors affecting the Company's business and
operations, including the Company's ability to implement its business strategy
in new markets on a timely and cost-effective basis. There can be no assurance
that the Company will have adequate sources of liquidity to make required
payments of principal and interest on its indebtedness (including the Notes),
whether at or prior to maturity, finance anticipated capital expenditures and
fund working capital requirements. If the Company does not have sufficient
available resources to repay its outstanding indebtedness when it becomes due
and payable, the Company may find it necessary to refinance such indebtedness;
there can be no assurance however that refinancing will be available, or if
available, that it will be available on reasonable terms. Any failure by the
Company to satisfy its obligations with respect to its indebtedness at
maturity or prior thereto would constitute a default under such indebtedness
and could cause a default under agreements governing other
11
<PAGE>
indebtedness, if any, of the Company. Such defaults could result in a default
under the Indenture and could delay or preclude payment of interest or
principal on the Notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources." If the
Company were unable to obtain adequate financing or refinancing on
satisfactory terms, it would have to consider various other options such as
the sale of certain assets or additional equity to meet its debt service
requirements or other options available to it under law. There can be no
assurance that such options would be permitted under the terms of the
Company's indebtedness or other agreements or that such options would be
available on terms acceptable to the Company, if at all. See "Description of
the Exchange Notes--Certain Covenants."
The Company's high degree of leverage could have important consequences,
including: (i) a substantial portion of the Company's sources of capital and
cash flow from operations must be dedicated to debt service payments, thereby
reducing the funds available to the Company for other purposes; (ii) the
Company's ability to obtain additional debt financing in the future for
working capital, capital expenditures, acquisitions, repayment of indebtedness
or other purposes may be impaired, whether as a result of the covenants and
other terms of its debt instruments or otherwise; (iii) the Company is
substantially more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; (iv) the Company's high degree of
leverage may limit its ability to expand capacity and otherwise meet its
growth objectives; and (v) the Company's high degree of leverage may hinder
its ability to adjust rapidly to changing market conditions and could make it
more vulnerable in the event of a downturn in general economic conditions or
its business. In addition, the Company's operating and financial flexibility
is limited by the Indenture and may be limited by covenants contained in
agreements governing future indebtedness of the Company and its subsidiaries.
Such covenants will impose significant operating and financial restrictions on
the Company and its subsidiaries and will restrict, limit or prohibit, among
other things, the ability of the Company and its subsidiaries to incur
additional indebtedness, pay dividends, repay indebtedness prior to its stated
maturity, sell assets, make investments, engage in transactions with
affiliates, create liens or engage in mergers or acquisitions. There can be no
assurance that such covenants will not adversely affect the Company's ability
to finance its future operations or capital needs or to engage in other
business activities which may be in the interest of the Company. See
"Description of the Exchange Notes."
FUTURE CAPITAL REQUIREMENTS
Expansion of the Company's existing networks and services, the acquisition
and development of new networks and services and the funding of initial
operating losses will require significant capital expenditures. The Company
plans to have operations in ten cities by the end of 1999. The Company
currently intends to fund the expansion of its networks and the deployment of
switches in all of such networks with full capabilities for local dial tone
and switched access termination and origination services with its existing
cash balances and the net proceeds of additional financings, if required. See
"Use of Proceeds." If the Company requires additional capital to complete the
planned build out of its networks, or if customer demand in such markets
exceeds current expectations, the Company's funding needs may increase. In
addition, the Company will continue to evaluate additional revenue
opportunities in each of its markets and, as attractive additional
opportunities may develop, the Company plans to make additional capital
investments in its networks that might be required to pursue such
opportunities. The Company expects to meet such additional capital needs with
additional borrowings under credit facilities, proceeds from the sale of
additional debt or equity securities and joint ventures. The Company's network
design strategy of leasing its transmission facilities may result in EBITDA
(as defined in footnote 2 on page 10) levels lower than other CLECs that own
their transport facilities. Such differences may, in the absence of other
factors that management believes should increase its EBITDA (as defined in
footnote 2 on page 10) relative to its competitors, make it more difficult for
the Company to obtain debt financing relative to other CLECs of similar size.
There can be no assurance, however, that the Company will be successful in
raising sufficient additional debt or equity capital on terms that it will
consider acceptable or that the Company's operations will produce cash flow in
sufficient amounts. Failure to raise and generate sufficient funds may require
the Company to delay or abandon some of its planned future expansion or
expenditures, which could have a material adverse effect on the Company's
growth and its ability to compete in the telecommunications industry.
12
<PAGE>
The Company's expectations of required future capital expenditures are based
on the Company's current estimates. There can be no assurance that actual
expenditures will not be significantly higher or lower.
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION OF THE EXCHANGE NOTES
The Company is a holding company which derives all of its revenues from the
operation of its subsidiaries. The holders of the Exchange Notes will have no
direct claim against the subsidiaries for payment under the Exchange Notes. As
such, the Company is dependent upon dividends and other payments from its
subsidiaries to generate the funds necessary to meet its cash obligations,
including the payment of principal and interest on the Exchange Notes. The
ability of the Company to obtain such dividend payments from its subsidiaries
may be limited or restricted by, among other things, the profitability and
cash flow of such subsidiaries, the terms of such subsidiaries' indebtedness
and applicable laws, including state corporate laws which in certain
circumstances limit the ability of a corporation to pay dividends. Although
there are currently no such limitations or restrictions on the Company's
ability to obtain dividend payments from its subsidiaries, future debt
securities, loan agreements or other agreements may contain such limitations
or restrictions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Claims of creditors of the Company's subsidiaries and holders of preferred
stock of such subsidiaries will have priority as to the assets of such
subsidiaries over the claims of the Company and the holders of the Company's
indebtedness, including the Exchange Notes, except to the extent that such
subsidiaries have provided guarantees of the Company's indebtedness and except
to the extent that loans made by the Company to its subsidiaries are
recognized as indebtedness. Therefore, the Exchange Notes will be effectively
subordinated in right of payment to all existing and future indebtedness and
other liabilities of the Company's subsidiaries, including trade payables. See
"Use of Proceeds" and "Description of the Exchange Notes--Ranking."
The Exchange Notes will be effectively subordinated to any secured
indebtedness of the Company because holders of such indebtedness will have
claims that are prior to the claims of the holders of the Exchange Notes with
respect to the assets securing such indebtedness except to the extent the
Exchange Notes are equally and ratably secured by such assets. As of March 31,
1998, the Company had no outstanding indebtedness other than the Notes. The
Indenture limits, but does not prohibit, the incurrence of certain other
secured and unsecured indebtedness by the Company and its subsidiaries. See
"Description of the Exchange Notes--Certain Covenants--Limitation on
Consolidated Indebtedness." See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
IMPLEMENTATION OF GROWTH STRATEGY
The expansion and development of the Company's operations will depend, among
other things, on the Company's ability to assess markets, install and operate
switches, recruit and hire personnel, install facilities, implement and
improve its operating and administrative systems and obtain any required
government authorizations, franchises and permits, all in a timely manner, at
reasonable costs and on satisfactory terms and conditions. As a result, there
can be no assurance that the Company will be able successfully to expand its
existing networks or acquire or develop new networks in a timely manner in
accordance with its strategic objectives. As a result of the Company's
strategy to achieve rapid growth, the operating complexity of the Company may
increase. The Company's ability to manage its expansion effectively will
depend on, among other things, the expansion, training and management of the
Company's employee base and the Company's successful development of
operational, financial and management plans, systems and controls. Given the
Company's limited operating history, there can be no assurance that the
Company will be able to satisfy these requirements or otherwise manage its
growth effectively. Such failures could have a material adverse effect on the
Company's financial condition. See "Business."
An essential element of the Company's strategy is the provision of switched
local service. There can be no assurance that the installation of the required
switches and associated electronics necessary to implement the Company's
business plan will continue to be completed on time or that, during the
testing of these switches and related equipment, the Company will not
experience technological problems that cannot be resolved. The failure of the
Company to install and operate successfully additional switches and other
network equipment could have a material adverse effect upon the Company's
ability to enter additional markets.
13
<PAGE>
The Company has agreements for the interconnection of its networks with the
networks of the ILEC covering each market in which it is currently operating.
The U.S. Court of Appeals for the Eighth Circuit vacated Federal
Communications Commission ("FCC") rules governing, among other things, pricing
in interconnection agreements and providing "most favored nation" treatment.
This decision has been appealed to the Supreme Court, and the Supreme Court
has granted certiorari. The outcome of those appeals cannot be predicted at
this time. The Eighth Circuit decision creates uncertainty about the rules
governing pricing, terms and conditions of interconnection agreements, and
could make negotiation and enforcement of such agreements more difficult and
protracted, and may require renegotiation of existing agreements. There can be
no assurance that the Company will successfully negotiate such other
agreements for interconnection with the ILEC or renewals of existing
interconnection agreements. The failure to negotiate required interconnection
agreements could have a material adverse effect upon the Company's ability to
enter additional markets. See "--Regulation."
The Company has developed processes and procedures in the implementation of
customer orders for services, the provisioning, installation and delivery of
such services and monthly billing for those services. In connection with its
development of a comprehensive information technology platform, the Company is
developing automated internal systems for processing customer orders,
provisioning and billing. The failure to develop effective internal processes
and systems for these service elements could have a material adverse effect
upon the Company's ability to achieve its growth strategy.
COMPETITION
In each of the cities anticipated to be served by the Company's networks,
the services offered by the Company compete or will compete principally with
the services offered by the ILEC serving that area. ILECs have long-standing
relationships with their customers, have the potential to subsidize
competitive services from monopoly service revenues and benefit from favorable
state and federal regulations. While the FCC's interconnection decisions and
the Telecom Act provide increased business opportunities to CLECs such as the
Company, they also provide the ILECs with increased pricing flexibility for
their services and other regulatory relief, which could have a material
adverse effect on CLECs, including the Company. If the ILECs are allowed by
regulators to lower their rates for their services, engage in substantial
volume and term discount pricing practices for their customers, or seek to
charge CLECs substantial fees for interconnection to the ILECs' networks, the
income of CLECs, including the Company, could be materially adversely
affected.
ILECs can also adversely affect the pace at which CLECs add new customers by
prolonging the process of providing unbundled network elements, colocations,
intercompany trunks, and operations support system ("OSS") interfaces, which
allow the electronic transfer between ILECs and CLECs of needed information
about customer accounts, service orders and repairs. Although the Telecom Act
requires ILECs to provide the unbundled network elements, interconnections and
OSS interfaces needed to allow the customers of CLECs and other new entrants
to the local exchange market to obtain service comparable to that provided by
the ILECs in terms of installation time, repair response time, billing and
other administrative functions, in many cases the ILECs may not have fully
complied with the mandates of the Telecom Act. In addition, the
interconnection regulations may be affected by the outcome of the pending
Supreme Court review of the Eighth Circuit's decision. See "--Regulation."
The Company also faces, and expects to continue to face, competition from
other current and potential market entrants, including other CLECs,
interexchange carriers ("IXCs"), cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and private
networks built by large end users. A continuing trend toward combinations and
strategic alliances in the telecommunications industry, including potential
consolidation among existing telecommunications providers in the same or
different market segments, or among telephone companies and other types of
companies not currently providing telecommunications services, could give rise
to significant new competition.
The Company believes that various legislative initiatives, including the
Telecom Act, as well as a recent series of completed and proposed transactions
between ILECs, IXCs and cable companies, increase the
14
<PAGE>
likelihood that barriers to local exchange competition will be removed more
quickly than had earlier been anticipated. The introduction of such
competition, however, also means that the Company may face new or increased
competition from entities who do not currently compete with the Company in any
significant way.
Many of the Company's current and potential competitors have financial,
personnel and other resources substantially greater than those of the Company,
as well as other competitive advantages over the Company. See "Business--
Competition" for more detailed information on the competitive environment
faced by the Company.
REGULATION
The Company is subject to varying degrees of federal, state and local
regulation. The Company is not currently subject to price cap or rate of
return regulation, nor is it currently required to obtain FCC authorization
for the installation, acquisition or operation of its network facilities.
While the FCC has determined that non-dominant carriers, such as the Company
and its subsidiaries, should no longer be required to file interstate tariffs,
that decision has been stayed. Thus, carriers currently are required to
continue filing such tariffs for long-distance service. The Company's
subsidiaries that provide intrastate services are also generally subject to
certification and tariff filing requirements by state regulators. Challenges
to these tariffs by third parties could cause the Company to incur substantial
legal and administrative expenses. Although the trend in federal and state
regulation appears to favor increased competition, no assurance can be given
that changes in current or future regulations adopted by the FCC or state
regulators or other legislative or judicial initiatives relating to the
telecommunications industry would not have a material adverse effect on the
Company. In particular, the Company's ability to compete in the segments of
the local exchange market recently opened to CLEC competition depends upon
continued favorable pro-competitive regulatory changes and may be adversely
affected by the greater pricing flexibility and other regulatory relief
granted to ILECs under the Telecom Act. The Company's ability to compete also
may be affected by the recent decision of a U.S. District Court in Texas
(which has been stayed pending appeal) invalidating certain provisions of the
Telecom Act which prohibit the Regional Bell Operating Companies ("RBOCs")
from providing certain services or engaging in other activity until such time
as they have demonstrated that their local market has been opened to
competition. In addition, the Eighth Circuit's decision vacating the FCC's
interconnection pricing rules (which will be reviewed by the United States
Supreme Court during its 1998-99 term) may slow the pace of open competition
initiatives and result in individual states having a more prominent role in
the opening of local exchange markets to competition. Notwithstanding the
uncertainty of the interconnection pricing rules, the Company has in effect or
expects to have in effect interconnection agreements with the ILECs for all of
its operating networks. These agreements are subject to review and approval by
the respective states. While the Company believes its agreements will be
approved, there can be no assurance that the agreements will be approved. In
addition, one or both parties to the agreements may seek to have the
agreements modified based upon the outcome of regulatory and judicial rulings
occurring subsequent to the date of the agreements. There can be no assurances
that the outcome, or any resultant modified agreements, will not adversely
affect the Company. See "Business--Regulation."
RELIANCE ON LEASED TRANSPORT FACILITIES AND ILEC INTERCONNECTION
Because the Company has elected to lease transport capacity, it is dependent
upon the availability of fiber optic transmission facilities owned by ILECs,
CLECs and other fiber optic transport providers whose fiber optic networks are
being leased by the Company. The risks inherent in this approach include, but
are not limited to, negotiating and renewing favorable supply agreements, and
timeliness of the ILECs, CLECs or other fiber optic transport providers in
processing the Company's orders for customers who seek to utilize the
Company's service. The Company currently leases a majority of its transport
facilities from WorldCom and, although the Company believes that adequate
alternative sources of transport facilities exist, should WorldCom's
facilities become unavailable it could prove disruptive to the Company's
business. In addition, although the Company believes it has adequate
protection against unexpected increases in the cost of leased transport
facilities, should there be an unexpected material increase in such costs, it
could have a material adverse impact on the Company's results of operations.
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In addition to transport providers, the Company is reliant on executing
interconnection agreements with the ILECs operating in its target markets. The
Company's interconnection agreements currently provide that the Company's
connection and maintenance orders will receive attention at parity with the
ILECs' customers and the ILEC will provide adequate trunking capacity to keep
blockage within industry standards. Accordingly, the Company and its customers
are dependent on the ILECs to assure uninterrupted service. Blocked calls
result in customer dissatisfaction and risk the loss of Company business.
There can be no assurance ILECs will comply with their network provisioning
requirements. Furthermore, there can be no assurance the rates to be charged
to the Company under the interconnection agreements will allow the Company to
offer low enough usage rates to attract a sufficient number of customers and
to operate the business profitably.
RECIPROCAL COMPENSATION FOR INTERNET ACCESS
The Company expects to receive a majority of its initial revenue in a given
market from the ILEC in the form of reciprocal compensation payments. This is
a result of the Company's ISP and corporate customers receiving more calls
than they make due to the initial mix of applications typically sold. Certain
ILECs have refused to pay that portion of reciprocal compensation that they
estimate is the result of inbound ISP traffic since they believe such traffic
to be interstate in nature and not covered under the interconnection
agreements. For example, Illinois Bell Telephone Company ("Ameritech") has
disputed that portion of the reciprocal compensation charges billed to it by
Focal which it believes are related to Internet access services. The Company
has recorded revenues and related accounts receivable totaling $3.2 million
from inception to March 31, 1998 which are the subject of such dispute. On
March 11, 1998, the ICC issued an order stating that Ameritech is required to
pay reciprocal compensation with respect to calls made to ISPs. On March 15,
1998, Ameritech filed a motion with the ICC to stay the order pending an
appeal, which was denied by the ICC on March 23, 1998. On March 27, 1998,
Ameritech filed suit in the United States District Court for the Northern
District of Illinois seeking reversal of the ICC order. Oral arguments in this
matter were held on June 25, 1998. The District Court issued its ruling on
July 21, 1998, affirming the ICC's order requiring Ameritech to pay reciprocal
compensation with respect to calls made to ISPs. The District Court also
continued the ICC's stay order for an additional 35 days. The Company
anticipates that the District Court's decision will be appealed. This dispute
may take an extended time to resolve in the federal court system. Reciprocal
compensation payments from Ameritech currently comprise a majority of the
Company's revenues. As such, the ultimate resolution of this matter in
Ameritech's favor would have a material adverse effect on the Company.
While some states in which the Company is providing, or proposes to provide,
service have ordered ILECs to pay reciprocal compensation for such calls,
other states have not considered the issue. States which have not considered
the issue could determine that no reciprocal compensation is due with respect
to calls made to ISPs. In addition, the FCC also is considering this matter in
response to a request for a declaratory ruling. There can be no assurance that
the payment of reciprocal compensation for ISP or other traffic types will be
maintained. A change in the type of traffic eligible for reciprocal
compensation payments would have a material adverse effect on the Company. See
"Business--Legal and Administrative Proceedings."
On July 13, 1998, Ameritech filed a complaint with the ICC, alleging that
Focal's Virtual Office service was in violation of the interconnection
agreement and state statute. Ameritech also alleged that due to Focal's
Virtual Office service, Focal was contributing to the exhaustion of numbers in
the 847 area code. Ameritech complained that calls on Focal's Virtual Office
network were circumventing local toll charges, and should not be subject to
reciprocal compensation. Ameritech also claims that the Company is offering
service in violation of the state's pay-per-call rules. The case is set for
hearing before the ICC on September 18, 1998. If the Company were to lose the
case, it could have a material adverse affect on the Company.
CONTROL BY LIMITED NUMBER OF STOCKHOLDERS; POTENTIAL CONFLICT OF INTEREST
The Equity Investors control approximately 80% of the total voting power in
the Company. As a result of such control and pursuant to the terms of certain
agreements among the Company's stockholders, the Equity Investors and the
Company's management will continue to have the ability to effectively control
the future operations of the Company. See "Security Ownership of Certain
Beneficial Owners and Management." Certain decisions concerning the operations
or financial structure of the Company may present a conflict of interest
between the Company's stockholders and the holders of the Exchange Notes. For
example, if the Company encounters financial difficulties or is unable to pay
its debts as they mature, the interest of the Company's
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stockholders may conflict with those of the holders of Exchange Notes. In
addition, these investors may have an interest in pursuing acquisitions,
divestitures, financings or other transactions that, in their judgment could
enhance their equity investment in the Company, even though such transactions
might involve increased risk to the holders of the Exchange Notes. In addition
to their investment in the Company, the Equity Investors or their affiliates
currently have significant investments in other telecommunications companies
and may in the future invest in other entities engaged in the
telecommunications business or in related businesses (including entities
engaged in business in areas in which the Company operates). As a result, the
Equity Investors have, and may develop, relationships with businesses that are
or may be competitive with the Company. In addition, the Company and these
investors have agreed that such investors are under no obligation to bring the
Company any investment or business opportunities of which they become aware,
even if such opportunities are within the primary objectives of the Company.
See "Certain Transactions." Finally, Mr. Crawford, Mr. Finnegan, Mr. Frisbie
and Mr. Perry, each of whom are principals of the Equity Investors and
directors of the Company, also serve as directors of other telecommunications
companies and other private companies. As a result of these additional
directorships, Mr. Crawford, Mr. Finnegan, Mr. Frisbie and Mr. Perry may be
subject to conflicts of interest during their tenure as directors of the
Company. Because of these potential conflicts, Mr. Crawford, Mr. Finnegan, Mr.
Frisbie and Mr. Perry may be required, from time to time, to disclose certain
financial or business opportunities to the Company and to the other companies
to which they owe fiduciary duties. However, the Company does not believe
these conflicts of interest will be a detriment to the Company's growth or
ability to operate its business. Currently the Company does not have any
standard procedures for resolving potential conflicts of interest relating to
corporate opportunities or otherwise.
POTENTIAL NEED TO OBTAIN AND MAINTAIN PERMITS AND RIGHTS-OF-WAY
If the Company decides at a later date to acquire and develop its own fiber
optic transmission facilities, the Company may be required to obtain local
franchises and other permits, as well as rights to utilize underground conduit
and pole space and other rights-of-way from entities such as ILECs and other
utilities, railroads, long distance providers, state highway authorities,
local governments and transit authorities. The Telecom Act requires that local
governmental authorities treat telecommunications carriers in a competitively
neutral, non-discriminatory manner, and that most utilities, including most
ILECs and electric companies, afford CLECs access to their poles and conduits
and rights-of-way at reasonable rates on nondiscriminatory terms and
conditions. The failure to enter into and maintain any such required
arrangements for a particular network, including a network which is already
under construction, may affect the Company's ability to develop that network.
See "Business--Network."
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
A portion of the Company's future growth may come from acquisitions of other
companies. The acquisition of additional businesses will depend on the
Company's ability to identify suitable acquisition candidates, to negotiate
acceptable terms for their acquisition and to finance any such acquisitions.
The Company will also be subject to competition for suitable acquisition
candidates. Any acquisitions, if made, could divert the resources and
management time of the Company and would require integration with the
Company's existing networks and services. As a result, there can be no
assurance that any such acquisitions will occur or that any such acquisitions,
if made, would be made in a timely manner or on terms favorable to the Company
or would be successfully integrated into the Company's operations.
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. While the Company believes that for the foreseeable future
these changes will neither materially affect the continued use of the
Company's time-division multiplexed, circuit switching systems nor materially
hinder the Company's ability to acquire necessary technologies, the effect of
technological changes on the businesses of the Company cannot be predicted.
Thus, there can be no assurance that technological developments will not have
a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a relatively small number of senior
management and operating personnel, the loss of certain of whom could have a
material adverse effect on the Company. The Company
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believes that its ability to manage its planned growth successfully will
depend in large part on its continued ability to attract and retain highly
skilled and qualified personnel. See "Management" for detailed information on
the Company's management and directors. There can be no assurances that the
Company will be able to retain its key employees or that the Company can
attract or retain other skilled personnel in the future.
ABSENCE OF A PUBLIC MARKET FOR THE NOTES; POSSIBLE VOLATILITY OF NOTE PRICE
The Senior Notes have been designated for trading by qualified buyers in the
PORTAL Market. The Senior Notes have not been registered under the Securities
Act or any state securities laws, however, and will continue to be subject to
restrictions on transferability to the extent that they are not exchanged for
Exchange Notes. Furthermore, the Exchange Offer will not be conditioned upon
any minimum or maximum aggregate principal amount of Senior Notes being
tendered for exchange. No assurance can be given as to the liquidity of the
trading market of the Senior Notes following the Exchange Offer.
Although the Exchange Notes will generally be permitted to be resold or
otherwise transferred by the holders thereof (other than any holder that is:
(i) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act; (ii) a broker-dealer that acquired Senior Notes as a result of
market-making activities or other trading activities; or (iii) a broker-dealer
that acquired Senior Notes directly from the Company for resale pursuant to
Rule 144A or another available exemption under the Securities Act) without
compliance with the registration requirements under the Securities Act, they
will constitute a new issue of securities for which there is currently no
established trading market. If the Exchange Notes are traded after their
initial issuance, they may trade at a discount, depending upon prevailing
interest rates, the market for similar securities, the financial condition of
the Company and other factors beyond the control of the Company, including
general economic conditions. The Company does not intend to apply for a
listing or quotation of the Exchange Notes. The Initial Purchasers have
informed the Company that they currently intend to make a market in the
Exchange Notes. However, the Initial Purchasers are not obligated to do so,
and any such market making may be discontinued at any time without notice. No
assurance can be given as to the development or liquidity of any trading
market for the Exchange Notes.
Notwithstanding the registration of the Exchange Notes in the Exchange
Offer, holders who are "affiliates" of the Company (within the meaning of Rule
405 under the Securities Act) may publicly offer for sale or resell the
Exchange Notes only in compliance with the provisions of Rule 144 under the
Securities Act or any other available exemptions under the Securities Act.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Senior Notes, where such Senior 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. See "Plan of Distribution."
ORIGINAL ISSUE DISCOUNT; POSSIBLE UNFAVORABLE TAX AND OTHER LEGAL CONSEQUENCES
FOR HOLDERS OF NOTES
The Senior Notes were issued at a substantial discount from the stated
principal amount at maturity. Consequently, potential participants in the
Exchange Offer should be aware that there will be no periodic payments of cash
interest on the Exchange Notes prior to August 15, 2003 for U.S. federal
income tax purposes; however, OID (that is, the difference between the stated
redemption price at maturity and the issue price of the Senior Notes) will
accrue from February 18, 1998 and will be includible as interest income
periodically (including for periods ending prior to February 15, 2003) in a
holder's gross income in advance of receipt of the cash payments to which the
income is attributable. Similar results may apply under state and other tax
laws. The Notes constitute "applicable high yield discount obligations"
("AHYDOs"). As a result, for U.S. federal income tax purposes, a small portion
of the OID (the "Disqualified Portion") will not be deductible by the Company
and the balance of OID will not be deductible by the Company until payments
are made with respect thereto. Accordingly, during the term of the Notes, the
Company's after-tax cash flow (or its net operating loss carryforward, as the
case may be) will be less than it would be if the OID on the Notes was
deductible when accrued. For certain corporate holders of the Notes, the
Disqualified Portion may be treated for some U.S. federal
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income tax purposes, as dividends to the holders (to the extent that such
amounts would have been treated as dividends to the holders of the Notes if
they had been distributions with respect to shares of stock of the Company)
and thereby may be subject to a dividends received deduction. See "Certain
United States Federal Income Tax Considerations" for a more detailed
discussion of the U.S. federal income tax consequences to the holders
regarding the purchase, ownership and disposition of the Exchange Notes.
If a bankruptcy case is commenced by or against the Company under U.S.
federal bankruptcy laws after the issuance of the Notes, the claim of a holder
of Exchange Notes with respect to the stated principal amount at maturity
thereof may be limited to an amount equal to the sum of (i) the initial
offering price of the Senior Notes and (ii) that portion of the OID which is
not deemed to constitute "unmatured interest" for purposes of U.S. federal
bankruptcy law. Any OID that was not amortized as of any such bankruptcy
filing would constitute "unmatured interest." To the extent the U.S. federal
bankruptcy law differs from the Internal Revenue Code of 1986, as amended, in
determining the method of amortization of OID, a holder of Notes may realize
taxable gain or loss upon payment of such holder's claim in bankruptcy. See
"Certain United States Federal Income Tax Considerations."
CONSEQUENCES OF A FAILURE TO EXCHANGE SENIOR NOTES
The Senior Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case
in compliance with certain other conditions and restrictions. Senior Notes
which remain outstanding after consummation of the Exchange Offer will
continue to bear a legend reflecting such restrictions on transfer. In
addition, upon consummation of the Exchange Offer, holders of Senior Notes
which remain outstanding will not be entitled to any right to have such Senior
Notes registered under the Securities Act, except under certain limited
circumstances. The Company does not intend to register under the Securities
Act any Senior Notes which remain outstanding after consummation of the
Exchange Offer. See "The Exchange Offer."
To the extent that Senior Notes are tendered and accepted in the Exchange
Offer, the aggregate stated principal amount at maturity of outstanding Senior
Notes will decrease, which will result in a decrease in the liquidity of the
Senior Notes. Any trading market for Senior Notes which remain outstanding
after the Exchange Offer could be adversely affected.
FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for Senior Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Exchange Agent
of: (i) such Senior Notes or a book-entry confirmation of a book-entry
transfer of the Senior Notes into the Exchange Agent's account at The
Depository Trust Company ("DTC"); (ii) the Letter of Transmittal (or a
facsimile thereof), properly completed and duly executed, with any required
signature guarantees; and (iii) any other documents required by the Letter of
Transmittal. Holders of the Senior Notes desiring to tender such Senior Notes
in exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. The Company and the Exchange Agent are under no duty to give
notification of defects or irregularities with respect to the tenders of
Senior Notes for exchange. See "The Exchange Offer."
VARIABILITY OF QUARTERLY OPERATING RESULTS
As a result of the significant expenses associated with the expansion and
development of its networks and services and the variability of the level of
revenues generated through sales of its services, the Company anticipates that
its operating results could vary significantly from period to period. Such
variability could have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LIMITATIONS ON REPURCHASE OF NOTES
Upon a Change of Control, each holder of Exchange Notes will have the right,
at the holder's option, to require the Company to repurchase all or a portion
of such holder's Exchange Notes. If a Change of Control
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were to occur, there can be no assurance that the Company would have
sufficient funds to pay the repurchase price for all Exchange Notes tendered
by the holders thereof. In addition, the Company's repurchase of Exchange
Notes as a result of the occurrence of a Change of Control may be prohibited
or limited by, or create an event of default under, the terms of agreements
related to borrowings which the Company may enter into from time to time,
including senior indebtedness. See "Description of the Exchange Notes--
Repurchase at the Option of Holders upon a Change of Control."
INVESTOR RIGHTS
In the event that the Company has not consummated a public offering of its
common stock prior to November 27, 2003, the Equity Investors will each have
the right to require the Company to liquidate and distribute the proceeds of
the liquidation to the Company's creditors and stockholders in the priority of
their claims and as required by applicable law. In the event that the Equity
Investors were to exercise such right, the Company would be forced to cease
operations and liquidate, and there can be no assurance that the Company would
have sufficient cash to pay all or any portion of the principal of or other
amounts due with respect to the Notes.
IMPACT OF THE YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may 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.
The Company has assessed its systems and believes them to be year 2000
compliant. In addition, the Company has received assurance from its major
software vendors that the products used by the Company are year 2000 compliant
and will function adequately. If the systems of other companies on whose
services the Company depends or with whom the Company's systems interface are
not year 2000 compliant, it could have a material adverse effect on the
Company.
The Company will continue its year 2000 issue assessment and, if it comes to
the attention of the Company's management that any of its systems, or the
systems of those on whom the Company relies, are not year 2000 compliant, the
Company intends to develop an action plan, and assess the resources it would
be required to devote, to address such problem. There can be no assurance that
devoting further resources of the Company to the year 2000 issue, if one were
to occur, would not have a material adverse effect on the Company.
RISKS REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus which are not historical facts
are "forward-looking statements", which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks
and uncertainties. Management wishes to caution the reader that these forward-
looking statements, such as its anticipation of revenues from designated
markets, and statements regarding the development of the Company's businesses,
the markets for the Company's services and products, the Company's anticipated
capital expenditures, regulatory reform and other statements contained herein
regarding matters that are not historical facts, are only predictions. No
assurance can be given that the future results will be achieved; actual events
or results may differ materially as a result of risks facing the Company. Such
risks include, but are not limited to, the Company's ability to successfully
market its services to current and new customers, access markets, install
switching electronics, and obtain the use of leased fiber transport facilities
and any required governmental authorizations, franchises and permits, all in a
timely manner, at reasonable costs and on satisfactory terms and conditions,
as well as regulatory, legislative and judicial developments that could cause
actual results to differ materially from the future results indicated,
expressed or implied, in such forward-looking statements.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of the Senior Notes, the Company entered into
the Registration Agreement with the Initial Purchasers, pursuant to which the
Company agreed to file and to use its best efforts to cause to become
effective with the Commission a registration statement with respect to the
exchange of the Senior Notes for Exchange Notes with terms identical in all
material respects to the terms of the Senior Notes. A copy of the Registration
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part (the "Registration Statement"). The Exchange Offer
is being made to satisfy the contractual obligations of the Company under the
Registration Agreement.
By tendering Senior Notes in exchange for Exchange Notes, each holder will
represent to the Company that: (i) any Exchange Notes to be received by such
holder are being acquired in the ordinary course of such holder's business;
(ii) such holder has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of
Exchange Notes; (iii) such holder is not an "affiliate" of the Company (within
the meaning of Rule 405 under the Securities Act), or if such holder is an
affiliate, that such holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable; (iv)
such holder has full power and authority to tender, exchange, sell, assign and
transfer the tendered Senior Notes; (v) the Company will acquire good,
marketable and unencumbered title to the tendered Senior Notes, free and clear
of all liens, restrictions, charges and encumbrances; and (vi) the Senior
Notes tendered for exchange are not subject to any adverse claims or proxies.
Each tendering holder also will warrant and agree that such holder will, upon
request, execute and deliver any additional documents deemed by the Company or
the Exchange Agent to be necessary or desirable to complete the exchange,
sale, assignment, and transfer of the Senior Notes tendered pursuant to the
Exchange Offer. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Senior Notes, where such Senior 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. See "Plan of Distribution."
The Exchange Offer is not being made to, nor will the Company accept tenders
for exchange from, holders of Senior 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.
Unless the context requires otherwise, the term "holder" with respect to the
Exchange Offer means any person in whose name the Senior Notes are registered
on the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder, or any participant in DTC
whose name appears on a security position listing as a holder of Senior Notes
(which, for purposes of the Exchange Offer, include beneficial interests in
the Senior Notes held by direct or indirect participants in DTC and Senior
Notes held in definitive form).
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange $1,000 stated principal amount at maturity of Exchange Notes for each
$1,000 stated principal amount at maturity of Senior Notes properly tendered
prior to the Expiration Date and not properly withdrawn in accordance with the
procedures described below. Holders may tender their Senior Notes in whole or
in part in integral multiples of $1,000 stated principal amount at maturity.
The form and terms of the Exchange Notes will be the same as the form and
terms of the Senior Notes except that (i) the Exchange Notes will have been
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Senior Notes and (ii)
holders of the Exchange Notes will not be entitled to certain rights of
holders of the Senior Notes under the Registration Agreement. The Exchange
Notes will evidence the same indebtedness as the Senior Notes (which they
replace) and will be issued pursuant to, and entitled to the benefits of, the
Indenture.
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The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Notes being tendered for exchange. The Company reserves the
right in its sole discretion to purchase or make offers for any Senior Notes
that remain outstanding after the Expiration Date or, as set forth under "--
Conditions to the Exchange Offer," to terminate the Exchange Offer and, to the
extent permitted by applicable law, purchase Senior Notes in the open market,
in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer. As of
the date of this Prospectus, $270,000,000 aggregate stated principal amount at
maturity of Senior Notes is outstanding.
Holders of Senior Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Senior Notes which are not tendered for,
or are tendered but not accepted in connection with, the Exchange Offer will
remain outstanding. See "Risk Factors--Failure to Exchange Senior Notes."
If any tendered Senior 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 Senior Notes will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
Holders who tender Senior Notes in connection with the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Senior Notes in connection with the Exchange Offer. The Company
will pay all charges and expenses, other than certain applicable taxes
described below, in connection with the Exchange Offer. See "--Fees and
Expenses."
THE BOARD OF DIRECTORS OF THE COMPANY MAKES NO RECOMMENDATION TO HOLDERS OF
SENIOR NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY
PORTION OF THEIR SENIOR NOTES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO
ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF SENIOR
NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE
OFFER AND, IF SO, THE AGGREGATE AMOUNT OF SENIOR NOTES TO TENDER AFTER READING
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR
ADVISERS, IF ANY, BASED ON THEIR FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on , 1998
unless the Exchange Offer is extended by the Company (in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended).
The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time: (i)
to delay the acceptance of the Senior Notes for exchange; (ii) to terminate
the Exchange Offer (whether or not any Senior Notes have theretofore been
accepted for exchange) if the Company determines, in its sole and absolute
discretion, that any of the events or conditions referred to under "--
Conditions to the Exchange Offer" has occurred or exists or has not been
satisfied; (iii) to extend the Expiration Date of the Exchange Offer and
retain all Senior Notes tendered pursuant to the Exchange Offer, subject,
however, to the right of holders of Senior Notes to withdraw their tendered
Senior Notes as described under "--Withdrawal Rights;" and (iv) to waive any
condition or otherwise amend the terms of the Exchange Offer in any respect.
If the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, or if the Company waives a material condition of
the Exchange Offer, the Company will promptly disclose such amendment by means
of a prospectus supplement that will be distributed to the registered holders
of the Senior Notes, and the Company will extend the Exchange Offer to the
extent required by Rule 14e-1 under the Exchange Act.
Any such delay in acceptance, termination, extension or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent (any
such oral notice to be promptly confirmed in writing) and by
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making a public announcement thereof, and such announcement in the case of an
extension will be made no later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date. Without
limiting the manner in which the Company may choose to make any public
announcement, and subject to applicable laws, the Company shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, Exchange Notes
for Senior Notes validly tendered and not withdrawn (pursuant to the
withdrawal rights described under "--Withdrawal Rights") promptly after the
Expiration Date.
In all cases, delivery of Exchange Notes in exchange for Senior Notes
tendered and accepted for exchange pursuant to the Exchange Offer will be made
only after timely receipt by the Exchange Agent of: (i) Senior Notes or a
book-entry confirmation of a book-entry transfer of Senior Notes into the
Exchange Agent's account at DTC; (ii) the Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees; and (iii) any other documents required by the Letter of
Transmittal. Accordingly, the delivery of Exchange Notes might not be made to
all tendering holders at the same time, and will depend upon when Senior
Notes, book-entry confirmations with respect to Senior Notes and other
required documents are received by the Exchange Agent.
The term "book-entry confirmation" means a timely confirmation of a book-
entry transfer of Senior Notes into the Exchange Agent's account at DTC.
Subject to the terms and conditions of the Exchange Offer, the Company will
be deemed to have accepted for exchange, and thereby exchanged, Senior Notes
validly tendered and not withdrawn as, if and when the Company gives oral or
written notice to the Exchange Agent (any such oral notice to be promptly
confirmed in writing) of the Company's acceptance of such Senior Notes for
exchange pursuant to the Exchange Offer. The Company's acceptance for exchange
of Senior Notes tendered pursuant to any of the procedures described above
will constitute a binding agreement between the tendering holder and the
Company upon the terms and subject to the conditions of the Exchange Offer.
The Exchange Agent will act as agent for the Company for the purpose of
receiving tenders of Senior Notes, Letters of Transmittal and related
documents, and as agent for tendering holders for the purpose of receiving
Senior Notes, Letters of Transmittal and related documents and transmitting
Exchange Notes to holders who validly tendered Senior Notes. Such exchange
will be made promptly after the Expiration Date. If for any reason whatsoever
the acceptance for exchange or the exchange of any Senior Notes tendered
pursuant to the Exchange Offer is delayed (whether before or after the
Company's acceptance for exchange of Senior Notes), or the Company extends the
Exchange Offer or is unable to accept for exchange or exchange Senior Notes
tendered pursuant to the Exchange Offer, then, without prejudice to the
Company's rights set forth herein, the Exchange Agent may, nevertheless, on
behalf of the Company and subject to Rule 14e-1(c) under the Exchange Act,
retain tendered Senior Notes and such Senior Notes may not be withdrawn except
to the extent tendering holders are entitled to withdrawal rights as described
under "--Withdrawal Rights."
PROCEDURES FOR TENDERING SENIOR NOTES
Valid Tender. Except as set forth below, in order for Senior Notes to be
validly tendered pursuant to the Exchange Offer, either: (i) (a) a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), with
any required signature guarantees and any other required documents, must be
received by the Exchange Agent at the address set forth under "--Exchange
Agent" prior to the Expiration Date and (b) tendered Senior Notes must be
received by the Exchange Agent, or such Senior Notes must be tendered pursuant
to the procedures for book-entry transfer set forth below and a book-entry
confirmation must be received by the Exchange Agent, in each case prior to the
Expiration Date; or (ii) the guaranteed delivery procedures set forth below
must be complied with.
23
<PAGE>
If less than all of the Senior Notes are tendered, a tendering holder should
fill in the amount of Senior Notes being tendered in the appropriate box on
the Letter of Transmittal. The entire amount of Senior Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise
indicated.
If any Letter of Transmittal, endorsement, bond power, power of attorney, or
any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company, in its sole discretion, of such person's
authority to so act must be submitted.
Any beneficial owner of Senior Notes that are held by or registered in the
name of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
THE METHOD OF DELIVERY OF SENIOR NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY AND PROPER INSURANCE SHOULD BE
OBTAINED. NO LETTER OF TRANSMITTAL OR SENIOR NOTES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH
HOLDERS.
Book-Entry Transfer. The Exchange Agent will make a request to establish an
account with respect to the Senior Notes at DTC for purposes of the Exchange
Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in DTC's book-entry transfer
facility system may make a book-entry delivery of the Senior Notes by causing
DTC to transfer such Senior Notes into the Exchange Agent's account at DTC in
accordance with DTC's procedures for transfers. However, although delivery of
Senior Notes may be effected through book-entry transfer into the Exchange
Agent's account at DTC, the Letter of Transmittal (or facsimile thereof),
properly completed and duly executed, with any required signature guarantees
and any other required documents, must in any case be delivered to and
received by the Exchange Agent at its address set forth under "--Exchange
Agent" prior to the Expiration Date, or the guaranteed delivery procedure set
forth below must be complied with.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT.
Signature Guarantees. Certificates for Senior Notes need not be endorsed and
signature guarantees on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are unnecessary unless (a) a certificate for Senior Notes is
registered in a name other than that of the person surrendering the
certificate or (b) a registered holder completes the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" in the Letter of
Transmittal. In the case of (a) or (b) above, such certificates for Senior
Notes must be duly endorsed or accompanied by a properly executed bond power,
with the endorsement or signature on the bond power and on the Letter of
Transmittal or the notice of withdrawal, as the case may be, guaranteed by a
firm or other entity identified in Rule 17Ad-15 under the Exchange Act as an
"eligible guarantor institution," including (as such terms are defined
therein): (i) a bank; (ii) a broker, dealer, municipal securities broker or
dealer or government securities broker or dealer; (iii) a credit union; (iv) a
national securities exchange, registered securities association or clearing
agency; or (v) a savings association that is a participant in a Securities
Transfer Association (each an "Eligible Institution"), unless surrendered on
behalf of such Eligible Institution. See Instruction 1 to the Letter of
Transmittal.
Guaranteed Delivery. If a holder desires to tender Senior Notes pursuant to
the Exchange Offer and the certificates for such Senior Notes are not
immediately available or time will not permit all required documents to
24
<PAGE>
reach the Exchange Agent before the Expiration Date, or the procedures for
book-entry transfer cannot be completed on a timely basis, such Senior Notes
may nevertheless be tendered, provided that all of the following guaranteed
delivery procedures are complied with:
(i) such tenders are made by or through an Eligible Institution;
(ii) 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 accompanying the Letter of
Transmittal, setting forth the name and address of the holder of Senior
Notes and the amount of Senior Notes tendered, stating that the tender is
being made thereby and guaranteeing that within three New York Stock
Exchange trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered Senior
Notes, in proper form for transfer, or a book-entry confirmation, as the
case may be, and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent. The
Notice of Guaranteed Delivery may be delivered by hand, or transmitted by
facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in the Notice of Guaranteed
Delivery; and
(iii) the certificates (or book-entry confirmation) representing all
tendered Senior Notes, in proper form for transfer, together with a
properly completed and duly executed Letter of Transmittal, with any
required signature guarantees and any other documents required by the
Letter of Transmittal, are received by the Exchange Agent within three New
York Stock Exchange trading days after the date of execution of the Notice
of Guaranteed Delivery.
Determination of Validity. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange
of any tendered Senior Notes will be determined by the Company, in its sole
discretion, which determination shall be final and binding on all parties. The
Company reserves the absolute right, in its sole and absolute discretion, to
reject any and all tenders determined by it not to be in proper form or the
acceptance for exchange of which may, in the view of counsel to the Company,
be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer as set
forth under "--Conditions to the Exchange Offer" or any defect or irregularity
in any tender of Senior Notes of any particular holder whether or not similar
defects or irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including the Letter of Transmittal and the instructions thereto) will
be final and binding on all parties. No tender of Senior Notes will be deemed
to have been validly made until all defects or irregularities with respect to
such tender have been cured or waived. Neither the Company, any affiliates of
the Company, the Exchange Agent or any other person shall be under any duty to
give any notification of any defects or irregularities in tenders or incur any
liability for failure to give any such notification.
RESALES OF EXCHANGE NOTES
Based on interpretations by the staff of the Commission, as set forth in no-
action letters issued to third parties unrelated to the Company (e.g., Exxon
Capital Holdings Corporation, publicly available May 13, 1988; K-III
Communications Corporation, publicly available May 14, 1993; Brown & Wood LLP,
publicly available February 7, 1997; Warnaco, Inc., publicly available October
2, 1991; and Mary Kay Cosmetics, Inc., publicly available June 5, 1991), the
Company believes that holders of Senior Notes (other than any holder that is
(i) a broker-dealer that acquired Senior Notes as a result of market-making
activities or other trading activities, or (ii) a broker-dealer that acquired
Senior Notes directly from the Company for resale pursuant to Rule 144A or
another available exemption under the Securities Act) who exchange their
Senior Notes for Exchange Notes pursuant to the Exchange Offer may offer for
resale, resell and otherwise transfer such Exchange Notes without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are acquired in the ordinary course of
such holders' business, such holders have no arrangement or understanding with
any person to participate in the distribution of such Exchange Notes and such
holders are not "affiliates" of the Company (within the meaning of Rule 405 of
the Securities Act). However, the staff of the Commission has not considered
the Exchange Offer in the context of a no-action letter, and there can be no
25
<PAGE>
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Senior Notes, where such Senior
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. See "Plan
of Distribution."
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Senior Notes may be
withdrawn at any time prior to the Expiration Date.
In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at its address set forth under "--Exchange Agent" prior to
the Expiration Date. Any such notice of withdrawal must specify the name of
the person who tendered the Senior Notes to be withdrawn, the aggregate
principal amount of Senior Notes to be withdrawn, and (if certificates for
such Senior Notes have been tendered) the name of the registered holder of the
Senior Notes as set forth on the Senior Notes, if different from that of the
person who tendered such Senior Notes. If certificates for Senior Notes have
been delivered or otherwise identified to the Exchange Agent, the notice of
withdrawal must specify the serial numbers on the particular certificates for
the Senior Notes to be withdrawn and the signature on the notice of withdrawal
must be guaranteed by an Eligible Institution, except in the case of Senior
Notes tendered for the account of an Eligible Institution. If Senior Notes
have been tendered pursuant to the procedures for book-entry transfer set
forth in "--Procedures for Tendering Senior Notes," the notice of withdrawal
must specify the name and number of the account at DTC to be credited with the
withdrawal of Senior Notes and must otherwise comply with the procedures of
DTC. Withdrawals of tenders of Senior Notes may not be rescinded. Senior Notes
properly withdrawn will not be deemed validly tendered for purposes of the
Exchange Offer, but may be retendered at any subsequent time prior to the
Expiration Date by following any of the procedures described above under "--
Procedures for Tendering Senior Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, which determination shall be final and binding on all
parties. Neither the Company, any affiliates of the Company, the Exchange
Agent or any other person shall be under any duty to give any notification of
any defects or irregularities in any notice of withdrawal or incur any
liability for failure to give any such notification. Any Senior Notes which
have been tendered but which are withdrawn will be returned to the holder
thereof promptly after withdrawal.
INTEREST ON THE EXCHANGE NOTES
The Senior Notes and the Exchange Notes will accrete from February 18, 1998
at a rate of 12.125% per annum, compounded semiannually, to an aggregate
stated principal amount of $270,000,000 by February 15, 2003. Interest will
not be payable on the Exchange Notes prior to February 15, 2003. Thereafter,
interest on the Exchange Notes will accrue at the rate of 12.125% per annum
and will be payable in cash semiannually on August 15 and February 15,
commencing August 15, 2003.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer or any extension
of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Senior Notes for any Exchange Notes, and, as
described below, may terminate the Exchange Offer (whether or not any Senior
Notes have theretofore been accepted for exchange) or may waive any conditions
to or amend the Exchange Offer, if any of the following conditions have
occurred or exists or have not been satisfied:
(a) there shall occur a change in the current interpretation by the staff
of the Commission which permits the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Senior Notes to be offered for resale,
resold and otherwise transferred by holders thereof (other than (i) broker-
dealers that acquired Senior Notes as a result of market-making activities
or other trading activities or (ii) broker-dealers that acquired Senior
Notes directly from the Company for resale pursuant to Rule 144A or another
available
26
<PAGE>
exemption under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of
such holders' business, such holders have no arrangement or understanding
with any person to participate in the distribution of such Exchange Notes
and such holders are not "affiliates" of the Company (within the meaning of
Rule 405 under the Securities Act);
(b) any action or proceeding shall have been instituted or threatened in
any court or by or before any governmental agency or body with respect to
the Exchange Offer which, in the Company's judgment, would reasonably be
expected to impair the ability of the Company to proceed with the Exchange
Offer;
(c) any law, statute, rule or regulation shall have been adopted or
enacted which, in the Company's judgment, would reasonably be expected to
impair the ability of the Company to proceed with the Exchange Offer;
(d) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration
Statement, or proceedings shall have been initiated or, to the knowledge of
the Company, threatened for that purpose;
(e) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby; or
(f) any change, or any development involving a prospective change, in the
business or financial affairs of the Company has occurred which, in the
sole judgment of the Company, might materially impair the ability of the
Company to proceed with the Exchange Offer.
If the Company determines in its sole and absolute discretion that any of
the foregoing events or conditions has occurred or exists or has not been
satisfied, the Company may, subject to applicable law, terminate the Exchange
Offer (whether or not any Senior Notes have theretofore been accepted for
exchange) or may waive any such condition or otherwise amend the terms of the
Exchange Offer in any respect. If such waiver or amendment 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 Senior Notes, and the Company will extend the
Exchange Offer to the extent required by Rule 14e-1 under the Exchange Act.
EXCHANGE AGENT
Harris Trust and Savings Bank has been appointed as Exchange Agent for the
Exchange Offer. Delivery of the Letters of Transmittal and any other required
documents, questions, requests for assistance, and requests for additional
copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent as
follows:
By Mail
Harris Trust and Savings Bank
c/o Harris Trust Company of New York
Wall Street Station
P.O. Box 1010
New York, New York 10268-1010
Attention: Reorganization Dept.
By Overnight Courier or Hand
Harris Trust and Savings Bank
c/o Harris Trust Company of New York
Wall Street Plaza
88 Pine Street, 19th Floor
New York, New York 10005
Attention: Reorganization Dept.
27
<PAGE>
By Facsimile (for Eligible Institutions only)
(212) 701-7636
(212) 701-7637
Confirm by telephone: (212) 701-7624
DELIVERY TO OTHER THAN THE ABOVE ADDRESSES OR FACSIMILE NUMBER WILL NOT
CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail. Additional solicitation may be
made personally or by telephone or other means by officers, directors or
employees of the Company.
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company
has agreed to 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 Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related documents
to the beneficial owners of Senior Notes, and in handling or tendering for
their customers.
Holders who tender their Senior Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that if Exchange Notes
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of the Senior Notes tendered, or if a transfer tax
is imposed for any reason other than the exchange of Senior Notes in
connection with the Exchange Offer, then the amount of any such transfer tax
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
transfer tax or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer tax will be billed directly to such
tendering holder.
28
<PAGE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain obligations of the Company
under the Registration Agreement. The Company will not receive any proceeds
from the issuance of the Exchange Notes offered hereby. However, upon the
original issuance of the Senior Notes, the net proceeds received by the
Company, after deducting the discount to the Initial Purchasers and other
expenses payable by the Company, was approximately $144 million. The Company
used or will use the net proceeds (i) to fund the cost of acquiring and
installing telecommunications switches and related infrastructure, (ii) to
fund operating losses, (iii) to repay approximately $3.5 million principal
amount of outstanding indebtedness of a subsidiary, (iv) for potential,
selected acquisitions (although none have been negotiated or contemplated),
and (v) for general corporate purposes. Prior to using the net proceeds for
such purposes, the Company has invested the net proceeds in short-term money
market and other market-rate, investment-grade instruments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
In consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive, in exchange, an equal number of Senior
Notes in like principal amount. The form and terms of the Exchange Notes will
be identical in all material respects to the form and terms of the Senior
Notes, except as otherwise described herein under "The Exchange Offer--Terms
of the Exchange Offer." The Senior Notes surrendered in exchange for Exchange
Notes will be retired and cancelled and cannot be reissued. As such, no effect
has been given to the Exchange Offer in the pro forma statements or
capitalization tables.
CAPITALIZATION
The following table sets forth the total capitalization of the Company as of
March 31, 1998, and the total capitalization of the Company as of December 31,
1997. Because the Company will not receive any proceeds for the issuance of
the Exchange Notes offered hereby, no effect has been given to the Exchange
Offer in the pro forma statements or capitalization tables which was not
previously accounted for in the Offering. The information set forth below
should be read in conjunction with the Company's Consolidated Financial
Statements and notes related thereto included elsewhere in this Prospectus.
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources," and
"Description of Capital Stock."
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents........................ $ 2,256,552 $152,758,944
=========== ============
Long-term debt................................... 3,536,886 152,093,513
Redeemable Common Stock Class A, $.01 par value,
85,567 Shares authorized and 80,307 issued and
outstanding at December 31, 1997................ 12,403,218 --
Stockholders' equity (deficit):
Common stock, Class A.......................... -- 803
Common stock, Class B, par value $0.01; 35,000
shares authorized; 20,000 shares issued and
outstanding................................... 200 200
Common stock, Class C, par value $0.01; 15,000
shares authorized; 14,711 shares issued and
outstanding................................... 147 147
Additional paid-in capital..................... (103,565) 26,098,850
Accumulated deficit............................ (1,972,154) (1,988,345)
----------- ------------
Total stockholders' equity (deficit)......... (2,075,372) 24,111,655
----------- ------------
Total capitalization......................... $13,864,732 $176,205,168
=========== ============
</TABLE>
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial data presented below as of and for the
seven month period ended December 31, 1996, and the year ended December 31,
1997, have been derived from the Consolidated Financial Statements of the
Company, included elsewhere in this Prospectus. The Consolidated Financial
Statements of the Company as of and for the seven month period ended December
31, 1996 and for the year ended December 31, 1997 have been audited by Arthur
Andersen LLP, independent auditors. The selected financial data as of and for
the three month periods ended March 31, 1997 and 1998, have been derived from
the unaudited consolidated financial statements of the Company which, in the
opinion of management, include all adjustments necessary for a fair
presentation of the financial condition and results of operations for the
Company for such periods. The results of operations for interim periods are
not necessarily indicative of a full year's operations. The following
information should be read in conjunction with "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and the Consolidated Financial Statements of the Company and the
notes related thereto, and the other financial data appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
COMMENCEMENT
OF OPERATIONS THREE MONTHS ENDED
(MAY 31, 1996) TO YEAR ENDED -------------------------
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1998
----------------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ -- $ 4,023,690 $ -- $ 5,102,448
Expenses:
Customer service and
network operations.... -- 2,154,980 8,697 1,826,893
Selling, general
and administrative.... 421,777 2,887,372 416,492 1,307,625
Depreciation and
amortization.......... 1,150 615,817 7,337 890,871
---------- ------------ ----------- ------------
Operating Income
(loss)................. (422,927) (1,634,479) (432,526) 1,077,059
Interest income
(expense), net......... 17,626 67,626 42,925 (1,093,250)
---------- ------------ ----------- ------------
Net Income (loss)....... $ (405,301) $ (1,566,853) $ (389,601) $ (16,191)
========== ============ =========== ============
<CAPTION>
DECEMBER 31, MARCH 31, MARCH 31,
DECEMBER 31, 1996 1997 1997 1998
----------------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current Assets.......... $3,807,004 $ 4,737,808 $ 5,069,167 $158,404,803
Fixed Assets, net....... 81,153 11,176,774 2,318,202 18,125,851
Total Assets............ 3,888,157 15,914,582 7,387,369 182,228,022
Long-term debt.......... -- 3,536,886 -- 152,093,513
Redeemable Class A Com-
mon Stock(1)........... 4,024,653 12,403,218 8,024,653 --
Total stockholders' eq-
uity (deficit)......... (404,954) (2,075,372) 7,230,097 24,111,655
OTHER FINANCIAL DATA:
EBITDA(2)............... $ (421,777) $ (1,018,662) $ (425,189) $ 1,967,930
Capital expenditures.... 82,303 11,655,524 2,244,385 7,593,061
Deficiency of earnings
to fixed charges(3).... 405,301 1,566,853 389,601 16,191
SUMMARY CASH FLOW DATA:
Net cash provided by
(used in) operating
activities............. $ (152,576) $ (1,634,017) $ (522,595) $ 3,745,255
Net cash used in
investing activities... (82,303) (11,655,524) (2,244,385) (13,537,316)
Net cash provided by
financing activities... 4,025,000 11,755,972 3,999,514 160,294,453
OPERATING DATA:
Access lines in
service(4)............. -- 7,394 -- 14,528
Minutes of use
(millions)............. -- 281.7 -- 401.6
</TABLE>
30
<PAGE>
- --------
(1) See "Capitalization" and "Description of Capital Stock."
(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBITDA is not a measurement of financial performance under
generally accepted accounting principles, is not intended to represent
cash flow from operations, and should not be considered as an alternative
to net loss as an indicator of the Company's operating performance or to
cash flows as a measure of liquidity. The Company believes that EBITDA is
widely used by analysts, investors and other interested parties in the
telecommunications industry. EBITDA is not necessarily comparable with
similarly titled measures for other companies. See "Consolidated
Statements of Cash Flows."
(3) The ratio of earnings to fixed charges is calculated by dividing (i)
income (loss) before provision for income taxes, plus fixed charges by
(ii) fixed charges. Fixed charges consist of interest on indebtedness,
plus the estimated component of rental expense deemed by the Company to be
representative of the interest factor.
(4) Represents the number of access lines in service (at a DSO level) and
excludes the signaling channel of primary rate ISDN-based connections.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
General: The Company began operations during 1996 and has operated in
Chicago since May 1997 and New York since January 1998, currently serving a
total of 6 MSAs (metropolitan statistical areas). The Company plans to offer
services in 37 additional MSAs by the end of 1999, reaching a total of 43 MSAs
in ten metropolitan markets. As of March 31, 1998, the Company had 21,082
access lines sold, of which 14,528 were installed and in service. This
compares to 13,411 lines sold and 7,394 lines installed as of December 31,
1997.
The Company's plan to expand into 37 additional MSAs requires significant
expenditures to fund operating losses and the purchase of capital equipment.
The Company believes it can lower its initial capital requirements and
generate a substantially greater return on invested capital by concentrating
its investment in switching and information, billing, and support systems,
while leasing transport facilities. This network investment strategy differs
from many other competitive local exchange carries (CLECs) who build and
maintain their own transport facilities.
The Company targets its services to telecommunications-intensive customers
and, as a result, expects to generate revenue per line in excess of the
industry average. In addition, the Company's cost structure is anticipated to
be below the industry average. Consequently, the Company expects to more
rapidly generate positive operating cash flow from its new networks as
compared to other CLECs. Nevertheless, the simultaneous development of a
number of new networks may result in negative consolidated operating cash
flow.
Revenues: The Company's revenue is comprised of monthly recurring charges,
usage charges, and initial, non-recurring charges. Monthly recurring charges
include the fees paid by customers for lines in service, additional features
on those lines, and colocation space. Monthly recurring charges are derived
only from end user customers. Usage charges consist of fees paid by end users
for each call made, fees paid by the incumbent local exchange carrier (ILEC)
and other CLECs as reciprocal compensation (which results from the Company
terminating calls made by ILEC customers or other CLEC customers to Focal's
customers), and access charges paid by the interexchange carriers (IXCs) for
long distance traffic originated and terminated by the Company. Usage charges
are derived from both end user customers and from other carriers. Initial non-
recurring charges are paid by end users, if applicable, for the installation
of service by the Company.
Reciprocal compensation is currently a significant component of the
Company's total revenue, representing 76.5% of total revenue recorded during
the first quarter of 1998. This is the result of an imbalance of inbound and
outbound traffic due to the preponderance of inbound applications utilized by
the Company's customers. Such inbound applications include Focal Virtual
Office service which is used by Focal's corporate customers and Focal Multi-
Exchange Service which is used by Focal's Information Service Provider (ISP)
customers. The Company expects the proportion of revenue represented by
reciprocal compensation to decline over time as the percentage of lines sold
for outbound applications increases as each given market matures.
End user invoices are sent monthly with recurring charges being billed in
advance and usage charges being billed in arrears. Reciprocal compensation and
carrier access invoices are sent monthly to the appropriate ILECs and IXCs
according to industry standard practices and in industry standard formats.
Operating Expenses: The Company's operating expenses are categorized as
customer service and network operations; selling, general and administrative;
and depreciation and amortization expense. Settlement costs are a significant
portion of customer service and network operations expense and are comprised
of leased transport charges and reciprocal compensation payments. Leased
transport charges are the lease payments incurred by Focal for the fiber optic
transmission facilities used to connect the Company's customers to its switch
and to connect to the ILEC and other CLEC networks. The Company's strategy of
leasing rather than building its own fiber transport facilities results in the
Company's cost of service being a significant component of total costs.
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The Company has to date been successful in negotiating lease agreements which
match the duration of its customer contracts, thereby allowing the Company to
avoid the risk of continuing expenses associated with transmission facilities
that are not being used by revenue generating customers. The Company pays
reciprocal compensation to ILECs and other CLECs for terminating calls made by
Focal's customers to customers of the ILEC or CLEC.
Other customer service and network operations expense consists of the costs
to operate the Company's network and the costs of providing customer care
activities. Major components include: wages, rent, power, equipment
maintenance, supplies, and contract employees.
Selling, general and administrative expenses consist of sales force
compensation and promotional expenses as well as the cost of corporate
activities related to regulatory, finance, human resources, legal, executive,
and other administrative activities.
The Company's strategy of leasing, rather than building, its transport
network results in capital expenditures which are proportionately lower than
most fiber-based CLECs. In addition, the proportion of capital expenditures
which are "success-based" are higher than most fiber-based CLECs. In contrast,
the Company incurs operating expenses for leased facilities, which are
proportionately higher than fiber-based CLECs. The margin impact of these
higher, anticipated operating expenses is expected to be mitigated, in part,
by a higher revenue per line, which the Company anticipates as a result of its
focus on telecommunications-intensive users.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenue for the year ended December 31, 1997 was $4,023,690 compared to zero
revenue generated during the year ended December 31, 1996. This increase is
due to the Company recording its first revenue during May 1997. Prior to May
1997, the Company incurred startup and operating expenses in advance of
revenue as it prepared to launch its network services in the Chicago market.
Customer service and network operations expense increased from zero in 1996 to
$2,154,980 in 1997. There were no customer service or network activities
during 1996. Such activities began as the company initiated construction of
its first network in January 1997 and provision of service in May 1997.
Selling, general and administrative expenses increased from $421,777 in 1996
to $2,887,372 in 1997, largely due to a rapid increase in sales and
administrative personnel during 1997. Depreciation and amortization increased
from $1,150 in 1996 to $615,817 in 1997 due to the increase in assets put into
service by the Company during 1997. Interest income increased from $17,626 in
1996 to $195,696 in 1997 as a result of significantly greater cash balances
after receiving additional equity contributions during 1997. Interest expense
increased from zero in 1996 to $128,070 in 1997 due to debt financing by a
subsidiary of the Company. The net loss increased from $405,301 in 1996 to
$1,566,853 in 1997 as the Company underwent significant growth in its
operations during 1997.
Three Months Ended March 31, 1998
During the three months ended March 31, 1998, the Company generated
$5,102,448 in operating revenues. Customer service and network operations
expense totaled $1,826,893, and selling, general and administrative expense
during the period was $1,307,625. Customer service and network operations
expenses consisted primarily of leased transport charges, payroll and rent
costs. Selling, general and administrative expenses were largely comprised of
payroll and legal and accounting costs.
Depreciation and amortization expense during the period was $890,871,
resulting primarily from network assets placed in service in the Company's
operational markets. In addition, a portion of the amount is attributable to
the amortization of expenses incurred from the Company's offering of
$270,000,000 stated principal amount at maturity of 12.125% senior discount
notes due 2008. The offering was consummated on February 18, 1998 and the
Company received $150,027,606 in gross proceeds.
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<PAGE>
Interest income for the three months ended March 31, 1998 was $1,015,902 and
interest expense was $2,109,152. The Company's net loss for the period totaled
$16,191. This loss was largely due to increased interest expense accrued by
the Company as a result of the completion of its senior discount note
offering.
For the three months ended March 31, 1998, the Company's Chicago operating
subsidiary had 11,535 access lines in service and generated revenues of
$4,781,132. The subsidiary recorded positive EBITDA, (earnings before
interest, taxes, depreciation and amortization) or $2,834,462, which includes
a pro-rata allocation of central operations and corporate expenses. EBITDA is
not a substitute for net income or cash flow as determined in accordance with
generally accepted accounting principles. The Company believes EBITDA is
commonly used by investors to analyze and compare companies in the
telecommunications industry.
Three Months Ended March 31, 1997
During the three months ended March 31, 1997, the Company did not generate
operating revenue due to the fact that service did not commence until May
1997. Customer service and network operations expenses were $8,692. Selling,
general and administrative expenses were $416,492, resulting primarily from
payroll costs. Depreciation and amortization expense was $7,337 for the three
months ended March 31, 1997. The Company earned $43,055 in interest income and
paid a negligible amount of interest expense. For the three months ended March
31, 1997, the Company had a net loss of $389,601, resulting from the
incurrence of operating expenses for the initial development of the Company's
business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's existing operations have required, and its planned operations
will require, significant capital to fund the purchase and installation of
telecommunications switches, equipment, infrastructure, and the operating
losses expected during the start-up phase of each new market. Capital
expenditures were $7,593,061 for the three months ended March 31, 1998 and
$2,244,385 for the three months ended March 31, 1997. The Company expects
total capital expenditures for the year ended December 31, 1998 to be
approximately $50 million. Total capital expenditures for the buildout of the
ten city plan are currently estimated to be $110 million. Prior to the
completion of the senior discount note offering, the Company funded a
substantial portion of its capital expenditures through the private sale of
equity securities. In November 1996, the Company entered into a stock purchase
agreement which provided for the contribution over time of approximately $26.1
million of equity funding by a group of investors. As of February 13, 1998,
the equity investors have contributed the entire $26.1 million to the Company.
In addition, in 1997, the Company's Illinois subsidiary borrowed approximately
$3.5 million under a bank credit facility. The Company used a portion of the
net proceeds from the senior discount note offering to prepay this
indebtedness and cancel the facility.
On February 18, 1998, the Company received gross proceeds of $150,027,606
from the completion of its 12.125% senior discount note offering. The notes
will accrete to an aggregate stated principal amount of $270,000,000 by
February 15, 2003. No interest will be payable on the Notes prior to August
15, 2003. Thereafter, interest will be payable semiannually on August 15 and
February 15 of each year.
With the exception of the fourth quarter of 1997, the Company has incurred
net losses. A portion of the prior equity investments and debt proceeds have
been used to fund the Company's negative cash flow and net losses. Management
believes the Company may produce negative operating cash flow on a
consolidated basis as it completes the buildout of its ten city plan. There
can be no assurance the Company will realize positive consolidated operating
cash flow in subsequent periods. Until sufficient cash flow is generated, the
Company will continue to rely on cash on hand and outside capital to meet its
cash requirements.
The Company's cash flows for the period from May 31, 1996 (the Company's
commencement of operations) to December 31, 1996, was $3,790,121. During this
period, net cash used in operating activities consisted of $152,576; net cash
used in investing activities consisted of $82,303; and net cash provided by
financing activities consisted of $4,025,000. The Company's cash flows for the
year ended December 31, 1997
34
<PAGE>
was $1,533,569. During this period, net cash used in operating activities
consisted of $1,634,017; net cash used in investing activities consisted of
$11,655,524; and net cash provided by financing activities consisted of
$11,755,972. The Company's cash flows for the three months ended March 31,
1998 was $150,502,392. During this period, net cash used in operating
activities consisted of $3,745,255; net cash used in investing activities
consisted of $7,593,061; and net cash provided by financing activities
consisted of $154,350,198.
The Company expects its available cash, including the net proceeds from the
sale of its senior discount notes, will be sufficient to fund its capital
requirements through 1999. However, if the Company's expansion occurs more
rapidly than currently anticipated or if its operating results are below
expectations, the Company may require additional capital. The Company may
decide to raise additional capital before such time. The Company may secure
additional funding through the sale of public or private debt and/or equity
securities or enter into a future bank credit facility. There can be no
assurance, however, that the Company will be successful in raising sufficient
additional capital on terms that it will consider acceptable or that the
Company's operations will produce positive consolidated cash flow in
sufficient amounts to meet its debt obligations. Failure to raise and generate
sufficient funds may require the Company to delay or abandon some of its
planned future expansion or expenditures, which could have a material adverse
effect on the Company's growth and its ability to compete in the
telecommunications industry.
The foregoing discussion contains forward-looking statements. The Company's
future performance is subject to numerous risks and uncertainties that could
cause actual results to deviate substantially from those discussed in these
forward-looking statements. Factors that could impact the variability of
future results include: the outcome of legal and regulatory proceedings
regarding reciprocal compensation for Internet-related calls; successful
execution of the Company's expansion activities into new geographic markets on
a timely and cost-effective basis; the pace at which new competitors enter the
Company's existing and planned markets; competitive responses of the incumbent
local exchange carriers; execution of interconnection agreements with
incumbent local exchange carriers on terms satisfactory to the Company;
maintenance of the Company's supply agreements for transmission facilities;
continued acceptance of the Company's services by new and existing customers;
and the ability to attract and retain talented employees. Investors are
encouraged to examine the Company's SEC filing on form S-4, which more fully
describes the risks and uncertainties associated with the Company's business.
RECENT DEVELOPMENTS
The Company is in the process of completing preparation of its financial
statements for the second quarter of 1998. The following information
concerning the second quarter of 1998 is based on preliminary, unaudited
financial information and operating data that are subject to adjustment.
<TABLE>
<CAPTION>
3 MONTHS ENDED 6 MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
-------------- --------------
<S> <C> <C>
Revenue (mil)............................... $ 8.1 $ 13.2
Lines Sold to Date.......................... 30,385 30,385
Lines Installed to Date..................... 24,357 24,357
</TABLE>
35
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BUSINESS
INTRODUCTION
Focal began operations during 1996 and has operated in Chicago since May
1997 and New York since January 1998, currently serving a total of 6 MSAs
(metropolitan statistical areas.) The Company plans to offer services in 37
additional MSAs by the end of 1999, reaching a total of 43 MSAs in ten
metropolitan markets. As of March 31, 1998, the Company had 21,082 access
lines sold, of which 14,528 were installed and in service. This compares to
13,411 lines sold and 7,394 lines installed as of December 31, 1997.
MARKET POTENTIAL
The Company believes the telecommunications-intensive users in Tier I
markets are inadequately served for highly reliable, local switched
telecommunications services. Historically, the emergence of competition in the
telecommunications industry has created demand where none previously existed.
The Company believes that large telecommunications-intensive users will
increasingly demand diversity in local telecommunications providers as they
have already done in long distance and private-line telecommunications
services. The market potential for CLECs is large and growing. According to
data published by the FCC, total revenue from local telecommunications
services in 1996 was $101 billion. While this revenue figure represents total
local usage from residential and all business customers, the Company has
estimated that approximately $45.5 billion of the total $101 billion
represents local usage by businesses. Using further statistical data, the
Company has estimated that the total local usage revenues from the business
segment in the ten Tier I markets in which the Company intends to offer
service is approximately $12.2 billion per year.
The Company believes that its primary competitor in each of its target
markets is the ILEC. Most second generation CLECs initially chose to compete
in Tier II and Tier III markets, effectively ceding the Tier I markets to the
first generation CLECs (i.e., MFS and TCG). Moreover, the vast majority of
CLECs, both first and second generation, provide bundled communications
services to small and medium sized business customers. The Company's
experience to date has supported its belief that, unlike residential and small
to medium sized businesses who may prefer "one-stop" telecommunications
providers, large telecommunications-intensive users will purchase different
types of telecommunications services from different providers. As such, Focal
believes that there are few competitors offering telecommunications-intensive
users a stand-alone alternative to ILEC switched local services. Focal
represents The Third Generation CLEC(TM) that focuses on the provision of
value-added, switched local services to large telecommunications-intensive
users in Tier I markets. Management believes that it has a competitive
advantage over other local service providers as a result of its decision to
provide primarily local service to this significant and underserved market
segment.
BUSINESS STRATEGY
Principal Focus on Local Service. The Company offers a focused set of value-
added local switched services to its customers, which management believes
differentiates the Company from a majority of competitors who are seeking to
provide "one-stop" telecommunications services. This focus allows the Company
to outperform its competitors in the areas of network provisioning,
maintenance and customer care. For example, Focal guarantees its customers
that service will be turned-up within a specified period (typically less than
20 calendar days) or the first month fixed line charge is waived. To date, the
Company has met all of its installation commitments on time. Focal believes
its target customers prefer to purchase local telecommunications services from
multiple vendors, as they typically do with equipment, long distance and
private-line services. Management believes that the Company's customers will
seek to distribute an increasing portion of their switched local traffic to
one or more CLECs to secure redundancy and competitive pricing.
Design and Install a Highly Capital-Efficient Network. Management believes
the Company can generate a substantially greater return on invested capital by
concentrating its investment in switching, information, billing
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<PAGE>
and support systems, while leasing its transport facilities. Management also
believes that excess fiber capacity and multiple vendors in its target markets
will satisfy the Company's leasing needs and permit Focal to obtain such
facilities at competitive prices for the foreseeable future. Moreover, Focal's
network investment strategy results in a substantially lower, less risky
initial capital requirement than CLECs who build their own fiber facilities
due to a greater proportion of Focal's ultimate capital requirement being
"success-based." Utilizing existing fiber networks allows the Company to enter
markets more quickly, generate revenue and positive cash flows faster, avoid
the need for franchise and right-of-way agreements, and focus on providing
switched services.
Build a More Robust Network than ILECs or CLECs. The Company has designed
and built its network to meet the demanding traffic and reliability
requirements of its target customers. Focal utilizes Nortel, DMS-500 SuperNode
central office switches that have been engineered by the Company to be
virtually non-blocking, thereby maximizing call completion. Focal also designs
its leased fiber facilities to avoid blocking. The Company typically connects
to every local tandem switch in operation by the ILEC and directly connects to
numerous high-use end offices. By connecting to so many points in the ILEC's
network, the Company can improve call completion even if blockage occurs in
portions of the ILEC trunking network. To optimize the entire configuration,
Focal implements overflow routing among the various trunk connections between
itself and the ILEC. Management believes this design is unique among ILECs and
CLECs and is attractive to its telecommunications-intensive customer base.
Moreover, the Company's transport-neutral design allows it to deliver service
from its switch to customers over the fiber transport systems maintained by
each of its several fiber optic transport facility providers.
Minimize Dependence on Deregulation. While the Telecom Act is likely to
benefit CLECs in the long-term, Focal believes the tangible benefits from the
Telecom Act are limited in the short-term. Accordingly, Focal's business
strategy is focused on customers and markets which allow it to minimize its
reliance on provisions of the Telecom Act to achieve its objectives. For
example, while the unbundling of network elements is mandated by the Telecom
Act, the Company believes the ability of a CLEC to obtain unbundled loops of
acceptable transmission quality and in reasonable volumes is not yet
practicable in most ILEC jurisdictions. However, due to its target customer
base and the existence of high capacity transmission facilities to such
customers in the major markets, Focal is able to limit its leased transport
network to facilities of T-1 capacity or greater. Similarly, while number
portability is mandated by the Telecom Act, Focal believes the interim number
portability methods utilized today are unreliable and perform poorly.
Consequently, Focal has concentrated on providing outbound and incremental
inbound (i.e., inbound traffic using new numbers) calling applications rather
than expose its customers to the potential loss of inbound calls on existing
numbers due to the poor performance of remote call forwarding applications
currently used to achieve number portability.
Penetrate Corporate Accounts. The Company emphasizes the diversity,
reliability and sophistication of its network and services in order to earn
its selection as the local provider of choice for its customers. Focal has
developed a number of products and services which it believes provide it with
a competitive advantage when attempting to penetrate new corporate accounts,
including Focal Virtual Office and 800 service. See "Business--Products and
Services." Focal's initial sale to a corporate account typically involves
installing incremental lines for specialized inbound applications or
supplanting only a limited number of outbound lines. Management believes that
the Company will thereafter be able to increase its overall penetration of
local service from the customer based on the quality of its service.
Take Advantage of the Significant and Growing ISP Opportunity. The dramatic
increase in dial-up access to the Internet has created a particularly strong
demand for local access lines by ISPs. CLECs are generally well-positioned to
satisfy this demand as the only alternative source of access lines. Focal
offers advantages to ISPs that certain of its competitors are currently unable
to provide, such as environmentally conditioned colocation space, virtually
non-blocking switching and transport facilities, guaranteed installation times
and modified foreign exchange service (which allows certain calls which would
otherwise be toll calls to be made as local calls). Focal does not offer its
own Internet access service and is, therefore, not viewed as a direct
competitor of the ISPs which it serves. ISP traffic also helps maximize
network utilization by bringing traffic onto the network typically during off-
peak periods, such as evenings and weekends.
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Maximize Network Utilization through VAR and Other Wholesale
Arrangements. To further maximize network utilization while minimizing cost of
sales, Focal distributes service to other customer segments through VARs and
other wholesale arrangements. Management believes that many telecommunications
service providers, including long distance companies and wireless
licenseholders, will seek to provide bundled telecommunications services in
Tier I markets. The Company does not currently intend to offer bundled
telecommunications services or directly distribute its services to residential
or small to medium sized business customers--the most attractive segment to
bundled service providers. Because the Company does not intend to offer
bundled services or offer services to customers these entities are likely to
serve, Management believes that entities intending to offer bundled services
are more likely to purchase local service from Focal than its ILEC or CLEC
competitors who may compete with these entities.
NETWORK
The Company has chosen to pursue a network design approach which involves
purchasing and maintaining its own switches while leasing fiber optic
transmission facilities on an incremental basis as demand dictates. This
approach is made possible by the availability of fiber optic transmission
facilities from multiple vendors in each of the markets it intends to serve.
This switch-based, leased transport network architecture allows the Company to
(i) reduce the capital investments necessary to provide services to its
customers by focusing its capital expenditures on its switches, the most
critical component of its network, (ii) avoid the construction of speculative
fiber optic facilities and the "stranded" capital sometimes associated with
such construction, (iii) better match the commitment of capital to the
acquisition of revenue generating customers and (iv) generate revenue and cash
flow more quickly than if the Company constructed its own fiber optic
facilities. The Company leases transmission facilities from at least three
vendors in each market in which it conducts business, providing the Company
with negotiating leverage and allowing the Company to offer its customers
added redundancy and diversity. In addition, the Company's network has been
specifically designed to satisfy the needs of its high-volume corporate
customer base and has been engineered to be virtually non-blocking, thereby
maximizing call completion.
The Company believes the implementation of its network architecture
represents a lower risk, demand-driven approach requiring less capital
deployment than that required for the build out of a fiber optic
infrastructure. The Company concludes that it can generate a substantially
greater return on invested capital by concentrating its investment in
switching, information, billing, and support systems, while leasing the
transport facilities necessary to complete its full service offering. Focal's
network investment strategy results in a substantially lower, less risky
initial capital requirement than CLECs who build their own fiber facilities
due to a greater proportion of Focal's ultimate capital requirement being
"success-based."
Focal has the flexibility to add or subtract transport capacity on an
incremental basis with the addition or loss of customers. The Company believes
that the quantity of existing and planned fiber transport facilities and its
distribution among numerous owners will be sufficient to satisfy the Company's
need for leased transport facilities and permit Focal to obtain such
facilities at competitive prices for the foreseeable future. The ability of
the Company to consider the option of leasing its transport is the result of
the relative maturity of the competitive access market and the high operating
leverage associated with such networks. For these reasons, the fiber transport
providers which own and operate such fiber networks in the major metropolitan
markets compete for the Company's transport business in order to maximize the
return on their fixed-asset fiber networks. In many cases, this occurs despite
the fiber transport provider marketing its own switched services in
competition with Focal.
While the Company expects the fiber transport providers will continue to
find it in their best interest to compete for Focal's transport business, the
fact that they are common carriers requires that they make their transport
services available to Focal on terms no worse than those provided to any
similarly situated customer. In each market, Focal has or anticipates having
multiple fiber transport providers available for transport including the ILEC
and at least two CLECs. The Company expects that over time it may become
optimal to construct a portion of its own transport facilities as the traffic
volume in certain geographic areas reaches critical mass.
38
<PAGE>
PRODUCTS AND SERVICES
Focal primarily offers local services to its customers. These services can
generally be segmented into inbound and outbound calling services.
Inbound Services. The Company's basic, inbound service allows for the
completion of calls to a new phone number supplied to the customer by the
Company. Focal believes the interim number portability methods utilized today
are unreliable and perform poorly. In addition, Focal has no control over such
number portability methods. Rather than migrating a customer's existing
telephone number to the Focal network, Focal has concentrated on providing
incremental inbound (i.e., inbound traffic using new numbers) calling
applications. In this way, its customers are not exposed to the potential loss
of inbound calls on existing numbers due to the poor performance of remote
call forwarding applications which are currently used to achieve number
portability.
The Company offers a number of inbound calling applications. Direct inward
dial ("DID") service allows inbound calls to reach a particular station on a
customer's telephone system without operator intervention. Focal markets DID
service to corporations as both a primary service and as a backup service. As
a primary service, the customer uses Focal numbers in instances where a new
line and number are necessary such as when a customer hires a new employee. As
a backup service, Focal can implement an alternative numbering plan for the
customer should the customer's primary service from the ILEC be interrupted.
Focal Virtual Office is designed to allow a company's employees to dial-in
to the company's local area network ("LAN") via a telephone number within that
employee's untimed local calling area. As such, the employee can access the
LAN without incurring time sensitive charges and the company avoids
maintaining relatively expensive, region-wide 800 service for LAN access.
Future enhancements to these inbound services are planned which will increase
the screening capabilities and provide an added layer of security to a
company's LAN, remote access functionality.
Focal Multi-Exchange Service, a variant of the Focal Virtual Office service,
is sold to ISPs and allows the ISPs' customers to cost-effectively access the
ISPs' remote access servers. The combination of the multi-exchange service
capability, a single point of exchange of the traffic, and Focal's high level
of customer care has resulted in strong demand for such services by the ISPs.
Outbound Services. The Company's basic outbound services allow for the
completion of local and toll calls within a metropolitan region. Such direct
outward dial ("DOD") service is utilized by end users in several ways. As a
primary service, a customer uses Focal as a replacement for the ILEC in
originating calls bound for destinations within the region. In the least cost
routing ("LCR") application, a customer can utilize Focal service in
conjunction with its existing ILEC service to route calls using whichever
carrier is least expensive for that given call type. LCR has been implemented
for long distance calling by large corporate users for a number of years.
Other outbound applications in which Focal service is utilized include
outbound 800 calling and long distance overflow service. In the 800 calling
application, Focal de-loads a customer's outbound, local lines and provides an
incentive to the customer to handle that customer's outbound 800 calls. In the
case of long distance overflow service, Focal acts as a backup to the
customer's existing long distance carrier in order to optimize the number of
direct, special access lines installed from the customer's premises to the
long distance carrier's point of presence.
All of the services described above are commonly provisioned over a T-1
facility and interface the customer's private branch exchange equipment
("PBX") directly, thereby averting the need for Focal to provision premises-
based multiplexing equipment. This is possible due to the high traffic volume
characteristic of the large telecommunications-intensive accounts which the
Company targets. The ability to directly interface existing customer premises
equipment ("CPE") further minimizes the Company's capital investment
requirements and maximizes overall return on capital.
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<PAGE>
Focal also offers its customers the ability to colocate equipment in the
Company's switching and operations center. Equipment colocation benefits the
customer by allowing it to inexpensively deploy its equipment without having
to maintain environmentally controlled space. In addition, customers that
colocate qualify for special discounts on the monthly line rates for Focal's
switched services. From the Company's perspective, it is less costly to
deliver service within its own space since no leased transport is required to
reach the customer. This service is particularly well suited to Focal's ISP
customers, who frequently operate remote access servers and routers in
conjunction with the Company's switched services.
SALES AND MARKETING
Focal's objective is to satisfy the need for highly reliable, local switched
telecommunications services for telecommunications-intensive users in Tier I
markets by providing diverse, reliable and sophisticated service. Focal
believes it has a competitive advantage in satisfying this need since the
Company, from network architecture to customer service, is focused on
delivering a limited number of value-added services to its target customers.
Diversity. Focal provides diversity to telecommunications-intensive users by
delivering highly reliable, local switched telecommunications services as an
alternative to the ILEC in a multi-vendor environment. Such diversity already
exists with respect to other telecommunications services. Telecommunications-
intensive users clearly embrace the benefits that diversity brings;
principally, that redundancy minimizes the effects of facilities failures and
maximizes competitive pricing. As a result, the majority of Focal's target
customers typically have multiple long distance vendors, multiple equipment
providers, and multiple local private-line vendors. Because of its focused
strategy, the Company is uniquely positioned to become the preferred provider
of choice for local switched telecommunications services for large corporate
accounts, ISPs and VARs. The Company's focused strategy is predicated on its
ability to deliver the superior level of reliable, sophisticated and
competitive services that its customers require.
Reliability. Focal provides reliable service to telecommunications-intensive
users, who are highly sensitive to the potential effects of facilities
failures, by designing its own network around the same theme of diversity that
it advocates for its customers. Although local switched services are perceived
as simple, basic services, the delivery of highly reliable local switched
services requires sophisticated systems. Focal has designed and built its
switching and transport network to meet the demanding traffic and reliability
requirements of its target customers. The Company's network strategy is based
on developing and operating a highly robust, reliable, and high-throughput,
local network relative to the ILECs and other CLECs. Because Focal is a new
entrant to the market, the Company acknowledges that it must meet or exceed
the performance characteristics of the existing local networks in order to
attract telecommunications-intensive users to its service. Unlike smaller
users which tend to pre-qualify vendors based on price, the Company believes
that telecommunications-intensive users qualify potential vendors based on the
performance characteristics of their networks, particularly noting the
reliability aspects. Therefore, the design and operation of the network is a
key success factor in the business development process.
From an equipment standpoint, the Company conducted an exhaustive research
effort to identify the best hardware for the high-volume users that Focal
intends to serve. The result of such research led Focal to select Nortel, DMS-
500 SuperNode central office switches which the Company has engineered to be
virtually non-blocking. As such, customers are unlikely to find themselves
unable to complete or receive calls due to limitations inherent in Focal's
switches. In addition to engineering its switches to avoid blocking, Focal
also designs its leased fiber facilities to avoid blocking. The Company
typically connects to every local tandem switch in operation by the ILEC and
directly connects to numerous high-use end offices. By increasing the number
of connections to the ILEC's network, the Company can improve call completion
even if blockage occurs in portions of the ILEC trunking network. In order to
optimize the entire configuration, Focal implements overflow routing among the
various trunk connections between itself and the ILEC. Focal specifically
engineered its entire network to accommodate a volume per customer far in
excess of that which the ILECs or other CLECs would anticipate given the much
broader range of user volumes they serve. The Company believes its design is
unique
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among ILECs and CLECs and is attractive to its telecommunications-intensive
customer base. Moreover, reliability is further enhanced by the Company's
transport-neutral design which allows it to deliver service from its switch to
customers over the multiple fiber transport systems maintained by each of its
several fiber optic transport facility providers.
In every aspect of network design, Focal has implemented safeguards to
maximize reliability. Because of its distributed architecture, the DMS-500
switch allows the Company to automatically migrate customer traffic across
multiple bays of equipment, protecting against a line card failure. In
addition, the switch was engineered by Nortel with fully redundant processors
and memory in the event of a temporary failure. Focal's disaster prevention
strategy includes service from multiple power grids, on-site battery backup,
and diesel generator power at each switching facility to protect against
failures in its electrical service.
Sophistication. The Company recognizes that its target customers are
knowledgeable, sophisticated buyers that demand a high level of
professionalism throughout a vendor's organization. Focal believes that the
technical sophistication of its management and operations team is a critical
factor for its initial success and will continue to be a key element of
differentiation for the Company among its target customers. Focal requires a
well-experienced team of sales professionals to execute its strategy of
penetrating the telecommunications-intensive accounts. Therefore, attracting
and retaining experienced sales professionals is important to the Company's
overall success. The compensation of the Company's sales professionals is
structured to retain these valuable employees (through stock ownership) and
provides cash compensation incentives which bind the success of the sales team
members to the Company's revenue and operating cash flow objectives.
The Company has divided its direct sales force into three groups: (i) the
Corporate Services Group ("CSG"), responsible for selling to large, corporate
users; (ii) the Internet Services Group ("ISG"), responsible for selling to
Internet service providers; and (iii) the Telecom Services Group ("TSG"),
responsible for selling services on a wholesale basis to VARs and other
carriers. This segmentation permits each sales group to develop the particular
knowledge base and product focus necessary to gain credibility in each market
niche.
Focal's sales strategy for a corporate account sold through the CSG is to
complement the customer's existing service from the ILEC. Unlike other CLECs,
the Company does not offer a comprehensive bundle of telecommunications
services to corporate customers. Rather, the Company believes that there is a
specific demand for high quality, cost effective local switched service as a
stand-alone product. Focal's initial sale to a corporate account typically
involves installing incremental lines for specialized inbound applications or
supplanting only a limited number of outbound lines. After building the
service relationship, Focal anticipates increasing its overall penetration of
local service from the customer such that over a period of time, the Company
expects to dominate a corporate customer's local switched traffic. The Company
emphasizes its diversity, reliability and sophistication of service in order
to earn its selection as the local provider of choice for its customers.
Focal's ISG is able to offer several value-added services to ISPs, such as
environmentally conditioned colocation space, virtually non-blocking switching
and transport facilities, guaranteed rapid installation times and modified
foreign exchange service, which allows certain calls that would otherwise be
toll calls to be made as local calls. In addition, Focal's ISG can highlight
to the ISPs that the Company does not offer its own Internet access service
and is, therefore, an attractive, non-threatening service provider. Serving
the ISP segment also maximizes Focal's network utilization by bringing traffic
onto the network during periods, such as during evenings or on weekends, in
which the network would be otherwise underutilized.
Focal's TSG direct markets to other carriers and VARs by positioning the
Company as a highly reliable, responsive, and cost-effective source of
wholesale local switched telecommunications services. The Company believes a
wide array of telecommunications service providers, including long distance
companies and wireless licenseholders, will seek to provide bundled
telecommunications services in Tier I markets. Focal is well positioned to be
the provider of choice for re-bundled local service. The Company does not
intend to offer bundled telecommunications services or directly distribute its
services to residential or small to medium sized
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business customers--the segment which is most attractive to the "bundled"
service providers. Consequently, the Company believes that entities which
might wish to "purchase" the local service portion of their bundled offering
on a wholesale basis are more likely to purchase that service from Focal than
its ILEC or CLEC competitors.
Superior customer service is critical to achieving Focal's goal of capturing
market share. The Company is continually enhancing its service approach which
utilizes a trained team of customer sales and service representatives to
coordinate customer installation, billing and service. A comprehensive support
system is also a critical component of the Company's service delivery. The
Company has installed an integrated system which is designed to provide
comprehensive features addressing all aspects of its business, including
service order, provisioning, end user and carrier billing, and trouble
reporting. The efficiency of Focal's operating processes contributes to the
Company's ability to rapidly initiate service to new accounts. The
installation desk follows the customer's order, ensuring the installation date
is met. Additionally, customer sales representatives respond to all other
customer service inquiries, including billing questions or repair calls. The
Company believes automation of internal processes contributes greatly to the
overall success of a service provider and billing is a critical element of any
telephone company's operation. The Company expects to be able to deliver
billing information in a number of media besides paper including electronic
files, Internet inquiry or on-line inquiry. The Company believes this system
is readily adaptable to changing circumstances and is scaleable to support the
Company's operations throughout its expected growth.
COMPETITION
The primary competitor to the Company in each of its target markets is the
ILEC, most often an RBOC and/or GTE Corporation. The ILECs are generally
required to file their prices in tariffs with the public utilities commission
in each state. Any price changes must be reflected in the tariffs. Generally,
the ILECs have been given the flexibility to respond with lower pricing in
competitive situations. In most cases, these proposals must also be filed as
individual case basis tariffs and the pricing must be made available to other
similarly situated customers. Thus, while the ILECs in many states have some
pricing flexibility for local services, they must usually file any special
pricing plans offered and make such plans available to other customers. Focal
believes this provides a disincentive for the ILEC to significantly vary or
discount prices even in competitive situations.
The ILECs have substantially more resources than the Company and offer a
wider array of services and in a broader geographic area than the Company. As
a result, the ILECs may have an incentive to subsidize the pricing for
services in which Focal competes with the profits from other services in which
the ILEC remains the monopoly provider. Focal believes competition from
various providers has limited the number of ILEC monopoly services and state
regulators have exercised their enforcement powers such that it is unlikely
the ILEC would be able to successfully pursue such a protective strategy for
an extended period.
A number of IXCs have introduced local telecommunications services in
competition with the ILEC and Focal. These services include toll calling and
other local calling services; often packaged with the company's long distance
service. While Focal does not believe the packaging aspect of the service is
particularly attractive to the telecommunications-intensive users which the
Company targets, large IXCs enjoy certain competitive advantages over the
Company due to their vast financial resources. In addition, the Company
believes there is a risk that IXCs may subsidize the pricing of their local
services with profits from long distance services. Focal anticipates the entry
of the RBOCs into the long distance market will reduce the risk of such cross-
subsidization by reducing the profitability of the IXCs' long distance
minutes. Further, to the extent an IXC purchases Focal's service on a
wholesale basis and rebundles it at a subsidized rate, Focal may benefit as
the subsidized, wholesale service could result in a higher penetration than
would otherwise have occurred. In addition, Focal has successfully displaced
IXCs in customer accounts where the customer was dissatisfied with the quality
of the IXCs' local service. Focal expects its reputation for exceptional
service quality and customer care will continue to result in it displacing
IXCs as the primary alternative to the ILEC in competitive situations.
In addition to competition with the ILEC and IXCs, there are several CLECs
with switching facilities in each city in which Focal intends to operate. In
most cases, the stated target customer base for other CLECs is
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the small and medium size business customer. This differs from Focal's target
customer base of telecommunications-intensive users. Despite the current
difference in customer focus, the Company, at times, has competed against
other CLECs for customer business in the telecommunications-intensive customer
segment. The ongoing consolidation in the CLEC industry could change the
nature of the Company's competitive environment. Although there can be no
assurance, the Company does not expect that such consolidation will be
detrimental to its business.
REGULATION
The following summary of regulatory developments and legislation does not
purport to describe all present and proposed federal, state, and local
regulation and legislation affecting the telecommunications industry. Existing
federal and state regulations are currently the subject of judicial
proceedings, legislative hearings and administrative proposals which could
change, in varying degrees, the manner in which this industry operates.
Neither the outcome of these proceedings, nor their impact upon the
telecommunications industry or the Company, can be predicted at this time.
Overview. The Company's services are subject to varying degrees of federal,
state and local regulation. The FCC exercises jurisdiction over all facilities
of, and services offered by, telecommunications common carriers such as the
Company, to the extent those facilities are used to provide, originate or
terminate interstate or international communications. State regulatory
commissions retain jurisdiction over most of the same facilities and services
to the extent they are used to originate or terminate intrastate
communications. In addition, many of the regulations issued by these
regulatory bodies may be subject to judicial review, the result of which
review the Company is unable to predict.
Federal Regulation. The Company must comply with the requirements of common
carriage under the Communications Act of 1934, as amended (the "Communications
Act"). Comprehensive amendments to the Communications Act were made by the
Telecom Act, which was signed into law on February 8, 1996. The Telecom Act
effected plenary changes in regulation at both the federal and state levels
that affect virtually every segment of the telecommunications industry. The
stated purpose of the Telecom Act is to promote competition in all areas of
telecommunications and to reduce unnecessary regulation to the greatest extent
possible. While management believes it will take years for the industry to
feel the full impact of the Telecom Act, it is already clear the legislation
provides the Company with both opportunities and challenges.
The Telecom Act gives the FCC the authority to forebear from regulating
companies if it finds such regulation does not serve the public interest, and
directs the FCC to review its regulations for continued relevance on a regular
basis. As a result of this directive, a number of the regulations that apply
to CLECs have been and may continue to be eliminated in the future. While it
is therefore expected that a number of regulations that were developed prior
to the Telecom Act will be eliminated in time, those which apply to the
Company at present are discussed below.
The Telecom Act greatly expands the FCC's interconnection requirements on
the ILECs. The Telecom Act requires the ILECs to: (i) provide physical
colocation, which allows companies such as Focal and other interconnectors to
install and maintain their own network termination equipment in ILEC central
offices, and virtual colocation only if required or if physical colocation is
impractical due to space limitations or due to technical infeasibility; (ii)
unbundle and provide access to components of their local service networks to
other providers of local service; and (iii) establish "wholesale" rates for
the services they offer at retail to subscribers who are not telecommuications
carriers to promote resale by CLECs and other competitors; and requires ILECs
and CLECs, such as the Company, to: (i) establish number portability, which
will allow a customer to retain its existing phone number if it switches
service providers; (ii) establish dialing parity, which is intended to ensure
customers will not detect a quality difference in dialing telephone numbers or
accessing operators or emergency services; and (iii) provide nondiscriminatory
access to telephone poles, ducts, conduits and rights-of-way. In addition, the
Telecom Act requires ILECs and CLECs to compensate each other for traffic
originated by one and terminated on the network of the other.
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ILECs are required to negotiate in good faith with carriers requesting any
or all of the above arrangements. If a requesting carrier cannot reach an
agreement within the prescribed time, either carrier may request binding
arbitration by the state commission. Where an agreement cannot be reached,
carriers remain subject to the interconnection obligations established by the
FCC and state telecommunications regulatory commission.
The Company has successfully negotiated interconnection agreements with
Ameritech in Illinois and Indiana and with Bell Atlantic Corporation ("Bell
Atlantic") in New York, New Jersey, Pennsylvania and Delaware and Pacific Bell
Corporation ("Pacific Bell") and GTE in California. The Company also has been
granted global authority by the FCC to provide facilities-based and resold
international telecommunications services.
The FCC is charged with establishing national guidelines to implement the
Telecom Act. The FCC issued its Interconnection Orders on August 8, 1996,
which established detailed rules regarding rates, terms and conditions for
interconnection between CLECs and ILECs and for the implementation of dialing
parity. The Interconnection Orders were appealed to the U.S. Court of Appeals
for the Eighth Circuit. On July 18, 1997, the Court issued a final decision
vacating the interconnection pricing rules and "most favored nation" rules as
well as certain other interconnection rules. On October 14, 1997, the U.S.
Court of Appeals for the Eighth Circuit ruled that ILECs are under no
obligation to provide competing carriers, which would include the Company,
with a rebundled package of individual network elements. The Eighth Circuit
decision creates uncertainty about the rules governing pricing, terms and
conditions of interconnection agreements, and could make negotiation and
enforcement of such agreements more difficult and protracted, and may require
renegotiation of existing agreements. Several parties have appealed the Eighth
Circuit decisions to the United States Supreme Court. The Supreme Court
granted certiorari in several of those appeals. It is not possible at this
time to determine how or when the Supreme Court will respond to these appeals.
Since the Telecom Act's interconnection requirements also apply to IXCs and
all other providers of telecommunications services, including the Company, it
may provide the Company with the ability to reduce its own access costs by
interconnecting directly with non-ILECs, but may also cause the Company to
incur additional administrative and regulatory expenses in responding to
interconnection requests. At the same time, the Telecom Act also makes
competitive entry into other services or geographic markets more attractive to
RBOCs, other ILECs and IXCs and other companies, and likely will increase the
level of competition the Company faces.
While the Telecom Act reduces regulation to which non-dominant local
exchange carriers are subject, it also reduces the level of regulation that
applies to the ILECs, and increases their ability to respond quickly to
competition from the Company and others. For example, in accordance with the
Telecom Act, the FCC has applied "streamlined" tariff regulation to the ILECs,
which greatly accelerates the time prior to which changes to tariffed service
rates may take effect, and eliminates the requirement that ILECs obtain FCC
authorization before constructing new domestic facilities. These actions will
allow ILECs to change service rates more quickly in response to competition.
Similarly, the FCC has proposed affording significant new pricing flexibility
to ILECs subject to price cap regulation. To the extent such increased pricing
flexibility is provided, the Company's ability to compete with ILECs for
certain service may be adversely affected. In addition, a U.S. District Court
in Texas recently invalidated certain provisions of the Telecom Act which
prohibited RBOC engagement in certain manufacturing and marketing activities
and conditioned RBOC provision of in-region long distance service upon a
demonstration that the local market had been opened to competition. The
decision only directly applies to the RBOC parties to the proceeding. The
decision has been stayed pending appeal. The outcome of any such appeals
cannot be predicted at this time. There can be no assurances that the District
Court's decision will be reversed and, if not reversed, that the decision will
not have an adverse effect on the Company. While BellSouth Corp. ("BellSouth")
is not a party to that proceeding, BellSouth has appealed the FCC's previous
order denying BellSouth's request to provide in-region long distance service
in South Carolina. BellSouth has challenged the order on the same grounds as
Southwestern Bell Telephone Company challenged Sections 271 through 275 of the
Telecom Act.
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The Company expects to receive a significant portion of its initial revenue
in a given market from the ILEC in the form of reciprocal compensation
payments. This is a result of the Company's ISP and corporate customers
receiving more calls than they make due to the initial mix of applications
typically sold. Certain ILECs have refused to pay that portion of reciprocal
compensation that they estimate is the result of inbound ISP traffic since
they believe such traffic to be interstate in nature and not covered under the
interconnection agreements. While ILECs in all 19 states in which this issue
has been decided, including states in which the Company operates or proposes
to operate, have been ordered to pay reciprocal compensation for such calls,
there can be no assurance that the payment of reciprocal compensation for ISP
traffic will be maintained. The FCC is also considering this matter in
response to a request for a declaratory ruling. A final determination that
such traffic is not eligible for reciprocal compensation would have a material
adverse effect on the Company. See "--Legal and Administrative Proceedings."
On May 8, 1997, in compliance with the requirements of the Telecom Act, the
FCC released an order establishing a new federal universal service support
fund, which provides subsidies to carriers that provide service to under-
served individuals and customers in high-cost or low-income areas, and to
companies that provide telecommunications services and wiring for schools and
libraries and to rural health care providers. The Company is required to
contribute into the universal service fund and also is required to contribute
to state universal service funds. The Company may also obtain subsidies from
the universal service fund for certain services it provides. The new universal
service rules will be administered jointly by the FCC, the fund administrator,
and state regulatory authorities, many of which are still in the process of
establishing their administrative rules. The net revenue effect of these
regulations on the Company cannot be determined at this time.
Non-dominant carriers, including the Company, must file tariffs with the FCC
listing the rates, terms and conditions of interstate and international
services provided by the carrier. On October 29, 1996, the FCC adopted an
order in which it eliminated the requirement that non-dominant interstate
carriers maintain tariffs on file with the FCC for domestic interstate
services. The FCC's order was issued pursuant to authority granted in the
Telecom Act to "forbear" from regulating any telecommunications services
provider if certain statutory analyses are satisfied. The FCC's order,
however, has been stayed by a federal court and thus, non-dominant interstate
carriers currently must continue to file interstate tariffs with the FCC.
In addition, periodic reports concerning carriers' interstate circuits and
deployment of network facilities also are required to be filed. The FCC
generally does not exercise direct oversight over cost justification and the
level of charges for services of non--dominant carriers, although it has the
power to do so. The FCC also imposes prior approval requirements on transfers
of control and assignments of operating authorizations. Fines or other
penalties also may be imposed for violations of FCC rules or regulations.
State Regulation. Most states regulate entry into the local exchange and
other intrastate services, and states' regulation of CLECs vary in their
regulatory intensity. The majority of states mandate that companies seeking to
provide local exchange and other intrastate services apply for and obtain the
requisite authorization from a state regulatory body, such as a state public
utility commission or a state public service commission. This authorization
process generally requires the carrier to demonstrate that it has sufficient
financial, technical, and managerial capabilities and that granting the
authorization will serve the public interest. As of July 1, 1998, the Company
had obtained local certification or was otherwise authorized to provide local
service in California, Delaware, Florida, Illinois, Indiana, Maryland,
Massachusetts, New Jersey, New York, Pennsylvania, and Virginia and had
applications pending for local certification or other authorization in the
District of Columbia, Michigan, and Washington. The Company also has authority
to provide intrastate long distance (i.e. interexchange services) in
California, Delaware, Illinois, Indiana, Maryland, Massachusetts, New Jersey,
New York, Pennsylvania and Virginia. In addition, the Company has successfully
negotiated interconnection agreements with Ameritech in Illinois and Indiana
and with Bell Atlantic in New York, New Jersey, Pennsylvania and Delaware and
Pacific Bell and GTE in California.
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As a CLEC, the Company is (and will be) subject to the regulatory directives
of each state in which the Company is (and will be) certified. Most states
require that CLECs charge just and reasonable rates and not discriminate among
similarly situated customers. Some states also require the filing of periodic
reports, the payment of various regulatory fees and surcharges, and compliance
with service standards and consumer protection rules. States also often
require prior approvals or notifications for certain transfers of assets,
customers, or ownership of a CLEC. States generally retain the right to
sanction a carrier or to revoke certifications if a carrier violates relevant-
laws and/or regulations.
In most states, certificated carriers such as the Company are required to
file tariffs setting forth the terms, conditions, and prices for services
which are classified as intrastate. In some states, the required tariff may
list a range of prices for particular services, and in others, such prices can
be set on an individual customer basis. The Company, however, may be required
to file tariff addenda of the contract terms.
Under the Telecom Act, implementation of the Company's plans to compete in
local markets is and will continue to be, to a certain extent, controlled by
the individual states. The states in which the Company operates or intends to
operate have taken regulatory and legislative action to open local
communications markets to various degrees of local exchange competition.
Local Regulation. The Company is also subject to numerous local regulations,
such as building code requirements. These regulations may vary greatly from
state to state and from city to city.
EMPLOYEES
As of May 28, 1998, the Company employed a total of 105 full-time employees,
none of whom were unionized. The Company believes that its future success will
depend on its continued ability to attract and retain the most highly skilled
and qualified employees in the industry. The Company believes that its
relations with its employees are good.
PROPERTY
The Company leases office space in a number of locations, primarily for
network equipment installations and sales and administrative space. The
Company's headquarters is housed in approximately 22,300 square feet of
rentable space in downtown Chicago, Illinois, under a lease expiring in May
2003. The Company's Chicago switching and network operations center is located
in the same building as its headquarters and occupies approximately 10,500
square feet of rentable space. It is utilized under a ten-year lease that
expires in 2007 and includes two five-year options for renewal. The Company's
New York switching and network operations center occupies approximately 15,200
square feet of rentable space and is located in a commercial office building
in the downtown business district. It is utilized under a fifteen-year lease
that expires in 2012 and includes a five-year option for renewal. On January
26, 1998 the Company entered into a ten-year lease for an approximately 17,500
square foot space in a San Francisco, California office building. The space
will be used to house the Company's San Francisco switching and network
operations center. On March 10, 1998 the Company entered into a ten-year lease
and includes two five-year options for renewal for an approximately 17,600
square foot rentable space in a Philadelphia, Pennsylvania office building.
The space will be used to house the Company's Philadelphia switching and
network operations center. On May 4, 1998, the Company entered into a fifteen-
year lease for an approximately 19,500 square foot space in a Washington, D.C.
office building. The space will be used to house the Company's Washington,
D.C. switching and network operations center. On May 19, 1998, the Company
entered into a nine and one-half year lease for an approximately 19,200 square
foot space in a Los Angeles, California office building. The space will be
used to house the Company's Los Angeles switching and network operations
center.
LEGAL AND ADMINISTRATIVE PROCEEDINGS
With the exception of the matters discussed below, the Company is not aware
of any litigation against the Company. The Company is involved in a number of
regulatory proceedings before various public utilities commissions and the
FCC.
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On September 16, 1997, Focal Communications Corporation of Illinois filed a
complaint and request for temporary injunction against Illinois Bell Telephone
Company d/b/a Ameritech Illinois with the ICC. The complaint was for breach of
the terms of the interconnection agreement between the parties as Ameritech
refused to pay compensation for the transport and termination of calls to
Focal end users that it believed to be ISPs. The Company has recorded revenues
and related accounts receivable totaling $3.2 million from inception to March
31, 1998 in relation to the disputed compensation. In the interests of a more
timely judgment, Focal withdrew its complaint without prejudice on October 17,
1997, and filed to intervene in a consolidated docket which included similar
complaints from several other CLECs. On March 11, 1998, the ICC issued an
order stating that Ameritech is required to pay reciprocal compensation with
respect to calls made to ISPs. On March 15, 1998, Ameritech filed a motion
with the ICC to stay the order pending an appeal, which was denied by the ICC
on March 23, 1998. On March 27, 1998, Ameritech filed suit in the United
States District Court for the Northern District of Illinois seeking reversal
of the ICC Order. Oral arguments in this matter were held on June 25, 1998.
The District Court issued its ruling on July 21, 1998, affirming the ICC's
order requiring Ameritech to pay reciprocal compensation with respect to calls
made to ISPs. The District Court also continued the ICC's stay order for an
additional 35 days. The Company anticipates that the District Court's decision
will be appealed. The Company believes that Ameritech will ultimately be
required to pay such charges after exhausting the appeal process. However,
there can be no assurance of this. Approximately eighteen other states which
have previously considered this issue have ruled in favor of the Company's
position. While the Company does not believe the long-term effects of an
adverse decision would be material, an adverse decision would have a material
adverse effect on the Company's near-term earnings. See "Risk Factors--
Reciprocal Compensation for Internet Access" and "--Regulation." The Company's
interconnection agreement with Ameritech has not been, and is not expected to
be, amended as a result of this dispute.
On July 13, 1998, Ameritech filed a complaint with the ICC, alleging that
Focal's Virtual Office service was in violation of the interconnection
agreement and state statute. Ameritech also alleged that due to Focal's
Virtual Office service, Focal was contributing to the exhaustion of numbers in
the 847 area code. Ameritech complained that calls on Focal's Virtual Office
network were circumventing local toll charges, and should not be subject to
reciprocal compensation. Ameritech also claims that the Company is offering
service in violation of the state's pay-per-call rules. The case is set for
hearing before the ICC on September 18, 1998. The Company believes that the
claims lack merit.
The Company was named as a defendant, along with other parties, in a case
involving the wrongful death of an electrician who was killed while working on
the building premises in New York (Paula Falkowski v. Signature Construction,
Inc., Focal Communications Corporation of New York, and Hugh O'Kane Electric
Company, Inc.; Index No. 122037/97, Supreme Court of the State of New York,
County of New York, amended complaint filed 4/3/98). The decedent was not
under contract with Focal, nor was he working at the request of Focal. The
Company has tendered the defense of this claim, and it has been accepted by
the insurance carrier. The Company believes that it was not the cause of the
injuries and subsequent death which gave rise to this lawsuit, and that any
liability it may have in this case would be covered by insurance and not be
material.
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MANAGEMENT
The following table sets forth certain information with respect to certain
officers, key employees and directors of the Company as of March 31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION SERVED SINCE
- ---- --- -------- ------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS:
Robert C. Taylor, Jr.... 38 Director, President, and Chief Executive 8/96
Officer
John R. Barnicle........ 33 Director, Executive Vice President, Chief 6/96
Operating Officer, and Assistant Secretary
Joseph A. Beatty........ 34 Executive Vice President, Chief Financial 11/96
Officer, Treasurer, and Assistant Secretary
Brian F. Addy........... 33 Executive Vice President--Market Development 5/96
Renee M. Martin......... 43 Senior Vice President, General Counsel, and 3/98
Secretary
Robert M. Junkroski..... 34 Controller 1/97
KEY EMPLOYEES:
Anthony J. Leggio....... 40 Vice President and General Manager, Focal 10/97
Communications Corporation of New York
Tony T. Lou............. 51 Vice President and General Manager, Focal 2/98
Communications Corporation of Illinois
Andrew K. Robitshek..... 30 Vice President and General Manager, Focal 1/97
Communications Corporation of California
Richard F. Knight....... 35 Director of Sales--Telecom Services Group 11/97
Patrick K. Kuchevar..... 33 Director of Data Product Development 1/97
Daniel Montgomery, Jr... 41 Director of Network Operations 3/97
Gary D. Sloan........... 36 Director of Information Services 2/97
Jeffrey C. Wells........ 40 Director of Network Planning 2/97
David M. Cushing........ 31 Director of Product Development and 6/97
Business Analysis
DIRECTORS:
James E. Crawford, III.. 52 Director 11/96
Paul T. Finnegan........ 44 Director 11/96
Richard D. Frisbie...... 48 Director 11/96
James N. Perry, Jr...... 37 Director 11/96
Paul G. Yovovich........ 44 Director 3/97
</TABLE>
Robert C. Taylor, Jr. Mr. Taylor has been President, Chief Executive
Officer, and Director since August 1996. Mr. Taylor is a co-founder of the
Company. From 1994 to 1996, Mr. Taylor was the Vice President of Global
Accounts for MFS Communications Company, where he was responsible for the
operations and management of the Global Services Group, which included MFS'
fifty largest customers, and where he focused on developing all activities in
Mexico and Canada. From 1993 to 1994, Mr. Taylor was one of the original
senior executives at McLeod Telecommunications Group, a Cedar Rapids, Iowa
based CLEC. Mr. Taylor has also held management positions with MCI (1990-
1993), and Ameritech (1985-1990). Mr. Taylor also serves on the Executive
Board of the Association for Local Telecommunications Services. Mr. Taylor
received his M.B.A. from the University of Chicago Graduate School of Business
and holds a Bachelor of Science degree in Mechanical Engineering.
John R. Barnicle. Mr. Barnicle has been Executive Vice President, Chief
Operating Officer, Assistant Secretary and Director since June 1996. Mr.
Barnicle is a co-founder of the Company and is responsible for day-to-day
operations, engineering, marketing and long term planning. In 1996, Mr.
Barnicle was Vice President of Marketing for MFS Telecom Companies. From 1994
to 1996, Mr. Barnicle was a Vice President of Duff &
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Phelps Credit Rating Company and prior thereto held various marketing,
operations and engineering positions with MFS Telecom (1992-1994) and Centel
Corporation (1986-1992). Mr. Barnicle received his M.B.A. with Distinction
from DePaul University and holds a Bachelor of Science degree in Electrical
Engineering.
Joseph A. Beatty. Mr. Beatty has been Executive Vice President, Chief
Financial Officer, Treasurer, and Assistant Secretary since November 1996. Mr.
Beatty is a co-founder of the Company and is responsible for all financial
operations and information systems. From 1994 to 1996, Mr. Beatty was a Vice
President with NationsBanc Capital Markets where he was responsible for
investment research coverage of the telecommunications industry. From 1992 to
1994, Mr. Beatty was a Vice President of Duff & Phelps Credit Rating Company
with responsibility for credit ratings in the telecommunications and electric
utility sectors. From 1985 to 1992, Mr. Beatty held various technical
management positions with Centel Corporation's local exchange carrier
division. Mr. Beatty received his M.B.A. with a concentration in Finance from
the University of Chicago Graduate School of Business and is a Chartered
Financial Analyst (CFA). In addition, Mr. Beatty holds a Bachelor of Science
degree in Electrical Engineering.
Brian F. Addy. Mr. Addy has been Executive Vice President of Market
Development since May 1996. Mr. Addy is a co-founder of the Company and is
responsible for national accounts sales and market development activities.
From 1993 to 1996, Mr. Addy was a Vice President and Officer of Security
Capital Industrial Trust, where he was responsible for acquisitions,
development and national marketing. From 1986 to 1993, Mr. Addy held various
management positions with Centel Corporation's cellular, paging, telephone and
telephone systems operating units. Mr. Addy holds a Bachelor of Science degree
in Electrical Engineering.
Renee M. Martin. Ms. Martin has been Senior Vice President, General Counsel
and Secretary since March 1998. Ms. Martin is responsible for legal,
regulatory, and human resources functions within the Company. From 1984 to
1998, Ms. Martin held various executive positions at Ameritech, most recently
as Vice President and General Counsel Small Business Services where she
directed corporate legal resources to address contract negotiations,
employment issues, regulatory affairs and litigation, as well as managing
outside legal counsel. From 1982 to 1984, Ms. Martin was an attorney at Cook
and Franke, S.C. where she concentrated on general business and corporate law.
Ms. Martin received her J.D. from the University of Wisconsin and holds a
Bachelor of Arts degree in Journalism.
Robert M. Junkroski. Mr. Junkroski has been Controller since January 1997.
Mr. Junkroski is responsible for all internal accounting operations. From 1995
to 1997, Mr. Junkroski was Controller for Brambles Equipment Services, Inc.,
where he was responsible for establishing and maintaining the divisional
accounting, financial reporting, and budgeting function. From 1987 to 1994,
Mr. Junkroski was Controller for Focus Group, Ltd., where he was responsible
for the development and implementation of the accounting and financial
reporting functions of several emerging companies. Mr. Junkroski is a
Certified Public Accountant, received his M.B.A. with honors from Roosevelt
University concentrating in Finance and Accounting and holds a Bachelor of
Business Administration degree.
Anthony J. Leggio. Mr. Leggio has been Vice President and General Manager,
Focal Communications Corporation of New York since October 1997. Mr. Leggio is
responsible for sales and customer service activities in the Company's New
York operation. From 1996 to 1997, Mr. Leggio was Vice President Sales,
Eastern Region for Sprint PCS where he was responsible for planning,
development, organization and implementation of the Fortune 1000 sales and
support organization. From 1988 to 1996, Mr. Leggio held various management
positions with Sprint Corporation; most recently as Regional Director of
national accounts for Sprint's long distance division in the New York area.
Mr. Leggio received his M.B.A. from St. Joseph's University and holds a
Bachelor of Science degree in Marketing.
Tony T. Lou. Mr. Lou has been Vice President and General Manager, Focal
Communications Corporation of Illinois since February, 1998. Mr. Lou is
responsible for sales and customer service activities in the Company's Chicago
operation. From 1996 to 1997, Mr. Lou was Vice President, Corporate Accounts
for Safety-Kleen Corporation where he was responsible for developing a
national accounts strategy, quotas, account plans
49
<PAGE>
and increasing sales throughout all product lines. From 1990 to 1996, Mr. Lou
held various management positions with Sprint Corporation, most recently as
Regional Director of national accounts for Sprint's long distance division in
the Chicago area. Mr. Lou received his Masters in Management from the Kellogg
Graduate School of Business at Northwestern University and holds a Bachelor of
Commerce degree.
Andrew K. Robitshek. Mr. Robitshek has been with the Company since January
1997 and has been Vice President and General Manager, Focal Communications
Corporation of California since April 1998. Mr. Robitshek is responsible for
sales and customer service activities in the Company's San Francisco
operation. From 1994 to 1996, Mr. Robitshek was Director of Business Analysis
for MFS Communications Company where he was responsible for determining the
economics of local telephone service. From 1991 to 1993, Mr. Robitshek was
with MCI where he was responsible for business analysis and VNET Marketing.
Mr. Robitshek received his Masters in Management from the Kellogg Graduate
School of Business at Northwestern University, a Masters of Science in
Telecommunications from George Washington University and holds a Bachelor of
Science degree in Industrial Management.
Richard F. Knight. Mr. Knight has been Director of Sales-Telecom Services
Group since November 1997. Mr. Knight is responsible for managing sales and
service activities to other carriers on a nationwide basis. From 1988 to 1997,
Mr. Knight held various management positions at MCI Telecommunications, most
recently as Senior Manager-Carrier Product Marketing and Development. Mr.
Knight received his M.B.A. from DePaul University and holds a Bachelor of
Business Administration degree.
Patrick K. Kuchevar. Mr. Kuchevar has been with the Company since January
1997, and has served as Director of Data Product Development since March 1998.
Mr. Kuchevar is responsible for managing sales and service activities to large
Internet service providers on a nationwide basis and for data product
development across all customer groups. From 1992 to 1997, Mr. Kuchevar held
various management positions at Sprint, most recently as Global Account
Manager in the long-distance division. From 1988 to 1992, Mr. Kuchevar was
responsible for the marketing of X.25-based data switching services for
Sprint's local telecom division in Illinois. Mr. Kuchevar holds a Bachelor of
Business Administration degree.
Daniel Montgomery, Jr. Mr. Montgomery has been Director of Network
Operations since March 1997. Mr. Montgomery is responsible for coordinating
the implementation of Focal's transmission network. From 1988 to 1997, Mr.
Montgomery held several management positions with MFS Communications Company
including Director--Client Network Engineering and Senior Manager--Network
Services. From 1987 to 1988, Mr. Montgomery was Senior Communications Analyst
for Sears Communications Network, Inc. Mr. Montgomery received his Masters of
Science in Computer Science with Distinction from DePaul University and holds
a Bachelor of Arts degree in Economics.
Gary D. Sloan. Mr. Sloan has been Director of Information Services since
February 1997. Mr. Sloan is responsible for managing all aspects of the
Company's information systems. From 1995 to 1997, Mr. Sloan was Director of
Software Development, Billing Division, MIS for MFS Communications Company
where he was responsible for implementing a new corporate billing platform.
From 1988 to 1995, Mr. Sloan was Director of System Development, MIS for MFS
Telecom where he was responsible for the implementation and operation of
management information systems. From 1984 to 1988, Mr. Sloan was a consultant
for Andersen Consulting. Mr. Sloan holds a Bachelor of Science degree in
Computer Science.
Jeffrey C. Wells. Mr. Wells has been Director of Network Planning since
February 1997. Mr. Wells is responsible for implementing Focal's network
interconnection with the ILECs and engineering the Company's switches for
local network facilities. From 1995 to 1997, Mr. Wells was Senior Manager--
Local Network Planning/Implementation for MFS Communications Company where he
was responsible for designing and implementing all phases of the local
networks as well as overseeing interconnections with the ILECs. From 1985 to
1995, Mr. Wells held various technical management positions with
Sprint/Centel, including Manager of Central Offices for Sprint's local
telephone operations in Chicago. Mr. Wells holds an Associate in Electronic
Technology degree.
50
<PAGE>
David M. Cushing. Mr. Cushing has been Director of Product Development and
Business Analysis since June 1997. Mr. Cushing is responsible for all aspects
of developing and implementing new products as well as the pricing and
financial analysis of new services. From 1995 to 1997, Mr. Cushing held
various management positions at WorldCom (MFS Communications Company) most
recently as Senior Manager, Business Analysis. From 1988 to 1995, Mr. Cushing
held several positions at GTE/Contel most recently as Budget and Performance
Analyst where he initiated performance analyses and designed reports to
monitor customer service performance. Mr. Cushing received his M.B.A. from the
University of Chicago and holds a Bachelor of Science degree in General
Engineering.
James E. Crawford, III. Mr. Crawford is a Director. Mr. Crawford has served
as a Director of the Company since November, 1996. He is a general partner of
Frontenac Company, a venture capital firm that he joined in August, 1992. From
February, 1984 to August, 1992, Mr. Crawford was a general partner of William
Blair Venture Management Co., the general partner of William Blair Venture
Partners III, a venture capital fund. He was also a general partner of William
Blair & Company, an investment bank and brokerage affiliated with William
Blair Venture Management Co., from January, 1987 to August, 1992. Mr. Crawford
serves as a director of Optika Imaging Systems, Inc., Cornerstone Imaging,
Inc., Allegiance Telecom, Inc. and several other private companies.
Paul J. Finnegan. Mr. Finnegan is a Director. Mr. Finnegan has served as a
Director of the Company since November, 1996. Since January, 1993, Mr.
Finnegan has been Vice President of Madison Dearborn Partners, Inc., the
general partner of Madison Dearborn Capital Partners, L.P. Previously, he
served in various positions at First Capital Corporation of Chicago and its
affiliates. Mr. Finnegan currently serves on the Board of Trustees of The
Skyline Fund, the Board of Advisors of Falcon Cable Holding Group, L.P., the
Board of Directors of Omnipoint Corporation, and the Board of Directors of
Allegiance Telecom Inc.
Richard D. Frisbie. Mr. Frisbie is a Director. Mr. Frisbie has served as a
Director of the Company since November, 1996. Mr. Frisbie is a founder and
Managing Partner of Battery Ventures. He is responsible for management of the
Battery Funds and focuses principally on communications and software
opportunities. From 1976 to 1983, Mr. Frisbie was a principal at UNC Ventures
("UNC"), where he was instrumental in developing and implementing its high
technology investment strategy. Prior to joining UNC, Mr. Frisbie was employed
at Hutchins & Wheeler (1974-1976), a Boston law firm. Mr. Frisbie serves as a
director of Allegiance Telecom, PCS Development, Phoenix Wireless and UniSite
and is a member of the Board of Directors of the National Venture Capital
Association.
James N. Perry, Jr. Mr. Perry is a Director. Mr. Perry has been a Director
of the Company since November, 1996. In January, 1993, he became Vice
President of Madison Dearborn Partners, Inc. Previously, Mr. Perry served in
various positions at First Capital Corporation of Chicago and its affiliates.
Mr. Perry currently serves as a director of Clearnet Communications, Inc.,
Omnipoint Corporation, and Allegiance Telecom Inc.
Paul G. Yovovich. Mr. Yovovich is a Director. Mr. Yovovich has served as a
Director of the Company since March 1997. Mr. Yovovich served as President of
Advance Ross Corporation from 1993 to 1996. He served in several executive
positions with Centel Corporation from 1982 to 1992, where his last position
was that of President of its Central Telephone Company unit. Before joining
Centel, he was a Vice President in the investment banking unit of Dean Witter.
Mr. Yovovich also serves as a director of 3Com Corporation, APAC TeleServices,
Inc., May & Speh, Inc., Comarco, Inc., and Mastering, Inc.
TERM OF OFFICE FOR DIRECTORS AND OFFICERS
Pursuant to Article II, Section 1 of the Company's By-laws (the "By-laws"),
the stockholders of the Company shall elect the members of the Board of
Directors at the annual meeting of the stockholders to be held each year
within 180 days after the close of the immediately preceding fiscal year of
the Company. Pursuant to
51
<PAGE>
Article III, Section 2 of the By-laws, the directors shall be elected by a
plurality of the votes of the shares present in person or represented by proxy
at the annual meeting and entitled to vote in the election of directors. Each
director elected shall hold office until his or her successor is duly elected
and qualified or until his or her earlier death, resignation or removal.
Pursuant to Article IV, Sections 1 and 2 of the By-laws, the Board of
Directors shall annually elect the officers of the Company at its first
meeting held after each annual meeting of the stockholders. Each officer
elected shall hold office until his or her successor is duly elected and
qualified or until his or her earlier, death, resignation or removal.
POTENTIAL CONFLICTS OF INTEREST
In addition to serving as members of the Board of the Company, Messrs.
Crawford, Finnegan, Frisbie and Perry each serve as directors of other
telecommunications companies and other private companies. As a result of these
additional directorships, Messrs. Crawford, Finnegan, Frisbie and Perry may be
subject to conflicts of interest during their tenure as directors of the
Company. Because of these potential conflicts, Messrs. Crawford, Finnegan,
Frisbie and Perry may be required, from time to time, to disclose certain
financial or business opportunities to the Company and to the other companies
to which they owe fiduciary duties. However, the Company does not believe
these conflicts of interest will be a detriment to the Company's growth or
ability to operate its business. Currently the Corporation does not have any
standard procedures for resolving potential conflicts of interest relating to
corporate opportunities or otherwise.
BOARD COMMITTEES
The Board has established a Compensation Committee and an Audit Committee.
The Compensation Committee establishes salaries, incentives and other forms of
compensation for directors, executive officers and key employees of the
Company and administers the Company's 1997 Non-Qualified Stock Option Plan
(the "Stock Option Plan") and other incentive and benefit plans. Members of
the Compensation Committee are Messrs. Taylor, Perry, Finnegan, Crawford,
Frisbie, and Yovovich. The Audit Committee oversees the work performed by the
Company's independent auditors, and reviews internal audit controls. Members
of the Audit Committee are Messrs. Perry, Finnegan, Crawford, and Frisbie. The
Nominating Committee has been charged with the responsibility of identifying
nominees to stand for election to the Company's Board of Directors. Members of
the Nominating Committee are Messrs. Barnicle, Perry, Crawford and Yovovich.
COMPENSATION OF DIRECTORS
Except for Mr. Yovovich, outside directors do not currently receive cash
fees or option grants for serving as directors or for attending meetings. On
April 1, 1997, Mr. Yovovich was awarded an option to purchase 260 shares of
the Company's Class A Common (as defined herein), with such option to
immediately vest as to 10% of such shares and to vest as to an additional 15%
of such shares each six months thereafter. The Company reimburses directors
for out-of-pocket expenses incurred in connection with attendance at meetings.
52
<PAGE>
EXECUTIVE COMPENSATION
The Summary Compensation Table below sets forth certain information
concerning compensation paid or accrued for services rendered to the Company
in all capacities for the seven months ended December 31, 1996 and the year
ended December 31, 1997 by the Chief Executive Officer and each of the four
other most highly compensated officers or key employees of the Company whose
combined salary and bonus exceeded $100,000 (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- ------------
NUMBER OF
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
- ------------------ ---- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Taylor, Jr. .. 1997 $120,000 $50,000(2) $ -- -- $ --
Chief Executive Officer 1996 20,000 -- -- -- --
and President
John R. Barnicle........ 1997 120,000 47,000(2) -- -- --
Executive Vice 1996 20,000 -- -- -- --
President and Chief
Operating Officer
Joseph A. Beatty........ 1997 120,000 45,000(2) 25,000(1) -- --
Executive Vice 1996 20,000 -- -- -- --
President, Chief
Financial Officer,
Treasurer, and
Secretary
Brian F. Addy........... 1997 120,000 38,000(2) -- -- --
Executive Vice 1996 20,000 -- -- -- --
President of Market
Development
Patrick K. Kuchevar..... 1997 63,333 87,000(3) -- 80(4) --
Director of Data 1996 -- -- -- -- --
Product Development
</TABLE>
- --------
(1) Reimbursement for moving expenses.
(2) Discretionary bonuses are granted by the Board of Directors.
(3) Performance Based Sales Compensation Plan.
(4) Granted pursuant to the Company's Stock Option Plan.
Mr. Kuchevar is not an officer of the Company. Except for Mr. Kuchevar, none
of the Named Executive Officers (as defined) owns any options to purchase
shares of the Company's Common Stock.
STOCK OPTION PLAN
The Company's Stock Option Plan was adopted on February 27, 1997 by Focal
Communications Corporation of Illinois and pursuant to a Plan of
Reorganization and an Assignment of Interest Agreement, dated August 18, 1997,
such plan was adopted by the Company. The Stock Option Plan provides for the
grant of options to purchase up to an aggregate of 5,260 shares of Common
Stock. The Plan is administered by the Board of Directors which makes
discretionary grants ("discretionary grants") of options to employees
(including employees who are officers and directors of the Company) and
directors.
Options granted pursuant to the plan are to be non-qualified options and are
not intended to be "incentive stock options" within the meaning of Section
422A of the Internal Revenue Code of 1986, as amended.
The selection of participants, allotment of shares, determination of price
and other conditions of purchase of such options are determined by the Board,
in its sole discretion. Options are exercisable for a period of up to ten
years. The per share exercise price of options must be no less than 100% of
the fair market value of the Common Stock on the date of grant. As of June 1,
1998, the Board had granted options to purchase a net total of 2,926 shares of
the Company's Class A Common to 77 employees and directors pursuant to the
Stock Option Plan, after taking into account forfeited option grants. As of
December 31, 1997, the Board had granted options to purchase 1,222 shares of
Class A Common at prices ranging from $290 to $320 per share. On January 1,
1998,
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<PAGE>
the Board granted additional options to purchase 677 shares of Class A Common
at $333 per share. On April 1, 1998, the Board granted additional options to
purchase 1,057 shares of Class A Common at $1,050 per share.
Options granted under the Stock Option Plan are nontransferable, other than
by will or by the laws of descent and distribution, and during the lifetime of
the optionee, may be exercised only by the optionee, or in the event of
optionee's legal incapacity to do so, by the optionee's guardian or legal
representative.
The following table sets forth certain information with respect to options
granted to the Named Executive Officers during 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE GRANT
OPTIONS TO EMPLOYEES PRICE EXPIRATION DATE
NAME GRANTED (#) IN 1997 ($/SH)(1) DATE VALUE(2)
- ---- ----------- ---------------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Taylor, Jr.... -- 0% $-- -- $ --
John R. Barnicle........ -- 0% -- -- --
Joseph A. Beatty........ -- 0% -- -- --
Brian F. Addy........... -- 0% -- -- --
Patrick Kuchevar........ 80 6.55% 290 04/01/07 13,600
</TABLE>
- --------
(1) Options were granted under the Stock Option Plan at an exercise price
equal to the fair market value of the Company's Class A Common on the date
of grant, as determined by the Board.
(2)Calculation based on the Black-Scholes model.
The following table sets forth certain information with respect to the
unexercised options held by the Named Executive Officers as of December 31,
1997. No options were exercised by the Named Executive Officers during 1997.
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-
UNEXERCISED THE-MONEY
OPTIONS AT YEAR- OPTIONS AT YEAR-
END 1997(#) END 1997($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) REALIZED UNEXERCISABLE UNEXERCISABLE (1)
- ---- --------------- -------- ---------------- -----------------
<S> <C> <C> <C> <C>
Robert C. Taylor, Jr.... -- $-- -- $ --
John R. Barnicle........ -- -- -- --
Joseph A. Beatty........ -- -- -- --
Brian F. Addy........... -- -- -- --
Patrick Kuchevar........ 0 0 0/80 0/3,600
</TABLE>
- --------
(1) As of the end of fiscal year 1997, none of the options held by the Named
Executive Officers had been exercised.
EMPLOYMENT AGREEMENTS
The Company entered into continuing Executive Stock Agreement and Employment
Agreements (the "Employment Agreements") with each of the Executive Investors
(as defined herein) on of November 27, 1996 upon the same terms and
conditions. The Employment Agreements provide that each Executive Investor
shall receive a minimum base salary of $120,000 and bonuses based upon the
Company achieving certain performance goals set in advance of each year in the
sole discretion of the Board of Directors. Each Executive Investor is entitled
to severance payments if he is terminated other than for cause. In addition to
provisions relating to each Executive Investor's duties and compensation, the
Employment Agreements require each Executive Investor to
54
<PAGE>
assign all inventions he develops in the course of his employment with the
Company to the Company, maintain the confidentiality of the Company's
proprietary information and refrain from competing with and soliciting
employees from the Company during his employment with the Company and for a
period of up to eighteen months thereafter. Each Executive Investor is
entitled to certain Noncompete Compensation. The Company entered into an
employment agreement with Ms. Martin on March 20, 1998 and Mr. Robitshek on
July 15, 1998, on substantially the same employment terms as the Executive
Investors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership of
the Company's Common Stock as of June 1, 1998 for (i) each of the Company's
Officers and others included within the Named Executive Officers, (ii) each
director of the Company, (iii) all of the persons named in (i) or (ii) as a
group, and (iv) each stockholder of the Company who beneficially owns 5% or
more of the Company's Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
BENEFICIALLY OUTSTANDING
NAME OWNED(1) SHARES
- ---- ---------------- -----------
<S> <C> <C>
OFFICERS OR KEY EMPLOYEES:
Robert C. Taylor, Jr.(2)......................... 5,230.77 4.54%
John R. Barnicle(3).............................. 5,230.77 4.54%
Joseph A. Beatty(4).............................. 5,230.77 4.54%
Brian F. Addy(5)................................. 5,230.77 4.54%
Robert M. Junkroski(6)........................... 17.50 *
Renee M. Martin.................................. 0.00 *
Patrick Kuchevar(7).............................. 20.00 *
DIRECTORS:
James N. Perry Jr.(8)............................ 54,807.70 47.55%
Paul Finnegan(9)................................. 54,807.70 47.55%
James Crawford(10)............................... 25,576.92 22.19%
Richard Frisbie(11).............................. 12,788.46 11.10%
Paul G. Yovovich(12)............................. 334.77 *
ALL OFFICERS AND DIRECTORS AS A GROUP (10 STOCK-
HOLDERS)........................................ 114,450.93 99.30%
5% STOCKHOLDERS:
Madison Dearborn Capital Partnership, L.P.(13)... 54,807.70 47.55%
Frontenac VI, L.P.(14)........................... 25,576.92 22.19%
Battery Ventures III, L.P.(15)................... 12,788.46 11.10%
</TABLE>
- --------
* Less than 1% of the issued and outstanding shares of the Common Stock of the
Company.
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned by them, subject to community property laws
where applicable. The percentage of beneficial ownership is based on
115,260.983 shares of Common Stock outstanding as of June 1, 1998,
including 241.75 shares of Common Stock subject to options that are
currently exercisable or are exercisable within 60 days, which are deemed
to be outstanding and to be beneficially owned by the person holding such
options.
(2) Includes 230.77 shares of Class A Common and 5,000 shares of Class B
Common, but excludes 3,677.885 shares of Class C Common owned of record
by Mr. Taylor. The voting rights with respect to the Class C Common have
been transferred to the Equity Investors pursuant to the Vesting
Agreements (as hereinafter defined). The Class C Common and 3,000 shares
of Class B Common are subject to forfeiture. See "Description of Capital
Stock."
(3) Includes 230.77 shares of Class A Common and 5,000 shares of Class B
Common, but excludes 3,677.885 shares of Class C Common owned of record
by Mr. Barnicle. The voting rights with respect to the Class C Common
have been transferred to the Equity Investors pursuant to the Vesting
Agreements. The Class C Common and 3,000 shares of Class B Common are
subject to forfeiture. See "Description of Capital Stock."
55
<PAGE>
(4) Includes 230.77 shares of Class A Common and 5,000 shares of Class B
Common, but excludes 3,677.885 shares of Class C Common owned of record
by Mr. Beatty. The voting rights with respect to the Class C Common have
been transferred to the Equity Investors pursuant to the Vesting
Agreements. The Class C Common and 3,000 shares of Class B Common are
subject to forfeiture. See "Description of Capital Stock."
(5) Includes 230.77 shares of Class A Common and 5,000 shares of Class B
Common, but excludes 3,677.885 shares of Class C Common owned of record
by Mr. Addy. The voting rights with respect to the Class C Common have
been transferred to the Equity Investors pursuant to the Vesting
Agreements. The Class C Common and 3,000 shares of Class B Common are
subject to forfeiture. See "Description of Capital Stock."
(6) Includes 17.5 shares of Class A Common subject to options which are
exercisable within 60 days of June 1, 1998. Excludes 96.5 shares of Class
A Common subject to options which are not exercisable within 60 days of
June 1, 1998.
(7) Includes 20 shares of Class A Common subject to options which are
exercisable within 60 days of June 1, 1998. Excludes 100 shares of Class
A Common subject to options which are not exercisable within 60 days of
June 1, 1998. Mr. Kuchevar is not an officer of the Company. He is
included in the table because he is part of the group defined as Named
Executive Officers in the Summary Compensation Table.
(8) Mr. Perry, a director of the Company, owns no shares in his own name.
Includes 46,153.85 shares of Class A Common owned by MDCP and 8,653.85
shares of Class C Common, the voting rights with respect to which have
been transferred to MDCP pursuant to the Vesting Agreements. See
"Description of Capital Stock." Mr. Perry's address is c/o Madison
Dearborn Partners, Inc., Three First National Plaza, Suite 3800, Chicago,
IL 60602.
(9) Mr. Finnegan, a director of the Company, owns no shares in his own name.
Includes 46,153.85 shares of Class A Common owned by MDCP and 8,653.85
shares of Class C Common, the voting rights with respect to which have
been transferred to MDCP pursuant to the Vesting Agreements. See
"Description of Capital Stock." Mr. Finnegan's address is c/o Madison
Dearborn Partners, Inc., Three First National Plaza, Suite 3800, Chicago,
IL 60602.
(10) Mr. Crawford, a director of the Company, owns no shares in his own name.
Includes 21,538.46 shares of Class A Common owned by Frontenac and
4,038.46 shares of Class C Common, the voting rights with respect to
which have been transferred to Frontenac pursuant to the Vesting
Agreements. See "Description of Capital Stock." Mr. Crawford's address
is c/o Frontenac Company, 135 S. LaSalle Street, Suite 3800, Chicago, IL
60603.
(11) Mr. Frisbie, a director of the Company, owns no shares in his own name.
Includes 10,769.23 shares of Class A Common owned by Battery and
2,019.23 shares of Class C Common, the voting rights with respect to
which have been transferred to Battery pursuant to the Vesting
Agreements. See "Description of Capital Stock." Mr. Frisbie's address is
c/o Battery Ventures, 20 William Street, Wellesley, MA 02181.
(12) Includes 230.77 shares of Class A Common and an additional 104 shares of
Class A Common subject to options which are exercisable within 60 days
of June 1, 1998. Excludes 156 shares of Class A Common subject to
options which are not exercisable within 60 days of June 1, 1998.
(13) Includes 46,153.85 shares of Class A Common owned by MDCP and 8,653.85
shares of Class C Common, the voting rights with respect to which have
been transferred to MDCP pursuant to the Vesting Agreements. See
"Description of Capital Stock." To the Company's knowledge Mr. Perry and
Mr. Finnegan, directors of the Company, have the power to vote the
shares owned by MDCP. See "Management--Potential Conflicts of Interest."
(14) Includes 21,538.46 shares of Class A Common owned by Frontenac and
4,038.46 shares of Class C Common, the voting rights with respect to
which have been transferred to Frontenac pursuant to the Vesting
Agreements. See "Description of Capital Stock." To the Company's
knowledge Mr. Crawford, a director of the Company, has the power to vote
the shares owned by Frontenac. See "Management--Potential Conflicts of
Interest."
(15) Includes 10,769.23 shares of Class A Common owned by Battery and
2,019.23 shares of Class C Common, the voting rights with respect to
which have been transferred to Battery pursuant to the Vesting
Agreements. See "Description of Capital Stock." To the Company's
knowledge Mr. Frisbie, a director of the Company, has the power to vote
the shares owned by Battery. See "Management--Potential Conflicts of
Interest."
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<PAGE>
CERTAIN TRANSACTIONS
THE STOCK PURCHASE AGREEMENT
The Company and certain of its stockholders entered into a Stock Purchase
Agreement (as defined herein). Pursuant to such agreement and additional
agreements related thereto the Investors were granted certain put rights,
voting rights, and registration rights. See "Description of Capital Stock" for
a detailed discussion of the various rights and restrictions affecting the
Common Stock of the Company and its stockholders. Concurrent with the
consummation of the Offering, the Equity Investors relinquished certain Put
Rights (as defined herein) in exchange for certain liquidation rights. See
"Description of Capital Stock."
DIRECTOR/STOCKHOLDER RELATIONSHIPS
Several directors of the Company, who serve as designees of the Equity
Investors, also serve on the boards of companies with which the Company may
compete or enter into agreements. Specifically, Messrs. Crawford, Finnegan,
Frisbie, and Perry are directors of Allegiance Telecom, Inc., a Dallas-based
CLEC which competes with the Company. See "Management--Potential Conflicts of
Interest."
DESCRIPTION OF CAPITAL STOCK
As of December 31, 1997, there were a total of (i) 85,567.693 shares of
Class A Common authorized and 80,307.693 shares outstanding, (ii) 35,000
shares of Class B Common authorized and 20,000 shares outstanding, and (iii)
15,000 shares of Class C Common authorized and 14,711.54 shares outstanding.
Pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement") and
related documents, each dated November 27, 1996, the Company sold 79,384.62
shares of its Class A Common Stock, $0.01 par value per share (the "Class A
Common"), to MDCP, Frontenac, Battery, Brian F. Addy ("Addy"), John R.
Barnicle ("Barnicle"), Joseph A. Beatty ("Beatty"), and Robert C. Taylor, Jr.
("Taylor," with Addy, Barnicle, Beatty and Taylor being hereinafter
individually referred to as an "Executive Investor" and collectively as the
"Executive Investors," and the Equity Investors and the Executive Investors
being hereinafter collectively referred to as the "Investors") and converted
1,500 shares of its then outstanding common stock into 20,000 shares of Class
B Common Stock, $0.01 par value per share (the "Class B Common"), and
14,711.54 shares of Class C Common Stock, $0.01 par value per share (the
"Class C Common," the Class A Common, Class B Common and Class C Common are
hereinafter collectively referred to as the "Common Stock"). The Company
issued 923.073 shares of Class A Common to stockholders who were designated by
the Equity Investors and other investors concurrent with the Stock Purchase
Agreement.
In connection with the Stock Purchase Agreement, the Company and the
Investors entered into a number of additional agreements which affect their
relative rights as Stockholders of the Company. Following is a description of
the relative rights and obligations of the Company's Class A Common, Class B
Common and Class C Common.
Certain Voting Requirements
Pursuant to the Stock Purchase Agreement, the Company can not take certain
enumerated actions without obtaining the prior written consent of the holders
of at least 67% of the shares of Class A Common issued to Equity Investors
pursuant to the Stock Purchase Agreement. Until such consent is obtained the
Company may not, among other things: declare or pay dividends; redeem or
purchase the Company's stock or the stock of any of its subsidiaries; issue or
agree to issue any securities containing equity features; sell more than 10%
of the Company's assets; acquire or invest in another entity; enter into the
operation of any business other than the provision of local exchange
telecommunications services or other businesses identified in an approved
business plan; become subject to any agreement which would restrict the
Company's right to perform under the Stock Purchase Agreement or related
documents; incur indebtedness exceeding $100,000 (excluding the Notes and any
57
<PAGE>
refinancing thereof); make capital expenditures or enter into lease agreements
exceeding $100,000 in any twelve-month period unless provided for in an
approved business plan; or use proceeds of Class A Common contributions made
pursuant to the Stock Purchase Agreement for purposes other than for working
capital and budgeted general corporate purposes or as contemplated by an
approved business plan. The requirement for such consent terminates upon the
consummation of the Company's Initial Public Offering.
Voting
Pursuant to the Company's Certificate of Incorporation (the "Certificate"),
each share of Common Stock is entitled to one vote per share with the holders
of Class A Common, Class B Common and Class C Common voting together as a
single class.
Pursuant to the Vesting Agreement, the Executives have named the Equity
Investors as their proxies to vote all shares of Unvested Class C Common from
time-to-time outstanding. In addition, pursuant to the Stockholders Agreement,
the Stockholders have agreed, among other things, that the authorized number
of directors shall be established by the bylaws and remain at seven directors.
The Stockholders Agreement provides that the seven directors will include (i)
two directors designated by MDCP, so long as MDCP holds at least 50% of the
shares of Common Stock initially purchased by MDCP under the Stock Purchase
Agreement and thereafter one director designated by MDCP so long as MDCP holds
at least 10% of such Common Stock and at least 3% of the Company's outstanding
Common Stock, (ii) one director designated by Frontenac so long as Frontenac
holds at least 20% of the shares of Common Stock initially purchased by
Frontenac under the Stock Purchase Agreement and at least 3% of the Company's
outstanding Common Stock, (iii) one director designated by Battery so long as
Battery holds at least 50% of the shares of Common Stock initially purchased
by Battery under the Stock Purchase Agreement and at least 3% of the Company's
outstanding Common Stock, (iv) two Executive Investors employed by the Company
designated by a majority of the outstanding shares of Common Stock issued to
the Executive Investors pursuant to the Stock Purchase Agreement, and (v) one
outside director designated by the Equity Investors and reasonably acceptable
to the Executive Investors. The rights and requirements under the Stockholders
Agreements as to directors shall terminate at the earlier of the closing of
the Company's Initial Public Offering or the sale of the Company.
Investors' Liquidation Right
Pursuant to the Stock Purchase Agreement, Equity Investors had the right
(the "Put Right"), beginning after November 27, 2003, to require the Company
to repurchase all, but not less than all, of the Equity Investors' Class A
Common purchased pursuant to the Stock Purchase Agreement. Pursuant to a
January 1998 amendment to the Stock Purchase Agreement the Investors have
agreed to relinquish such Put Right in exchange for certain rights to require
liquidation of the Company if the Company has not completed a public offering
of its Common Stock prior to November 27, 2003. If a demand for liquidation is
made, at the option of the Company, in lieu of liquidation, the Company may
repurchase all, but not less than all, the shares of the Company's capital
stock then held by the Investors exercising such liquidation right. The
Indenture limits the ability of the Company to liquidate itself or to
repurchase shares of its Common Stock. In connection with the Offering, the
Equity Investors have acknowledged that the Indenture could restrict the
Company from liquidating or repurchasing Shares of its Common Stock and agreed
in writing that any claim for such payments would be subordinated in right of
payment to the Notes.
Forfeiture, Conversion and Repurchase of Common Stock
Pursuant to the terms of four separate Vesting Agreements (the "Vesting
Agreements"), each dated November 27, 1996, by and among the Executive
Investors and each of the Equity Investors, the shares of Class C Common owned
by each of the Executive Investors are subject to certain forfeiture
provisions.
Upon the vesting of the Class C Common, such shares of Class C Common are
convertible into Class B Common. Pursuant to the Vesting Agreements, upon the
vesting of any shares of Class C Common an equal number of shares of Class A
Common held by the Equity Investors shall be forfeited by such Equity
Investors.
58
<PAGE>
Pursuant to the terms of the Employment Agreements by and between the
Company and each of the Executive Investors, the shares of Class B Common
owned by each of the Executive Investors (including any shares of Class B
Common received upon conversion of the Class C Common as to which the vesting
provisions of the Vesting Agreement have lapsed) are subject to certain
forfeiture provisions.
Pursuant to the Employment Agreements, the Company has the option to
purchase (the "Repurchase Option") all Class A Common, Class B Common and
Class C Common then owned by each Executive Investor upon the termination of
such Executive Investors' employment by the Company for any reason. In certain
circumstances, the Company may be required to assign the Repurchase Option, or
a portion thereof, to the Equity Investors and/or the other Executive
Investors. The purchase price for shares of Unvested Class B and Unvested
Class C shall be the par value thereof. The purchase price for the vested
shares of Common Stock shall be the fair market value of such shares as
determined by the formula set forth in the Employment Agreements.
Registration Rights
Pursuant to the terms of a Registration Agreement (the "Registration
Agreement") dated November 27, 1996, the Company granted certain holders of
the Company's Class A Common and Class B Common Registration Rights. The
holders of approximately 78,461.54 shares of Class A Common have the benefit
of demand registration rights. Holders of Class A Common which have the
benefit of demand registration rights are hereinafter referred to as "Demand
Rights Holders." In order for the Demand Rights Holders to effect a demand for
registration prior to an Initial Public Offering, the Registration Agreement
requires that at least 67% of the Demand Rights Holders request such
registration. Prior to an Initial Public Offering, an unlimited number of
demands may be made for registration on Form S-1 or any similar long-form
registration ("Long-Form Registrations"). After an Initial Public Offering and
subject to minimum dollar limits, each Demand Rights Holder is subject to
certain limitations on demands which can be made for Long-Form Registrations,
while the Demand Rights Holders may make an unlimited number of demands for
registration on Form S-2 or S-3 or any similar short-form registration, if
available. In addition to demand registration rights, the Demand Rights
Holders and the holders of approximately 20,000 shares of Class B Common have
unlimited "piggyback" registration rights (hereinafter the Demand Rights
Holders and the holders of Class B Common to which such piggyback registration
rights have attached will be collectively called the "Piggyback Rights
Holders") pursuant to which the Piggyback Rights Holders have the right to
request that the Company register their registrable Class A Common and Class B
Common whenever the Company registers any of its securities under the
Securities Act (other than pursuant to a demand registration) and the
registration form to be used may be used for the registration of the
registrable Class A Common or Class B Common; unless the piggyback
registration is in connection with an underwritten registration and the
managing underwriter is of the opinion that inclusion of all or any portion of
the shares of Class A Common or Class B Common with respect to which the
Piggyback Rights Holders request registration would have an adverse impact on
the marketing of the securities to be sold in such underwritten offering.
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<PAGE>
Distributions
Pursuant to the Company's Certificate of Incorporation, the holders of Class
A Common, Class B Common, and Class C Common have differing rights to
distributions made by the Company depending on the type of distribution
involved. The following table details the relative rights based on the type of
distribution:
<TABLE>
<CAPTION>
DISTRIBUTION
CLASS A, B, C
COMMON CLASS A COMMON CLASS B COMMON CLASS C COMMON
- ------------- -------------- -------------- --------------
<S> <C> <C> <C>
1. Dividends (i) Each share of Class A (ii) Each share of Class (iii) No share of Class C
Common and A Common and Common has a
Class B Common Class B Common right to receive
share equally in any share equally in any any
dividend declared dividend declared portion of any
out of the earnings out of the earnings dividends out of
of the Company of the Company earnings
2. Other Non- (i) First, to the holders (ii) Second, to the (iii) The holders of
Liquidating of Class A holders of Class B Class C Common
Distributions(1) Common (ratably Common (ratably shall have no
among such among such right
holders) until the holders) in an (except such right
total Other amount up to the as may result from
Non-Liquidating product of the their holding
Distributions made quotient obtained by Class A
to each holder dividing the Common or
(since November 27, aggregate number Class B Common)
1996) is equal of Class B Common to receive any
to the sum of the outstanding by the portion of any
initial price paid to aggregate number Other Non-
the Company for of shares of Class A Liquidating
such shares of Common and Distributions
Class A Class B Common
Common plus the outstanding times
aggregate the aggregate of all
contributions to the Other
capital of the Non-Liquidating
Company made Distributions
with respect to such previously made
Class A Common pursuant to these
from November 27, subsections 2(i) and
1996 up to and 2(ii) to the holders
including the date of Class A
of such distribution Common and Class B
Common from
November 27, 1996
</TABLE>
- --------
(1) All distributions other than dividends made out of earnings or
distributions as part of a complete liquidation, dissolution, or winding
up of the Company are defined as "Other Non-Liquidating Distributions."
60
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION
CLASS A, B, C
COMMON CLASS A COMMON CLASS B COMMON CLASS C COMMON
- ------------- -------------- -------------- --------------
<S> <C> <C> <C>
Thereafter, to the holders of Class A Common and
Class B Common (ratably among such holders) based on
the number of shares of Class A Common and Class B
Common held by each such holder.
3. Liquidating (i) First, to the (ii) Second, to the
Distributions(2) holders holders of Class C
of Class A Common (ratably
Common (ratably among such
among such holders) in an
holders) until the amount up to the
total Other Non- product of the
Liquidating quotient obtained
Distributions by
and Liquidating dividing the
Distributions made aggregate
to number of Class C
each holder (since Common out-
November 27, standing by the
1996) is equal to aggregate number
the sum of the of shares of Class
initial price paid B
to Common and Class C
the Company for Common outstanding
such shares of Class times the aggregate
A of all Other Non-
Common plus the Liquidating
aggregate Distributions made
contributions pursuant to
to the capital subsections 2(i)
of the Company made and 2(ii) to the
with respect to such holders of Class B
Class A Common from Common from
November 27, 1996 November 27, 1996
up to and including
the date of such
distribution
Third, to the holders of Class B Common and Class C
Common (ratably among such holders)
Thereafter, to the holders of all classes of Common
Stock (ratably among such holders)
</TABLE>
- --------
(2) All distributions in any complete liquidation, dissolution, or winding up
of the Company are defined as "Liquidating Distributions."
61
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The Senior Notes were, and the Exchange Notes will be, issued under the
Indenture between the Company and Harris Trust and Savings Bank, as trustee
under the Indenture. For purposes of this Description of the Exchange Notes
only, the term "Company" refers to Focal Communications Corporation and does
not include its subsidiaries except where specifically noted and for purposes
of financial data determined on a consolidated basis.
The terms of the Exchange Notes will be identical in all material respects
to the Senior Notes, except that (i) the Exchange Notes will have been
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Senior Notes and (ii)
Holders of the Exchange Notes will not be entitled to certain rights of
Holders of Senior Notes under the Registration Agreement. The terms of the
Exchange Notes include those stated in the Indenture and those made a part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Exchange Notes will be subject to all such terms,
and Holders of the Exchange Notes are referred to the Indenture and the Trust
Indenture Act for a complete statement of such terms. A copy of the Indenture
is available from the Company on request. The statements and definitions of
terms under this caption relating to the Exchange Notes and the Indenture are
summaries and do not purport to be complete. Such summaries make use of
certain terms defined in the Indenture but not herein and are qualified in
their entirety by express reference to the Indenture. Certain capitalized
terms used herein and not otherwise defined below under "--Certain
Definitions" are defined in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes mature on February 15, 2008 (the "Stated Maturity"). The
Exchange Notes will be limited to an aggregate stated principal amount at
maturity of $270,000,000. The Senior Notes were issued at an issue price of
$555.6578 per $1,000 stated principal amount at maturity (the "Issue Price")
(55.56578% of the stated principal amount at maturity) to generate gross
proceeds to the Company of $150,027,606. The Exchange Notes are being issued
in substitution for the Senior Notes and are, therefore, deemed to have been
issued at the same discount. The Exchange Notes will bear interest on the
Issue Price at a rate of 12.125% per annum computed on a semiannual bond
equivalent basis from the Issue Date. In the period prior to February 15,
2003, interest at a rate of 12.125% per annum will accrue on the Issue Price
but will not be payable in cash ("Deferred Interest"). For United States
federal income tax purposes, a significant amount of original issue discount,
taxable as ordinary income, will be recognized by a holder of Exchange Notes
as such Deferred Interest accrues from the Issue Date. From February 15, 2003,
interest at a rate of 12.125% per annum ("Current Interest") on the stated
principal amount at maturity of the Exchange Notes will be payable in cash
semiannually on August 15 and February 15 of each year, beginning on August
15, 2003, to the Person in whose name the Exchange Note (or any predecessor
Exchange Note) is registered at the close of business on the preceding August
1, or February 1, as the case may be. The stated principal amount at maturity
is $1,000 per Exchange Note and represents the Issue Price plus Deferred
Interest accrued but unpaid up to February 15, 2003. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months. The Company
shall pay interest on overdue principal and premium, if any, of the Exchange
Notes and, to the extent lawful, interest on overdue installments of interest
on the Exchange Notes at a rate per annum equal to the interest rate payable
on the Exchange Notes.
The Exchange Notes will be issued without coupons and in fully registered
form only, in minimum denominations of $1,000 stated principal amount at
maturity and integral multiples thereof. The Exchange Notes will be issued
only against surrender of an equal stated principal amount at maturity of
Senior Notes.
The interest rate on the Exchange Notes is subject to increase if certain
conditions are not satisfied, all as further described under "Description of
the Exchange Notes--Exchange Offer; Registration Rights." All references
herein to Current Interest and Deferred Interest include any such Additional
Interest.
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<PAGE>
RANKING
The Exchange Notes will be senior unsecured obligations of the Company
ranking pari passu in right of payment with the Senior Notes and all other
existing and future senior Indebtedness of the Company, and will rank senior
in right of payment to all existing and future subordinated Indebtedness of
the Company, if any. Holders of secured Indebtedness of the Company, however,
will have claims that are prior to the claims of the Holders with respect to
the assets securing such other Indebtedness except to the extent the Notes are
equally and ratably secured by such assets. The Indenture will permit the
Company to incur secured Indebtedness. As of December 31, 1997, on a pro forma
basis after giving effect to the Offering and the application of the net
proceeds therefrom, the Company would have had no outstanding indebtedness
other than the Notes.
The operations of the Company are conducted through its subsidiaries and,
therefore, the Company is dependent upon cash flow from such entities to meet
its obligations. The Company's subsidiaries will have no direct obligation to
pay amounts due on the Exchange Notes and will not guarantee the Exchange
Notes. As a result, the Exchange Notes will be effectively subordinated to all
existing and future Indebtedness and other liabilities of the Company's
subsidiaries (including trade payables). See "Risk Factors--Holding Company
Structure; Effective Subordination of the Exchange Notes." Except to the
extent that loans made by the Company to its subsidiaries are recognized as
Indebtedness, any rights of the Company and its creditors, including the
Holders, to participate in the assets of any of the Company's subsidiaries
upon any liquidation or reorganization of any such subsidiaries will be
subject to the prior claims of such subsidiary's creditors (including trade
creditors).
BOOK-ENTRY SYSTEM
The Exchange Notes will initially be issued in the form of one or more
Global Notes (as defined in the Indenture) held in book-entry form. The
Exchange Notes will be deposited with the Trustee as custodian for DTC, and
DTC or its nominee will initially be the sole registered Holder of the
Exchange Notes for all purposes under the Indenture. Except as set forth
below, a Global Note may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC.
The Exchange Notes that are issued as described below under "--Certificated
Notes" will be issued in definitive form.
Upon the transfer of an Exchange Note in definitive form, such Exchange Note
will, unless the Global Note has previously been exchanged for Exchanges Notes
in definitive form, be exchanged for an interest in the Global Note
representing the principal amount of the Exchange Notes being transferred.
Upon the issuance of a Global Note, DTC or its nominee will credit, on its
internal system, the accounts of persons holding through it with the
respective principal amount of Exchange Notes of the individual beneficial
interests represented by such Global Note. Ownership of beneficial interests
in a Global Note will be limited to persons that have accounts with DTC
("participants") or persons that may hold interests through participants.
Ownership of beneficial interests by participants in a Global Note will be
shown on, and the transfer of that ownership interest will be effected only
through, records maintained by DTC or its nominee for such Global Note.
Ownership of beneficial interests in such Global Note by persons that hold
through participants will be shown on, and the transfer of that ownership
interest within such participant will be effected only through, records
maintained by such participant. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Note.
Payment of principal of, premium, if any, on and interest on Exchange Notes
represented by any such Global Note will be made to DTC or its nominee, as the
case may be, as the sole registered owner and the sole Holder of the Exchange
Notes represented thereby for all purposes under the Indenture. None of the
Company, the Trustee, or any agent of the Company will have any responsibility
or liability for (i) any aspect of DTC's reports relating to or payment made
on account of beneficial ownership interests in a Global Note representing
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<PAGE>
any Exchange Notes or for maintaining, supervising or reviewing any of DTC's
records relating to such beneficial ownership interests or (ii) any other
matter relating to the actions and practices of DTC or any of its
participants.
The Company has been advised by DTC that upon receipt of any payment of
principal of, premium, if any, on or interest on any Global Note, DTC will
immediately credit, on its book-entry registration and transfer system, the
accounts of participants with payments in amounts proportionate to their
respective beneficial interests in the principal or face amount of such Global
Note, as shown on the records of DTC. The Company expects that payments by
participants to owners of beneficial interests in a Global Note held through
such participants will be governed by standing instructions and customary
practices as is now the case with securities held for customer accounts
registered in "street name" and will be the sole responsibility of such
participants.
So long as DTC or its nominee is the registered owner or Holder of such
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or Holder of the Exchange Notes represented by such Global Note for
the purposes of receiving payment on the Exchange Notes, receiving notices and
for all other purposes under the Indenture and the Exchange Notes. Beneficial
interests in Exchange Notes will be evidenced only by, and transfers thereof
will be effected only through, records maintained by DTC and its participants.
Except as provided above, owners of beneficial interests in a Global Note will
not be entitled to and will not be considered the Holders of such Global Note
for any purposes under the Indenture. Accordingly, each person owning a
beneficial interest in a Global Note must rely on the procedures of DTC and,
if such person is not a participant, on the procedures of the participant
through which such person owns its interest, to exercise any rights of a
Holder under the Indenture. The Company understands that, under existing
industry practices, in the event that the Company requests any action of
Holders or that an owner of a beneficial interest in a Global Note desires to
give or take any action that a Holder is entitled to give or take under the
Indenture, DTC would authorize the participants holding the relevant
beneficial interest to give or take such action, and such participants would
authorize beneficial owners owning through such participants to give or take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
DTC has advised the Company that it will take any action permitted to be
taken by a Holder of Exchange Notes (including the presentation of Exchange
Notes for exchange as described below) only at the direction of one or more
participants to whose account with DTC interests in the Global Note are
credited and only in respect of such portion of the aggregate principal amount
of the Exchange Notes as to which such participant or participants has or have
given such direction.
DTC has advised the Company that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a "banking
organization" within the meaning of New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and
to facilitate the clearance and settlement of securities transactions among
its participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical
movement of securities certificates. DTC's participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations some of whom (and/or their representatives) own DTC.
Access to DTC's book-entry system is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but
the Company takes no responsibility for the accuracy thereof.
CERTIFICATED NOTES
The Exchange Notes represented by a Global Note are exchangeable for
certificated Exchange Notes only if: (i) DTC notifies the Company that it is
unwilling or unable to continue as a depository for such Global Note
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<PAGE>
or if at any time DTC ceases to be a clearing agency registered under the
Exchange Act, and a successor depository is not appointed by the Company
within 90 days; (ii) the Company executes and delivers to the Trustee a notice
that such Global Note shall be so transferable, registrable and exchangeable,
and such transfer shall be registrable; or (iii) there shall have occurred and
be continuing an Event of Default with respect to the Notes represented by
such Global Note. Any Global Note that is exchangeable for certificated
Exchange Notes pursuant to the preceding sentence will be transferred to, and
registered and exchanged for, certificated Exchange Notes in authorized
denominations and registered in such names as DTC or its nominee holding such
Global Note may direct. Subject to the foregoing, a Global Note is not
exchangeable, except for a Global Note of like denomination to be registered
in the name of DTC or its nominee. In the event that a Global Note becomes
exchangeable for certificated Exchange Notes: (i) certificated Exchange Notes
will be issued only in fully registered form in denominations of $1,000 or
integral multiples thereof; (ii) payment of principal, any repurchase price,
and interest on the certificated Exchange Notes will be payable, and the
transfer of the certificated Exchange Notes will be registrable, at the office
or agency of the Company maintained for such purposes; and (iii) no service
charge will be made for any issuance of the certificated Exchange Notes,
although the Company may require payment of a sum sufficient to cover any tax
or governmental charge imposed in connection therewith.
OPTIONAL REDEMPTION
The Exchange Notes will be redeemable, at the Company's option, in whole or
in part, at any time or from time to time, on or after February 15, 2003 and
prior to maturity, upon not less than 30 nor more than 60 days' prior notice
by first class mail to each Holder's last address as it appears in the
Register, at the redemption prices (expressed in percentages of stated
principal amount at maturity) set forth below, plus accrued and unpaid Current
Interest, if any, on the stated principal amount at maturity so redeemed to
the redemption date (subject to the right of Holders of record on the relevant
Record Date that is on or prior to the redemption date to receive Current
Interest, if any, due on an interest payment date), if redeemed during the 12-
month period commencing February 15, of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003..................................................... 106.063%
2004..................................................... 104.042
2005..................................................... 102.021
2006 and thereafter...................................... 100.000
</TABLE>
In addition, at any time and from time to time prior to February 15, 2001,
the Company may redeem in the aggregate up to 35% of the original aggregate
stated principal amount at maturity of the Exchange Notes with the proceeds
from one or more Public Equity Offerings following which there is a Public
Market at a redemption price (expressed as a percentage of Accreted Value on
the redemption date) of 112.125%, plus Additional Interest, if any; provided,
that at least 65% of the original aggregate stated principal amount at
maturity of the Notes remains outstanding after each such redemption.
If less than all of the Notes are to be redeemed, the Trustee shall select,
in such manner as it shall deem fair and appropriate, the particular Notes to
be redeemed or any portion thereof in stated principal amounts at maturity of
$1,000 or integral multiples thereof.
MANDATORY REDEMPTION
Except as set forth under "--Repurchase at the Option of Holders upon a
Change of Control" and "--Asset Sale," the Company is not required to make
redemption payments or sinking fund payments with respect to the Exchange
Notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder will have the right
to require the Company to repurchase all or any part (equal to $1,000 stated
principal amount at maturity or an integral multiple thereof) of
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<PAGE>
such Holder's Exchange Notes pursuant to the offer described below (the
"Change of Control Offer") at a purchase price (the "Change of Control
Purchase Price") equal to 101% of the Accreted Value thereof plus accrued and
unpaid Current Interest, if any, to but excluding any Change of Control
Payment Date (as defined below).
Within 30 days following any Change of Control, the Company or the Trustee
(at the expense of the Company) shall mail a notice to each Holder stating:
(i) that a Change of Control Offer is being made pursuant to the covenant
described under "--Repurchase at the Option of Holders upon a Change of
Control" and that all Exchange Notes timely tendered will be accepted for
payment; (ii) the Change of Control Purchase Price and the purchase date (the
"Change of Control Payment Date"), which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed; (iii) any Exchange
Notes or portions thereof not tendered or accepted for payment will continue
to accrue interest; (iv) that unless the Company defaults in the payment of
the Change of Control Purchase Price, all Exchange Notes or portions thereof
accepted for payment pursuant to the Change of Control Offer shall cease to
accrue interest from and after the Change of Control Payment Date; (v) Holders
electing to have any Exchange Notes or portions thereof purchased pursuant to
a Change of Control Offer will be required to surrender their Exchange Notes
to the Paying Agent at the address set forth in the notice prior to the close
of business on the third Business Day preceding the Change of Control Payment
Date; (vi) Holders will be entitled to withdraw their election if the Paying
Agent receives, not later than the close of business on the second Business
Day preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the stated
principal amount at maturity of Exchange Notes delivered for purchase, and a
statement that such Holder is withdrawing such Holder's election to have such
Exchange Notes or portions thereof purchased; (vii) Holders whose Exchange
Notes are being purchased only in part will be issued new Exchange Notes equal
in stated principal amount at maturity to the unpurchased portion of the
Exchange Note or Exchange Notes surrendered, which unpurchased portion must be
equal to $1,000 in stated principal amount at maturity or an integral multiple
thereof; and (viii) if after giving effect to such Change of Control Offer, at
least 95% of the original aggregate stated principal amount at maturity of the
Notes has been redeemed or repurchased, the Company shall have the right to
redeem the balance of the Notes at the Change of Control Redemption Purchase
Price.
On the Change of Control Payment Date, the Company will: (i) accept for
payment Exchange Notes or portions thereof properly tendered pursuant to the
Change of Control Offer; (ii) irrevocably deposit with the Paying Agent in
immediately available funds an amount equal to the Change of Control Purchase
Price in respect of all Exchange Notes or portions thereof so tendered; and
(iii) deliver, or cause to be delivered, to the Trustee the Exchange Notes so
accepted together with an Officers' Certificate listing the Exchange Notes or
portions thereof tendered to the Company and accepted for payment. The Paying
Agent shall promptly mail to each Holder of Exchange Notes so accepted,
payment in an amount equal to the Change of Control Purchase Price for such
Exchange Notes, and the Company shall execute and the Trustee shall promptly
authenticate and mail to each Holder a new Note equal in stated principal
amount at maturity to any unpurchased portion of the Exchange Notes
surrendered, if any; provided that each such new Note shall be in a stated
principal amount at maturity of $1,000 or an integral multiple thereof.
If after giving effect to a Change of Control Offer at least 95% of the
original aggregate stated principal amount at maturity of the Notes has been
repurchased, the Company shall have the right to redeem the balance of the
Notes at a redemption price (the "Change of Control Redemption Purchase
Price") equal to 101% of the Accreted Value thereof plus accrued and unpaid
Current Interest, if any, to but excluding the Change of Control Redemption
Date (as defined below) by giving the Holders notice of such redemption within
30 days following the Change of Control Payment Date with respect to such
Change of Control Offer (the "Change of Control Redemption"). Such notice
shall state that (i) a Change of Control Offer has been consummated and after
giving effect thereto at least 95% of the original aggregate stated principal
amount at maturity of the Notes has been redeemed or repurchased, (ii) the
Company is exercising its right to redeem the balance of the outstanding
Notes, (iii) the redemption date (the "Change of Control Redemption Date")
with respect to such Notes which shall be no earlier than 30 days nor later
than 60 days from the date such notice is mailed, (iv) unless the Company
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defaults in the payment of the Change of Control Redemption Purchase Price
with respect to such Notes, all such Notes will cease to accrue interest from
and after such Change of Control Redemption Date and (v) Holders are required
to surrender their Notes to the Paying Agent at the address set forth in the
notice prior to the close of business on the third Business Day preceding such
Change of Control Redemption Date.
On the Change of Control Redemption Date, the Company will: (i) accept for
payment Exchange Notes or portions thereof properly tendered pursuant to the
Change of Control Redemption; (ii) irrevocably deposit with the Paying Agent
in immediately available funds an amount equal to the applicable Change of
Control Redemption Purchase Price in respect of all Exchange Notes so
tendered; and (iii) deliver, or cause to be delivered, to the Trustee the
Exchange Notes so accepted together with an Officers' Certificate listing the
Exchange Notes tendered to the Paying Agent and accepted for payment. The
Paying Agent shall promptly mail to each Holder of Exchange Notes so accepted,
payment in an amount equal to the applicable Change of Control Redemption
Purchase Price for such Exchange Notes.
The existence of the Holders' right to require, subject to certain
conditions, the Company to repurchase Exchange Notes upon a Change of Control
may deter a third party from acquiring the Company in a transaction that
constitutes a Change of Control. Future indebtedness of the Company may
contain provisions which prohibit the purchase by the Company of any Exchange
Notes prior to their stated maturity, require obligations thereunder to be
repurchased upon a Change of Control or limit or prohibit the Company's
ability to comply with its obligations under the Indenture in the event of a
Change of Control. Further, the failure of the Company to pay the Change of
Control Purchase Price would constitute an Event of Default which in turn
could cause an event of default under such other indebtedness of the Company.
Moreover, due to the financial effect of such repurchase on the Company, the
exercise by the Holders of their right to require the Company to repurchase
the Exchange Notes could cause a default under such other indebtedness, even
if the Change of Control itself does not. If a Change of Control Offer is
made, there can be no assurance that the Company will have sufficient funds to
pay the Change of Control Purchase Price for all Exchange Notes tendered by
Holders seeking to accept the Change of Control Offer. In the event that a
Change of Control Offer occurs at a time when the Company does not have
sufficient available funds to pay the Change of Control Purchase Price for all
Exchange Notes tendered pursuant to such offer or at a time when the Company
is prohibited from purchasing the Notes (and the Company is unable either to
obtain the consent of the holders of the relevant indebtedness or to repay
such indebtedness), an Event of Default would occur under the Indenture.
One of the events that constitutes a Change of Control under the Indenture
is a sale, conveyance, transfer or lease of all or substantially all of the
Property of the Company. The Indenture will be governed by New York law, and
there is no established definition under New York law of "substantially all"
of the assets of a corporation. Accordingly, if the Company were to engage in
a transaction in which it disposed of less than all of its assets, a question
of interpretation could arise as to whether such disposition was of
"substantially all" of its assets and whether the Company was required to make
a Change of Control Offer.
To the extent such laws and regulations are applicable, the Company will
comply with the requirements of Section 14(e) under the Exchange Act and any
other securities laws and regulations in connection with the repurchase of
Exchange Notes pursuant to a Change of Control Offer or a Change of Control
Redemption.
Except as described herein with respect to a Change of Control, the
Indenture does not contain any other provisions that permit Holders to require
that the Company repurchase or redeem Exchange Notes in the event of a
takeover, recapitalization or similar restructuring.
ASSET SALE
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, consummate an Asset Sale unless (i) the Company or
such Restricted Subsidiary, as the case may be, receives consideration for
such Asset Sale at least equal to the Fair Market Value (as evidenced by a
Board Resolution delivered to the Trustee) of the Property or other assets
sold or otherwise disposed of, (ii) at least 75% of the consideration
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received by the Company or such Restricted Subsidiary for such Property or
other assets consists of (a) cash, readily-marketable cash equivalents or
Telecommunications Assets, (b) the assumption of Indebtedness of the Company
or such Restricted Subsidiary (other than Indebtedness that is subordinated by
its terms to the Notes) and the release of the Company or the Restricted
Subsidiary, as the case may be, from all liability on the Indebtedness so
assumed or (c) publicly-traded shares of Capital Stock (other than Preferred
Stock and Disqualified Stock) traded in the United States of any Person
engaged in a Telecommunications Business and (iii) the Company or any
Restricted Subsidiary, as the case may be, uses the Net Cash Proceeds from
such Asset Sale in the manner set forth in the next paragraph.
Within 360 days after any Asset Sale, the Company or any Restricted
Subsidiary, as the case may be, may at its option (i) reinvest an amount equal
to the Net Cash Proceeds (or any portion thereof) from such Asset Sale in
Telecommunications Assets or in Capital Stock of any Person engaged in the
Telecommunications Business and/or (ii) apply an amount equal to such Net Cash
Proceeds (or remaining Net Cash Proceeds) (a) to the permanent reduction of
senior secured Indebtedness of the Company (other than Indebtedness to a
Restricted Subsidiary unless the proceeds thereof are used by such Restricted
Subsidiary in a manner contemplated by (i) through (iii) of this sentence) or
other Indebtedness of the Company (other than Indebtedness to a Restricted
Subsidiary unless the proceeds thereof are used by such Restricted Subsidiary
in a manner contemplated by (i) through (iii) of this sentence) that is senior
to the Notes or to the permanent reduction of Indebtedness, or to the
redemption of Preferred Stock, of any Restricted Subsidiary (other than
Indebtedness to, or Preferred Stock owned by, the Company or another
Restricted Subsidiary unless the proceeds thereof are used by the Company or
such Restricted Subsidiary in a manner contemplated by (i) through (iii) of
this sentence) or (b) to the extent none of the Company or any of its
Restricted Subsidiaries has any Indebtedness outstanding of the type referred
to in the immediately preceding clause (a) (other than Indebtedness under
senior secured revolving credit facilities), to the repayment of outstanding
Indebtedness under any such revolving credit facility; provided, however, that
neither the Company nor any Restricted Subsidiary shall be required to
permanently reduce the commitments under any such revolving credit facility by
an amount equal to the outstanding Indebtedness thereunder so repaid or
prepaid and/or (iii) apply an amount equal to such Net Cash Proceeds (or
remaining Net Cash Proceeds) to prepay, whether in whole or in part,
Indebtedness that is pari passu with the Notes and that matures prior to
February 15, 2008. Any Net Cash Proceeds from any Asset Sale that are not used
within 360 days as described in (i) through (iii) above shall constitute
"Excess Proceeds."
If at any time the aggregate amount of Excess Proceeds calculated as of any
date exceeds $5 million, the Company shall, within 30 days of such date, make
an offer to purchase (an "Asset Sale Offer"), on a pro rata basis, (i) Notes
at a purchase price (the "Offer Purchase Price") in cash equal to 100% of the
Accreted Value thereof, plus accrued and unpaid Current Interest thereon, if
any, to but excluding the purchase date, in accordance with the procedures set
forth in the Indenture and (ii) to the extent required by the terms thereof,
any other Indebtedness of the Company that is pari passu with the Notes. The
pro rata amount of such Excess Proceeds to be used to purchase Notes shall be
in an amount equal to the aggregate amount of such Excess Proceeds multiplied
by the quotient obtained by dividing the Accreted Value of the outstanding
Notes by the sum of such Accreted Value and the principal amount of such other
Indebtedness. To the extent that the aggregate Offer Purchase Price of all
Notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds relating thereto (such shortfall constituting a "Deficiency"), the
Company may use such Deficiency for general corporate purposes and such
Deficiency shall not thereafter constitute Excess Proceeds for any purpose. In
the event the aggregate Accreted Value of the outstanding Notes tendered
pursuant to an Asset Sale Offer is in excess of the Excess Proceeds to be used
to purchase such Notes, such Excess Proceeds shall be applied to purchase such
Notes on a pro rata basis in stated principal amounts at maturity of $1,000 or
integral multiples thereof. Any amount remaining after giving effect to such
purchase shall constitute a Deficiency and shall be applied as provided in the
immediately preceding sentence. Upon the completion of the purchase of all
Notes tendered pursuant to an Asset Sale Offer, the amount of Excess Proceeds
shall be reset to zero.
To the extent such laws and regulations are applicable, the Company will
comply with the requirements of Section 14(e) under the Exchange Act and any
securities laws and regulations, in connection with the repurchase of Notes
pursuant to an Asset Sale Offer.
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CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the Indenture:
Limitation on Consolidated Indebtedness
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, Incur any Indebtedness after the Issue Date; provided
that the Company may Incur Indebtedness if, after giving effect to the
Incurrence of such Indebtedness and the receipt and application of the net
proceeds therefrom, the ratio of (a) the aggregate consolidated principal
amount of Indebtedness of the Company (including, in the case of the Notes,
only the Accreted Value thereof) outstanding as of the most recent available
quarterly or annual balance sheet, after giving pro forma effect to the
Incurrence of such Indebtedness and any other Indebtedness Incurred since such
balance sheet date and the receipt and application of the proceeds thereof, to
(b) Consolidated Cash Flow Available for Fixed Charges for the four full
fiscal quarters immediately preceding the Incurrence of such Indebtedness for
which consolidated financial statements of the Company are available,
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 four fiscal
quarters, would be less than 6.0 to 1.0 for such four-quarter period.
Notwithstanding the foregoing limitation, the Company and its Restricted
Subsidiaries may Incur the following Indebtedness:
(i) Senior Indebtedness in an aggregate principal amount outstanding at
any one time not to exceed $100,000,000, and any renewal, extension,
refinancing or refunding thereof in an amount which, together with any
principal amount remaining outstanding or available pursuant to this clause
(i) does not exceed the aggregate principal amount outstanding or available
under all such Senior Indebtedness immediately prior to such renewal,
extension, refinancing or refunding, less, in any case, any amount of such
Indebtedness permanently repaid under the covenant described above under
"--Asset Sale";
(ii) Indebtedness (including Guarantees) Incurred to finance the cost
(including the cost of design, development, acquisition, construction,
installation, improvement, transportation or integration) to acquire
equipment, inventory or network assets (including acquisitions by way of
any Capital Lease Obligation and acquisitions of the Capital Stock of a
Person that becomes a Restricted Subsidiary to the extent of the Fair
Market Value of the equipment, inventory or network assets so acquired) by
the Company or a Restricted Subsidiary after the Issue Date;
(iii) Indebtedness owed by the Company to any Significant Restricted
Subsidiary or Indebtedness owed by a Restricted Subsidiary to the Company
or to a Significant Restricted Subsidiary; provided that upon either (a)
the transfer or other disposition by a Significant Restricted Subsidiary or
the Company of any Indebtedness so permitted to a Person other than the
Company or a Significant Restricted Subsidiary or (b) the issuance (other
than directors' qualifying shares), sale, transfer or other disposition of
shares of Capital Stock (including by amalgamation, consolidation or
merger) of a Significant Restricted Subsidiary (such that upon such sale,
transfer or other disposition such Restricted Subsidiary would no longer
meet the definition of a Significant Restricted Subsidiary) to a Person
other than the Company or a Significant Restricted Subsidiary, the
provisions of this clause (iii) shall no longer be applicable to such
Indebtedness and such Indebtedness shall be deemed to have been Incurred at
the time of such transfer or other disposition;
(iv) Indebtedness Incurred to renew, extend, refinance or refund
(including successive extensions, renewals, refinancings and refundings),
whether in whole or in part (each, a "refinancing") (a) the Notes, (b)
Indebtedness outstanding at the date of the Indenture, (c) Indebtedness
Incurred pursuant to clause (ii) of this paragraph or (d) Indebtedness
Incurred pursuant to the first paragraph under the caption "--Limitation on
Consolidated Indebtedness," in an aggregate principal amount not to exceed
the aggregate principal amount of the Indebtedness so refinanced plus the
amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Indebtedness so refinanced or the
amount of any premium reasonably determined by the Company as necessary to
accomplish such refinancing by means of a tender offer or privately
negotiated repurchase, plus the expenses of the Company
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and its Restricted Subsidiaries incurred in connection with such
refinancing; provided that Indebtedness the proceeds of which are used to
refinance the Notes or Indebtedness which is pari passu with the Notes or
Indebtedness which is subordinate in right of payment to the Notes shall
only be permitted under this clause (iv) if (y) in the case of any
refinancing of the Notes or Indebtedness which is pari passu with the
Notes, the refinancing Indebtedness is made pari passu to the Notes or
constitutes Subordinated Indebtedness, and, in the case of any refinancing
of Subordinated Indebtedness, the refinancing Indebtedness constitutes
Subordinated Indebtedness and (z) in any case, the refinancing Indebtedness
by its terms, or by the terms of any agreement or instrument pursuant to
which such Indebtedness is issued, (1) does not provide for payments of
principal of such Indebtedness at stated maturity or by way of a sinking
fund applicable thereto or by way of any mandatory redemption, defeasance,
retirement or repurchase thereof by the Company (including any redemption,
retirement or repurchase which is contingent upon events or circumstances,
but excluding any retirement required by virtue of the acceleration of any
payment with respect to such Indebtedness upon any event of default
thereunder), in each case prior to the time the same are required by the
terms of the Indebtedness being refinanced and (2) does not permit
redemption or other retirement (including pursuant to an offer to purchase
made by the Company) of such Indebtedness at the option of the holder
thereof prior to the time the same are required by the terms of the
Indebtedness being refinanced, other than a redemption or other retirement
at the option of the holder of such Indebtedness (including pursuant to an
offer to purchase made by the Company) which is conditioned upon a change
of control pursuant to provisions substantially similar to those described
under "--Repurchase at the Option of Holders upon a Change of Control";
(v) Indebtedness (a) in respect of performance, surety or appeal bonds
provided in the ordinary course of business, (b) in respect of guarantees
or letters of credit Incurred in the ordinary course of business or (c)
arising from customary 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 the case of this clause (c) Incurred in connection with the disposition
of any business, assets or Restricted Subsidiary (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);
(vi) Indebtedness outstanding under the Notes and the Indenture;
(vii) Subordinated Indebtedness in an aggregate principal amount
outstanding at any one time not to exceed $100,000,000, less, in any case,
any amount of such Indebtedness permanently repaid as provided under the
covenant described above under "--Asset Sale";
(viii) Indebtedness of the Company not to exceed, at any one time
outstanding, two times (a) the Net Cash Proceeds received by the Company
after the Issue Date as a capital contribution or from the issuance and
sale of its Capital Stock (other than Disqualified Stock) to a Person that
is not a Subsidiary of the Company, to the extent (x) such capital
contribution or Net Cash Proceeds have not been used pursuant to clause
(iii)(c) of the first paragraph, or clause (ii) or (vi) of the second
paragraph, of the "--Limitation on Restricted Payments" covenant described
below to make a Restricted Payment and (y) if such capital contribution or
Net Cash Proceeds are used to consummate a transaction pursuant to which
the Company Incurs Acquired Indebtedness, the amount of such Net Cash
Proceed exceeds one-half of the amount of Acquired Indebtedness so Incurred
and (b) 80% of the fair market value of property (other than cash and cash
equivalents) received by the Company after the Issue Date from the sale of
its Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of the Company, to the extent (x) such capital contribution or
Net Cash Proceeds have not been used pursuant to clause (iii)(c) of the
first paragraph, or clause (ii) or (vi) of the second paragraph, of the "--
Limitation on Restricted Payments" covenant described below to make a
Restricted Payment and (y) if such capital contribution or Capital Stock is
used to consummate a transaction pursuant to which the Company Incurs
Acquired Indebtedness, 80% of the fair market value of the property
received exceeds one-half of the amount of Acquired Indebtedness so
Incurred provided, in the case of each of clause (a) and (b), that any such
Indebtedness Incurred pursuant to this clause (viii) does not mature prior
to the Stated Maturity of the Notes and has an Average Life longer than the
Notes;
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(ix) Acquired Indebtedness;
(x) Indebtedness of the Company to the extent the net proceeds thereof
are promptly (a) used to repurchase Notes tendered as a result of a Change
of Control Offer or (b) deposited to defease the Notes as provided under
the covenant described below under "--Satisfaction and Discharge of the
Indenture, Defeasance"; and
(xi) Indebtedness not otherwise permitted to be Incurred pursuant to
clauses (i) through (x) above, which, together with any other outstanding
Indebtedness Incurred pursuant to this clause (xi), will not exceed
$5,000,000 aggregate principal amount at any one time outstanding.
For purposes of determining any particular amount of Indebtedness under this
"--Limitation on Consolidated Indebtedness" covenant, (i) 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 and (ii) any Liens granted pursuant to the equal and ratable
provisions referred to in the "--Limitation on Liens" covenant described below
shall not be treated as Indebtedness. For purposes of determining compliance
with this "--Limitation on Consolidated 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, shall classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses;
provided, however, that the Company may allocate portions of such Indebtedness
between or among such clauses.
Limitation on Restricted Payments
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, make any Restricted Payment unless, at the time of
and after giving effect to such proposed Restricted Payment (i) no Default or
Event of Default shall have occurred and be continuing or shall occur as a
consequence thereof, (ii) after giving effect, on a pro forma basis, to such
Restricted Payment and the incurrence of any Indebtedness the net proceeds of
which are used to finance such Restricted Payment, the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of "--
Limitation on Consolidated Indebtedness" and (iii) after giving effect to such
Restricted Payment on a pro forma basis, the aggregate amount expended (the
amount so expended, if other than cash, to be determined in good faith by a
majority of the disinterested members of the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) or
declared for all Restricted Payments after the Issue Date does not exceed the
sum of (a) 50% of the Consolidated Net Income of the Company (or, if
Consolidated Net Income shall be a deficit, minus 100% of such deficit) for
the period (taken as one accounting period) beginning on the last day of the
fiscal quarter immediately preceding the Issue Date and ending on the last day
of the fiscal quarter for which the Company's financial statements are
available immediately preceding the date of such Restricted Payment, plus (b)
100% of the net reduction in Investments, subsequent to the Issue Date, in any
Person, resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of Property (but only to
the extent such interest, dividends, repayments or other transfers of Property
are not included in the calculation of Consolidated Net Income), in each case
to the Company or any Restricted Subsidiary from any Person (including,
without limitation, from Unrestricted Subsidiaries) or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of "Investment"), not to exceed in the case of any
Person the amount of Investments previously made subsequent to the Issue Date
by the Company or any Restricted Subsidiary in such Person and which was
treated as a Restricted Payment; plus (c) the aggregate Net Cash Proceeds
received after the Issue Date (x) as capital contributions to the Company, (y)
from the issuance (other than to a Subsidiary of the Company) of Capital Stock
(other than Disqualified Stock) of the Company and warrants, rights or options
on Capital Stock (other than Disqualified Stock) of the Company, or (z) from
the conversion of Indebtedness of the Company into Capital Stock (other than
Disqualified Stock and other than by a Subsidiary of the Company) of the
Company after the date of the Indenture, except, in the case of this clause
(c), to the extent such Net Cash Proceeds are used to Incur Indebtedness
pursuant to clause (viii) under the covenant described above under "--
Limitation on Consolidated Indebtedness" or to make Restricted Payments
pursuant to clauses (ii) or (vi) of the second paragraph of this "Limitation
on Restricted Payments" covenant.
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The foregoing limitations shall not prevent the Company from (i) paying a
dividend on its Capital Stock at any time within 60 days after the declaration
thereof if, on the declaration date, the Company could have paid such dividend
in compliance with the preceding paragraph, (ii) retiring (a) any Capital
Stock of the Company or (b) any Indebtedness of the Company that is
subordinate in right of payment to the Notes, in exchange for, or out of the
proceeds of the substantially concurrent sale of Qualified Stock of the
Company, (iii) retiring any Indebtedness of the Company subordinated in right
of payment to the Notes in exchange for, or out of the proceeds of, the
substantially concurrent incurrence of Indebtedness of the Company (other than
Indebtedness to a Subsidiary of the Company), provided that such new
Indebtedness (a) is subordinated in right of payment to the Notes at least to
the same extent as the Indebtedness being refinanced, (b) has an Average Life
longer than the Notes, and (c) has no scheduled principal payments due in any
amount earlier than the equivalent amount of principal under the Indebtedness
so retired, (iv) retiring any Capital Stock or options to acquire Capital
Stock of the Company held by any directors, officers or employees of the
Company or any Restricted Subsidiary upon the termination of such Person's
tenure as a director or employee, as the case may be; provided that the
aggregate price paid for all such retired Capital Stock or options shall not
exceed $5,000,000 in the aggregate, (v) retiring any Capital Stock of the
Company to the extent necessary (as determined in good faith by a majority of
the disinterested members of the Board of Directors, whose determination shall
be conclusive and evidenced by a Board Resolution) to prevent the loss, or to
secure the renewal or reinstatement, of any license or franchise held by the
Company or any Restricted Subsidiary from any governmental agency, (vi)
Investments in any Person the primary business of which is related, ancillary
or complimentary to the business of the Company and its Restricted
Subsidiaries on the date of such Investments; provided that the aggregate
amount of Investments made pursuant to this clause (vi) does not exceed the
sum of (a) $20,000,000 and (b) the amount of Net Cash Proceeds received by the
Company after the Issue Date as a capital contribution or from the sale of its
Capital Stock (other than Disqualified Stock) to a Person who is not a
Subsidiary of the Company, except to the extent such Net Cash Proceeds are
used to Incur Indebtedness pursuant to clause (viii) under the covenant
described above under
"--Limitation on Consolidated Indebtedness" or to make Restricted Payments
pursuant to clause (iii)(c) of the first paragraph, or clause (ii) or this
clause (vi) of this paragraph, of this "Limitation on Restricted Payments"
covenant, plus (c) the net reduction in Investments made pursuant to this
clause (vi) resulting from distributions on or repayments of such Investments
or from the Net Cash Proceeds from the sale of any such Investment (except in
each case to the extent any such payment or proceeds are included in the
calculation of Consolidated Net Income) or from such Person becoming a
Restricted Subsidiary (valued in each case as provided in the definition of
"Investment"), provided that the net reduction in any Investment shall not
exceed the amount of such Investment, (vii) the declaration or payment of
dividends on the Common Stock of the Company (so long as such dividends are
paid to the holders of all classes of Common Stock) following a Public Equity
Offering of such Common Stock of up to 6% per annum of the Net Cash Proceeds
received by the Company in such Public Equity Offering, (viii) payments or
distributions to dissenting stockholders pursuant to applicable law to the
extent required 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 (ix) making Investments not otherwise
permitted in an aggregate amount not to exceed $2,000,000 at any one time
outstanding.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (ii) and (iii) of the foregoing
paragraph shall not be included as Restricted Payments.
Not later than the date of making any Restricted Payment (including any
Restricted Payment permitted to be made pursuant to the two previous
paragraphs), the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the required calculations were computed, which calculations may be
based upon the Company's latest available financial statements.
Limitation on Liens
The Company may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, Incur or suffer to exist any Lien on or with respect
to any Property or other assets or interests therein now owned or
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hereafter acquired or any income or profits therefrom or any interest thereon
to secure any Indebtedness without making, or causing such Restricted
Subsidiary to make, effective provision for securing the Notes equally and
ratably with such Indebtedness, provided that no Indebtedness of the Company
which is subordinate in right of payment to the Notes may be so secured.
The foregoing restrictions shall not apply to: (i) Liens existing on the
date of the Indenture and securing Indebtedness outstanding on the date of the
Indenture, (ii) Liens Incurred on or after the Issue Date pursuant to clause
(i) of the second paragraph under the covenant "--Limitation on Consolidated
Indebtedness", (iii) Liens in favor of the Company or any Significant
Restricted Subsidiary, (iv) Liens on Property of the Company or a Restricted
Subsidiary acquired, constructed or constituting improvements made after the
Issue Date to secure Indebtedness incurred pursuant to clause (ii) of the
second paragraph under "--Limitation on Consolidated Indebtedness" which is
otherwise permitted under the Indenture, provided that (a) the principal
amount of any Indebtedness secured by any such Lien does not exceed 100% of
such purchase price or cost of construction or improvement of the Property
subject to such Lien, (b) such Lien attaches to such Property prior to, at the
time of, or within 180 days after the engineering, acquisition, installation,
development, improvement, completion of construction or commencement of
operation of such Property and (c) such Lien does not extend to or cover any
Property other than the specific item of Property (or portion thereof)
acquired, engineered, constructed, installed, developed or constituting the
improvements made with the proceeds of such Indebtedness, (v) Liens to secure
Acquired Indebtedness, provided that (a) such Lien attaches to the acquired
asset prior to the time of the acquisition of such asset and (b) such Lien
does not extend to or cover any other Property, (vi) Liens to secure
Indebtedness Incurred to extend, renew, refinance or refund (or successive
extensions, renewals, refinancings or refundings), in whole or in part,
Indebtedness secured by any Lien referred to in the foregoing clauses (i),
(ii), (iv) and (v) so long as such Lien does not extend to any other Property
and the principal amount of Indebtedness so secured is not increased except as
otherwise permitted under clause (iv) of the second paragraph of
"--Limitation on Consolidated Indebtedness," (vii) Liens not otherwise
permitted by the foregoing clauses (i) through (vi) in an aggregate amount not
to exceed 5% of the Company's Consolidated Tangible Assets as of the date on
which any such Lien arises, (viii) Liens granted after the Issue Date pursuant
to the immediately preceding paragraph to secure the Notes and (ix) Permitted
Liens.
Limitation on Sale and Leaseback Transactions
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into, assume, Guarantee or otherwise become
liable with respect to any Sale and Leaseback Transaction (other than a Sale
and Leaseback Transaction between the Company or a Restricted Subsidiary on
the one hand and a Restricted Subsidiary or the Company on the other hand),
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Sale and Leaseback Transaction at
least equal to the Fair Market Value (as evidenced by a Board Resolution) of
the Property subject to such transaction, (ii) the Attributable Indebtedness
of the Company or such Restricted Subsidiary with respect thereto is included
as Indebtedness and would be permitted under the covenant described under "--
Limitation on Consolidated Indebtedness," (iii) the Company or such Restricted
Subsidiary would be permitted to create a Lien on such Property without
securing the Notes by the covenant described under "--Limitation on Liens" and
(iv) the Net Cash Proceeds from such transaction are applied in accordance
with the covenant described under "--Asset Sale."
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective, or enter
into, any encumbrance or restriction (other than pursuant to law or
regulation) on the ability of any Restricted Subsidiary (i) to pay dividends
or make any other distributions in respect of its Capital Stock or pay any
Indebtedness or other obligation owed to the Company or any Restricted
Subsidiary, (ii) to make loans or advances to the Company or any Restricted
Subsidiary or (iii) to transfer any of its Property to the Company or any
other Restricted Subsidiary, except: (a) any encumbrance or restriction
existing as of the Issue Date, (b) any encumbrance or restriction pursuant to
an agreement relating to an
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acquisition of Property, so long as the encumbrances or restrictions in any
such agreement relate solely to the Property so acquired, (c) any encumbrance
or restriction relating to any Indebtedness of any Restricted Subsidiary
existing on the date on which such Restricted Subsidiary is acquired by the
Company or another Restricted Subsidiary (other than any such Indebtedness
Incurred by such Restricted Subsidiary in connection with or in anticipation
of such acquisition), (d) any encumbrance or restriction pursuant to an
agreement effecting a permitted refinancing of Indebtedness issued pursuant to
an agreement referred to in the foregoing clauses (a) through (c), so long as
the encumbrances and restrictions contained in any such refinancing agreement
are not materially more restrictive than the encumbrances and restrictions
contained in such agreements, (e) in the case of clause (iii) above only,
customary provisions (x) that restrict the subletting, assignment or transfer
of any Property or other asset that is a lease, license, conveyance or
contract or similar Property or other asset, (y) existing by virtue of any
transfer of, agreement to transfer, option or right with respect to, or Lien
on, any Property or other assets of the Company or any Restricted Subsidiary
not otherwise prohibited by the Indenture or (z) 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
other assets of the Company or any Restricted Subsidiary in any manner
material to the Company or any Restricted Subsidiary, (f) in the case of
clause (iii) above only, restrictions contained in any security agreement
(including a Capital Lease Obligation) securing Indebtedness of the Company or
a Restricted Subsidiary otherwise permitted under the Indenture, but only to
the extent such restrictions restrict the transfer of the Property subject to
such security agreement, (g) any encumbrance or restriction pursuant to Senior
Indebtedness which is permitted to be outstanding under clause (i) of the
second paragraph of "--Limitation on Consolidated Indebtedness," (h) in the
case of clause (iii) only, any encumbrance or restriction pursuant to an
agreement for Indebtedness that is permitted to be outstanding under clause
(ii) of the second paragraph of "--Limitation on Consolidated Indebtedness,"
and (i) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary, provided that the consummation of such transaction
would not result in a Default, that such restriction terminates if such
transaction is not consummated and that the consummation or abandonment of
such transaction occurs within one year of the date such agreement was entered
into.
The foregoing limitations shall not prevent the Company or any Restricted
Subsidiary from (i) creating, incurring, assuming or suffering to exist any
Liens otherwise permitted under the "--Limitation on Liens" covenant or (ii)
restricting the sale or other disposition of Property or other assets of the
Company or any of its Restricted Subsidiaries that secure Indebtedness of the
Company or any of its Restricted Subsidiaries otherwise permitted under "--
Limitation on Consolidated Indebtedness."
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of directors' qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been
permitted to be made under the covenant described above under "--Limitation on
Restricted Payments" if made on the date of such issuance or sale; or (iv)
issuances or sales of Common Stock (other than Disqualified Stock) of a
Restricted Subsidiary, provided that the Company or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, of any such sale in accordance with the
covenant described above under "--Asset Sale."
Transactions with Affiliates
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, sell, lease, transfer, or otherwise dispose of,
any of its Properties or assets to, or purchase any Property or other assets
from, or enter into any contract, agreement, understanding, loan, advance or
Guarantee with, or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (i) such Affiliate Transaction or series
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of related Affiliate Transactions is on terms that are no less favorable to
the Company or such Restricted Subsidiary than those that could have been
obtained in a comparable arm's-length transaction by the Company or such
Restricted Subsidiary with a Person that is not an Affiliate (or, in the event
that there are no comparable transactions involving Persons who are not
Affiliates of the Company or the relevant Restricted Subsidiary to apply for
comparative purposes, is otherwise on terms that, taken as a whole, the
Company has determined to be fair to the Company or the relevant Restricted
Subsidiary) and (ii) the Company delivers to the Trustee (a) with respect to
any Affiliate Transaction involving aggregate payments or, in the case of
assets or Property, a Fair Market Value in excess of $1,000,000, a certificate
of the chief executive, operating or financial officer of the Company
evidencing such officer's determination that such Affiliate Transaction or
series of related Affiliate Transactions complies with clause (i) above and is
in the best interests of the Company or such Restricted Subsidiary, (b) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate payments or, in the case of assets or
Property, a Fair Market Value in excess of $5,000,000, a Board Resolution
certifying that such Affiliate Transaction or series of related Affiliate
Transactions complies with clause (i) above and that such Affiliate
Transaction or series of related Affiliate Transactions has been approved by a
majority of the disinterested members of the Board of Directors who have
determined that such Affiliate Transaction or series of related Affiliate
Transactions is in the best interest of the Company or such Restricted
Subsidiary and (c) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate payments or, in the case of
any assets or Property, a Fair Market Value in excess of $10,000,000, a
written opinion stating that the transaction complies with clause (i) above
from a financial point of view from an investment banking firm of national
standing in the United States which, in the good faith judgment of the Board
of Directors, is independent with respect to the Company and its Subsidiaries
and qualified to perform such task; provided that the following shall not be
deemed Affiliate Transactions: (1) any employment, noncompetition,
confidentiality or similar agreement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business, (2) any agreement
or arrangement with respect to the compensation of a director or officer of
the Company or any Restricted Subsidiary approved by a majority of the
disinterested members of the Board of Directors, (3) transactions permitted by
the covenant described under "--Limitation on Restricted Payments," (4)
transactions pursuant to any agreement or arrangement existing on the Issue
Date, including any renewal, replacement, extension, amendment or other
modification thereof, provided such modifications are not materially more
adverse to the Company or the Restricted Subsidiaries, (5) issuances of
Capital Stock of the Company to any Affiliates and (6) the sale of
telecommunications services to any Affiliate on an arm's length basis which is
undertaken in the ordinary course of the Company's business.
Restricted and Unrestricted Subsidiaries
(i) The Company may designate a Subsidiary (including a newly formed or
newly acquired Subsidiary) of the Company or any of its Restricted
Subsidiaries as an Unrestricted Subsidiary if such Subsidiary does not have
any obligations which, if in default, would result in a cross default on
Indebtedness of the Company or a Restricted Subsidiary (other than
Indebtedness to the Company or a Significant Restricted Subsidiary), and
(a) such Subsidiary has total assets of $1,000 or less, (b) such Subsidiary
has assets of more than $1,000 and an Investment in such Subsidiary in an
amount equal to the Fair Market Value of such Subsidiary would then be
permitted under the first paragraph of "--Limitation on Restricted
Payments" or (c) such designation is effective immediately upon such Person
becoming a Subsidiary. Unless so designated as an Unrestricted Subsidiary,
any Person that becomes a Subsidiary of the Company shall be classified as
a Restricted Subsidiary thereof.
(ii) The Company may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that (a) no Default or Event of Default
shall have occurred and be continuing at the time of or after giving effect
to such designation and (b) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately after such designation would, if
Incurred at such time, have been permitted to be Incurred (and shall be
deemed to have been Incurred) for all purposes of the Indenture.
(iii) The designation of a Subsidiary as an Unrestricted Subsidiary or
the designation of an Unrestricted Subsidiary as a Restricted Subsidiary in
compliance with clause (ii) shall be made by the Board of Directors
pursuant to a Board Resolution and shall be effective as of the date
specified in such Board Resolution.
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Reports
The Company has agreed that, for so long as any Notes remain outstanding, it
will furnish to the Holders, to securities analysts and to prospective
investors, upon their request, the information required to be delivered
pursuant to Rule 144A(d)(4) under the Securities Act. The Company will file
with the Trustee within 15 days after it files them with the Commission copies
of the annual reports on Form 10-K and the information, documents, and other
reports that the Company is required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act as well as quarterly reports ("SEC
Reports"). In the event the Company shall cease to be required to file SEC
Reports pursuant to either of such sections of the Exchange Act, the Company
will nevertheless continue to file such reports with the Commission (unless
the Commission will not accept such a filing) and the Trustee. The Company
will furnish copies of the SEC Reports to the Holders of Notes at the time the
Company is required to file the same with the Trustee.
AMALGAMATION, CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The Company will not, in any transaction or series of related transactions,
amalgamate or consolidate with, or merge with or into, any other Person (other
than a merger of a Restricted Subsidiary into the Company in which the Company
is the surviving corporation), or sell, convey, assign, transfer, lease or
otherwise dispose of all or substantially all of the Property and assets of
the Company and its Restricted Subsidiaries taken as a whole to any other
Person, unless:
(i) either (a) the Company shall be the surviving corporation or (b) the
corporation (if other than the Company) formed by such amalgamation or
consolidation or into which the Company is merged, or the Person which
acquires, by sale, assignment, conveyance, transfer, lease or disposition,
all or substantially all of the Property and assets of the Company and the
Restricted Subsidiaries taken as a whole (such corporation or Person, the
"Surviving Entity"), shall be a corporation organized and validly existing
under the laws of the United States of America, any political subdivision
thereof, any state thereof or the District of Columbia and shall expressly
assume, by a supplemental indenture, the due and punctual payment of the
principal of (and premium, if any) and interest on all the Notes and the
performance of the Company's covenants and obligations under the Indenture;
(ii) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred in connection with or in respect of such
transaction or series of related transactions), no Default shall have
occurred and be continuing;
(iii) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred in connection with or in respect of, and any
Indebtedness to be repaid in connection with or as a result of, such
transaction or series of related transactions), the Company (or the
Surviving Entity, if the Company is not the surviving corporation) (A)
shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction
and (B) would be permitted to Incur at least $1 of additional Indebtedness
pursuant to the first paragraph of the covenant "--Limitation on
Consolidated Indebtedness"; provided that this clause (iii)(B) shall not
apply to (x) a consolidation, merger or sale of all (but not less than all)
of the assets of the Company if all Liens and Indebtedness of the Company
or the Surviving Entity, as the case may be, and its Restricted
Subsidiaries outstanding immediately after such transaction would, if
Incurred at such time, have been permitted to be Incurred (and all such
Liens and Indebtedness, other than Liens and Indebtedness of the Company
and its Restricted Subsidiaries outstanding immediately prior to the
transaction, shall be deemed to have been Incurred for all purposes of the
Indenture) or (y) a consolidation, merger or sale of all or substantially
all of the assets of the Company if immediately after giving effect to such
transaction or series of related transactions on a pro forma basis
(including, without limitation, any Indebtedness incurred in connection
with or in respect of, and any Indebtedness to be repaid in connection with
or as a result of, such transaction or series of related transactions) the
Company's (or the Surviving Entity's) leverage ratio computed pursuant to
the first paragraph under "--Limitation on Consolidated Indebtedness" would
be equal to or less than the leverage ratio of the Company immediately
prior to such transaction.
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(iv) if, as a result of any such transaction, Property of the Company
would become subject to a Lien prohibited by the provisions of the
Indenture described under "--Limitation on Liens" above, the Company or the
Surviving Entity to the Company shall have secured the Notes as required
thereby; and
(v) the Company delivers to the Trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with
clause (iii)) and 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.
EVENTS OF DEFAULT
Each of the following is an "Event of Default" under the Indenture:
(i) default in the payment of interest (including Additional Interest, if
any) on any Note when the same becomes due and payable, and the continuance
of such default for a period of 30 days;
(ii) default in the payment of the principal of (or premium, if any, on)
any Note at its maturity, upon optional redemption, including a Change in
Control Redemption Offer, required repurchase (including pursuant to a
Change of Control Offer or an Asset Sale Offer) or otherwise or the failure
to make an offer to purchase any Note as required under the Indenture;
(iii) default in the performance, or breach, of any covenant or warranty
of the Company in the Indenture (other than a covenant or warranty
addressed in clauses (i) or (ii) above) and continuance of such Default or
breach for a period of 60 days after written notice thereof has been given
to the Company by the Trustee or to the Company and the Trustee by Holders
of at least 25% of the aggregate stated principal amount at maturity of the
outstanding Notes;
(iv) (a) any principal payment in excess of $1,000,000 with respect to
Indebtedness of the Company or any Restricted Subsidiary is not paid when
due within the applicable grace period, if any, or (b) Indebtedness of the
Company or any Restricted Subsidiary is accelerated by the Holders thereof
and the principal amount of such accelerated Indebtedness exceeds
$5,000,000;
(v) the entry by a court of competent jurisdiction of one or more final
judgments against the Company or any Restricted Subsidiary in an uninsured
or unindemnified aggregate amount in excess of $10,000,000 which is not
discharged, waived, appealed, stayed, bonded or satisfied for a period of
60 consecutive days; or
(vi) certain events of bankruptcy, insolvency or reorganization affecting
the Company or any Restricted Subsidiary shall occur.
If any Event of Default (other than an Event of Default specified in clause
(vi) above) occurs and is continuing, then and in every such case either the
Trustee or the Holders of not less than 25% of the aggregate stated principal
amount at maturity of the outstanding Notes may declare the Accreted Value of,
and any accrued and unpaid Current Interest on, all Notes then outstanding to
be immediately due and payable by a notice in writing to the Company (and to
the Trustee if given by Holders), and upon any such declaration, such Accreted
Value and any accrued and unpaid Current Interest thereon will become and be
immediately due and payable. If any Event of Default specified in clause (vi)
above occurs, the Accreted Value of, and any accrued and unpaid Current
Interest on, the Notes then outstanding shall become immediately due and
payable without any declaration or other act on the part of either the Trustee
or any Holder. In the event of a declaration of acceleration because an Event
of Default set forth in clause (iv) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if
the event of default triggering such Event of Default pursuant to clause (iv)
shall be remedied, or cured or waived by the holders of the relevant
Indebtedness, within 60 days after such Event of Default.
The Company will be required to deliver to the Trustee on or before a date
not more than 90 days after the end of each fiscal year a statement regarding
compliance with the Indenture. In addition, the Company is required within 30
days after becoming aware of any Default or Event of Default, to deliver to
the Trustee a statement
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describing such Default or Event of Default, its status and what action the
Company is taking or proposes to take with respect thereto. The Trustee may
withhold from Holders notice of any continuing Default or Event of Default
(other than relating to the payment of principal or interest) if the Trustee
determines that withholding such notice is in the Holders' interest.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company and the Trustee may, at any time and from time to time, without
notice to or consent of any Holder of Notes, enter into one or more indentures
supplemental to the Indenture (i) to evidence the succession of another Person
to the Company in accordance with the terms of the Indenture and the
assumption by such successor of the covenants of the Company in the Indenture
and the Notes, (ii) to add to the covenants of the Company, for the benefit of
the Holders, or to surrender any right or power conferred upon the Company by
the Indenture, (iii) to add any additional Events of Default, (iv) to evidence
and provide for the acceptance of appointment under the Indenture of a
successor Trustee, (v) to secure the Notes, (vi) to cure any ambiguity in the
Indenture, to correct or supplement any provision in the Indenture which may
be inconsistent with any other provision therein or to add any other
provisions with respect to matters or questions arising under the Indenture;
provided such actions shall not adversely affect the interests of the Holders
in any material respect or (vii) to comply with the requirements of the
Commission or any other regulatory authority in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act.
With the consent of the Holders of not less than a majority in stated
principal amount at maturity of the outstanding Notes, the Company and the
Trustee may enter into one or more indentures supplemental to the Indenture
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Indenture or modifying in any manner
the rights of the Holders; provided that no such supplemental indenture shall,
without the consent of the Holder of each outstanding Note: (i) change the
Stated Maturity of the principal of, or the due date of any installment of
interest on, any Note, or alter the redemption provisions thereof, or reduce
the principal amount thereof (or premium, if any), or the interest thereon
that would be due and payable upon Maturity thereof, or change the place of
payment where, or the coin or currency in which, any Note or any premium or
interest thereon is payable, (ii) reduce the percentage in stated principal
amount at maturity of the outstanding Notes, (iii) subordinate in right of
payment, or otherwise subordinate, the Notes to any other Indebtedness, (iv)
impair the right to institute suit for the enforcement of any payment with
respect to the Notes, (v) make any change that would result in the Company
being required to make any deduction or withholding from any payment made
under or with respect to the Notes or modify any provision of this paragraph
(except to increase any percentage set forth herein).
The Holders of not less than a majority in stated principal amount at
maturity of the outstanding Notes may, on behalf of the Holders of all the
Notes, waive any past Default under the Indenture and its consequences, except
a Default (i) in the payment of any amount on any Note, or (ii) in respect of
a covenant or provision hereof which under the proviso to the prior paragraph
cannot be modified or amended without the consent of the Holder of each
outstanding Note affected.
Satisfaction and Discharge of the Indenture, Defeasance
The Company may terminate its obligations under the Indenture when (i)
either (a) all outstanding Notes have been delivered to the Trustee for
cancellation or (b) all such Notes not theretofore delivered to the Trustee
for cancellation have become due and payable, will become due and payable
within one year or are to be called for redemption within one year under
irrevocable arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name and at the expense of the Company,
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 (or premium, if any, on) and interest to the
date of deposit or maturity or date of redemption, (ii) the Company has paid
or caused to be paid all sums payable by the Company under the Indenture and
(iii) the Company has delivered an Officers' Certificate and an Opinion of
Counsel relating to compliance with the conditions set forth in the Indenture.
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The Company, at its election, shall (i) be deemed to have paid and
discharged its debt on the Notes and the Indenture shall cease to be of
further effect as to all outstanding Notes (except as to (a) rights of
registration of transfer, substitution and exchange of Notes and the Company's
right of optional redemption, (b) rights of Holders to receive payments of
principal of, premium, if any, and interest on the Notes (but not the Change
of Control Purchase Price or the Offer Purchase Price), (c) the rights,
obligations and immunities of the Trustee under the Indenture and (d) certain
other specified provisions in the Indenture) and (ii) cease to be under any
obligation to comply with certain restrictive covenants including those
described under "--Certain Covenants," after the irrevocable deposit by the
Company with the Trustee, in trust for the benefit of the Holders, at any time
prior to the Maturity of the Notes, of (a) United States dollars in an amount,
(b) U.S. Government Obligations which through the payment of interest and
principal will provide, not later than one day before the due date of payment
in respect of the Notes, money in an amount, or (c) a combination thereof,
sufficient to pay and discharge the principal of, and interest on, the Notes
then outstanding on the dates on which any such payments are due in accordance
with the terms of the Indenture and of the Notes. Such defeasance or covenant
defeasance shall be deemed to occur only if certain conditions are satisfied,
including, among other things, delivery by the Company to the Trustee of an
opinion of independent counsel, reasonably acceptable to the Trustee to the
effect that (i) such deposit, defeasance and discharge will not be deemed, or
result in, a taxable event for U.S. federal income tax purposes with respect
to the Holders (and, in the case of defeasance only, such opinion of counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable U.S. federal income tax law), and (ii) the Company's deposit will
not result in the trust created thereby or the Trustee being subject to
regulation under the Investment Company Act of 1940, as amended.
THE TRUSTEE
Harris Trust and Savings Bank will be the Trustee under the Indenture and
its current address is 111 West Monroe Street, Chicago, Illinois 60690-0755.
The Holders of not less than a majority in stated principal amount at
maturity 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. Except during the
continuance of an Event of Default, the Trustee will perform only such duties
as are specifically set forth in the Indenture. The Indenture provides that in
case an Event of Default shall occur (which shall not be cured or waived), the
Trustee will be required, in the exercise of its rights and powers under the
Indenture, to use the degree of care of a prudent person in the conduct of
such person's 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 of the Holders, unless such Holders shall have
offered to the Trustee indemnity satisfactory to it against any loss,
liability or expense.
No Personal Liability of Controlling Persons, Directors, Officers, Employees
and Stockholders
No controlling Person, director, officer, employee, incorporator or
stockholder of the Company, as such, shall have any liability for any
covenant, agreement or other obligations of the Company under the Notes or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation, solely by reason of its past, present or future
status as a controlling Person, director, officer, employee, incorporator or
stockholder of the Company. By accepting a Note each Holder waives and
releases all such liability (but only such liability). The waiver and release
are part of the consideration for issuance of the Notes. Nonetheless, such
waiver may not be effective to waive liabilities under the Federal securities
laws and it has been the view of the Commission that such a waiver is against
public policy.
GOVERNING LAW
The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York without giving effect to its conflicts
of laws provisions.
TRANSFER AND EXCHANGE
The Senior Notes will be subject to certain restrictions on transfer. A
Holder may transfer or exchange Notes in accordance with the Indenture. The
Company, the Registrar and the Trustee may require a Holder, among
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other things, to furnish appropriate endorsements and transfer documents and
the Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture.
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company entered into a Registration Agreement with the Initial
Purchasers for the benefit of the holders of Senior Notes, pursuant to which
the Company has filed a Registration Statement (of which this Prospectus
constitutes a part) with the Commission (the "Exchange Offer") registering the
exchange of the Senior Notes for the Exchange Notes having terms substantially
identical in all material respects to the Senior Notes (except that the
Exchange Notes will not contain terms with respect to transfer restrictions
and will not be entitled to certain benefits under the Registration
Agreement). The Company will offer the Exchange Notes in exchange for
surrender of the Senior Notes. Pursuant to the Registration Agreement, the
Company will keep the Exchange Offer open for not less than 30 days (or longer
if required by applicable law) after the date notice of the Exchange Offer is
mailed to the holders of the Senior Notes. For each Senior Note surrendered to
the Company pursuant to the Exchange Offer, the holder of such Senior Note
will receive an Exchange Note having a stated principal amount at maturity
equal to that of the surrendered Senior Note. Under existing Commission
interpretations, the Exchange Notes would be freely transferable by holders
other than affiliates of the Company after the Exchange Offer without further
registration under the Securities Act if the holder of the Exchange Notes
represents that it is acquiring the Exchange Notes in the ordinary course of
its business, that it has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes and that it is not an
affiliate of the Company, as such terms are interpreted by the Commission;
provided that broker-dealers ("Participating Broker-Dealers") receiving
Exchange Notes in the Exchange Offer will have a prospectus delivery
requirement with respect to resales of such Exchange Notes. The Commission has
taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to Exchange Notes (other than a
resale of an unsold allotment from the original sale of the Senior Notes) with
the prospectus contained in the Registration Statement. Under the Registration
Agreement, the Company is required to allow Participating Broker-Dealers and
other persons, if any, with similar prospectus delivery requirements to use
this Prospectus in connection with the resale of such Exchange Notes. The
Registration Statement will be kept effective for a period of 90 days after
the Exchange Offer has been consummated in order to permit resales of Exchange
Notes acquired by broker-dealers in after-market transactions.
A holder of Senior Notes (other than certain specified holders) who wishes
to exchange such Senior Notes for Exchange Notes in the Exchange Offer will be
required to represent that any Exchange Notes to be received by it will be
acquired in the ordinary course of its business and that at the time of the
commencement of the Exchange Offer it has no arrangement or understanding with
any person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Notes and that it is not an "affiliate" of the
Company, as defined in Rule 405 of the Securities Act, or if it is an
affiliate, that it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
The Company has filed the Registration Statement and will commence the
Exchange Offer pursuant to the Registration Agreement. In the event that (i)
applicable interpretations of the staff of the Commission do not permit the
Company to effect the Exchange Offer, (ii) for any other reason the
Registration Statement is not declared effective within 180 days after the
date of original issuance of the Senior Notes, (iii) the Exchange Offer is not
consummated (the term "consummated" as used in this context shall mean that
the Company has offered the Exchange Notes in exchange for surrender of the
Senior Notes, kept such offer open for the period of time required above and
fulfilled all of its other obligations under such offer) within 210 days after
the date of original issuance of the Senior Notes, (iv) the Initial Purchasers
so request with respect to Senior Notes held by such Initial Purchasers and
thus not eligible to be exchanged for Exchange Notes in the Exchange Offer, or
(v) any holder of the Senior Notes (other than an Initial Purchaser or any
affiliate of the Company) does not receive freely tradeable Exchange Notes in
the Exchange Offer (it being understood that, for purposes of this clause (v),
(a) the requirement that a holder deliver a prospectus containing the
information required by Items 507 and/or 508 of Regulation S-K under the
Securities Act in connection with sales of Exchange Notes acquired in exchange
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for the Senior Notes shall result in such Exchange Notes being not "freely
tradeable" but (b) the requirement that a Participating Broker-Dealer deliver
a prospectus in connection with sales of Exchange Notes acquired in the
Exchange Offer in exchange for Senior Notes acquired as a result of market
making activities or other trading activities shall not result in the Exchange
Notes being not "freely tradeable"), the Company will, at its cost, (x) as
promptly as practicable, file a Shelf Registration Statement covering resales
of the Senior Notes or the Exchange Notes, as the case may be, (y) use its
reasonable best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act and (z) keep the Shelf
Registration Statement effective until two years (or any shorter period under
Rule 144(k) under the Securities Act) after its effective date (or until one
year after such effective date if such Shelf Registration Statement is filed
at the request of an Initial Purchaser) or such shorter period that will
terminate when all the Senior Notes or Exchange Notes, as applicable, covered
by the Shelf Registration Statement have been sold. The Company will, in the
event a Shelf Registration Statement is filed, among other things, provide to
each holder for whom such Shelf Registration Statement was filed copies of the
prospectus which is a part of the Shelf Registration Statement, notify each
such holder when the Shelf Registration Statement has become effective and
take certain other actions as are required to permit unrestricted resales of
the Senior Notes or the Exchange Notes, as the case may be. A holder selling
such Senior Notes or Exchange Notes pursuant to the Shelf Registration
Statement generally would 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 Agreement which are applicable to such holder (including certain
indemnification obligations).
In the event that (i) either the Exchange Offer has not been consummated or
the Shelf Registration Statement has not been declared effective on or prior
to the 210th day following the date of original issuance of the Senior Notes;
or (ii) after the Shelf Registration Statement has been declared effective,
such Registration Statement thereafter ceases to be effective or usable
(subject to certain exceptions) in connection with resales of Senior Notes or
Exchange Notes in accordance with and during the periods specified in the
Registration Agreement without being succeeded promptly by an additional
registration statement filed and declared effective (each such event referred
to in clauses (i) and (ii) a "Registration Default"), interest ("Additional
Interest") will accrue on the Senior Notes and the Exchange Notes (in addition
to the stated interest on the Senior Notes and the Exchange Notes) from and
including the date on which any such Registration Default shall occur to but
excluding the date on which all Registration Defaults have been cured.
Additional Interest will be payable in cash semiannually in arrears on August
15 and February 15 of each year, beginning on the August 15 or February 15
immediately following a Registration Default, at a rate per annum equal to
0.50% of the Accreted Value of the Notes (determined daily) at the end of each
subsequent 90-day period. In no event shall such rate per annum exceed 1.50%
of the Accreted Value of the Notes (determined daily) in the aggregate
regardless of the number of Registration Defaults.
The summary herein of certain provisions of the Registration Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Registration Agreement, a copy of
which is available upon request to the Company.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any capitalized terms used herein for which no
definition is provided.
"Accreted Value" means, as of any date (the "Specified Date"), with respect
to each $1,000 stated principal amount at maturity of Notes the sum of (i) the
Issue Price of each Note and (ii) the amount of accrued but unpaid Deferred
Interest on such Note to the Specified Date such that:
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(a) If the Specified Date is one of the following dates (each a
"Semiannual Accrual Date") the Accreted Value will be the amount set forth
opposite such date below:
<TABLE>
<CAPTION>
SEMIANNUAL ACCRUAL DATE ACCRETED VALUE
----------------------- --------------
<S> <C>
February 18, 1998.......................................... $ 555.66
August 15, 1998............................................ $ 588.77
February 15, 1999.......................................... $ 624.46
August 15, 1999............................................ $ 662.32
February 15, 2000.......................................... $ 702.47
August 15, 2000............................................ $ 745.06
February 15, 2001.......................................... $ 790.23
August 15, 2001............................................ $ 838.14
February 15, 2002.......................................... $ 888.95
August 15, 2002............................................ $ 942.84
February 15, 2003 and thereafter........................... $1,000.00
</TABLE>
(b) If the Specified Date occurs before February 15, 2003, and between
two Semiannual Accrual Dates, the Accreted Value shall be the sum of (x)
the Accreted Value for the Semiannual Accrual Date immediately preceding
the Specified Date and (y) an amount equal to the Deferred Interest accrued
from such Semiannual Accrual Date to the Specified Date.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person; provided that
such Indebtedness was not incurred in connection with, or in anticipation or
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, but excluding Indebtedness which is
extinguished, retired or repaid in connection with such other Person merging
with or into or becoming a Subsidiary of such specified Person.
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by,
such Person; provided that each Unrestricted Subsidiary shall be deemed to be
an Affiliate of the Company and of each other Subsidiary of the Company;
provided further that neither the Company nor any of its Restricted
Subsidiaries shall be deemed to be Affiliates of each other. For purposes of
this definition, "control" (including, with correlative meanings, the terms
"controlling," "under common control with" and "controlled by"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of
such Person, whether through the ownership of Voting Stock, by agreement or
otherwise.
"Asset Sale" means any transfer, conveyance, sale, lease or other
disposition by the Company or any of its Restricted Subsidiaries (including an
amalgamation, consolidation or merger or other sale of any such Restricted
Subsidiary with, into or to any Person (other than the Company or any other
Restricted Subsidiary) in a transaction in which such Restricted Subsidiary
ceases to be a Restricted Subsidiary of the Company, but excluding a
disposition by a Restricted Subsidiary to the Company or a Significant
Restricted Subsidiary or by the Company to a Significant Restricted
Subsidiary) of (i) shares of Capital Stock or other ownership interests of a
Subsidiary of the Company (other than pursuant to an amalgamation, merger or
consolidation of a Restricted Subsidiary into the Company or any Restricted
Subsidiary), (ii) substantially all of the assets of the Company or any
Restricted Subsidiary representing a division or line of business (other than
as part of a Permitted Investment) or (iii) other assets or rights of the
Company or any of its Restricted Subsidiaries outside of the ordinary course
of business and, in each case, that is not governed by the provisions of the
Indenture applicable to amalgamations, consolidations, mergers, and transfers
of all or substantially all of the assets of the Company; provided that "Asset
Sale" shall not include (a) sales or other dispositions of inventory,
receivables and other current assets in the ordinary course of business or
sales or other dispositions of equipment that has become worn-out, obsolete or
damaged or otherwise unsuitable for use in connection with the business of the
Company or a Restricted Subsidiary, (b) contemporaneous exchanges by the
Company or any Restricted Subsidiary of
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Telecommunications Assets for other Telecommunications Assets in the ordinary
course of business; provided that the applicable Telecommunications Assets
received by the Company or such Restricted Subsidiary have at least
substantially equal Fair Market Value to the Company or such Restricted
Subsidiary (as evidenced by a Board Resolution), or (c) the sale or other
disposition of any assets (x) with a Fair Market Value (as certified in an
Officers' Certificate) not in excess of $1,000,000 or (y) that constitute
Restricted Payments which are permitted under the covenant "--Limitation on
Restricted Payments" above.
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present
value (discounted at a rate consistent with accounting guidelines, as
determined in good faith by the responsible accounting officer of such Person)
of the payments during the remaining term of the lease (including any period
for which such lease has been extended or may, at the option of the lessor, be
extended) or until the earliest date on which the lessee may terminate such
lease without penalty or upon payment of a penalty (in which case the payments
during the remaining term shall include such penalty).
"Average Life" means, as of any date, with respect to any debt security or
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (a) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund
or mandatory redemption payment requirements) of such debt security or
Disqualified Stock multiplied in each case by (b) the amount of such principal
or redemption payment, by (ii) the sum of all such principal or redemption
payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of the Board of Directors.
"Board Resolution" means a copy of a resolution, certified by the Secretary
of the Company to have been a duly adopted resolution of the Board of
Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee within 60 days of adoption
thereof.
"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal Property which is required to be
classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person prepared in accordance with GAAP, and the
maturity thereof shall be the date of the last payment of rent or any amount
due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty. The principal amount of
such obligation shall be the capitalized amount that would appear on the face
of a balance sheet of such Person in accordance with GAAP.
"Capital Stock" in any Person means any and all shares, interests,
participation or other equivalents of an equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to subscribe for or acquire an equity
interest in such Person.
"Change of Control" shall be deemed to occur if (i) the sale, conveyance,
transfer or lease of all or substantially all of the assets of the Company to
any "Person" or "group" (as such term is used in Sections 13(d)(3) and
14(d)(2) of the Exchange Act, including any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of Rule 13d-
5(b)(i) under the Exchange Act), other than any Permitted Holder (as defined
below) or any Restricted Subsidiary, shall have occurred, (ii) any "Person" or
"group" (as the term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange
Act, including any group acting for the purpose of acquiring, holding or
disposing of securities within the meaning of Rule 13d-5(b)(i) under the
Exchange Act), other than any Permitted Holder, becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act) of more than 50% of the
total voting power of all classes of the Voting Stock of the Company
(including any warrants, options or rights to acquire such Voting Stock),
calculated on a fully diluted basis, (iii) at any time after a Public Market
shall exist, during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors (together with
(a) any directors whose
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election or appointment by the Board of Directors or whose nomination for
election by the stockholders of the Company was approved by a vote of a
majority of the directors then still in office who were either directors at
the beginning of such period or whose election or nomination for election was
previously so approved and (b) any directors elected pursuant to the terms of
any shareholders' agreement among the Company's shareholders) cease for any
reason to constitute a majority of the Board of Directors then in office or
(iv) the merger, amalgamation or consolidation of the Company with or into
another Person or the merger of another Person with or into the Company shall
have occurred, and the securities of the Company that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of the Company are changed into or
exchanged for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for, in addition to
any other consideration, securities of the surviving corporation that
represent immediately after giving effect to such transaction, at least a
majority of the aggregate voting power of the Voting Stock of the surviving
corporation.
"Common Stock" means, with respect to the Company, the Class A Common Stock,
Class B Common Stock, Class C Common Stock or any similar common stock of the
Company.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of the Company and its Restricted Subsidiaries for
such period increased, to the extent deducted in arriving at Consolidated Net
Income, by the sum of (i) Consolidated Interest Expense of the Company and its
Restricted Subsidiaries for such period, (ii) Consolidated Income Tax Expense
of the Company and its Restricted Subsidiaries for such period, (iii) the
consolidated depreciation and amortization expense of the Company and its
Restricted Subsidiaries for such period, (iv) any non-cash expense related to
the issuance to employees of the Company or any Restricted Subsidiary of
options to purchase Capital Stock of the Company or such Restricted
Subsidiary, (v) any charge related to any premium or penalty paid in
connection with redeeming or retiring any Indebtedness prior to its stated
maturity and (vi) any non-cash expense related to a purchase accounting
adjustment not requiring an accrual or reserve and separately disclosed in the
Company's consolidated statement of operations and deficit, and decreased by
the amount of any non-cash item that increases such Consolidated Net Income,
all as determined on a consolidated basis in accordance with GAAP; provided
that (a) there shall be excluded therefrom the Consolidated Cash Flow
Available for Fixed Charges (if positive) of any Restricted Subsidiary
(calculated separately for such Restricted Subsidiary in the same manner as
provided above for the Company) that is subject to a restriction which
prevents the payment of dividends or the making of distributions to the
Company or another Restricted Subsidiary to the extent of such restriction and
(b) (1) if, during or after such period, the Company or any of its Restricted
Subsidiaries shall have made any disposition of any Person or business, then
Consolidated Cash Flow Available for Fixed Charges of the Company and its
Restricted Subsidiaries shall be computed so as to give pro forma effect to
such disposition and (2) if, during or after such period, the Company or any
of its Restricted Subsidiaries completes an acquisition of any Person or
business which immediately after such acquisition is a Subsidiary of such
Person or whose assets are held directly by the Company or a Restricted
Subsidiary, then Consolidated Cash Flow Available for Fixed Charges shall be
computed so as to give pro forma effect to the acquisition of such Person or
business.
"Consolidated Income Tax Expense" for any period means the aggregate amount
of the provisions for income taxes of the Company and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means for any period the interest expense
included in a consolidated income statement (excluding interest income) of the
Company and its Restricted Subsidiaries for such period in accordance with
GAAP, including without limitation or duplication (or, to the extent not so
included, with the addition of), (i) the amortization of Indebtedness discount
(including original issue discount), (ii) any payments or fees with respect to
letters of credit, bankers' acceptances or similar facilities, (iii) fees with
respect to interest rate swap or similar agreements or foreign currency hedge,
exchange or similar agreements, (iv) Preferred Stock dividends of the
Company's Restricted Subsidiaries (other than dividends paid in shares of
Preferred Stock that is not Disqualified Stock) declared and paid or payable,
(v) accrued Disqualified Stock dividends of the Company
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and its Restricted Subsidiaries, whether or not declared or paid, (vi)
interest on Indebtedness guaranteed by the Company and its Restricted
Subsidiaries, (vii) the portion of any Capital Lease Obligation accruing
during such period that is allocable to interest expense in accordance with
GAAP, (viii) capitalized interest and (ix) commitment and other fees with
respect to senior credit facilities.
"Consolidated Net Income" of the Company means, for any period, the
aggregate net income (or net loss) of the Company and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; provided that there shall be excluded therefrom, without
duplication (i) all items classified as extraordinary or non-recurring, (ii)
any net income (or net loss) of any Person other than the Company and its
Restricted Subsidiaries, except to the extent of the amount of dividends or
other distributions actually paid to the Company or its Restricted
Subsidiaries by such other Person during such period, (iii) the net income (or
net loss) of any Person acquired by the Company or any of its Restricted
Subsidiaries in a pooling-of-interests transaction for any period prior to the
date of the related acquisition, (iv) any gain or loss, net of taxes, realized
on the termination of any employee pension benefit plan, (v) net gains (or net
losses) in respect of Asset Sales by the Company or its Restricted
Subsidiaries, (vi) the net income (or net loss) of any Restricted Subsidiary
to the extent that the payment of dividends or other distributions to the
Company is restricted by the terms of its constituting documents or any
agreement, instrument, contract, judgment, order, decree, statute, rule,
governmental regulation or otherwise, except for any dividends or
distributions actually paid by such Restricted Subsidiary to the Company,
(vii) with regard to a non-wholly owned Restricted Subsidiary, any aggregate
net income (or net loss) in excess of the Company's or such Restricted
Subsidiary's pro rata share of such non-wholly owned Restricted Subsidiary's
net income (or net loss), and (viii) the cumulative effect of changes in
accounting principles.
"Consolidated Tangible Assets" of any Person means the total amount of
assets (less applicable reserves and other properly deductible items) which
under GAAP would be included on a consolidated balance sheet of such Person
and its Restricted Subsidiaries after deducting therefrom all goodwill, trade
names, trademarks, patents, unamortized debt discount and expense and other
like intangibles, which in each case under GAAP would be included on such
consolidated balance sheet.
"Consolidated Net Worth" means, 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 Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take account of Unrestricted Subsidiaries),
less any amounts attributable to Disqualified 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 Restricted Subsidiaries, each
item to be determined in conformity with GAAP.
"Default" means any event, act or condition, the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness by the holder thereof at any time, in whole or in part, on or
prior to the Stated Maturity of the Notes.
"Eligible Cash Equivalents" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof
in each case with a term of not more than one year, (ii) investments in time
deposit accounts, term deposit accounts, certificates of deposit, money-market
deposits, bankers acceptances and obligations maturing within one year of the
date of acquisition thereof issued by a bank or trust company which is
organized under the laws of the United States of America or any state thereof
and which bank or trust company has, or the obligation of which bank or trust
company is guaranteed by a bank or trust company which has, capital, surplus
and undivided profits aggregating in excess of $150,000,000 and has
outstanding debt which is rated "A" (or
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such similar equivalent rating) or higher by at least one "nationally
recognized statistical rating organization" (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor, (iii) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in
clause (i) above entered into with a bank meeting the qualifications described
in clause (ii) above, (iv) investments in commercial paper, maturing not more
than 180 days after the date of acquisition, issued by a corporation (other
than an Affiliate of the Company) organized and in existence under the laws of
the United States of America 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 Corporation
and (v) investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state, commonwealth,
territory or province of the United States of America or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard &
Poor's Corporation or "A-2" by Moody's Investors Service, Inc.
"Fair Market Value" means, 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, as determined in good faith by the
Board of Directors.
"GAAP" means generally accepted accounting principles in the United States,
consistently applied, which are in effect on the date of the Indenture.
"Guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative
to the foregoing); provided that the term "Guaranteed" and any meaning
correlative thereto shall not include endorsements for collection or deposit.
"Holder" means (i) in the case of any Certificated Note, the Person in whose
name such Certificated Note is registered in the Note Register and (ii) in the
case of any Global Note, the Depositary.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, Guarantee or otherwise become liable in respect of such Indebtedness
or other obligation including by acquisition of Subsidiaries or the recording,
as required pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such Person (and "Incurrence," "Incurred,"
"Incurrable" and "Incurring" shall have meanings correlative to the
foregoing); provided that a change in GAAP that results in an obligation of
such Person that exists at such time becoming Indebtedness shall not be deemed
an Incurrence of such Indebtedness and that the accrual of interest shall not
be deemed an Incurrence of Indebtedness. Indebtedness otherwise Incurred by a
Person before it becomes a Subsidiary of the Company (whether by merger,
amalgamation, consolidation, acquisition or otherwise) shall be deemed to have
been Incurred by the Company at the time at which such Person becomes a
Subsidiary of the Company.
"Indebtedness" means, at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for money
borrowed, (ii) any obligation of such Person evidenced by bonds, debentures,
notes, Guarantees or other similar instruments, including, without limitation,
any such obligations incurred in connection with the acquisition of Property,
assets or businesses, excluding trade accounts payable made in the ordinary
course of business, (iii) any reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities
issued for the account of such Person, (iv) any obligation of such Person
issued or assumed as the deferred purchase price of Property or services (but
excluding trade accounts payable or accrued liabilities arising in the
ordinary course of business, which in either case are being contested in good
faith), (v) any Capital Lease Obligation of such Person, (vi) the maximum
fixed redemption or repurchase price of Disqualified Stock of such Person and,
to the extent held by Persons other than such Person or its Restricted
Subsidiaries, the maximum fixed redemption or repurchase price of Preferred
Stock of such Person's Restricted Subsidiaries, at
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the time of determination, (vii) any Attributable Indebtedness with respect to
any Sale and Leaseback Transaction to which such Person is a party, (viii)
Indebtedness of other Persons secured by a Lien to which the Property owned or
held by such first Person is subject, whether or not the obligation or
obligations secured thereby shall have been assumed (the amount of such
Indebtedness being deemed to be the lesser of the value of such property and
assets or the amount of the Indebtedness so secured) and (ix) any obligation
of the type referred to in clauses (i) through (viii) of this definition of
another Person and all dividends and distributions of another Person the
payment of which, in either case, such Person has Guaranteed or is responsible
or liable for, directly or indirectly, as obligor, Guarantor or otherwise. For
purposes of the preceding sentence, the maximum fixed repurchase price of any
Disqualified Stock or Preferred Stock that does not have a fixed repurchase
price shall be calculated in accordance with the terms of such stock as if
such stock were repurchased on any date on which Indebtedness shall be
required to be determined pursuant to the Indenture; provided that, if such
stock is not then permitted to be repurchased, the repurchase price shall be
the book value of such stock. 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 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.
"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person, or
(iii) the acquisition, by purchase or otherwise, of all or substantially all
of the business, assets or stock or other evidence of beneficial ownership of
such Person; provided that Investments shall exclude extensions of trade
credit in the ordinary course of business. The amount of any Investment shall
be the original cost of such Investment, plus the cost of all additions
thereto and minus the amount of any portion of such Investment repaid to such
Person in cash as a repayment of principal or a return of capital, as the case
may be, but without any other adjustments for increases or decreases in value,
or write-ups, write-downs or write-offs with respect to such Investment. In
determining the amount of any Investment involving a transfer of any Property
other than cash, such Property shall be valued at its Fair Market Value at the
time of such transfer.
"Issue Date" means the date on which the Notes are first authenticated and
delivered under the Indenture.
"Lien" means, with respect to any Property or other asset, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement,
security interest, lien (statutory or other), charge, setoff right, easement,
encumbrance, preference, priority or other security or similar agreement or
preferential arrangement of any kind or nature whatsoever on or with respect
to such Property or other asset (including, without limitation, any
conditional sale or title retention agreement having substantially the same
economic effect as any of the foregoing).
"Maturity" means, when used with respect to a Note, the date on which the
principal of such Note becomes due and payable as provided therein or in the
Indenture, whether on the Stated Maturity, on the Change of Control Payment
Date or purchase date established pursuant to the terms of the Indenture with
regard to an Asset Sale Offer, as applicable, or by declaration of
acceleration, call for redemption or otherwise.
"Net Cash Proceeds" means (i) with respect to the sale of any Property or
other assets by the Company or any of the Restricted Subsidiaries, cash or
readily marketable cash equivalents received net of (a) all reasonable out-of-
pocket expenses of the Company or such Restricted Subsidiary incurred in
connection with such sale, including, without limitation, all legal, title and
recording tax expenses, commissions and other fees and expenses incurred (but
excluding any finder's fee or broker's fee payable to any Affiliate of the
Company) and all U.S. federal, state, provincial, foreign and local taxes
arising in connection with such sale that are paid or required to be accrued
as a liability under GAAP by the Company or its Restricted Subsidiaries, (b)
all payments made or required to be made by the Company or its Restricted
Subsidiaries on any Indebtedness which is secured by
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such Properties or other assets in accordance with the terms of any Lien upon
or with respect to such Properties or other assets or which must, by the terms
of such Lien, or in order to obtain a necessary consent to such transaction or
by applicable law, be repaid in connection with such sale, (c) all
contractually required distributions and other payments made to minority
interest holders (but excluding distributions and payments to Affiliates of
the Company) in Restricted Subsidiaries as a result of such transaction and
(d) appropriate amounts to be provided by the Company or any Restricted
Subsidiary, as the case may be, as a reasonable reserve against any
liabilities associated with such assets and retained by the Company or any
Restricted Subsidiary thereof, as the case may be, after such transaction,
including, without limitation, liabilities under any indemnification
obligations and severance and other employee termination costs associated with
such transaction, in each case as determined by the Board of Directors, in its
reasonable good faith judgment evidenced by a Board Resolution; provided that,
in the event that any consideration for a transaction (which would otherwise
constitute Net Cash Proceeds) is required to be held in escrow pending
determination of whether a purchase price adjustment or indemnification or
other payment or similar adjustment will be made, such consideration (or any
portion thereof) shall become Net Cash Proceeds only at such time as it is
released to the Company or the Restricted Subsidiaries from escrow; and
provided, further, that any noncash consideration received in connection with
any transaction, which is subsequently converted to cash, shall be deemed to
be Net Cash Proceeds at such time, and shall thereafter be applied in
accordance with the Indenture and (ii) with respect to any sale, issuance,
transfer or other disposition of Capital Stock, the proceeds of such sale,
issuance, transfer or other disposition in the form of cash or cash
equivalents, net of attorneys' fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees and reasonable out-of-pocket expenses of the Company or any
Subsidiary of the Company incurred in connection with such sale, issuance,
transfer or other disposition and net of taxes paid or payable as a result
thereof.
"Officers' Certificate" means a certificate signed by (i) the President or
the Chief Executive Officer and (ii) the Chief Financial Officer, the Chief
Accounting Officer or the Treasurer, of the Company and delivered to the
Trustee, which shall comply with the Indenture.
"Permitted Holders" means Madison Dearborn Capital Partnership, L.P.,
Frontenac V.I. L.P., and Battery Ventures III, L.P., and Affiliates (other
than the Company and the Restricted Subsidiaries) of each of the foregoing.
"Permitted Investments" means (i) Eligible Cash Equivalents, (ii)
Investments in any Person engaged in a Telecommunications Business as a result
of which such Person becomes a Restricted Subsidiary in compliance with the
Indenture, (iii) Investments pursuant to agreements or obligations of the
Company or a Restricted Subsidiary, in effect on the Issue Date, to make
Investments described in clause (ii) above, (iv) Investments in prepaid
expenses, negotiable instruments held for collection and lease, utility and
workers' compensation, performance and other similar deposits, (v)
Investments, Capital Stock, bonds, notes, debentures or other debt or equity
securities received as a result of Asset Sales permitted under the covenant
described under "--Asset Sale," (vi) Investments in existence at the Issue
Date, (vii) commission, payroll, travel and similar advances made in the
ordinary course of business to cover matters that are expected at the time of
such advances ultimately to be treated as expenses in accordance with GAAP,
(viii) loans or advances to employees and directors made in the ordinary
course of business at any time outstanding not to exceed in the aggregate
$5,000,000 and (ix) stock, obligations or securities received in satisfaction
of judgments.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have
been made therefor, (ii) other Liens incidental to the conduct of the
Company's or a Restricted Subsidiary's business or the ownership of its
Property and assets, and which do not in the aggregate materially detract from
the value of the Company's and its Restricted Subsidiaries' Property or other
assets when taken as a whole, or materially impair the use thereof in the
operation of its business, (iii) Liens with respect to assets of a Restricted
Subsidiary granted by such Restricted Subsidiary to secure Indebtedness owing
to the Company, (iv) Liens incurred or pledges and
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deposits made in the ordinary course of business in connection with workers'
compensation and unemployment insurance and other types of social security,
(v) statutory Liens of landlords, carriers, warehousemen, mechanics,
materialmen, repairmen and other types of statutory obligations, (vi) deposits
made to secure the performance of tenders, bids, leases, surety and appeal
bonds, government contracts, performance and return-of money bonds and other
obligations of like nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money), (vii) zoning
restrictions, servitudes, easements, rights-of-way, restrictions and other
similar charges or encumbrances incurred in the ordinary course of business
which, in the aggregate, do not materially detract from the value of the
Property subject thereto or interfere with the ordinary conduct of the
business of the Company or its Restricted Subsidiaries, (viii) Liens arising
out of judgments or awards against the Company or any Restricted Subsidiary
with respect to which the Company or such Restricted Subsidiary is prosecuting
an appeal or proceeding for review and the Company or such Restricted
Subsidiary is maintaining adequate reserves in accordance with GAAP, (ix) any
interest or title of a lessor in the Property subject to any lease other than
a Capital Lease, (x) leases or subleases granted to others that do not
materially interfere with the ordinary course of business of the Company and
its Restricted Subsidiaries, (xi) Liens encumbering Property or other assets
under construction arising from progress or partial payments by a customer of
the Company or its Restricted Subsidiaries relating to such Property or other
assets, (xii) 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 other assets of the Company or any Restricted
Subsidiary other than the Property or other assets acquired, (xiii) 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, (xiv) 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, (xv) 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, (xvi) Liens on or sales of
receivables; and (xvii) Liens in favor of the Trustee pursuant to the
Indenture.
"Person" means any individual, corporation, limited liability company,
partnership, limited liability partnership, joint venture, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding up of such Person, to shares
of Capital Stock of any other class of such Person.
"Property" means, with respect to any Person, any interest of such Person in
any kind of property or other asset, whether real, personal or mixed, or
tangible or intangible, excluding Capital Stock of any other Person.
"Public Equity Offering" means an underwritten primary public offering of
the Common Stock of the Company pursuant to an effective registration
statement under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company immediately prior to the consummation of such
Public Equity Offering has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
"Restricted Payment" means (i) a dividend or other distribution declared or
paid on the Capital Stock of the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than the
Company or a Restricted Subsidiary on the Capital Stock of any Restricted
Subsidiary, in each case, other than dividends, distributions or payments made
solely in Qualified Stock of the Company or such Restricted Subsidiary and
other than pro rata dividends or other distributions made by a Restricted
Subsidiary
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that is not a Significant Restricted Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Restricted Subsidiary that
is an entity other than a corporation), (ii) a payment made by the Company or
any of its Restricted Subsidiaries (other than to the Company or any
Restricted Subsidiary) to purchase, redeem, acquire or retire any Capital
Stock of the Company or (iii) a payment made by the Company or any of its
Restricted Subsidiaries (other than a payment made solely in Qualified Stock
of the Company) to redeem, repurchase, defease (including an in-substance or
legal defeasance) or otherwise acquire or retire for value (including pursuant
to mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory redemption payment, Indebtedness of the Company
which is subordinate (whether pursuant to its terms or by operation of law) in
right of payment to the Notes and which was scheduled to mature on or after
the maturity of the Notes (other than permitted refinancings thereof) or (iv)
an Investment in any Person, including an Unrestricted Subsidiary or the
designation of a Subsidiary as an Unrestricted Subsidiary, other than (a) a
Permitted Investment, (b) an Investment by the Company in a Restricted
Subsidiary engaged in a Telecommunications Business or (c) an Investment by a
Restricted Subsidiary in the Company or in a Restricted Subsidiary engaged in
a Telecommunications Business.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated as an "Unrestricted Subsidiary."
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or
transferred by such Person or a Restricted Subsidiary of such Person and is
thereafter leased back from the purchaser or transferee thereof by such Person
or one of its Restricted Subsidiaries.
"Senior Indebtedness" means all Indebtedness of the Company which is not,
expressly by its terms, subordinate or junior in right of payment to the
Notes.
"Significant Restricted Subsidiary" means any Restricted Subsidiary of which
the Company owns, directly or indirectly, 80% or more of all of the
outstanding Capital Stock or other ownership interests (other than any
director's qualifying shares).
"Subordinated Indebtedness" means Indebtedness of the Company as to which
the payment of principal of (and premium, if any) and interest and other
payment obligations in respect of such Indebtedness shall be subordinate to
the prior payment in full of the Notes to at least the following extent: (i)
no payments of principal of (or premium, if any) or interest on or otherwise
due in respect of such Indebtedness may be permitted for so long as any
Default in the payment of principal (or premium, if any) or interest on the
Notes exists, (ii) in the event that any other Default exists, upon notice by
Holders of 25% or more of the aggregate stated principal amount at maturity of
the outstanding Notes to the Trustee, the Trustee shall have the right to give
notice to the Company and the holders of such Indebtedness (or trustees or
agents therefor) of a payment blockage, and thereafter no payments of
principal of (or premium, if any) or interest on or otherwise due in respect
of such Indebtedness may be made for a period of 179 days from the date of
such notice, and (iii) such Indebtedness may not (x) provide for payments of
principal of such Indebtedness at the stated maturity thereof or by way of a
sinking fund applicable thereto or by way of any mandatory redemption,
defeasance, retirement or repurchase thereof by the Company (including any
redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of acceleration
of such Indebtedness upon an event of default thereunder), in each case prior
to the final Stated Maturity of the Notes or (y) permit redemption or other
retirement (including pursuant to an offer to purchase made by the Company) of
such other Indebtedness at the option of the holder thereof prior to the final
Stated Maturity of the Notes, other than a redemption or other retirement at
the option of the holder of such Indebtedness (including pursuant to an offer
to purchase made by the Company) which is conditioned upon a change of control
of the Company pursuant to provisions substantially similar to those described
under "--Repurchase at the Option of Holders upon a Change of Control" (and
which shall provide that such Indebtedness will not be repurchased pursuant to
such provisions prior to the Company's repurchase of the Notes required to be
repurchased by the Company pursuant to the provisions described under "--
Repurchase at the Option of Holders upon a Change of Control").
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"Subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding shares of Voting Stock of which is owned, directly
or indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(ii) any general partnership, joint venture or similar entity, more than 50%
of the outstanding partnership or similar interests of which are owned,
directly or indirectly, by such Person, or by one or more other Subsidiaries
of such Person, or by such Person and one or more other Subsidiaries of such
Person and (iii) any limited partnership of which such Person or any
Subsidiary of such Person is a general partner.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, real or personal, whether tangible or intangible,
used or intended for use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased wireline or wireless transmission facilities, (ii)
creating, developing, constructing, installing, repairing, maintaining or
marketing communications-related systems, network equipment and facilities,
software and other products, or (iii) evaluating, owning, operating,
participating in or pursuing any other business that is primarily related to
those identified in the foregoing clauses (i) or (ii) above (in the case of
this clause (iii), however, in a manner consistent with the Company's manner
of business on the Issue Date), and shall, in any event, include all
businesses in which the Company or any of its Subsidiaries are engaged on the
Issue Date or have entered into agreements to engage in or to acquire a
company to engage in or contemplate engaging in, as expressly set forth in
this Prospectus; provided that the determination of what constitutes a
Telecommunications Business shall be made in good faith by the Board of
Directors.
"Unrestricted Subsidiary" means any Subsidiary of the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the
Indenture. See "--Restricted and Unrestricted Subsidiaries" for a description
of the conditions in which the Company may designate a Subsidiary of the
Company an "Unrestricted Subsidiary."
"Voting Stock" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or at the times that such class of Capital Stock has voting power
by reason of the happening of any contingency) to vote in the election of
members of the board of directors or comparable body of such Person.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests (other than any director's qualifying shares) of which
shall at the time be owned by such Person or by one or more other Wholly Owned
Restricted Subsidiaries of such Person or by such Person and one or more other
Wholly Owned Restricted Subsidiaries of such Person.
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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 Senior
Notes where such Senior Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed that, starting
on the Expiration Date and ending on the close of business 90 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. In
addition, until , 1998, all dealers effecting transactions in the Exchange
Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange 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 commissions 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 of any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation 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 90 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 (including the expenses of one counsel for the holders of
the Senior Notes), other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Senior Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. HOLDERS
The following, subject to the limitations set forth below, are the material
U.S. federal income tax consequences associated with the acquisition,
ownership, and disposition of the Notes. As used herein, a "U.S. Holder" means
a beneficial owner of a Note who purchased a Senior Note pursuant to the
Offering at the Issue Price that is for U.S. federal income tax purposes (i) a
citizen or resident of the United States; (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
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 if (A) a court within the United States is able to exercise primary
supervision over the administration of the trust and (B) one or more U.S.
fiduciaries have the authority to control all substantial decisions of the
trust. This summary deals only with Notes held as capital assets and does not
address persons with special tax situations, such as Non-U.S. Holders (as
defined herein), financial institutions, insurance companies, tax-exempt
organizations, dealers in securities or currencies, persons holding Notes as a
hedge against currency risks or that are part of a straddle or a conversion
transaction, or persons whose functional currency is not the U.S. dollar, and
does not discuss any aspect of state, local or foreign tax laws or any estate
or gift tax considerations.
This summary is based upon the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the Treasury Regulations promulgated thereunder
(the "Regulations"), rulings and judicial decisions issued thereunder, all of
which may be repealed, revoked or modified, possibly with retroactive effect.
Holders of the Notes should consult their tax advisors regarding the U.S.
federal, state, local and foreign income and other tax considerations of the
purchase, exchange, ownership and disposition of the Notes.
THE FOLLOWING DOES NOT PURPORT TO BE A DISCUSSION OF ALL POTENTIAL TAX
CONSEQUENCES. EACH HOLDER IS STRONGLY URGED TO CONSULT WITH ITS OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF SUCH HOLDER'S PERSONAL TAX SITUATION ON
THE ANTICIPATED TAX CONSEQUENCES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN OR OTHER TAX LAWS, OF THE ACQUISITION, EXCHANGE OWNERSHIP AND
DISPOSITION OF THE NOTES.
THE EXCHANGE
The exchange of Senior Notes for Exchange Notes will not be treated as an
exchange for U.S. federal income tax purposes because the Exchange Notes will
not differ materially in kind or extent from the Senior Notes. As a result,
holders who exchange their Senior Notes for Exchange Notes will not recognize
any income, gain or loss for U.S. federal income tax purposes. A U.S. Holder
will have the same adjusted issue price, adjusted basis and holding period in
the Exchange Notes immediately after the exchange as it had in the Senior
Notes immediately before the exchange.
ORIGINAL ISSUE DISCOUNT
General
Because the Senior Notes were issued at an Issue Price which was
substantially less than their stated principal amounts at maturity and because
Current Interest on the Notes will not be payable until August 15, 2003, the
Notes have been issued with OID, and each U.S. Holder will be required to
include in income in each year, in advance of the receipt of cash payments on
such Notes, that portion of the OID, computed on a constant yield basis,
attributable to each day during such year on which the U.S. Holder held the
Notes.
In the event of a Registration Default as described under "Description of
the Exchange Notes--Exchange Offer; Registration Rights", Additional Interest
will accrue on the Notes in the manner described therein. According to the
Regulations, the possibility of a change in the interest rate will not affect
the amount of interest
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income recognized by a U.S. Holder if the likelihood of the change, as of the
date the Notes are issued, is remote. The Company believes that the likelihood
of a change in the interest rate on the Notes is remote and does not intend to
treat the possibility of a change in the interest rate as affecting the yield
to maturity of any Note. Solely for purposes of determining the amount of OID,
the Notes would be treated as retired and reissued on any date the amount of
interest were changed for an amount equal to its adjusted issue price.
The Amount of Original Issue Discount
The amount of OID with respect to each Note is equal to the excess of (i)
its "stated redemption price at maturity" over (ii) its "issue price." The
"issue price" of the Notes is equal to the initial offering price to the
public (not including any bond house, broker or similar person or organization
acting in the capacity of an underwriter, placement agent or wholesaler) at
which a substantial amount of the Notes are sold. The "stated redemption price
at maturity" of each Note will include all payments to be made in respect
thereof, including any Current Interest payments. Accordingly, payments on the
Note (including principal and Current Interest payments) are not separately
included in a U.S. Holder's income as interest, but rather are treated first
as payments of accrued OID and then as payments of principal which reduce the
U.S. Holder's basis in the Notes.
A U.S. Holder of a debt instrument issued with OID is required to include in
gross income for U.S. federal income tax purposes an amount equal to the sum
of the "daily portions" of such OID for all days during the taxable year on
which the holder holds the debt instrument. The daily portions of OID required
to be included in a holder's gross income in a taxable year will be determined
on a constant yield basis by allocating to each day during the taxable year on
which the holder holds the debt instrument a pro rata portion of the OID on
such debt instrument which is attributable to the "accrual period" in which
such day is included. Accrual periods with respect to a Note may be any set of
periods (which may be of varying lengths) selected by a U.S. Holder as long as
(i) no accrual period is longer than one year and (ii) each scheduled payment
of interest or principal on the Note occurs on either the first or final day
of an accrual period. The amount of OID attributable to each "accrual period"
will be equal to the product of (i) the "adjusted issue price" at the
beginning of such accrual period and (ii) the "yield to maturity" of the debt
instrument stated in a manner appropriately taking into account the length of
the accrual period. The "yield to maturity" is the discount rate that, when
used in computing the present value of all payments to be made under the
Notes, produces an amount equal to the issue price of the Notes. The "adjusted
issue price" of a Note at the beginning of an accrual period is generally
defined as the issue price of the Note plus the aggregate amount of OID that
accrued in all prior accrual periods, less any cash payments on the Note.
Accordingly, a U.S. Holder of a Note will be required to include OID thereon
in gross income for U.S. federal tax purposes in advance of the receipt of
cash in respect of such income. The amount of OID allocable to an initial
short accrual period may be computed using any reasonable method if all other
accrual periods, other than a final short accrual period, are of equal length.
The amount of OID allocable to the final accrual period at maturity of a Note
is the difference between (x) the amount payable at the maturity of the Note
and (y) the Note's adjusted issue price as of the beginning of the final
accrual period.
High-Yield Discount Obligations
The Notes constitute AHYDOs as their yield to maturity exceeds the sum of
the applicable federal rate in effect at the time of the issuance of the Notes
(the "AFR") plus five percentage points. For February 1998, the long-term AFR
was 5.84% (based on semiannual compounding). Under Sections 163(e) and 163(i)
of the Code, a C corporation that is an issuer of a debt obligation subject to
the AHYDO rules may not deduct any portion of OID on the obligation until such
portion is actually paid. A debt obligation is generally subject to the AHYDO
rules if (i) its maturity date is more than five years from the date of issue,
(ii) its yield to maturity equals or exceeds the sum of the AFR plus five
percentage points, and (iii) it bears "significant OID." A debt obligation
will bear significant OID for this purpose if, as of the close of any accrual
period ending more than five years after issuance, the total amount of income
includible by a holder with respect to the debt instrument exceeds the sum of
(i) the total amount of "interest" paid under the obligation before the close
of such accrual period and (ii) the product of the issue price of the debt
instrument and its yield to maturity. In addition, the yield to maturity of
the Notes exceeds the sum of the AFR plus six percentage points. Accordingly,
under the Code, a portion of
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<PAGE>
the OID under the Notes, equal to the product of the total OID under the Notes
times the ratio of (a) the excess of the yield to maturity over the sum of the
AFR plus six percentage points to (b) the yield to maturity (the "Disqualified
Portion"), will not be deductible by the Company and will be treated for some
purposes as dividends to the holders of the Notes (to the extent that such
amounts would have been treated as dividends to the holders of the Notes if
they had been distributions with respect to the Company's stock). The
Disqualified Portion will be nondeductible by the Company, and may qualify for
the dividend received deduction for corporate U.S. Holders, but will be
treated as OID and not as dividends for withholding tax purposes.
Effect of Mandatory and Optional Redemptions on OID
In the event of a Change of Control, the Company will be required to offer
to redeem all of the Notes, at redemption prices specified elsewhere herein.
If after giving effect to a Change of Control Offer at least 95% of the
original aggregate stated principal amount of the Notes has been repurchased,
the Company may, at its option, redeem the balance of the Notes at redemption
prices specified elsewhere herein. In the event that the Company receives net
proceeds from one or more public offerings, the Company may, at its option,
use all or a portion of such net proceeds to redeem Notes having an aggregate
issue price of up to 35% of the aggregate Issue Price of the Notes at
redemption prices specified elsewhere herein; provided that Notes having an
issue price equal to at least 65% of the original aggregate stated principal
amount of the Notes remain outstanding after such redemption. In addition,
upon an Asset Sale, the Company may in certain circumstances be required to
redeem all or part of the Notes. Computation of the yield and maturity of the
Notes is not affected by such redemption rights and obligations if, based on
all the facts and circumstances as of the issue date, the stated payment
schedule of the Notes (that does not reflect a Change of Control, an Asset
Sale, or a Public Equity Offering) is significantly more likely than not to
occur. The Company has determined that, based on all of the facts and
circumstances as of the issue date, it is significantly more likely than not
that the Notes will be paid according to their stated schedule.
The Company may redeem the Notes, in whole or in part, at any time on or
after February 15, 2003, at redemption prices specified elsewhere herein plus
accrued and unpaid Current Interest, if any, on the Notes so redeemed to but
excluding the date of redemption. The Regulations contain rules for
determining the "maturity date" and the stated redemption price at maturity of
an instrument that may be redeemed prior to its stated maturity date at the
option of the issuer. Under the Regulations, solely for purposes of the
accrual of OID, it is assumed that the issuer will exercise any option to
redeem a debt instrument if such exercise will lower the yield-to-maturity of
the debt instrument. The Company believes that it will not be presumed to
redeem the Notes prior to their stated maturity under these rules because the
exercise of such option would not lower the yield-to-maturity of the Notes.
U.S. Holders may wish to consult their tax advisor regarding the treatment
of such contingencies under the Regulations.
Tax Basis
A U.S. Holder's initial tax basis in a Note generally will be equal to the
purchase price paid by such U.S. Holder for such Note. A U.S. Holder's tax
basis in a Note will be increased by the amount of OID that is included in
such U.S. Holder's income and will be decreased by the amount of any cash
payments received.
Sale or Redemption
Unless a nonrecognition provision applies, the sale, exchange, redemption
(including pursuant to an offer by the Company) or other disposition of a Note
will be a taxable event for U.S. federal income tax purposes. In such event, a
U.S. Holder will recognize gain or loss equal to the difference between (i)
the amount of cash plus the fair market value of any property received by such
holder and (ii) the U.S. Holder's adjusted tax basis therein. Such gain or
loss will be capital gain or loss and will be long-term capital gain or loss
if the Note was held by the U.S. Holder for more than one year at the time of
such sale, exchange, redemption or other disposition. On
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<PAGE>
August 5, 1997, legislation was enacted which, among other things, reduces to
20% the maximum rate of tax on long-term capital gains on most capital assets
held by an individual for more than 18 months. Gain on most capital assets
held by an individual more than one year and up to 18 months is subject to tax
at a maximum rate of 28%. The distinction between capital gain or loss and
ordinary income or loss is also relevant for purposes of, among other things,
limitations on the deductibility of capital losses.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following summary describes certain United States federal income and
estate tax consequences of the ownership of Notes as of the date hereof by any
holder who is a beneficial owner of a Note but is not a U.S. Holder (a "Non-
U.S. Holder").
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) generally no withholding of United States federal income tax will be
required with respect to the payment by the Company or any paying agent of
principal or interest (including OID) on a Note owned by a Non-U.S. Holder,
provided (i) that the beneficial owner does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock
of the Company entitled to vote within the meaning of section 871(h)(3) of
the Code and the regulations thereunder, (ii) the beneficial owner is not a
"controlled foreign corporation" (as defined in Section 957 of the Code)
that is related directly, indirectly or constructively to the Company
through stock ownership and (iii) the beneficial owner satisfies the
statement requirement (described generally below) set forth in section
871(h) and section 881(c) of the Code and the regulations thereunder;
(b) generally no withholding of United States federal income tax will be
required with respect to any gain or income realized by a Non-U.S. Holder
upon the sale, exchange or retirement of a Note and
(c) a Note beneficially owned by an individual who at the time of death
is a Non-U.S. Holder generally will not be includible in the individual's
gross estate for the purposes of the United States federal estate tax as a
result of such individual's death, provided that such individual does not
at the time of death actually or constructively own 10% or more of the
total combined voting power of all classes of stock of the Company entitled
to vote within the meaning of section 871(h)(3) of the Code and provided
that the interest payments with respect to such Note will not have been, if
received at the time of such individual's death, effectively connected with
the conduct of a United States trade or business by such individual.
To satisfy the requirement referred to in (a)(iii) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, the Company
or a paying agent of the Company with a statement to the effect that the
beneficial owner is not a U.S. person. Pursuant to current temporary
Regulations, these requirements will be met if (1) the beneficial owner
provides the payor his name and address, and certifies, under penalties of
perjury, that he is not a U.S. person (which certification may be made on an
Internal Revenue Service Form W-8 (or successor or substitute form)) or (2) a
financial institution that holds customers' securities in the ordinary course
of its trade or business and holds the Note on behalf of the beneficial owner
certifies, under penalties of perjury, that such statement has been received
by it (or by another financial institution acting on behalf of the Non-U.S.
Holder), and furnishes a paying agent with a copy thereof.
Regulations recently issued by the Internal Revenue Service, which will be
effective for payments made after December 31, 1998 (subject to certain
transition rules), made modifications to the certification procedures
applicable to Non-U.S. Holders. In general, these regulations unify certain
certification procedures and forms and clarify and modify reliance standards.
A Non-U.S. Holder should consult its own advisor regarding the effect of the
new Regulations.
If a Non-U.S. Holder cannot satisfy the requirements of the "portfolio
interest" exception described in (a) above, payments of interest (including
OID) made to Non-U.S. Holders will generally be subject to a 30%
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<PAGE>
withholding tax, or such lower rate as may be specified by an applicable
income tax treaty, unless the beneficial owner of the Note provides the
Company or its paying agent, as the case may be, with a properly executed (1)
Internal Revenue Service Form 1001 (or successor form) claiming an exemption
from withholding under the benefit of a tax treaty or (2) Internal Revenue
Service Form 4224 (or successor form) stating that interest (including OID)
paid on the Note is not subject to withholding tax because it is effectively
connected with the beneficial owner's conduct of a trade or business in the
United States.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest (including OID) on the Note is effectively connected with the
conduct of such trade or business, the Non-U.S. Holder, although exempt from
the withholding tax discussed above, will generally be subject to United
States federal income tax on such interest (including OID) on a net income
basis in the same manner as if it were a United States person. In addition, if
such holder is a foreign corporation, it may be subject to a branch profits
tax equal to 30% of its effectively connected earnings and profits for the
taxable year, or such lower rate as may be specified by an applicable income
tax treaty, subject to adjustments.
Any gain or income realized upon the sale, exchange or retirement of a Note
generally will not be subject to United States federal income tax unless (i)
such gain or income is effectively connected with a trade or business in the
United States of the Non--U.S. Holder, or (ii) in the case of a Non-U.S.
Holder who is a nonresident alien individual, such Holder is present in the
United States for 183 days or more in the taxable year of such sale, exchange
or retirement, and certain other conditions are met.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The "backup" withholding and information reporting requirements may apply to
certain payments of principal and interest (including OID) on a Note and to
certain payments or proceeds of the sale or retirement of a Note. The Company,
its agent, a broker, the Trustee or any paying agent, as the case may be, is
required to withhold tax from any payment that is subject to backup
withholding at a rate of 31% of such payment if the holder fails to furnish
his taxpayer identification number (social security number or employer
identification number), to certify that such holder is not subject to backup
withholding, or to otherwise comply with the applicable requirements of the
backup withholding rules. Certain holders (including, among others, all
corporations) are not subject to the backup withholding and reporting
requirements.
Under current Treasury Regulations, backup withholding and information
reporting do not apply to payments made by the Company or any agent thereof
(in its capacity as such) to a holder of a Note who has provided the required
certification under penalties of perjury that it is not a U.S. Holder as set
forth in the third paragraph under "--Non-U.S. Holders" or has otherwise
established an exemption (provided that neither the Company nor such agent has
actual knowledge that the holder is a U.S. Holder or that the conditions of
any other exemption are not in fact satisfied). Payments of the proceeds from
the sale by a holder who is not a U.S. Holder of a Note made to or through a
foreign office of a broker will not be subject to U.S. information reporting
or backup withholding, except that if the broker is a U.S. person, a
controlled foreign corporation for U.S. tax purposes or a foreign person 50%
or more of whose gross income is effectively connected with a United States
trade or business for a specified three-year period, U.S. information
reporting may apply to such payments.
Payments of the proceeds from the sale of a Note to or through the United
States office of a broker is subject to U.S. information reporting and backup
withholding unless the holder or beneficial owner certifies as to its non-U.S.
status or otherwise establishes an exemption from U.S. information reporting
and backup withholding.
In October 1997, Regulations were issued which alter the foregoing rules in
certain respects and which generally will apply to any payments (including
OID) in respect of a Note or proceeds from the sale of a Note that are made
after December 31, 1998. Among other things, such regulations expand the
number of foreign intermediaries that are potentially subject to information
reporting and address certain documentary evidence requirements relating to
exemption from the general backup withholding requirements. Holders of the
Notes should consult their tax advisors concerning possible application of the
final regulations to amounts of OID that
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<PAGE>
they are required to include as well as the possible application of such
regulation to any payments made on or with respect to the Notes.
Any amounts withheld under the backup withholding rules from a payment to a
holder may be claimed as a credit against such holder's United States federal
income tax liability.
The Company is required to furnish certain information to the Internal
Revenue Service, and will furnish annually to record holders of Notes,
information with respect to interest and OID accruing during the calendar
year. The OID information will be based upon the adjusted issue price of the
debt instrument as if the holder were the original holder of the debt
instrument. No assurance can be given that the Internal Revenue Service will
not challenge the accuracy of the reported information. Subsequent holders who
purchase Notes for an amount other than the adjusted issue price and/or on a
date other than the last day of an accrual period will be required to
determine for themselves the amount of OID, if any, they are required to
include in gross income for U.S. federal income tax purposes.
LEGAL MATTERS
The legality of the Exchange Notes offered hereby are being passed upon for
the Company by Ross & Hardies, Chicago, Illinois.
INDEPENDENT PUBLIC ACCOUNTANTS
The Consolidated Financial Statements as of December 31, 1996 and 1997 and
for the period from May 31, 1996 to December 31, 1996 and for the year ended
December 31, 1997 and the financial statement schedule included in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their reports appearing herein.
AVAILABLE INFORMATION
The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-4 under the
Securities Act with respect to the Exchange Offer. As permitted by the rules
and regulations of the Commission, this Prospectus does not contain all the
information set forth in the Registration Statement. For further information
about the Company and the Exchange Offer, reference is made to the
Registration Statement and to the financial statements, exhibits and schedules
filed therewith. The statements contained in this Prospectus about the
contents of any contract or other document referred to are not necessarily
complete, and in each instance, reference is made to a copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of each
such document may be obtained from the Commission at its principal office in
Washington, D.C. upon payment of the charges prescribed by the Commission or,
in the case of certain such documents, by accessing the Commission's World
Wide Web site at http://www.sec.gov.
The Company has agreed that, for so long as any Notes remain outstanding, it
will furnish to the Holders of the Notes and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act. The Company
will file with the Trustee after it files with the Commission copies of the
annual reports on Form 10-K and the information, documents, and other reports
that the Company is required to file with the Commission pursuant to Section
13 or 15(d) of the Exchange Act as well as quarterly reports (collectively,
the "SEC Reports"). In the event the Company ceases to be required to file SEC
Reports pursuant to either of such Sections of the Exchange Act, the Company
will nevertheless continue to file such reports with the Commission (unless
the Commission will not accept such a filing) and the Trustee. The Company
will furnish copies of the SEC Reports to the Holders of the Notes at the time
the Company is required to file the same with the Trustee.
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GLOSSARY
Access Charges--The charges paid by an interexchange carrier to a LEC for
the origination or termination of the IXC's customer's long distance calls.
Access Line--A circuit that connects a telephone user (customer) to the
public switched telephone network.
CLEC (Competitive Local Exchange Carrier)--A category of telephone service
provider (carrier) that offers services similar to the former monopoly local
telephone company, as recently allowed by changes in telecommunications law
and regulation. A CLEC may also provide other types of telecommunications
services (long distance, etc.)
CLEC Certification--Granted by a state public service commission or public
utility commission, this allows a telecommunications service provider the
legal standing to offer local exchange telephone services in direct
competition with the incumbent LEC and other CLECs. Such certifications are
granted on a state by state basis.
Central Office--The switching system (such as a DMS-500 by Nortel) used to
connect calls.
Communications Act of 1934, The--The first major federal legislation that
established rules for broadcast and non-broadcast communications, both
wireless and wired telephony.
DMS-500--A telephone switch manufactured by Nortel, that provides both local
exchange switching (also known as a "class 5" switch) and a long distance
switch (also known as a "class 4" switch) in a single device.
FCC (Federal Communications Commission)--The United States Government
organization charged with the oversight of all public communications media.
ILEC (Incumbent Local Exchange Carrier)--The local exchange carrier that was
the monopoly carrier, prior to the opening of local exchange services to
competition.
Interconnection Agreement--A contract between an ILEC and a CLEC for the
interconnection of the party's networks, for the purpose of mutual passing of
traffic between the networks, allowing customers of one of the networks to
call users served by the other network. These agreements set out the financial
and operational aspects of such interconnection.
Interim Number Portability--A temporary technique that allows local exchange
service customers of an ILEC to keep their existing telephone number, while
moving their service to a CLEC. This interim technique uses a central office
feature called remote call forwarding. The permanent solution to number
portability is to be implemented over the next few years.
Fiber Optic Digital Network--A modern telephone technology that combines
voice and data switching in an efficient manner.
ISP (Information Service Provider)--An information service provider which
allows for access to the Internet.
IXC (Interexchange Carrier)--A provider of telecommunications services
between exchanges, or cities; also called long distance carrier. A long
distance carrier may offer services over its own or another carrier's
facilities.
LEC (Local Exchange Carrier)--Any telephone service provider offering local
exchange services.
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Local Exchange--An area inside of which telephone calls are generally
completed without any toll, or long distance charges. Local exchange areas are
defined by the state regulator of telephone services.
POP (Point of Presence)--A location where a carrier, usually an IXC, has
located transmission and terminating equipment to connect its network to the
networks of other carriers, or to customers.
PUC (Public Utility Commission)--A state regulatory body, established in
most states, which regulates utilities, including telephone companies
providing intrastate services.
Reciprocal Compensation--The compensation paid by a carrier to terminate
traffic on another carrier's network.
RBOC (Regional Bell Operating Company)--One of the LECs created by the
divestiture of the local exchange business from AT&T in 1984. These include
BellSouth, Bell Atlantic, Ameritech, US West and SBC.
Special Access Lines--Private, non-switched connections between an IXC and a
customer, for the purpose of connecting the customer's long distance calls
directly to the IXC's network, without having to pay the LEC's access charges.
Switch--A device that 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. The DMS-
500 by Nortel is an example of a switch.
Switched Services--Transmission of switched calls through the local switched
network.
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FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................................. F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996, 1997 and March 31,
1998................................................................... F-3
Consolidated Statements of Operations for the Period from May 31, 1996
(Commencement of Operations), to December 31, 1996, for the Year Ended
December 31, 1997 and for the Three Months Ending March 31, 1997 and
1998................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Period
from May 31, 1996 (Commencement of Operations), to December 31, 1996,
for the Year Ended December 31, 1997 and for the Three Months Ending
March 31, 1997 and 1998................................................ F-5
Consolidated Statements of Cash Flows for the Period from May 31, 1996
(Commencement of Operations), to December 31, 1996, for the Year Ended
December 31, 1997 and for the Three Months Ending March 31, 1997 and
1998................................................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Focal Communications Corporation:
We have audited the accompanying consolidated balance sheets of FOCAL
COMMUNICATIONS CORPORATION AND SUBSIDIARIES (a Delaware corporation) as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the period from May 31,
1996 (commencement of operations), to December 31, 1996, and for the year
ended December 31, 1997. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Focal
Communications Corporation and Subsidiaries as of December 31, 1996 and 1997,
and the results of its operations and its cash flows for the period from May
31, 1996 (commencement of operations), to December 31, 1996, and for the year
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Chicago, Illinois
January 14, 1998
F-2
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, DECEMBER 1998
ASSETS 1996 31, 1997 (UNAUDITED)
------ ------------ ----------- ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............ $3,790,121 $ 2,256,552 $152,758,944
Accounts receivable, trade (net of
allowance for doubtful accounts of
$469,000 and $1,046,000 at December
31, 1997 and March 31, 1998,
respectively)....................... -- 2,355,814 5,196,879
Related-party receivables............ 16,883 34,883 120,349
Other current assets................. -- 90,559 328,631
---------- ----------- ------------
Total current assets............... 3,807,004 4,737,808 158,404,803
---------- ----------- ------------
FIXED ASSETS, at cost:
Communications network............... -- 7,906,336 11,125,470
Construction in progress............. 37,285 1,938,236 4,325,152
Computer equipment................... 45,018 941,237 1,211,371
Leasehold improvements............... -- 652,173 2,268,183
Furniture and fixtures............... -- 355,759 437,337
Motor vehicles....................... -- -- 19,289
---------- ----------- ------------
82,303 11,793,741 19,386,802
Less--Accumulated depreciation and
amortization........................ 1,150 616,967 1,260,951
---------- ----------- ------------
Fixed assets, net.................. 81,153 11,176,774 18,125,851
Other non-current assets (net)....... -- -- 5,697,368
$3,888,157 $15,914,582 $182,228,022
========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
------------------------------------
CURRENT LIABILITIES:
Accounts payable..................... $ 197,246 $ 1,502,479 $ 5,256,228
Accrued liabilities.................. 71,212 367,890 497,404
Current maturities of long-term
debt................................ -- 943,621 --
---------- ----------- ------------
Total current liabilities.......... 268,458 2,813,990 5,753,632
LONG-TERM DEBT, net of current
maturities............................ -- 2,593,265 152,093,513
---------- ----------- ------------
OTHER NONCURRENT LIABILITIES........... -- 179,481 269,222
---------- ----------- ------------
REDEEMABLE COMMON STOCK:
Class A, $.01 par value, 85,567
shares authorized and 80,307 issued
and outstanding at December 31,
1997................................ 4,024,653 12,403,218 --
---------- ----------- ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, Class A, $.01 par
value, 85,567 shares authorized and
80,307 issued and outstanding at
March 31, 1998...................... -- -- 803
Common stock, Class B, $.01 par
value; 35,000 shares authorized,
20,000 shares issued and outstanding
at December 31, 1996, 1997 and March
31, 1998............................ 200 200 200
Common stock, Class C, $.01 par
value; 15,000 shares authorized,
14,711 shares issued and outstanding
at December 31, 1996, 1997 and March
31, 1998............................ 147 147 147
Additional paid-in capital........... -- (103,565) 26,098,850
Accumulated deficit.................. (405,301) (1,972,154) (1,988,345)
---------- ----------- ------------
Total stockholders' equity
(deficit)......................... (404,954) (2,075,372) 24,111,655
---------- ----------- ------------
$3,888,157 $15,914,582 $182,228,022
========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
MAY 31, 1996 FOR THE FOR THE THREE MONTHS
(COMMENCEMENT OF YEAR ENDING ENDING MARCH 31,
OPERATIONS) TO DECEMBER ---------------------
DECEMBER 31, 1996 31, 1997 1997 1998
------------------- ----------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES................ $ -- $ 4,023,690 $ -- $5,102,448
EXPENSES:
Customer service and
network operations... -- 2,154,980 8,692 1,826,893
Selling, general and
administrative....... 421,777 2,887,372 416,492 1,307,625
Depreciation and amor-
tization............. 1,150 615,817 7,337 890,871
--------- ----------- --------- ----------
Total operating ex-
penses............. 422,927 5,658,169 432,521 4,025,389
--------- ----------- --------- ----------
Operating income
(loss)............. (422,927) (1,634,479) (432,521) 1,077,059
--------- ----------- --------- ----------
OTHER INCOME (EXPENSE):
Interest income....... 17,626 195,696 43,055 1,015,902
Interest expense...... -- 128,070 135 2,109,152
--------- ----------- --------- ----------
17,626 67,626 42,920 (1,093,250)
--------- ----------- --------- ----------
NET LOSS................ $(405,301) $(1,566,853) $(389,601) $ (16,191)
--------- ----------- --------- ----------
ACCRETION TO REDEMPTION
VALUE OF CLASS A COMMON
STOCK.................. -- (103,565) (25,891) --
--------- ----------- --------- ----------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS.... $(405,301) $(1,670,418) $(415,492) $ (16,191)
========= =========== ========= ==========
BASIC AND DILUTED NET
LOSS PER SHARE OF COM-
MON STOCK.............. $ (12.42) $ (16.69) $ (4.18) $ (0.16)
========= =========== ========= ==========
BASIC AND DILUTED
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING...... 32,625 100,093 99,461 100,307
========= =========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MAY 31, 1996 (COMMENCEMENT OF OPERATIONS), TO DECEMBER 31,
1996, FOR THE YEAR ENDED DECEMBER 31, 1997, AND FOR THE THREE MONTHS ENDED
MARCH 31, 1998
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
COMMON STOCK COMMON STOCK COMMON STOCK
COMMON STOCK $.01 PAR VALUE $.01 PAR VALUE $.01 PAR VALUE ADDITIONAL
-------------- ---------------- ---------------- ---------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ -------- ------- -------- ------- -------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
May 31, 1996
(commencement of
operations)...... -- $-- -- $ -- -- $ -- -- $ -- $-- $-- $--
Issuance of
common stock.... 1,500 -- -- -- -- -- -- -- -- -- --
Conversion of
common stock to
Class B common.. (1,125) -- -- -- 20,000 200 -- -- -- -- 200
Conversion of
common stock to
Class C common.. (375) -- -- -- -- -- 14,711 147 -- -- 147
Net loss......... -- -- -- -- -- -- -- -- -- (405,301) (405,301)
------ ---- -------- ------ -------- ------ -------- ------ ----------- ----------- -----------
BALANCE,
December 31, 1996.. -- -- -- -- 20,000 200 14,711 147 -- (405,301) (404,954)
Accretion of
redeemable
common stock.... -- -- -- -- -- -- -- -- (103,565) -- (103,565)
Net loss......... -- -- -- -- -- -- -- -- -- (1,566,853) (1,566,853)
------ ---- -------- ------ -------- ------ -------- ------ ----------- ----------- -----------
BALANCE,
December 31, 1997.. -- -- -- -- 20,000 200 14,711 147 (103,565) (1,972,154) (2,075,372)
Adjustment to
reflect
amendment to
stock purchase
agreement....... -- -- 80,307 803 -- -- -- -- 12,402,415 -- 12,403,218
Class A common
capital
contributions... -- -- -- -- -- -- -- -- 13,800,000 -- 13,800,000
Net Loss......... -- -- -- -- -- -- -- -- -- (16,191) (16,191)
------ ---- -------- ------ -------- ------ -------- ------ ----------- ----------- -----------
BALANCE, March 31,
1998
(Unaudited)...... -- $-- 80,307 $ 803 20,000 $ 200 14,711 $ 147 $26,098,850 $(1,988,345) $24,111,655
====== ==== ======== ====== ======== ====== ======== ====== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 31, 1996
(COMMENCEMENT
OF FOR THE YEAR FOR THREE MONTHS ENDED
OPERATIONS), ENDED MARCH 31,
TO DECEMBER DECEMBER 31, -------------------------
31, 1996 1997 1997 1998
------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss.............. $ (405,301) $ (1,566,853) $ (389,602) $ (16,191)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities--
Depreciation and
amortization....... 1,150 615,817 7,337 890,871
Deferred lease
costs.............. -- 179,481 -- 89,741
Accretion of senior
discount notes..... -- -- -- 2,062,174
Provision for losses
on accounts
receivable......... -- 469,000 -- 577,000
(Increase) decrease
in operating assets
and liabilities--
Accounts
receivable....... -- (2,824,814) -- (3,418,065)
Related-party
receivables...... (16,883) (18,000) (29,679) (85,466)
Other assets...... -- (90,559) -- (238,072)
Accounts payable
and accrued
liabilities...... 268,458 1,601,911 (110,651) 3,883,263
---------- ------------ ----------- ------------
Net cash
provided by
(used in)
operating
activities..... (152,576) (1,634,017) (522,595) 3,745,255
---------- ------------ ----------- ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures.. (82,303) (11,655,524) (2,244,385) (7,593,061)
Capitalized debt
issuance costs....... -- -- -- --
---------- ------------ ----------- ------------
Net cash used in
investing
activities..... (82,303) (11,655,524) (2,244,385) (7,593,061)
CASH FLOW FROM FINANCING
ACTIVITIES:
Net proceeds from
issuance of long-term
debt................. -- 3,697,500 -- 144,083,351
Payments on bank
credit facility and
capital leases....... -- (216,528) (486) (3,533,153)
Proceeds from Class A
common capital
contributions........ 4,025,000 8,275,000 4,000,000 13,800,000
---------- ------------ ----------- ------------
Net cash
provided by
financing
activities..... 4,025,000 11,755,972 3,999,514 154,350,198
---------- ------------ ----------- ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 3,790,121 (1,533,569) 1,232,534 150,502,392
CASH AND CASH
EQUIVALENTS, beginning
of period.............. -- 3,790,121 3,790,121 2,256,552
---------- ------------ ----------- ------------
CASH AND CASH
EQUIVALENTS, end of
period................. $3,790,121 $ 2,256,552 $ 5,022,655 $152,758,944
========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997, AND MARCH 31, 1997 AND 1998
1. ORGANIZATION AND OPERATIONS
Focal Communications Corporation began operations on May 31, 1996. Focal
Communications Corporation and Subsidiaries (the "Company") is a competitive
local exchange carrier ("CLEC") in the United States and offers a range of
telecommunications services. The Company currently has operations in Illinois
and New York. The Company competes with incumbent local exchange carriers
("ILECs") by providing high quality, local telecommunications services,
primarily over fiber optic digital networks, to meet the voice and data
transmission needs of its customers. The Company's customers are principally
telecommunications-intensive businesses, other carriers and resellers and
internet service providers.
The Company incurred an accumulated deficit of $1,972,154 from May 31, 1996
(commencement of operations), through December 31, 1997. The Company must
recognize significant sales and obtain additional capital to adequately grow
its operations. Future profitability of the Company is dependent upon
continued market acceptance and the Company continuing to adequately provide
and maintain its services. Management believes that current financial
forecasts, marketing strategies and capital raising plans are adequate to
address these issues.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The 1996, 1997, and March 31, 1998 consolidated balance sheets include the
accounts of the Company and all wholly owned subsidiaries. All material
intercompany transactions and balances have been eliminated in consolidation.
Interim Financial Information
The unaudited consolidated balance sheet as of March 31, 1998, the unaudited
consolidated statement of stockholders' equity for the three months ended
March 31, 1998 and the unaudited statements of operations and cash flows for
the three months ended March 31, 1997 and 1998 include, in the opinion of
management, all adjustments (consisting of normal and recurring adjustments)
necessary to present fairly the Company's financial position, results of
operations and cash flows. Operating results for the three months ended March
31, 1998 are not necessarily indicative of the results which may be expected
for the year ended December 31, 1998. The information included in these notes
to financial statements relating to the three months ended March 31, 1998 and
1997 is unaudited.
Basis of Accounting
The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Risks and Uncertainties
The Company has recorded revenues and related accounts receivable totaling
$1.7 million as of December 31, 1997, and $3.2 million as of March 31, 1998
from another carrier who is currently disputing its obligation to the Company.
This dispute was ruled on in favor of the Company by the Illinois Commerce
Commission ("ICC") in March of 1998. The other carrier has appealed the ICC
ruling, and a stay of payments due was granted in federal district court
pending consideration of the appeal. A federal court ruling is expected in
June.
Concentration of Suppliers
The Company currently leases its transport capacity from a limited amount of
suppliers and is dependent upon the availability of fiber optic transmission
facilities owned by the suppliers. The Company is currently vulnerable to the
risk of renewing favorable supplier contracts, timeliness of the supplier in
processing the Company's orders for customers and is at risk to regulatory
agreements that govern the rates to be charged to the Company.
Cash and Cash Equivalents
Cash and cash equivalents (stated at cost which approximates market) consist
principally of highly liquid investments, with a maturity date of three months
or less when purchased.
Revenue Recognition
Revenue is recognized over the period in which the services are provided.
Monthly recurring charges include fees paid by customers for lines in service,
additional features on those lines and colocation space. These charges are
billed monthly, in advance, and are fully earned during the month. Usage
charges, initial, non-recurring charges, and reciprocal compensation charges
are billed in arrears and are fully earned when billed.
Depreciation and Amortization
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets as follows:
<TABLE>
<CAPTION>
ASSET DESCRIPTION USEFUL LIFE
----------------- -----------
<S> <C>
Communications network........... 3-8 years
Computer equipment............... 3 years
Leasehold improvements........... Shorter of asset life or life of lease
Furniture and fixtures........... 2-5 years
</TABLE>
When depreciable assets are replaced or retired, the amounts at which such
assets were carried are removed from the respective accounts and charged to
accumulated depreciation and any gains or losses on disposition is recorded
currently in the consolidated statements of operations.
Maintenance and repairs are charged to expense as incurred, while major
replacements and improvements are capitalized.
F-8
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Impairment of Long-Lived Assets
The Company periodically assesses the recoverability of the carrying cost of
its long-lived assets based on a review of its projected undiscounted cash
flows related to the asset held for use. If assets are determined to be
impaired then the asset is written down to its fair value based on the present
value of the discounted cash flows of the related asset or other relevant
measures (quoted market prices, third party offers, etc.). Based on its
review, management does not believe that an impairment of the long-lived
assets has occurred.
Capitalized Interest
Interest is capitalized in connection with the construction of major
facilities and communication networks. The capitalized interest is recorded as
part of the asset to which it relates and is amortized over the asset's
estimated useful life. No interest was capitalized for the period from May 31,
1996, to December 31, 1996, and for the year ended December 31, 1997, and for
the three months ended March 31, 1998.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," pursuant to which deferred income tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities, using enacted tax rates currently in effect.
State and local taxes may be based on factors other than income.
Other Noncurrent Liabilities
Other noncurrent liabilities represent deferred lease incentives which
reduce lease expense ratably over future periods.
Financial Instruments
The carrying amounts of the Company's financial instruments at December 31,
1996 and 1997 and March 31, 1997 and 1998 approximate their fair values. The
following methods were used in estimating fair value disclosures for
significant financial instruments: (i) cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate their carrying amount due to
the short duration of those instruments and (ii) long-term debt approximates
the underlying cash flows discounted at the Company's incremental borrowing
rates.
Stock-Based Compensation
The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation expense has been recorded for its stock option awards, but
rather, the Company has determined the pro forma net loss amount for 1997, and
the three months ended March 31, 1998 as if compensation expense had been
recorded for options granted during 1997 and the three months ended March 31,
1998 under the fair value method described in SFAS No. 123, "Accounting for
Stock-Based Compensation."
The Company utilized the Black-Scholes option pricing model to estimate the
fair value of options at the date of grant during 1997 and the three months
ended March 31, 1998. Had the Company adopted SFAS No. 123, pro forma net loss
applicable to common stockholders and pro forma basic and diluted net loss per
share of common stock would have been approximately ($1,710,434) and ($17.09)
for the year ended December 31, 1997,
F-9
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and ($35,353) and ($0.35) for the quarter ended March 31, 1998. The pro forma
disclosure is not likely to be indicative of pro forma results which may be
expected in future years because of the fact that options vest over several
years, compensation expense is recognized as the options vest and additional
awards may also be granted.
Accretion to Redemption Value of Class A Common Stock
Accretion to redemption value of redeemable Class A common stock represents
the change in the redemption value of all outstanding Class A common stock
allocable to each period. The redemption values for all Class A common shares
are based on fair market value and accretion is calculated using the effective
interest method (Note 11).
Loss Per Share
Basic and diluted loss per share were computed in accordance with SFAS No.
128, "Earnings Per Share" (Note 7).
3. RELATED-PARTY RECEIVABLES
As part of the stock purchase agreement (Note 10), executive shareholders,
as defined, purchased their Class A common shares with 90-day promissory
notes. The promissory notes are with recourse to each executive and have a
prepayment provision without penalty. The notes are secured by a pledge of all
Company common stock and other assets held by the executives. Interest accrues
on a daily basis at a rate equal to the applicable federal rate (5.61% at
February 13, 1998) for obligations of similar duration. On March 31, 1998
there was $120,348 due from the executive shareholders.
4. LONG-TERM DEBT
During September, 1997, the Company entered into a credit facility with a
bank which provides for, among other things, a committed equipment line of up
to a maximum principal amount of $6,000,000. The credit facility expires on
October 30, 2002.
The Company may request advances ranging from 70% to 100%, of invoice
amounts related to equipment purchases and construction of facilities, as
defined. All advances under the committed equipment line bear interest at two
percentage points above the prime rate (10.5% at December 31, 1997).
All advances that are outstanding for 30 days will be payable in 48 equal
monthly installments of principal, plus all accrued interest. Advances, once
repaid, may not be reborrowed. Total advances of $3,480,972 were outstanding
as of December 31, 1997. All of the outstanding Class A, Class B and Class C
common stock have been pledged as security for the performance of all
obligations as defined in the credit facility. In February 1998 all amounts
outstanding on this credit facility were repaid and the credit facility was
terminated.
In February 1998 the Company completed its offering of $270 million stated
principal amount at maturity of its 12.125% senior discount notes due 2008
(the "Notes"), which resulted in gross proceeds of $150,027,606. The Notes
bear interest at the rate of 12.125% per annum (computed on a semiannual bond
equivalent basis). In the period prior to February 15, 2003, interest will
accrue but will not be payable in cash. From February 15, 2003, interest on
the stated principal amount at maturity of the Notes will be payable in cash
semi-annually on August 15 and February 15 of each year, beginning on August
15, 2003.
The Notes are senior unsecured obligations of the Company ranking pari passu
in right of payment with all other existing and future senior indebtedness of
the Company, if any, and will rank senior in right of payment to all existing
and future subordinated indebtedness of the Company, if any. Holders of
secured indebtedness of the
F-10
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company, however, will have claims that are prior to the claims of the holders
of the Notes with respect to the assets securing such other indebtedness. The
Notes will be effectively subordinated to all existing and future indebtedness
and other liabilities of the Company's subsidiaries (including accounts
payable).
The Notes are redeemable, at the Company's option, in whole or in part, at
any time or from time to time, on or after February 15, 2003, at 106.063% of
their stated principal amount at maturity, plus accrued and unpaid current
interest, declining ratably to 100% of their stated principal amount at
maturity, plus accrued and unpaid current interest, on or after February 15,
2006. In addition, at any time and from time to time, prior to February 15,
2001, the Company may redeem in the aggregate up to 35% of the original
aggregate stated principal amount at maturity of the Notes with the proceeds
from one or more public equity offerings following which there is a public
market, at a redemption price (expressed as a percentage of accreted value on
the redemption date) of 112.125%, plus additional interest, if any; provided
that at least 65% of the original aggregate stated principal amount at
maturity of the Notes remains outstanding after each such redemption.
The Notes indenture contains certain covenants which, among other things,
restrict the ability of the Company and certain of its subsidiaries to incur
additional indebtedness (and, in the case of certain subsidiaries, issue
preferred stock), pay dividends or make distributions in respect of the
Company's or such subsidiaries' capital stock, make other restricted payments,
enter into sale and leaseback transactions, incur liens, cause encumbrances or
restrictions to exist on the ability of certain subsidiaries to pay dividends
or make distributions in respect of their capital stock, issue and sell
capital stock of certain subsidiaries, enter into transactions with
affiliates, sell assets, or amalgamate, consolidate, merge or sell or
otherwise dispose of all or substantially all of their property and assets.
These covenants are subject to exceptions and qualifications.
Long-term debt at December 31, 1997 and March 31, 1998, consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Credit facility with bank, maximum borrowing
level at $6,000,000........................... $3,480,972 $ --
12.125% senior discount notes due 2008, net of
unamortized discount of $117,910,220.......... -- 152,089,780
Capital leases on equipment with interest at
14.66%, $2,327 due monthly through April,
2000.......................................... 55,914 3,733
---------- ------------
3,536,886 152,093,513
Less--Current Maturities....................... 943,621 --
---------- ------------
$2,593,265 $152,093,513
========== ============
</TABLE>
Aggregate maturities of long-term debt outstanding as of December 31, 1997,
is as follows:
<TABLE>
<S> <C>
1998........................................................... $ 943,621
1999........................................................... 943,621
2000........................................................... 937,579
2001........................................................... 712,065
----------
Total...................................................... $3,536,886
==========
</TABLE>
F-11
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. STOCK OPTIONS
The Company established the Focal Communications Corporation 1997 Non-
Qualified Stock Option Plan (the "Plan") effective February 27, 1997. The Plan
is administered by the Company's Board of Directors (the "Board"). The Board
has sole and complete authority to select participants and grant options for
the Company's Class A common shares which shall not exceed 5,260 shares, as
defined. During 1997, and the three months ended March 31, 1998 stock options
were granted to employees and a director with exercise prices approximating
the fair market value of the shares on the date of grant and, accordingly, no
compensation expense has been recognized in connection with the options.
The Plan gives the Board complete discretion in determining vesting periods
and terms of each participant's options granted. All options granted to
employees and to a director during 1997 and the three months ended March 31,
1998 provide vesting ranging from three to four years. Vesting occurs at 10%
immediately for one participant, 25% on the first-year anniversary from grant
date for all remaining participants and vesting at 12.5% to 15% every six
months for the remainder of vesting years. The term of each option is 10
years. In addition, the Plan provides for accelerated vesting upon certain
events, as defined.
The following summarizes option activity:
<TABLE>
<CAPTION>
WEIGHTED
SHARES OF AVERAGE
CLASS A EXERCISE EXERCISE
COMMON PRICES PRICES
--------- --------- --------
<S> <C> <C> <C>
Outstanding at December 31, 1996........... -- $ -- $ --
Granted during 1997...................... 1,222 $290-$320 $296.61
----- --------- -------
Outstanding at December 31, 1997........... 1,222 $290-$320 $296.61
===== ========= =======
Granted during the three months ended
March 31, 1998.......................... 627 $ 335 $335.00
----- --------- -------
Outstanding at March 31, 1998.............. 1,849 $290-$335 $309.63
===== ========= =======
</TABLE>
The fair value of each option was estimated on the date of grant based on
the Black-Scholes option pricing model assuming, among other things, no
dividend yield, a risk-free interest rate ranging from 6.0% to 6.66%, expected
volatility of 41.67% and expected life of five years.
The Black-Scholes option model estimated the weighted average fair value at
the date of grant of options granted in 1997 and for the three months ended
March 31, 1998 to be $161 per option as of March 31, 1998. The remaining
contractual life of all options was approximately 10 years.
F-12
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES
There is no current or deferred tax expense for the period from May 31,
1996, to December 31, 1996, for the year ended December 31, 1997, and for the
three months ended March 31, 1998. The deferred tax consequences of temporary
differences in reporting items for financial statement and income tax purposes
are recognized, if appropriate. Realization of future tax benefits related to
the deferred tax assets is dependent on many factors, including the Company's
ability to generate taxable income. Management has considered these factors
and has concluded that a full valuation allowance for financial reporting
purposes is required for the deferred tax assets. The income tax effect of
temporary differences comprising the net deferred tax asset is a result of the
following:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Deferred income tax liabilities--Depreciation...... $ -- $(227,000)
-------- ---------
Deferred income tax assets--Assets recorded for tax
purposes.......................................... -- 205,000
Net operating losses............................... 76,000 724,000
-------- ---------
76,000 929,000
-------- ---------
Less--Valuation allowance.......................... (76,000) (702,000)
-------- ---------
Net deferred tax assets............................ $ -- $ --
======== =========
</TABLE>
The Company has net operating loss carryforwards as of December 31, 1997 of
approximately $1,811,000 for tax purposes to offset future taxable income. The
operating loss carryforwards expire principally in 2012.
7. LOSS PER SHARE
SFAS No. 128, "Earnings Per Share," requires the Company to calculate its
earnings per share based on basic and diluted earnings per share, as defined.
Basic and diluted loss per share for the period from May 31, 1996, to December
31, 1996, for the year ended December 31, 1997, and for the three months ended
March 31, 1998 was computed by dividing net loss applicable to common
stockholders by the weighted average number of shares of common stock (Class A
and Class B common stock).
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 1997 1997 1998
------------ ------------ --------- ---------
<S> <C> <C> <C> <C>
Basic Weighted Average
Number of Common Shares
Outstanding.............. 32,625 100,093 99,461 100,307
Dilutive Stock Options.... -- -- -- 1,304
------ ------- ------ -------
Dilutive Weighted Average
Number of Common Shares
Outstanding.............. 32,625 100,093 99,461 101,611
====== ======= ====== =======
</TABLE>
The 14,711 Class C common shares and the Company's 1,849 unvested stock
options granted during 1997 and the three months ended March 31, 1998, are
antidilutive and have been excluded from diluted loss per share calculation
for the year ended December 31, 1997 and the three months ended March 31,
1998.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan (the "Plan") covering substantially all
eligible employees. Under the Plan, participants may make pretax contributions
from 1% to 15% of eligible earnings, as defined. The Company may elect to
contribute to the Plan at its discretion. There have been no Company
contributions to the Plan for the years ended December 31, 1996 and 1997. In
February 1998 the company elected to match 30% of the first 10% that an
employee contributes to the plan.
F-13
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Under the terms of various short- and long-term contracts, the Company is
obligated to pay office rents and rent for leasing fiber optic transmission
facilities. The Company is obligated to pay office rents in connection with
its operations through 2012. The office rent contracts provide for certain
scheduled increases and for possible escalation of basic rentals based on a
change in the cost of living or on other factors. The Company expects to enter
into other contracts for additional office space, other facilities, equipment
and maintenance services in the future.
A summary of such fixed commitments at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
1998........................................................... $ 575,000
1999........................................................... 584,000
2000........................................................... 595,000
2001........................................................... 475,000
2002........................................................... 500,000
Thereafter..................................................... 4,784,000
----------
Total........................................................ $7,513,000
==========
</TABLE>
Rent expense under operating leases for office rent and rent for leasing
fiber optic transmission facilities was approximately $6,488 for the period
from May 31, 1996, to December 31, 1996, and $651,159 for the year ended
December 31, 1997, and $166,484 for the three months ended March 31, 1998.
In the ordinary course of business, the Company is involved in various
regulatory matters (Note 2), proceedings and claims.
10. STOCK PURCHASE AGREEMENT
On November 27, 1996, the Company entered into a Stock Purchase Agreement
(the "Agreement") with Institutional Investors and Executives ("Investors"),
as defined in the Agreement. The Agreement resulted in 79,384 shares of Class
A Common Stock, par value $.01 per share being issued for an aggregate
purchase price of $4 million, and subsequent transactions in which Investors
will make pro-rata contributions to the capital of the Company (with no
additional shares being issued) of up to an additional $21.8 million (total
investment of up to $25.8 million). Total capital contributions to the Company
for the issuance of Class A common were $4,025,000 and $8,275,000 for the
period from May 31, 1996, to December 31, 1996, and for the year ended
December 31, 1997, respectively.
Subsequent to the closing of the Agreement, the Company sold 77 shares and
846 shares of Class A Common shares to Designees (as defined in the Agreement)
of the Institutional Investors, for a total purchase price of $25,000 and
$275,000 for the period from May 31, 1996, to December 31, 1996, and for the
year ended December 31, 1997, respectively.
As part of the Agreement, the Company and Executives' existing common stock
held by the executives converted into newly issued Class B common and Class C
common shares (the "Exchange"). The closing of the Exchange and issuance of
Class B common and Class C common shares took place simultaneously with the
initial closing of the issuance of Class A common shares under the Agreement.
A summary of the Company's Class A, B and C common stock is as follows:
Class A Common--A total of 85,567 shares have been authorized and 79,461
and 80,307 are issued and outstanding as of December 31, 1996 and 1997,
respectively. Institutional Investors, as defined, who
F-14
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
hold Class A common shares have the right to put the shares to the Company
at fair market value (Notes 11 and 14). Once the put right is exercised by
the Institutional Investors, the Executive Investors and Designees of the
Institutional Investors have the right to participate in the put option as
to all, but not less than all, of the shares of Class A common owned by
them and pursuant to the Agreement. The Class A common held by
Institutional Investors have demand registration rights, all Class A common
stockholders have voting rights, piggyback registration rights, participate
in earnings and dividends and other preference features, as defined.
Class B Common--A total of 35,000 shares have been authorized and 20,000
shares are issued and outstanding as of December 31, 1996 and 1997. Class B
common stockholders have voting rights, piggyback registration rights,
participate in earnings and dividends and other preference features, as
defined. The Executive Stock Agreement ("ESA") provides vesting for Class B
common of 20% at the closing of the Agreement and an additional 20% on each
of the four anniversaries of the closing date of the Agreement. The ESA
also provides for vesting acceleration upon the occurrence of certain
events (as defined): (a) qualified sale of the Company; (b) qualified
reorganization; and (c) public offering of the Company's stock.
Class C Common--A total of 15,000 shares have been authorized and 14,711
shares are issued and outstanding as of December 31, 1996 and 1997. Class C
common stockholders have voting rights in which the executives have named
the Institutional Investors as their proxies to vote all unvested Class C
common shares. The ESA and other vesting agreements, under the Agreement,
provide vesting of the Class C common shares. Under the vesting agreements,
the Class C common shares vest, based upon certain triggering events (as
defined), including: (a) qualified sale of the Company; (b) qualified
liquidation of the Company; and (c) public offering of the Company's stock.
The Class C common shares will be automatically forfeited on November 27,
2003 if a triggering event does not occur. Once a triggering event takes
place the vesting of Class C common shares will also be subject to vesting
under the ESA which provides vesting at 20% at the closing of the agreement
and an additional 20% on each of the four anniversaries of the closing date
(November 27, 1996). Pursuant to the vesting agreements, upon the vesting
of any shares of Class C common an equal number of shares of Class A common
held by the Institutional Investors will be forfeited. At the time of a
triggering event the Company will be subject to a compensation charge equal
to the value transferred to the Class C common stockholders.
11. REDEEMABLE COMMON STOCK
As defined in the Agreement (Note 10), Institutional Investors which hold an
aggregate of 78,461 shares of Class A common shares have the right to put the
shares to the Company on or after November 27, 2003, at the greater of the
initial purchase price per share of Class A common owned by the Institutional
Investors or fair market value, as defined in the Agreement. Once the put
right is exercised by the Institutional Investors, the Executive Investors and
Designees of the Institutional Investors have the right to participate in the
put option as to all, but not less than all, of the shares of Class A common
owned by them and pursuant to the Agreement. This put right automatically
terminates upon the closing of an initial public offering, as defined. The
Company records accretion each quarter to the expected redemption value at
November 27, 2003, based on the effective interest method.
Although management has not obtained an appraisal of the fair market value
of the Company, certain public equity transactions have occurred within the
industry upon which management has based its estimate on the potential
redemption value of the aforementioned shares to be $333 and $325 per share as
of December 31, 1997 and 1996, respectively. The Company recorded accretion
totaling $103,565 and $0 for the year ended December 31, 1997, and for the
period from May 31, 1996, to December 31, 1996, respectively.
During January 1998, the Agreement was amended and the aforementioned put
right was replaced by a provision which would allow the Class A common
Institutional Investors, Executive Investors, and Designees of
F-15
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Institutional Investors, as defined, to require the Company to voluntarily
liquidate. The Institutional Investors at any time and from time to time on or
after November 27, 2003, but not after the consummation of a public offering,
shall have the right to require the Company to voluntarily liquidate the
assets of the Company. Upon receipt of notice of the required liquidation, the
Company may elect to purchase all but not less than all of the Institutional
Investors' Class A common shares.
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest and noncash investing and financing activities for
the year ended December 31, 1997, and for the three months ended March 31,
1998, was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE THREE
ENDED MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Cash paid during the year for interest....... $ 94,533 $69,079
======== =======
Fixed assets acquired under capital leases... $ 68,589 $ --
======== =======
Payments made under capital leases........... $ 12,675 $51,908
======== =======
Accretion to redemption value of Class A
common stock................................ $103,565 $ --
======== =======
</TABLE>
13. SELECTED CONSOLIDATED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996 (for period from May
31, 1996 (commencement of
operations), to December
31, 1996)--
Revenues.................. $ -- $ -- $ -- $ --
Loss from operations...... -- -- (21,650) (401,277)
Net loss applicable to
common stockholders...... -- -- (21,650) (383,651)
==========
Basic and diluted net loss
per share................ $ -- $ -- $ (1.08) $ (7.77)
========== ========= ========== ==========
1997--
Revenues.................. $ -- $ 86,907 $1,226,076 $2,710,707
Income (loss) from
operations............... (432,526) (820,686) (461,382) 80,115
Net income (loss)
applicable to common
stockholders............. (415,492) (794,257) (466,446) 5,777
Basic and diluted net
income (loss) per share.. $ (4.18) $ (7.92) $ (4.65) $ .06
========== ========= ========== ==========
1998--
Revenues.................. $5,102,448
Income (loss) from
operations............... 1,077,059
Net income (loss)
applicable to common
stockholders............. (16,191)
Basic and diluted net loss
per share................ $ (0.16)
==========
</TABLE>
F-16
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHO-
RIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS PRO-
SPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANY-
ONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO
DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITA-
TION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 11
The Exchange Offer....................................................... 21
Use of Proceeds.......................................................... 29
Capitalization........................................................... 29
Selected Consolidated Financial and Operating Data....................... 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 32
Business................................................................. 36
Management............................................................... 48
Security Ownership of Certain Beneficial Owners and Management........... 55
Certain Transactions..................................................... 57
Description of Capital Stock............................................. 57
Description of the Exchange Notes........................................ 62
Plan of Distribution..................................................... 92
Certain United States Federal Income Tax Considerations.................. 93
Legal Matters............................................................ 98
Independent Public Accountants........................................... 98
Available Information.................................................... 98
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$270,000,000
FOCAL COMMUNICATIONS CORPORATION
OFFER TO EXCHANGE ITS 12.125% SENIOR DISCOUNT NOTES DUE 2008, SERIES B FOR ANY
AND ALL OF ITS OUTSTANDING 12.125% SENIOR DISCOUNT NOTES DUE 2008
LOGO
----------------
PROSPECTUS
DATED , 1998
----------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware General Corporation Law. The Company has statutory authority to
indemnify the officers and directors. The applicable provisions of the DGCL
state that, to the extent such person is successful on the merits or
otherwise, a corporation may indemnify any person who was or is a party or who
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation), by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise ("such Person"), against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement,
actually and reasonably incurred by such Person, if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. In
any threatened, pending or completed action by or in the right of the
corporation, a corporation also may indemnify any such Person for costs
actually and reasonably incurred by him in connection with that action's
defense or settlement, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation;
however, no indemnification shall be made with respect to any claim, issue or
matter as to which such Person shall have been adjudged to be liable to the
corporation, unless and only to the extent that a court shall determine that
such indemnity is proper.
Under the applicable provisions of the DGCL, any indemnification shall be
made by the corporation only as authorized in the specific case upon a
determination that the indemnification of the director, officer, employee or
agent is proper in the circumstances because he has met the applicable
standard of conduct. Such determination shall be made:
(1) By the Board of Directors by a majority vote of a quorum consisting
of directors who are not parties to such action, suit or proceeding; or
(2) If such a quorum is not obtainable or, even if obtainable, a quorum
of disinterested directors so directs, by independent legal counsel in a
written opinion; or
(3) By the affirmative vote of a majority of the shares entitled to vote
thereon.
The Company's Certificate of Incorporation provides for indemnification to
the full extent permitted by the laws of the State of Delaware against and
with respect to threatened, pending or completed actions, suits or proceedings
arising from or alleged to arise from, a party's actions or omissions as a
director, officer, employee or agent of the Company or of any subsidiary of
the Company or of any other corporation, partnership, joint venture, trust or
other enterprise which he has served in such capacity at the request of the
Company if such acts or omissions occurred or were or are alleged to have
occurred, while said party was a director or officer of the Company.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.1 Purchase Agreement with Salomon Brothers Inc, Morgan Stanley & Co.
Incorporated, and NationsBanc Montgomery Securities LLC, dated
February 12, 1998.+
2.1 Plan of Reorganization and Agreement by and among Focal Communications
Corporation and its Subsidiaries, dated June 12, 1997.+
3.1 Certificate of Incorporation+
3.2 By-Laws+
4.1 Indenture with Harris Trust and Savings Bank, dated February 18,
1998.+
4.2 Initial Global 12.125% Senior Discount Note Due February 15, 2008,
dated February 18, 1998.+
4.3 Exchange and Registration Agreement with Salomon Brothers Inc, Morgan
Stanley & Co. Incorporated, and NationsBanc Montgomery Securities LLC,
dated February 18, 1998.+
4.4 Form of Exchange Agent Agreement with Harris Trust and Savings Bank,
dated , 1998.+
4.5 Stock Purchase Agreement with Madison Dearborn Capital Partners, L.P.,
Frontenac VI, L.P., Battery Ventures III, L.P., Brian F. Addy, John R.
Barnicle, Joseph Beatty, and Robert C. Taylor Jr., dated November 27,
1996.
4.6 Amendment to Stock Purchase Agreement with Madison Dearborn Capital
Partners, L.P., Frontenac VI, L.P., Battery Ventures III, L.P., Brian
F. Addy, John R. Barnicle, Joseph Beatty, and Robert C. Taylor Jr.,
dated January 23, 1998.+
4.7 Executive Investor Stock Pledge Agreement with Brian F. Addy, dated
November 27, 1996.+
4.8 Executive Investor Stock Pledge Agreement with John R. Barnicle, dated
November 27, 1996.+
4.9 Executive Investor Stock Pledge Agreement with Joseph A. Beatty, dated
November 27, 1996.+
4.10 Executive Investor Stock Pledge Agreement with Robert C. Taylor, Jr.,
dated November 27, 1996.+
4.11 Stockholders Agreement with Madison Dearborn Capital Partners, L.P.,
Frontenac VI, L.P., Battery Ventures III, L.P., Brian F. Addy, John R.
Barnicle, Joseph Beatty, and Robert C. Taylor Jr., dated November 27,
1996.+
4.12 Executive Stock Agreement and Employment Agreement with Brian F. Addy,
dated November 27, 1996.+
4.13 Executive Stock Agreement and Employment Agreement with John R.
Barnicle, dated November 27, 1996.+
4.14 Executive Stock Agreement and Employment Agreement with Joseph A.
Beatty, dated November 27, 1996.+
4.15 Executive Stock Agreement and Employment Agreement with Robert C.
Taylor, Jr., dated November 27, 1996.+
4.16 Registration Agreement with Madison Dearborn Capital Partners, L.P.,
Frontenac VI, L.P., Battery Ventures III, L.P., Brian F. Addy, John R.
Barnicle, Joseph Beatty, and Robert C. Taylor Jr., dated November 27,
1996.+
5.1 Opinion of Ross & Hardies+
8.1 Tax Opinion of Ross & Hardies+
10.1 Interconnection Agreement with Ameritech Information Industry
Services, dated October 28, 1996.+
10.2 Interconnection Agreement with Ameritech Information Industry
Services, dated October 24, 1997.+
10.3 Interconnection Agreement with New York Telephone Company, dated
November 10, 1997.+
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.4 Amended and Restated Interconnection Agreement with Ameritech
Information Industry Services, dated March 16, 1998.+
10.5 Network Products Purchase Agreement with Northern Telecom Inc., dated
January 21, 1997.*
10.6 Amendments No. 1 and No. 2 to Network Products Purchase Agreement with
Northern Telecom Inc., both dated March 6, 1998.*
10.7 Lease Agreement for property located at 200 North LaSalle, Chicago,
IL, dated December 31, 1996.+
10.8 First Amendment to Lease Agreement for property located at 200 North
LaSalle, Chicago, IL, dated May 14, 1997.+
10.9 Second Amendment to Lease Agreement for property located at 200 North
LaSalle, Chicago, IL, dated November 15, 1997.+
10.10 Third Amendment to Lease Agreement for property located at 200 North
LaSalle, Chicago, IL, dated March 2, 1998.+
10.11 Lease Agreement for property located at 32 Old Slip, New York, NY,
dated May 20, 1997.+
10.12 Lease Agreement for property located at 650 Townsend Street, San
Francisco, CA, dated January 26, 1998.+
10.13 Lease Agreement for property located at 701 Market Street,
Philadelphia, Pennsylvania, dated March 10, 1998.+
10.14 1997 Non-Qualified Stock Option Plan, adopted February 27, 1997.+
10.15 Form of Stock Option Agreement+
10.16 Employment Agreement with Renee M. Martin, dated March 20, 1998+
10.17 Software License with DPI/TFS, Inc., dated April 10, 1997*
10.18 Fourth Amendment to Lease Agreement for property located at 200 North
LaSalle, Chicago, IL, dated April 4, 1998.+
10.19 Lease Agreement for property located at 1120 Vermont Avenue, N.W.,
Washington, D.C., dated as of May 4, 1998.+
10.20 Lease Agreement for property located at 1200 West Seventh Street, Los
Angeles, California, dated as of May 19, 1998.+
10.21 Executive Employment Agreement with Andrew K. Robitshek, dated July
15, 1998.
10.22 Interconnection Agreement with Pacific Bell, dated June 15, 1998.++
10.23 Interconnection Agreement with GTE-California, dated June 12, 1998.++
12.1 Statement re Computation of Ratios+
21.1 Subsidiaries of the Registrant+
23.1 Consent of Arthur Andersen LLP
Consent of Ross & Hardies (included as part of its opinions filed as
23.2 Exhibits 5.1 and 8.1 hereto)+
24.1 Powers of Attorney (included on signature pages hereof)+
25.1 Statement of Eligibility of Trustee+
99.1 Form of Letter of Transmittal+
99.2 Form of Notice of Guaranteed Delivery+
</TABLE>
- --------
+ Previously Filed.
++ To be filed by Amendment.
* Certain portions of these Exhibits have been omitted pursuant to a request
for confidential treatment and the omitted portions have been separately
filed with the Commission.
(B) Financial Statement Schedules.
Schedules not listed have been omitted because they are inapplicable or the
information required to be set forth therein is provided in the Consolidated
Financial Statements of the Company or notes thereto.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
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 Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, office 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
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
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
this Registration Statement when it became effective.
The undersigned registrant hereby undertakes that for purposes of
determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as of the time
it was declared effective.
The undersigned registrant hereby undertakes that for the purpose of
determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement related 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.
The undersigned registrant hereby undertakes 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 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-
effective amendment hereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Securities and
Exchange Commission pursuant to rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in this Registration Statement when it becomes
effective; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
The undersigned registrant hereby undertakes 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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 3 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Chicago, State of Illinois, on , 1998.
Focal Communications Corporation
/s/ Robert C. Taylor, Jr.
By: _________________________________
ROBERT C. TAYLOR, JR.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
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 , 1998.
SIGNATURE TITLE(S)
/s/ Robert C. Taylor, Jr. President, Chief Executive Officer and
- ------------------------------------- Director
ROBERT C. TAYLOR, JR.
/s/ John R. Barnicle* Executive Vice President, Chief
- ------------------------------------- Operating Officer, Assistant
JOHN R. BARNICLE Secretary, and Director
/s/ Joseph A. Beatty Executive Vice President, Principal
- ------------------------------------- Financial Officer, Treasurer and
JOSEPH A. BEATTY Assistant Secretary
/s/ Robert M. Junkroski Controller (Principal Accounting
- ------------------------------------- Officer)
ROBERT M. JUNKROSKI
/s/ James E. Crawford, III* Director
- -------------------------------------
JAMES E. CRAWFORD, III
/s/ Paul T. Finnegan* Director
- -------------------------------------
PAUL T. FINNEGAN
/s/ Richard D. Frisbie* Director
- -------------------------------------
RICHARD D. FRISBIE
/s/ James N. Perry* Director
- -------------------------------------
JAMES N. PERRY, JR.
/s/ Paul G. Yovovich* Director
- -------------------------------------
PAUL G. YOVOVICH
*Signed by Joseph A. Beatty pursuant to power of attorney
II-5
<PAGE>
Exhibit 4.5
STOCK PURCHASE AGREEMENT
BY AND AMONG
FOCAL COMMUNICATIONS CORPORATION
AND
MADISON DEARBORN CAPITAL PARTNERS, L.P.
FRONTENAC VI, L.P.
BATTERY VENTURES III, L.P.
BRIAN F. ADDY
JOHN R. BARNICLE
JOSEPH BEATTY
ROBERT C. TAYLOR, JR.
NOVEMBER 27, 1996
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Authorization and Closings........................................... 2
1A. Authorization of the Class A Common........................... 2
1B. Purchase and Sale of the Class A Common....................... 2
1C. The Initial Closing........................................... 2
1D. The Subsequent Closings....................................... 3
2. Conditions to the Initial Closing.................................... 4
2A. Representations and Warranties; Covenants..................... 4
2B. Amendment of Certificate of Incorporation..................... 4
2C. Amendment of the Company's Bylaws............................. 4
2D. Stockholders Agreement........................................ 4
2E. Executive Stock Agreements.................................... 4
2F. Registration Agreement........................................ 4
2G. Vesting Agreements............................................ 4
2H. Interconnection Agreement and Achievement of Common Carrier
Status....................................................... 4
2I. Sale of Class A Common to Each Investor....................... 5
2J. Securities Law Compliance..................................... 5
2K. Opinion of the Company's Counsel.............................. 5
2L. Proceedings................................................... 5
2M. Expenses...................................................... 5
2N. Compliance with Applicable Laws............................... 5
2O. Initial Closing Documents..................................... 6
2P. Waiver........................................................ 6
3. Conditions to Each Subsequent Closing................................. 6
3A. Authorized by Initial and/or Subsequent Business Plan(s)...... 7
3B. Representations and Warranties................................ 7
3C. No Default.................................................... 7
3D. No Material Adverse Change.................................... 7
3E. Proceedings................................................... 8
3F. Opinion of the Company's Counsel.............................. 8
3G. Expenses...................................................... 8
3H. Subsequent Closing Documents.................................. 8
3I. Waiver........................................................ 8
4. Covenants............................................................. 9
4A. Financial Statements and Other Information.................... 9
4B. Inspection of Property........................................ 11
4C. Restrictions.................................................. 12
4D. Affirmative Covenants......................................... 15
4E. Compliance with Agreements.................................... 16
4F. Current Public Information.................................... 16
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
4G. Amendment of Vesting Agreements or Executive Stock
Agreements................................................... 16
4H. Intellectual Property Rights.................................. 16
4I. Public Disclosures............................................ 16
4J. First Refusal Rights.......................................... 17
5. Investors' Put Right................................................. 18
5A. Put Right..................................................... 18
5B. Company Obligation............................................ 18
5C. Repurchase Price.............................................. 18
5D. Repurchase Closing............................................ 19
6. Transfer of Restricted Securities.................................... 19
6A. General Provisions............................................ 19
6B. Opinion Delivery.............................................. 19
6C. Rule 144A..................................................... 19
6D. Legend Removal................................................ 20
7. Representations and Warranties of the Company........................ 20
7A. Organization, Corporate Power and Licenses.................... 20
7B. Capital Stock and Related Matters............................. 20
7C. Authorization; No Breach...................................... 21
7D. Conduct of Business; Absence of Liabilities................... 21
7E. Assets........................................................ 21
7F. No Subsidiaries............................................... 21
7G. Contracts and Commitments..................................... 21
7H. Intellectual Property Rights.................................. 22
7I. Litigation, etc............................................... 22
7J. Brokerage..................................................... 23
7K. Governmental Consent, etc..................................... 23
7L. Compliance with Laws.......................................... 23
7M. Affiliated Transactions....................................... 23
7N. Projections and Pro Forma Financial Statements................ 23
7O. Disclosure.................................................... 24
Section 8. Representations and Warranties of the Institutional
Investors.................................................... 24
8A. Assets........................................................ 24
8B. Initial Business Plan......................................... 24
8C. Authorization................................................. 24
9. Miscellaneous Provisions.............................................. 25
9A. Expenses...................................................... 25
9B. Remedies...................................................... 25
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
9C. Investor's Investment Representations......................... 26
9D. Consent to Amendments......................................... 26
9E. Survival of Representations and Warranties.................... 26
9F. Successors and Assigns........................................ 26
9G. Capital and Surplus; Special Reserves......................... 27
9H. Severability.................................................. 27
9I. Counterparts.................................................. 27
9J. Descriptive Headings; Interpretation.......................... 27
9K. Governing Law................................................. 27
9L. Notices....................................................... 28
9M. Understanding among the Investors............................. 28
9N. No Strict Construction........................................ 28
</TABLE>
Appendix A - Index of Definitions
Appendix B - Schedule of Investors
Appendix C - Original Offering Memorandum
Exhibits:
Exhibit 1 - The Initial Business Plan
Exhibit 2 - Restated Certificate of Incorporation
Exhibit 3 - Form of Executive Note
Exhibit 4 - Form of Executive Investor Stock Pledge Agreement
Exhibit 5 - Bylaws Amendment
Exhibit 6 - Stockholders Agreement
Exhibit 7 - Form of Executive Stock Agreement and Employment Agreement
Exhibit 8 - Registration Agreement
Exhibit 9 - Form of Vesting Agreement
Exhibit 10 - Interconnection Agreement
Exhibit 11 - Opinion of Bischoff, Kenney & Niehaus (Initial Closing)
Exhibit 12 - Opinion of Bischoff, Kenney & Niehaus (Subsequent Closings)
Exhibit 13 - Form of Nondisclosure and Noncompetition Agreement
-iii-
<PAGE>
Disclosure Schedules
Licenses Schedule
Capitalization Schedule
Liabilities Schedule
Assets Schedule
Contracts Schedule
Intellectual Property Schedule
Litigation Schedule
Consents Schedule
Affiliated Transactions Schedule
-iv-
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of November
---------
27, 1996, by and among Focal Communications Corporation, a Delaware corporation
(the "Company"), Madison Dearborn Capital Partners, L.P., a Delaware limited
-------
partnership ("MDCP"), Frontenac VI, L.P., a Delaware limited partnership
----
("Frontenac"), Battery Ventures III, L.P., a Delaware limited partnership ("BV",
--------- --
and collectively with MDCP and Frontenac, the "Institutional Investors"), and
-----------------------
Robert C. Taylor, Jr. ("Taylor"), John R. Barnicle ("Barnicle"), Brian F. Addy
------ --------
("Addy") and Joseph Beatty ("Beatty", and, collectively with Taylor, Barnicle
---- ------
and Addy, the "Executive Investors"). The Institutional Investors and the
-------------------
Executive Investors are referred to herein collectively as the "Investors" and
---------
individually as an "Investor." Capitalized terms used herein are defined in the
--------
Index of Definitions attached hereto as Appendix A, which is hereby made a part
----------
of this Agreement.
The Company has submitted a business plan in form and substance set
forth in Exhibit 1 attached hereto (the "Initial Business Plan"), which
--------- ---------------------
contains, among other information, a financial model, with underlying
assumptions, containing a plan to establish the Company's business in the
Chicago metropolitan statistical area ("MSA"). Pursuant to such Initial
---
Business Plan, the Company will require a certain level of capital to establish
itself in the Chicago MSA, such amount having been determined to be $8 million,
$4 million of which the Company will need at the time of the Initial Closing.
Thus, pursuant to the terms and subject to the conditions set forth
herein, this Agreement contemplates an initial transaction in which the
Investors will buy from the Company, and the Company will sell to the Investors,
79,384.62 shares of the Company's Class A Common Stock, par value $.01 per
share (the "Class A Common") for an aggregate purchase price of $4 million, and
--------------
subsequent transactions in which the Investors will make pro rata contributions
to the capital of the Company of up to an additional $21.8 million in the
aggregate (for a total investment, including the $4 million initial purchase, of
up to $25.8 million). Attached as Appendix C hereto is the original offering
----------
memorandum of the Company, which is included for reference purposes only and
shall in no way be construed as a Subsequent Business Plan (as defined below) or
a proposal therefor, nor considered to obligate any party hereto to approve any
Subsequent Business Plan.
1
<PAGE>
Additionally, this Agreement contemplates that after the Initial
Closing hereunder (as defined below), Frontenac's designee(s) (or, if none,
Frontenac) may purchase up to 230.77 shares of Class A Common for a total
initial purchase price of up to $11,627.91, and MDCP's designee(s) (or, if
none, MDCP) may purchase up to 384.61 shares of Class A Common for a total
initial purchase price of $19,379.84 upon entering into a written counterpart to
this Agreement agreeing to be bound by the provisions of such purchases hereof.
All such additional purchasers shall be considered Investors and all such
purchased Class A Common shall be considered Investor Stock; provided that any
--------
such additional purchaser may prepay its capital contribution commitment to the
Company pursuant to this Agreement at the time of purchase (in the amount of
$325 per share, less the purchase price paid for such shares), upon which
prepayment such additional purchaser shall be under no further obligation to
make subsequent capital contributions hereunder.
NOW, THEREFORE, in consideration of the mutual promises made herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. AUTHORIZATION AND CLOSINGS.
--------------------------
1.1A. Authorization of the Class A Common. The Company shall
-----------------------------------
authorize the issuance and sale to the Investors of 80,000 shares of its Class A
Common, having the rights and preferences set forth in the Restated Certificate
of Incorporation attached hereto as Exhibit 2.
---------
1.1B. Purchase and Sale of the Class A Common. At the Initial
---------------------------------------
Closing (as defined below), subject to the terms and conditions set forth
herein, the Company shall sell to each Investor and each Investor shall purchase
from the Company the number of shares of Class A Common set forth opposite such
Investor's name on the "Schedule of Investors," which is attached hereto as
---------------------
Appendix B. The aggregate purchase price to be paid at the Initial Closing by
- ----------
each Investor, which is set forth opposite such Investor's name on the Schedule
of Investors, is referred to herein as that Investor's "Initial Contribution."
--------------------
The sale of the Class A Common to each Investor at the Initial Closing shall
constitute a separate sale hereunder.
1.1C. The Initial Closing. The closing of the separate initial
-------------------
purchases and sales of the Class A Common (the "Initial Closing") shall take
---------------
place at the offices of Kirkland & Ellis at 8:30 a.m. on November 27, 1996, or
at such other place or on such other date as may be mutually agreeable to the
Company and the Investors (the "Initial Closing Date"), but in no event shall
--------------------
the Initial Closing Date be later than November 30, 1996. At the Initial
Closing, the Company shall deliver to each Investor stock certificates
evidencing the Class A Common to be purchased by such Investor, registered in
such Investor's name, upon such Investor's delivery to the Company of either of
the following:
(i) in the case of an Institutional Investor, a cashier's or
certified check or wire transfer of immediately available funds to an
account designated by the Company (collectively, "Cash"), in the aggregate
----
amount of such Institutional Investor's Initial Contribution, or
-2-
<PAGE>
(ii) in the case of an Executive Investor, canceled Company
notes (as well as documentation acceptable in good faith to the
Institutional Investors sufficient to demonstrate such amounts were loaned
to the Company) in the aggregate amount of $6,000, together with Cash, or
if so specified opposite such Executive Investor's name on the Schedule of
Investors, a combination of Cash and a ninety-day promissory note in the
form of Exhibit 3 attached hereto (such Executive Investor's "Note") in the
--------- ----
proportion specified opposite such Executive Investor's name on the
Schedule of Purchasers, in an aggregate amount equal to such Executive
Investor's Initial Contribution minus $6,000. Each Executive Investor's
-----
Note (including any such Notes issued at Subsequent Closings, as defined
below) shall be secured by a pledge of all Company securities owned by such
Executive Investor (including any such securities acquired hereafter at any
time that such Note is outstanding, but excluding shares of Class C Common
pledged to an Institutional Investor pursuant to a Vesting Agreement), and
in connection therewith, such Executive Investor will enter into a pledge
agreement in the form of Exhibit 4 attached hereto (the "Executive Investor
--------- ------------------
Stock Pledge Agreement").
----------------------
1.1D. The Subsequent Closings. Each of the subsequent closings
------------------------
hereunder (the "Subsequent Closings") shall, subject to the terms and conditions
-------------------
set forth below, occur (i) if the Specified Contribution of each Investor at
such Subsequent Closing, together with the Initial Contribution and the
aggregate Specified Contributions of each such Investor at all prior Subsequent
Closings, will not exceed 80/258 times the maximum commitment set forth opposite
-----
each such Investor's name on the Schedule of Investors (each such Investor's
"Maximum Commitment"), at a time and place determined by the Company's president
------------------
and set forth in a written notice given to each Investor at least 10 days (or,
if BV does not have immediately available funds sufficient to satisfy its
obligation at such Subsequent Closing, 15 days) prior to the applicable
Subsequent Closing, or (ii) otherwise, at a time and place determined by the
Company's board of directors (the "Board") and set forth in a written notice
-----
sent to each Investor at least 30 days prior to the applicable Subsequent
Closing. Such notice shall set forth the aggregate amount to be contributed by
the Investors at such Subsequent Closing and the pro rata portion thereof (based
on the Investors' respective Initial Contributions) to be contributed by each
Investor (each Investor's "Specified Contribution" for such Subsequent Closing);
----------------------
provided that the aggregate amount of each Investors' Specified Contribution at
- --------
any Subsequent Closing shall not, together with the Initial Contribution and the
aggregate Specified Contributions of each such Investor at all prior Subsequent
Closings, exceed each such Investor's Maximum Commitment. At each Subsequent
Closing, each Investor shall deliver to the Company either of the following:
(i) in the case of an Institutional Investor, Cash in the
aggregate amount of such Institutional Investor's Specified Contribution
for such Subsequent Closing, or
(ii) in the case of an Executive Investor, Cash or, at the
election of such Executive Investor, Cash and a ninety-day Note, in an
aggregate amount equal to such Executive Investor's Specified Contribution
for such Subsequent Closing.
SECTION 2. CONDITIONS TO THE INITIAL CLOSING. The obligation of
---------------------------------
each Investor to purchase and pay for the Class A Common at the Initial Closing
is subject to the satisfaction as of the Initial Closing of the following
conditions:
-3-
<PAGE>
2.1A. Representations and Warranties; Covenants. The representations
-----------------------------------------
and warranties contained in Section 7 and 8 hereof shall be true and correct in
all material respects at and as of the Initial Closing as though then made,
except to the extent of changes caused by the transactions expressly
contemplated herein, and the Company shall have performed in all material
respects all of the covenants required to be performed by it hereunder prior to
the Initial Closing.
2.1B. Amendment of Certificate of Incorporation. The Company's
-----------------------------------------
Certificate of Incorporation shall have been amended to include the provisions
set forth in Exhibit 2 hereto (as so amended, the "Certificate of
--------- --------------
Incorporation"), shall be in full force and effect under the laws of Delaware as
- -------------
of the Initial Closing as so amended, and shall not have been further amended or
modified.
2.1C. Amendment of the Company's Bylaws. The Company's bylaws shall
---------------------------------
have been duly amended to include the provisions set forth in Exhibit 5 hereto
---------
(as so amended, the "Bylaws"), shall be in full force and effect under the laws
of Delaware as of the Initial Closing as so amended, and shall not have been
further amended or modified.
2.1D. Stockholders Agreement. The Company and the Investors shall
----------------------
have entered into a stockholders agreement in form and substance set forth in
Exhibit 6 attached hereto (the "Stockholders Agreement"), and the Stockholders
- --------- ----------------------
Agreement shall be in full force and effect as of the Initial Closing.
2.1E. Executive Stock Agreements. The Company shall have entered
--------------------------
into an executive stock agreement and employment agreement, in form and
substance substantially similar to Exhibit 7 attached hereto (the "Executive
--------- ---------
Stock Agreements"), with each Executive Investor, and each Executive Stock
- ----------------
Agreement shall not have been amended or modified and shall be in full force and
effect as of the Initial Closing.
2.1F. Registration Agreement. The Company and the Investors shall
----------------------
have entered into a registration agreement in form and substance as set forth in
Exhibit 8 attached hereto (the "Registration Agreement"), and the Registration
- --------- ----------------------
Agreement shall be in full force and effect as of the Initial Closing.
2.1G. Vesting Agreements. The Company and the Executive Investors
------------------
shall have entered into a vesting agreement, in form and substance substantially
similar to Exhibit 9 attached hereto (the "Vesting Agreements"), with each
--------- ------------------
Institutional Investor, and each Vesting Agreement shall be in full force and
effect as of the Initial Closing.
2.1H. Interconnection Agreement and Achievement of Common Carrier
-----------------------------------------------------------
Status. The Company shall have entered into an Interconnection Agreement under
- ------
Sections 251 and 252 of the Telecommunications Act of 1996, with Ameritech
Information Industrial Services, a division of Ameritech Services, Inc., on
behalf of Ameritech Illinois, in form and substance as set forth in Exhibit 10
----------
attached hereto (the "Interconnection Agreement"), and such Interconnection
-------------------------
Agreement shall be in full force and effect as of the Initial Closing. In
addition, the Company shall have been certified by the Illinois Commerce
Commission to provide
-4-
<PAGE>
facilities-based and resold, switched and dedicated, local exchange services in
the portions of MSA-1 served by Ameritech and Centel, and interexchange services
throughout Illinois ("Chicago Common Carrier Status"), and such certification
-----------------------------
shall not have been conditioned, restricted or withdrawn, and shall not be under
challenge, as of the Initial Closing.
2.1I. Sale of Class A Common to Each Investor. The Company shall
---------------------------------------
have simultaneously sold to each Investor the Class A Common to be purchased by
such Investor hereunder at the Initial Closing and shall have received payment
therefor in full as specified in paragraph 1C hereof.
2.1J. Securities Law Compliance. The Company shall have made all
-------------------------
filings under all applicable federal and state securities laws necessary to
consummate the issuance, in compliance with such laws, of the Class A Common to
be issued at the Initial Closing pursuant to this Agreement.
2.1K. Opinion of the Company's Counsel. Each Investor shall have
--------------------------------
received from Bischoff, Kenney, and Niehaus, counsel for the Company, an opinion
with respect to the matters set forth in Exhibit 11 attached hereto, which shall
----------
be addressed to each Investor, dated the Initial Closing Date, and in form and
substance satisfactory to each Investor.
2.1L. Proceedings. All corporate and other proceedings taken or
-----------
required to be taken by the Company in connection with the transactions to occur
at the Initial Closing shall be consummated at or prior to the Initial Closing
and all documents incident thereto shall be satisfactory in form and substance
to each Institutional Investor and the Institutional Investors' special counsel.
2.1M. Expenses. At the Initial Closing, the Company shall have (i)
--------
reimbursed the Institutional Investors for their out-of-pocket expenses,
including the fees and expenses of their special counsel and special
telecommunications counsel as provided in paragraph 9A hereof, to the extent
then known, (ii) paid the fees and expenses of the counsel for the Company
related to the transactions contemplated hereby, to the extent then known, and
(iii) reimbursed Beatty for his reasonable expenses incurred in relocating from
Charlotte, North Carolina to Chicago, Illinois, to the extent then known,
provided that such reimbursement to Beatty shall not exceed $25,000.
- --------
2.1N. Compliance with Applicable Laws. The purchase of Class A
-------------------------------
Common by each Investor hereunder at the Initial Closing shall not be prohibited
by any applicable law or governmental rule or regulation and shall not subject
such Investor to any penalty, liability or, in such Investor's reasonable
judgment, other onerous condition under or pursuant to any applicable law or
governmental rule or regulation, and the purchase of the Class A Common by each
Investor hereunder shall be permitted by the laws, rules and regulations of the
jurisdictions and governmental authorities and agencies to which such Investor
is subject.
2.1O. Initial Closing Documents. The Company shall have delivered to
-------------------------
each Investor all of the following documents:
-5-
<PAGE>
(i) an Officer's Certificate, dated as of the Initial Closing
Date, stating that the conditions specified in paragraphs 1A, 2A-2C, 2E,
and 2H-2J, have been fully satisfied;
(ii) certified copies of (a) the resolutions duly adopted by
the Board authorizing the execution, delivery and performance of this
Agreement, the Stockholders Agreement, the Executive Stock Agreements, the
Registration Agreement and each of the other agreements contemplated
hereby, the filing of the amendment to the Company's certificate of
incorporation referred to in paragraph 2B, the amendment to the Company's
bylaws referred to in paragraph 2C, the issuance and sale of the Class A
Common, and the consummation of all other transactions to occur as of the
Initial Closing as contemplated by this Agreement, and (b) the resolutions
duly adopted by the Company's stockholders adopting the amendment to the
certificate of incorporation referred to in paragraph 2B;
(iii) certified copies of the Certificate of Incorporation and
the Bylaws, each as in effect at the Initial Closing;
(iv) certified copies of the Executive Stock Agreements and the
Interconnection Agreement, each as in effect at the Initial Closing;
(v) copies of all third party and governmental consents,
approvals and filings required in connection with the consummation of the
transactions to occur as of the Initial Closing hereunder (including,
without limitation, all blue sky law filings, waivers of all preemptive
rights and rights of first refusal, and certified orders of the Illinois
Commerce Commission certifying the Company for Chicago Common Carrier
Status and approving the Interconnection Agreement);
(vi) such other documents relating to the transactions
contemplated by this Agreement as any Institutional Investor or the
Institutional Investors' special counsel, or any Executive Investor or the
counsel for the Company, may reasonably request.
2.1P. Waiver. Any condition specified in this Section 2 may be
------
waived if such waiver is consented to by each Investor; provided that no such
--------
waiver shall be effective against any Investor unless it is set forth in a
writing executed by such Investor.
SECTION 3. CONDITIONS TO EACH SUBSEQUENT CLOSING. The obligation of
-------------------------------------
each Investor to make such Investor's Specified Contribution to the capital of
the Company at each Subsequent Closing is subject to the satisfaction as of such
Subsequent Closing of
(i) if the Specified Contribution of each Investor at such
Subsequent Closing, together with the Initial Contribution and the
aggregate Specified Contributions of each such Investor at all prior
Subsequent Closings, will not exceed 80/258 times such Investor's Maximum
-----
Commitment, the following condition: As of the date of such Subsequent
Closing, there shall not have been any loss or invalidity of the
Interconnection Agreement or of any similar agreement entered into after
the date hereof, any change in
-6-
<PAGE>
the laws or regulations to which the Company is subject that negatively
affects the ability of the Company to conduct its business, nor any
conditioning, restriction, or withdrawal of Chicago Common Carrier Status
or of any similar certification granted after the date hereof; or
(ii) otherwise, all of the following conditions:
3.1A. Authorized by Initial and/or Subsequent Business Plan(s). The
--------------------------------------------------------
Specified Contributions of all Investors at such Subsequent Closing shall be
contemplated and authorized under the terms of the Initial Business Plan and/or
any Subsequent Business Plan(s). "Subsequent Business Plan" means a business
------------------------
proposal submitted by Management to the Board setting forth proposed business
activities of the Company during a specified period of time, projections of
income from such business activities, the capital contributions Management deems
necessary to support such business activities during such time, and a budget of
expected expenditures of such capital, where such proposal has been approved by
a majority of the Board and the holders of at least 67% of the Institutional
Investor Stock then outstanding. "Management" means the Executive Investors (so
----------
long as such individuals are employed by the Company) together with such other
employees of the Company or its Subsidiaries as may be designated by the
Executive Investors and approved by the Board.
3.1B. Representations and Warranties. The representations and
------------------------------
warranties contained in paragraphs 7A, 7B(ii), 7C, 7J, 7K, 7L, and 7O hereof
shall be true and correct in all material respects at and as of such Subsequent
Closing as though then made, except to the extent of changes caused by the
transactions expressly contemplated herein.
3.1C. No Default. The Company shall not be in default of any of its
----------
obligations to the Investors pursuant to this Agreement, the Stockholders
Agreement, the Registration Agreement, or any Executive Stock Agreement or
Vesting Agreement, and neither the Company nor any of its Subsidiaries (if any)
shall be in material default under any other material agreement to which it is a
party.
3.1D. No Material Adverse Change. The Investors shall not be
--------------------------
obligated to make their Specified Contributions at a Subsequent Closing if, in
the good faith judgment of all of the Institutional Investors then holding at
least 3% of the Company's outstanding Common Stock, a material adverse change
(other than a change specifically and expressly contemplated in a Subsequent
Business Plan approved prior to the date of such Subsequent Closing) has
occurred after the date hereof and prior to such Subsequent Closing in the
business, financial condition, operations, assets, or business prospects of the
Company or any Subsidiary. Material adverse change shall for the purposes of
this paragraph include, without limitation, the loss or invalidity of any
material contract or agreement to which the Company is a party where such loss
or invalidity negatively affects the ability of the Company to conduct its
business (including, but not limited to, the Interconnection Agreement and any
similar agreement entered into after the date hereof), or the conditioning,
restriction, or withdrawal of Chicago Common Carrier Status or any similar
certification granted after the date hereof.
-7-
<PAGE>
3.1E. Proceedings. All corporate and other proceedings taken or
-----------
required to be taken by the Company in connection with the transactions to occur
at the Subsequent Closing as contemplated by this Agreement shall be consummated
at or prior to the Subsequent Closing and all documents incident thereto shall
be reasonably satisfactory in form and substance to each Investor and the
Investors' special counsel.
3.1F. Opinion of the Company's Counsel. The Investors shall have
--------------------------------
received from Bischoff, Kenney, and Niehaus, counsel for the Company, an opinion
with respect to the matters set forth in Exhibit 12 attached hereto, which shall
----------
be addressed to the Investors, dated the date of the Subsequent Closing, and in
form and substance satisfactory to the holders of at least 67% of the
Institutional Investor Stock then outstanding.
3.1G. Expenses. At such Subsequent Closing, the Company shall have
--------
reimbursed the Institutional Investors for their out-of-pocket expenses,
including the fees and expenses of their special counsel and their special
telecommunications counsel as provided in paragraph 9A hereof, to the extent
then known, and shall have reimbursed the Executive Investors for all of the
fees and expenses of the Executive Investors' special counsel incurred in
connection with such Subsequent Closing, to the extent then known.
3.1H. Subsequent Closing Documents. The Company shall have delivered
----------------------------
to the Investors all of the following documents:
(i) an Officer's Certificate, dated the date of the Subsequent
Closing, stating that the conditions specified in paragraphs 3A through 3C,
inclusive, have been fully satisfied;
(ii) certified copies of the resolutions duly adopted by the
Board requesting the capital contributions being made at such Subsequent
Closing; and
(iii) such other documents relating to the transactions to occur
at such Subsequent Closing as any Institutional Investor or the
Institutional Investors' special counsel may reasonably request.
3.1I. Waiver. Any condition specified in this Section 3 may be
------
waived if consented to by holders of at least 67% of the Institutional Investor
Stock; provided that the condition in 3G respecting the Company's payment of the
--------
fees and expenses for the Executive Investors' special counsel may not be waived
without the express written consent of a majority of the Executive Investors.
SECTION 4. COVENANTS.
---------
4.1A. Financial Statements and Other Information. The Company shall
------------------------------------------
deliver (a) to each Executive Investor, so long as such Executive Investor holds
any Investor Stock, the information set forth in subparagraph 4A(iii) below,
and (b) to each Institutional Investor, so long as such Institutional Investor
holds any Investor Stock, and to any subsequent holder of at least
-8-
<PAGE>
10% of the Investor Stock then outstanding (each such Institutional Investor and
each such subsequent 10% holder, a "Qualified Holder"), all the information
----------------
described in this paragraph 4A:
(i) as soon as available but in any event within 30 days after
the end of each monthly accounting period in each fiscal year: (a)
unaudited consolidating and consolidated statements of income and cash
flows of the Company and its Subsidiaries for such monthly period and for
the period from the beginning of the fiscal year to the end of such month,
and unaudited consolidating and consolidated balance sheets of the Company
and its Subsidiaries as of the end of such monthly period, setting forth in
each case comparisons to the Company's annual budget and to the
corresponding period in the preceding fiscal year, and all such statements
shall be prepared in accordance with generally accepted accounting
principles, consistently applied and shall be certified by the Company's
chief financial officer, and (b) a status report prepared by the Company's
chief financial officer, indicating whether the Company has met its
budgeted financial goals (including those specified in the Initial Business
Plan or in any Subsequent Business Plan), discussing the reasons for any
variation from such goals, and describing what actions the Company and its
Subsidiaries have taken and propose to take in order to meet budgeted
financial targets in the future;
(ii) within 45 days after the end of each quarterly accounting
period in each fiscal year, an Officer's Certificate stating that the
Company is not in default under this Agreement, the Stockholders Agreement,
the Registration Agreement, or any Executive Stock Agreement or Vesting
Agreement, and that neither the Company nor any of its Subsidiaries is in
default under any of its other material agreements or, if any such default
exists, specifying the nature and period of existence thereof and what
actions the Company and its Subsidiaries have taken and propose to take
with respect thereto;
(iii) within 90 days after the end of each fiscal year,
consolidating and consolidated statements of income and cash flows of the
Company and its Subsidiaries for such fiscal year, and consolidating and
consolidated balance sheets of the Company and its Subsidiaries as of the
end of such fiscal year, setting forth in each case comparisons to the
Company's annual budget and to the preceding fiscal year, all prepared in
accordance with generally accepted accounting principles, consistently
applied, and accompanied by (a) with respect to the consolidated portions
of such statements, an opinion containing no exceptions or qualifications
(except for qualifications regarding specified contingent liabilities) of
an independent accounting firm of recognized national standing acceptable
to the holders of at least 67% of the Institutional Investor Stock then
outstanding, (b) a certificate from such accounting firm, addressed to the
Board, stating that in the course of its examination nothing came to its
attention that caused it to believe that there was any default specified in
paragraph 4A(ii) in existence or that there was any other default by the
Company or any Subsidiary in the fulfillment of or compliance with any of
the terms, covenants, provisions or conditions of any other material
agreement to which the Company or any Subsidiary is a party or, if such
accountants have reason to believe any such default by the Company or any
Subsidiary exists, a certificate specifying the nature and period of
existence thereof, and (c) a copy of such firm's annual management letter
to the Board;
-9-
<PAGE>
(iv) promptly upon receipt thereof, any additional reports,
management letters or other detailed information concerning significant
aspects of the Company's operations or financial affairs given to the
Company by its independent accountants (and not otherwise contained in
other materials provided hereunder);
(v) at least 30 days but not more than 90 days prior to the
beginning of each fiscal year, an annual budget prepared on a monthly basis
for the Company and its Subsidiaries for such fiscal year (displaying
anticipated statements of income and cash flows and balance sheets), and
promptly upon preparation thereof any other significant budgets prepared by
the Company and any revisions of such annual or other budgets, and within
30 days after any monthly period in which there is a material adverse
deviation from the annual budget, an Officer's Certificate explaining the
deviation and what actions the Company has taken and proposes to take with
respect thereto;
(vi) promptly (but in any event within five business days)
after the discovery or receipt of notice of any default under any material
agreement to which the Company or any of its Subsidiaries is a party, any
condition or event which is reasonably likely to result in any material
liability under any federal, state or local statute or regulation relating
to public health and safety, worker health and safety or pollution or
protection of the environment or any other material adverse change, event
or circumstance affecting the Company or any Subsidiary (including, without
limitation, the filing of any material litigation against the Company or
any Subsidiary or the existence of any dispute with any Person which
involves a reasonable likelihood of such litigation being commenced), an
Officer's Certificate specifying the nature and period of existence thereof
and what actions the Company and its Subsidiaries have taken and propose to
take with respect thereto;
(vii) within ten days after transmission thereof, copies of all
financial statements, proxy statements, reports and any other general
written communications which the Company sends to its stockholders and
copies of all registration statements and all regular, special or periodic
reports which it files, or (to its knowledge) any of its officers or
directors file with respect to the Company, with the Securities and
Exchange Commission or with any securities exchange on which any of its
securities are then listed, and copies of all press releases and other
statements made available generally by the Company to the public concerning
material developments in the Company's and its Subsidiaries' businesses;
and
(viii) with reasonable promptness, such other information and
financial data concerning the Company and its Subsidiaries as any Qualified
Holder may reasonably request.
Each of the financial statements referred to in subparagraphs 4A(i) and (iii)
shall be true and correct in all material respects as of the dates and for the
periods stated therein, subject in the case of the unaudited financial
statements to changes resulting from normal year-end adjustments for recurring
accruals (none of which would, alone or in the aggregate, be materially adverse
to
-10-
<PAGE>
the financial condition, operating results, assets, operations or business
prospects of the Company and its Subsidiaries taken as a whole).
Notwithstanding the foregoing, the provisions of this paragraph 4A shall cease
to be effective so long as the Company (a) is subject to the periodic reporting
requirements of the Securities Exchange Act and continues to comply with such
requirements and (b) promptly provides to each Qualified Holder (and to each
Executive Investor then holding any Investor Stock) all reports and other
materials filed by the Company with the Securities and Exchange Commission
pursuant to the periodic reporting requirements of the Securities Exchange Act;
provided that so long as any Investor Stock remains outstanding, the Company
- --------
shall continue to deliver to each Qualified Holder the information specified in
subparagraphs 4A(ii), 4A(iii)(b), 4A(vi), and 4A(viii).
Except as otherwise required by law or judicial order or decree or requested by
any governmental agency or authority, or as specified in the immediately
following proviso, each Person entitled to receive information regarding the
Company and its Subsidiaries under paragraph 4A or 4B shall not disclose any
such information to any third party (other than such Person's advisors or
representatives); provided that such a Person may disclose such information (i)
--------
in connection with the sale or transfer of any Investor Stock if such Person's
transferee agrees in writing to be bound by the provisions hereof, or (ii) if
such information is available to the public other than by reason of such
Person's breach of this provision.
All holdings of Investor Stock or Institutional Investor Stock by Persons who
are Affiliates of each other shall be aggregated for purposes of meeting any
threshold tests under this Agreement.
4.1B. Inspection of Property. To the extent not otherwise prohibited
----------------------
by law or regulation, the Company shall permit any representatives designated by
any Qualified Holder, upon reasonable notice and during normal business hours
and at such other times as any such Qualified Holder may reasonably request to
(i) visit and inspect any of the properties of the Company and its Subsidiaries,
(ii) examine the corporate and financial records of the Company and its
Subsidiaries and make copies thereof or extracts therefrom and (iii) discuss the
affairs, finances and accounts of any such corporations with the directors,
officers, key employees and independent accountants of the Company and its
Subsidiaries. The presentation of an executed copy of this Agreement by any
Qualified Holder to the Company's independent accountants shall constitute the
Company's permission to its independent accountants to participate in
discussions with such Persons.
4.1C. Restrictions. The Company shall not, without the prior written
------------
consent of the holders of at least 67% of the Institutional Investor Stock then
outstanding:
(i) directly or indirectly declare or pay any dividends or
make any distributions upon any of its capital stock;
(ii) directly or indirectly redeem, purchase or otherwise
acquire, or permit any Subsidiary to redeem, purchase or otherwise acquire,
any of the Company's or any Subsidiary's capital stock or other equity
securities (including, without limitation, warrants, options and other
rights to acquire such capital stock or other equity securities,
-11-
<PAGE>
and the exercise of first refusal rights under the Stockholders Agreement),
except for: (a) cancellations of the Company's Common Stock pursuant to any
of the Vesting Agreements, (b) repurchases of Investor Stock pursuant to
Section 5 or paragraph 9B(ii) of this Agreement, (c) repurchases of the
Company's capital stock from employees of the Company or its Subsidiaries
(or such employees' transferees) pursuant to the terms of the Executive
Stock Agreements contemplated by this Agreement, or (d) repurchases of
options to acquire the Company's capital stock or of capital stock issued
upon the exercise of such options, pursuant to the terms of any Permitted
Stock Option Plan that may be approved by the Board, as contemplated under
subparagraph 4C(xix) of this Agreement;
(iii) except upon conversion of Class C Common into Class B
Common pursuant to the Certificate of Incorporation, or as expressly
contemplated by this Agreement or the Executive Stock Agreement, authorize,
issue or enter into any agreement providing for the issuance (contingent or
otherwise) of (a) any notes or debt securities containing equity features
(including, without limitation, any notes or debt securities convertible
into or exchangeable for capital stock or other equity securities, issued
in connection with the issuance of capital stock or other equity securities
or containing profit participation features), other than as may be
expressly specified in the Initial Business Plan or any Subsequent Business
Plan, or (b) any capital stock or other equity securities (or any
securities convertible into or exchangeable for any capital stock or other
equity securities);
(iv) make, or permit any Subsidiary to make, any loans or
advances to, guarantees for the benefit of, or Investments in, any Person
(other than a Wholly-Owned Subsidiary established under the laws of a
jurisdiction of the United States or any of its territorial possessions),
except for (a) reasonable advances to employees or customers in the
ordinary course of business and (b) Investments having a stated maturity no
greater than one year from the date the Company makes such Investment in
(1) obligations of the United States government or any agency thereof or
obligations guaranteed by the United States government, (2) certificates of
deposit of commercial banks having combined capital and surplus of at least
$500 million or (3) commercial paper with a rating of at least "Prime-1" by
-------
Moody's Investors Service, Inc.;
(v) merge or consolidate with any Person or permit any
Subsidiary to merge or consolidate with any Person (other than a merger
between Wholly-Owned Subsidiaries);
(vi) sell, lease or otherwise dispose of, or permit any
Subsidiary to sell, lease or otherwise dispose of, more than 10% of the
consolidated assets of the Company and its Subsidiaries (computed on the
basis of book value, determined in accordance with generally accepted
accounting principles consistently applied, or fair market value,
determined by the Board in its reasonable good faith judgment) in any
transaction or series of related transactions (other than sales in the
ordinary course of business), or sell or permanently dispose of any of its
or any Subsidiary's Intellectual Property Rights;
-12-
<PAGE>
(vii) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation,
any reorganization into a limited liability company, a partnership or any
other non-corporate entity which is treated as a partnership for federal
income tax purposes), except as provided in paragraph 5(d) of the
Stockholders Agreement;
(viii) acquire, or permit any Subsidiary to acquire, any
interest in any company or business (whether by a purchase of assets,
purchase of stock, merger or otherwise), or enter into any joint venture;
(ix) enter into, or permit any Subsidiary to enter into, the
ownership, active management or operation of any business other than the
provision of local exchange telecommunications services or such other
business activities as may be identified in a Subsequent Business Plan;
(x) become subject to, or permit any of its Subsidiaries to
become subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would
(under any circumstances) restrict (a) the right of any Subsidiary to make
loans or advances or pay dividends to, transfer property to, or repay any
Indebtedness owed to, the Company or another Subsidiary or (b) the
Company's right to perform the provisions of this Agreement, the
Stockholders Agreement, the Registration Agreement, the Certificate of
Incorporation or the Bylaws (including, without limitation, the provisions
of Section 5 hereof);
(xi) except as expressly contemplated by this Agreement, make
any amendment to the Certificate of Incorporation or the Bylaws, or file
any resolution of the Board with the Delaware Secretary of State containing
any provisions which would adversely affect or otherwise impair the rights
or the relative preferences and priorities of the holders of the Class A
Common under the Certificate of Incorporation;
(xii) enter into, amend, modify or supplement, or permit any
Subsidiary to enter into, amend, modify or supplement, any agreement,
transaction, commitment or arrangement with any of its or any Subsidiary's
officers, directors, employees or Affiliates or with any individual related
by blood, marriage or adoption to any such individual or with any entity in
which any such Person or individual owns a beneficial interest, except for
customary employment arrangements and benefit programs on reasonable terms
and except as otherwise expressly contemplated by this Agreement;
(xiii) establish or acquire (a) any Subsidiaries other than
Wholly-Owned Subsidiaries or (b) any Subsidiaries organized outside of the
United States and its territorial possessions;
(xiv) create, incur, assume or suffer to exist, or permit any
Subsidiary to create, incur, assume or suffer to exist, Indebtedness
exceeding an aggregate principal amount of $100,000 outstanding at any time
on a consolidated basis (other than
-13-
<PAGE>
Indebtedness expressly specified in the Initial Business Plan or any
Subsequent Business Plan);
(xv) create, incur, assume or suffer to exist, or permit any
Subsidiary to create, incur, assume or suffer to exist, any Liens other
than Permitted Liens;
(xvi) make any capital expenditures or permit any Subsidiary to
make any capital expenditures (including, without limitation, payments with
respect to capitalized leases, as determined in accordance with generally
accepted accounting principles consistently applied) exceeding $100,000 in
the aggregate on a consolidated basis during any twelve-month period (other
than capital expenditures expressly specified in the Initial Business Plan
or any Subsequent Business Plan);
(xvii) enter into any leases or other rental agreements
(excluding capitalized leases, as determined in accordance with generally
accepted accounting principles consistently applied) under which the amount
of the aggregate lease payments for all such agreements exceeds $100,000 on
a consolidated basis for any twelve-month period, provided that the Company
--------
shall be allowed to enter into any leasing arrangements that are necessary
to the conduct of its business purpose and expressly specified in the
Initial Business Plan or any Subsequent Business Plan (including, but not
limited to, leasing telecommunications networks);
(xviii) change its fiscal year;
(xix) adopt any new stock option plan or employee stock
ownership plan or issue any shares of Common Stock to its or its
Subsidiaries' employees other than a plan, the terms of which shall be
approved by a majority of the Board and the holders of at least 67% of the
Institutional Investor Stock then outstanding, under which during the four-
year period after the date hereof specified employees of the Company or its
Subsidiaries are granted options to acquire, for fair market value, up to
5% (by value) of the Company's common stock (a "Permitted Stock Option
----------------------
Plan");
----
(xx) issue or sell any shares of the capital stock, or rights
to acquire shares of the capital stock, of any Subsidiary to any Person
other than the Company or a Wholly-Owned Subsidiary; or
(xxi) use the proceeds from the sale of the Class A Common and
the subsequent capital contributions at the Subsequent Closings other than
for working capital and budgeted general corporate purposes or as
contemplated by the Initial Business Plan and any Subsequent Business Plan,
as applicable.
The restrictions of this paragraph 4C shall terminate upon the consummation of a
Public Offering.
4.1D. Affirmative Covenants. So long as any Investor Stock remains
---------------------
outstanding, the Company shall, and shall cause each Subsidiary (if any) to:
-14-
<PAGE>
(i) at all times cause to be done all things necessary to
maintain, preserve and renew its corporate existence and all material
licenses, authorizations and permits necessary to the conduct of its
businesses;
(ii) pay and discharge when payable all taxes, assessments and
governmental charges imposed upon its properties or upon the income or
profits therefrom (in each case before the same becomes delinquent and
before penalties accrue thereon) and all material claims for labor,
materials or supplies which if unpaid would by law become a Lien upon any
of its property unless and to the extent that the same are being contested
in good faith and by appropriate proceedings and adequate reserves (as
determined in accordance with generally accepted accounting principles,
consistently applied) have been established on its books with respect
thereto;
(iii) comply with all other material obligations which it incurs
pursuant to any contract or agreement, whether oral or written, express or
implied, as such obligations become due, unless and to the extent that the
same are being contested in good faith and by appropriate proceedings and
adequate reserves (as determined in accordance with generally accepted
accounting principles, consistently applied) have been established on its
books with respect thereto;
(iv) comply in all material respects with all applicable laws,
rules and regulations of the FCC and all other governmental authorities
material to the business of the Company and its Subsidiaries (including,
without limitation, all requirements for maintaining Chicago Common Carrier
Status or any similar certification granted after the date hereof);
(v) apply for and continue in force with good and responsible
insurance companies adequate insurance covering risks of such types and in
such amounts as are customary for well-insured corporations of similar size
engaged in similar lines of business;
(vi) maintain proper books of record and account which present
fairly in all material respects its financial condition and results of
operations and make provisions on its financial statements for all such
proper reserves as in each case are required in accordance with generally
accepted accounting principles, consistently applied; and
(vii) enter into and maintain nondisclosure and noncompete
agreements, in form and substance as set forth in Exhibit 13 hereto, with
----------
all Persons (other than the Executive Investors) who from time to time
become key employees of the Company or any of its Subsidiaries.
4.1E. Compliance with Agreements. The Company shall perform and
--------------------------
observe all of its obligations to the holders of Common Stock as set forth in
the Certificate of Incorporation and the Bylaws, the Stockholders Agreement, the
Vesting Agreements, the Executive Stock Agreements and the Registration
Agreement.
-15-
<PAGE>
4.1F. Current Public Information. At all times after the Company has
--------------------------
filed a registration statement with the Securities and Exchange Commission
pursuant to the requirements of either the Securities Act or the Securities
Exchange Act, the Company shall file all reports required to be filed by it
under the Securities Act and the Securities Exchange Act and the rules and
regulations adopted by the Securities and Exchange Commission thereunder and
shall take such further action as any holder or holders of Restricted Securities
may reasonably request, all to the extent required to enable such holders to
sell Restricted Securities pursuant to (i) Rule 144 adopted by the Securities
and Exchange Commission under the Securities Act (as such rule may be amended
from time to time) or any similar rule or regulation hereafter adopted by the
Securities and Exchange Commission or (ii) a registration statement on Form S-2
or S-3 or any similar registration form hereafter adopted by the Securities and
Exchange Commission. Upon request, the Company shall deliver to any holder of
Restricted Securities a written statement as to whether it has complied with
such requirements.
4.1G. Amendment of Vesting Agreements or Executive Stock Agreements.
-------------------------------------------------------------
The Company shall not amend, modify or fail to enforce any provision of any
Vesting Agreement or any Executive Stock Agreement without the prior written
consent of the holders of at least 67% of the Institutional Investor Stock then
outstanding.
4.1H. Intellectual Property Rights. The Company shall, and shall
----------------------------
cause each Subsidiary to, possess and maintain all material Intellectual
Property Rights necessary to the conduct of their respective businesses and own
all right, title and interest in and to, or have a valid license for, all such
Intellectual Property Rights. Neither the Company nor any Subsidiary shall take
any action, or fail to take any action, which would result in the invalidity,
abandonment, misuse or unenforceability of such Intellectual Property Rights or
which would infringe upon or misappropriate any rights of other Persons.
4.1I. Public Disclosures. The Company shall not, nor shall it permit
------------------
any Subsidiary to, disclose any Institutional Investor's name or identity as an
investor in the Company in any press release or other public announcement or in
any document or material filed with any governmental entity, without the prior
written consent of such Institutional Investor, unless such disclosure is
required by applicable law or governmental regulations or by order of a court of
competent jurisdiction, in which case prior to making such disclosure the
Company shall give written notice to such Institutional Investor describing in
reasonable detail the proposed content of such disclosure and shall permit the
Institutional Investor to review and comment upon the form and substance of such
disclosure.
4.1J. First Refusal Rights.
--------------------
(i) Except for issuances of (a) shares of Class A Common pursuant
to this Agreement, shares of Class B Common pursuant to any of the Executive
Stock Agreements contemplated hereby, or shares of Class B Common upon
conversion of Class C Common into such Class B Common pursuant to the
Certificate of Incorporation, (b) options to acquire Common Stock pursuant to
the Permitted Stock Option Plan, or shares of Common Stock upon the exercise of
such options, or (c) any securities pursuant to a Public Offering, if the
Company authorizes the issuance or sale of any shares of Common Stock or any
securities containing
-16-
<PAGE>
options or rights to acquire any shares of Common Stock (other than as a pro
rata dividend on the outstanding Common Stock), the Company shall first offer to
sell to each holder of Investor Stock a portion of such stock or securities
equal to the quotient determined by dividing (1) the number of shares of
Investor Stock held by such holder by (2) the total number of shares of Investor
Stock then outstanding. Each holder of Investor Stock shall be entitled to
purchase such stock or securities at the most favorable price and on the most
favorable terms as such stock or securities are to be offered to any other
Persons; provided that if all Persons entitled to purchase or receive such stock
or securities are required to also purchase other securities of the Company, the
holders of Investor Stock exercising their rights pursuant to this paragraph
shall also be required to purchase the same strip of securities (on the same
terms and conditions) that such other Persons are required to purchase. The
purchase price for all stock and securities offered to the holders of the
Investor Stock shall be payable in cash.
(ii) In order to exercise its purchase rights hereunder, a holder of
Investor Stock must within 30 days after receipt of written notice from the
Company describing in reasonable detail the stock or securities being offered,
the purchase price thereof, the payment terms and such holder's percentage
allotment, deliver a written notice to the Company describing such holder's
election hereunder. If all of the securities offered to the holders of Investor
Stock are not fully subscribed by such holders, the remaining stock and
securities shall be reoffered by the Company to the holders purchasing their
full allotment upon the terms set forth in this paragraph, except that such
holders must exercise their purchase rights within five business days after
receipt of such reoffer.
(iii) Upon the expiration of the offering periods described above,
the Company shall be entitled to sell such stock or securities which the holders
of Investor Stock have not elected to purchase during the 180 days following
such expiration on terms and conditions no more favorable to the purchasers
thereof than those offered to such holders. Any stock or securities offered or
sold by the Company after such 180-day period must be reoffered to the holders
of Investor Stock pursuant to the terms of this paragraph.
(iv) The rights of the holders of Investor Stock under this
paragraph shall terminate upon the consummation of a Public Offering.
SECTION 5. INVESTORS' PUT RIGHT.
--------------------
5.1A. Put Right. At any time and from time to time on or after the
---------
seventh anniversary of the Initial Closing Date, but not after the consummation
of a Public Offering, each Institutional Investor shall have the right to
require the Company to repurchase all, but not less than all, of the
outstanding Investor Stock held by such Institutional Investor and its
Affiliates at the Repurchase Price (as defined below) by giving written notice
to the Company of such Institutional Investor's exercise of this right (the
"Exercise Notice"). Within 10 days after receipt of an Exercise Notice, the
---------------
Company shall give written notice (the "Repurchase Notice") to each other holder
-----------------
of Investor Stock, setting forth the identity of the Institutional Investor
tendering such Exercise Notice, the number of shares of Investor Stock to be
repurchased from such Investor, and a reasonable approximation of the fair
market value of the Company's assets (net of any Company liabilities senior in
liquidation preference to the Investor Stock) and of each
-17-
<PAGE>
share of Investor Stock at the time of such Repurchase Notice. Each Investor
shall be entitled to join in such repurchase and require the Company to purchase
all, but not less than all, of the Investor Stock held by such Investor and its
Affiliates at the same closing, at the same price, and on the same terms as the
Institutional Investor tendering the Exercise Notice by giving Exercise Notice
within 20 days after the date of the Repurchase Notice. Promptly (but in any
event within 3 business days after the end of this 20-day period), the Company
shall send each Investor written notice updating the information contained in
the Repurchase Notice (the "Revised Repurchase Notice"). The Revised Repurchase
-------------------------
Notice shall also set forth a time (which shall be not less than 5 nor more than
10 business days after the date of such notice) and place for a meeting between
the Company and the holders of a majority of the Investor Stock which the
Company has been requested to repurchase (the "Majority Holders").
----------------
5.1B. Company Obligation. The Company shall do everything within its
------------------
power under the law and the Certificate of Incorporation, including but not
limited to assuming or refinancing debt, recapitalizing the Company, or selling
the Company, to enable the Company to satisfy its repurchase obligations under
this Section 5.
5.1C. Repurchase Price. The repurchase price for each share of
----------------
Investor Stock repurchased by the Company under this Section 5 (the "Repurchase
----------
Price") shall be equal to the greater of (i) the initial purchase price of such
- -----
share hereunder and all amounts subsequently contributed to the capital of the
Company with respect to such share pursuant to this Agreement (as adjusted for
stock splits, stock dividends, combinations, or other reorganizations) or (ii)
the fair market value of such share (without any discount for lack of liquidity
or minority status) as of the date of the first Repurchase Notice.
The Company, the Majority Holders, and the holders of a majority of
the Executive Stock then outstanding shall attempt in good faith to agree on the
fair market value of the Investor Stock. If they are unable to reach such
agreement within 20 days after the meeting date set forth in the Revised
Repurchase Notice, the Company and the Majority Holders will each, within 10
days thereafter, appoint one investment banker or other appraiser experienced in
valuing companies like the Company, and the two Persons so appointed shall
within 10 days after their appointment appoint a third investment banker or
appraiser similarly experienced. The three investment bankers/appraisers shall
each appraise the fair market value of the Investor Stock (based on the highest
price reasonably obtainable for the Company in an orderly, arm's length sale to
a willing unaffiliated buyer), and the fair market value for purposes hereof
shall be the average of the two appraisals closest to each other. Such
determination shall be final and binding on all parties hereto. The cost of the
appraisal shall be borne by the Company.
5.1D. Repurchase Closing. At the closing of a Company repurchase
------------------
of Investor Stock pursuant to this Section 5 (the "Repurchase Closing"), each
------------------
Investor selling Investor Stock shall deliver to the Company all existing stock
certificates evidencing the Investor Stock held by such Investor, upon the
Company's delivery to each such selling Investor of Cash in an aggregate amount
equal to the Repurchase Price of such Investor Stock.
-18-
<PAGE>
SECTION 6. TRANSFER OF RESTRICTED SECURITIES.
---------------------------------
6.1A. General Provisions. Restricted Securities are transferable
------------------
only pursuant to (i) public offerings registered under the Securities Act, (ii)
Rule 144 or Rule 144A of the Securities and Exchange Commission (or any similar
rule or rules then in force) if such rule is available, and (iii) subject to the
various conditions and prohibitions set forth in this Agreement, the
Stockholders Agreement, the Vesting Agreements, and the Executive Stock
Agreements, any other legally available means of transfer.
6.1B. Opinion Delivery. In connection with the transfer of any
----------------
Restricted Securities (other than a transfer described in paragraph 6A(i) or
(ii) above), the holder thereof shall deliver written notice to the Company
describing in reasonable detail the transfer or proposed transfer, together with
an opinion of Kirkland & Ellis or other counsel which (to the Company's
reasonable satisfaction) is knowledgeable in securities law matters to the
effect that such transfer of Restricted Securities may be effected without
registration of such Restricted Securities under the Securities Act. In
addition, if the holder of the Restricted Securities delivers to the Company an
opinion of Kirkland & Ellis or such other counsel that no subsequent transfer of
such Restricted Securities shall require registration under the Securities Act,
the Company shall promptly upon such contemplated transfer deliver new
certificates for such Restricted Securities which do not bear the Securities Act
legend set forth in paragraph 9C below. If the Company is not required to
deliver new certificates for such Restricted Securities not bearing such legend,
the holder thereof shall not transfer the same until the prospective transferee
has confirmed to the Company in writing its agreement to be bound by the
conditions contained in this Section 6 and paragraph 9C.
6.1C. Rule 144A. Upon the request of any Investor, the Company shall
---------
promptly supply to such Investor or its prospective transferees all information
regarding the Company required to be delivered in connection with a transfer
pursuant to Rule 144A of the Securities and Exchange Commission.
6.1D. Legend Removal. If any Restricted Securities become eligible
--------------
for sale pursuant to Rule 144(k), the Company shall, upon the request of the
holder of such Restricted Securities, remove the legend set forth in paragraph
9C from the certificates for such Restricted Securities.
SECTION 7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As a
---------------------------------------------
material inducement to the Investors to enter into this Agreement and purchase
the Class A Common hereunder, the Company hereby represents and warrants that:
7.1A. Organization, Corporate Power and Licenses. The Company is a
------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of Delaware and is qualified to do business in every jurisdiction in which its
ownership of property or conduct of business requires it to qualify. The
Company possesses all requisite corporate power and authority and, except as set
forth in the "Licenses Schedule" attached hereto, all material licenses, permits
-----------------
and authorizations necessary to own and operate its properties, to carry on its
businesses
-19-
<PAGE>
as now conducted and presently proposed to be conducted and to carry out the
transactions contemplated by this Agreement. The copies of the Company's
charter documents and Bylaws which have been furnished to the Investors' special
counsel reflect all amendments made thereto at any time prior to the date of
this Agreement and are correct and complete.
7.1B. Capital Stock and Related Matters.
---------------------------------
(i) As of the Initial Closing and immediately thereafter, the
authorized capital stock of the Company (collectively, the "Common Stock") shall
------------
consist of (a) 80,000 shares of Class A Common, of which 79,384.62 shall be
issued and outstanding; (b) 35,000 shares of Class B Common Stock, par value
$.01 per share ("Class B Common"), 20,000 shares of which shall be issued and
--------------
outstanding, and 14,711.54 shares of which shall be reserved for issuance upon
conversion of the Class C Common Stock, par value $.01 per share ("Class C
-------
Common"); and 15,000 shares of Class C Common, of which 14,711.54 shall be
- ------
issued and outstanding. Except as set forth on the attached "Capitalization
--------------
Schedule," as of the Initial Closing, the Company shall not have outstanding any
- --------
stock or securities, nor any options, warrants or other rights to acquire
capital stock or securities of the Company. As of the Initial Closing, all of
the outstanding shares of the Company's capital stock listed on the
Capitalization Schedule shall be validly issued, fully paid and nonassessable.
(ii) The Company has not violated any applicable federal or state
securities laws in connection with the offer, sale or issuance of any of its
capital stock, and the offer, sale and issuance of the Class A Common hereunder
or the Class B Common and Class C Common under the Executive Stock Agreements do
not require registration under the Securities Act or any applicable state
securities laws. To the best of the Company's knowledge, there are no
agreements between the Company's stockholders with respect to the voting or
transfer of the Company's capital stock or with respect to any other aspect of
the Company's affairs, except for the Stockholders Agreement, the Vesting
Agreement, and the Executive Stock Agreements.
7.1C. Authorization; No Breach. The execution, delivery and
------------------------
performance of this Agreement, the Stockholders Agreement, the Registration
Agreement, the Vesting Agreements, the Executive Stock Agreements, and all
other agreements contemplated hereby to which the Company is a party, the filing
of the amendment of the Company's Certificate of Incorporation referred to in
paragraph 2B above, and the amendment of the Company's Bylaws referred to in
paragraph 2C above have been duly authorized by the Company. This Agreement,
the Stockholders Agreement, the Executive Stock Agreements, the Vesting
Agreements, the Registration Agreement, the Certificate of Incorporation, and
all other agreements contemplated hereby to which the Company is a party each
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms. The execution and delivery by the Company of this
Agreement, the Stockholders Agreement, the Executive Stock Agreements, the
Vesting Agreements, the Registration Agreement and all other agreements
contemplated hereby to which the Company is a party, the offering, sale and
issuance of the Class A Common hereunder and the Class B Common and Class C
Common under the Executive Stock Agreements, the filing of the amendments to
the Certificate of Incorporation referred to above and the fulfillment of and
compliance with the respective terms hereof and thereof by the Company, do not
and shall not (i) conflict with or result in a breach of the terms, conditions
or provisions of, (ii) constitute a
-20-
<PAGE>
default under, (iii) result in the creation of any lien, security interest,
charge or encumbrance upon the Company's or any Subsidiary's capital stock or
assets pursuant to, (iv) give any third party the right to modify, terminate or
accelerate any obligation under, (v) result in a violation of, or (vi) require
any authorization, consent, approval, exemption or other action by or notice or
declaration to, or filing with, any court or administrative or governmental body
or agency pursuant to the charter or Bylaws of the Company, or any law, statute,
rule or regulation to which the Company or any Subsidiary is subject, or any
agreement, instrument, order, judgment or decree to which the Company is
subject.
7.1D. Conduct of Business; Absence of Liabilities. Prior to the
-------------------------------------------
Initial Closing, except as set forth on the attached "Liabilities Schedule," the
--------------------
Company has not conducted any business nor incurred any expenses, obligations or
liabilities (whether accrued, absolute, contingent, unliquidated or otherwise,
whether or not known to the Company and whether due or to become due and
regardless of when asserted).
7.1E. Assets. Except as set forth on the attached "Assets Schedule,"
------ ---------------
the Company does not own or lease any Assets, whether tangible or intangible
(excluding Intellectual Property Rights). The Company has good and marketable
title to, or a valid leasehold interest in, all assets listed on the Assets
Schedule, free and clear of all Liens.
7.1F. No Subsidiaries. The Company does not own or hold, and has
---------------
never owned or held, any rights to acquire any shares of stock or any other
security or interest in any other Person.
7.1G. Contracts and Commitments.
-------------------------
(i) Except as expressly contemplated by this Agreement or as set
forth on the attached "Contracts Schedule," neither the Company nor any
------------------
Subsidiary is a party to or bound by any written or oral contract of any kind,
including but not limited to any agreement, employee benefit plan, employment
contract, insurance contract, loan agreement, guarantee, lease, license,
warranty, or affirmative or restrictive covenant.
(ii) All of the contracts, agreements and instruments set forth on
the Contracts Schedule are valid, binding and enforceable in accordance with
their respective terms.
(iii) The Investors' special counsel has been supplied with a true
and correct copy of each of the written instruments, plans, contracts and
agreements and an accurate written description of each of the oral arrangements,
contracts and agreements which are referred to on the Contracts Schedule,
together with all amendments, waivers or other changes thereto.
7.1H. Intellectual Property Rights. The attached "Intellectual
---------------------------- ------------
Property Schedule" contains a complete and accurate list of all (a) patented or
- -----------------
registered Intellectual Property Rights owned or used by the Company or any
Subsidiary, (b) pending patent applications and applications for registrations
of other Intellectual Property Rights filed by the Company or any Subsidiary,
(c) unregistered trade names and corporate names owned or used by the Company or
any Subsidiary and (d) unregistered trademarks and service marks. The
Intellectual Property
-21-
<PAGE>
Schedule also contains a complete and accurate list of all licenses and other
rights granted by the Company or any Subsidiary to any third party with respect
to any Intellectual Property Rights and all licenses and other rights granted by
any third party to the Company or any Subsidiary with respect to any
Intellectual Property Rights, in each case identifying the subject Intellectual
Property Rights. Except as set forth on the Intellectual Property Schedule: (a)
the Company or one of its Subsidiaries owns all right, title and interest to, or
has the right to use pursuant to a valid license, all Intellectual Property
Rights necessary for the operation of the businesses of the Company and its
Subsidiaries as presently proposed to be conducted, free and clear of all Liens,
(b) the Company and its Subsidiaries own all right, title and interest in and to
all of the Intellectual Property Rights listed on such schedule, free and clear
of all Liens, (c) there have been no claims made against the Company or any
Subsidiary asserting the invalidity, misuse, or unenforceability of any of such
Intellectual Property Rights, and there are no valid grounds for the same, and
(d) neither the Company nor any Subsidiary has received any notices of, and is
not aware of any facts which indicate the likelihood of, any infringement or
misappropriation by, or conflict with, any third party with respect to such
Intellectual Property Rights (including, without limitation, any demand or
request that the Company or any Subsidiary license any rights from a third
party).
7.1I. Litigation, etc. Except as set forth on the attached
---------------
"Litigation Schedule," there are no actions, suits, proceedings, orders,
-------------------
investigations or claims pending or, to the best of the Company's knowledge,
threatened against or affecting the Company or any Subsidiary (or to the best of
the Company's knowledge, pending or threatened against or affecting any of the
officers, directors or employees of the Company and its Subsidiaries with
respect to their businesses or proposed business activities), or pending or
threatened by the Company or any Subsidiary against any third party, at law or
in equity, or before or by any governmental department, commission, board,
bureau, agency or instrumentality (including, without limitation, any actions,
suit, proceedings or investigations with respect to the transactions
contemplated by this Agreement); neither the Company nor any Subsidiary is
subject to, to the best of the Company's knowledge, any governmental
investigations or inquiries (including, without limitation, inquiries as to the
qualification to hold or receive any license or permit); and, to the best of the
Company's knowledge, there is no basis for any of the foregoing. Neither the
Company nor any Subsidiary is subject to any judgment, order or decree of any
court or other governmental agency, and neither the Company nor any Subsidiary
has received any opinion or memorandum or legal advice from legal counsel to the
effect that it is exposed, from a legal standpoint, to any liability or
disadvantage which may be material to its business.
7.1J. Brokerage. There are no claims for brokerage commissions,
---------
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement binding
upon the Company. The Company shall pay, and hold each Investor (excluding any
Executive Investor that had actual knowledge of such arrangement or agreement
prior to the date hereof) harmless against, any liability, loss or expense
(including, without limitation, reasonable attorneys' fees and out-of-pocket
expenses) arising in connection with any such claim.
7.1K. Governmental Consent, etc. Except as set forth on the attached
-------------------------
"Consents Schedule," no permit, consent, approval or authorization of, or
-----------------
declaration to or filing with, any
-22-
<PAGE>
governmental authority is required in connection with the execution, delivery
and performance by the Company of this Agreement or the other agreements
contemplated hereby, or the consummation by the Company of any other
transactions contemplated hereby or thereby.
7.1L. Compliance with Laws. The Company has not violated any law or
--------------------
any governmental regulation or requirement in any material respect.
7.1M. Affiliated Transactions. Except as set forth on the attached
-----------------------
"Affiliated Transactions Schedule," no officer, director, employee or Affiliate
--------------------------------
of the Company or any Subsid iary or any individual related by blood, marriage
or adoption to any such individual or any entity in which any such Person or
individual owns any beneficial interest, is a party to any agreement, contract,
commitment or transaction with the Company or has any material interest in any
material property owned or used by the Company.
7.1N. Projections and Pro Forma Financial Statements.
----------------------------------------------
(i) Included as part of the Initial Business Plan attached hereto
as Exhibit 1 is a true and complete copy of the latest projections of the
consolidated income and cash flows of the Company and its Subsidiaries for the
five consecutive 12-month periods commencing with and following the date hereof.
Such projections have been prepared on the basis of the assumptions set forth
therein, which the Company reasonably believes are fair and reasonable in light
of current and reasonably foreseeable business conditions.
(ii) The pro forma consolidated balance sheets of the Company and
its Subsidiaries as of the end of each of the five consecutive 12-month periods
commencing with and following the date hereof, included as part of the Initial
Business Plan attached hereto as Exhibit 1, is complete and correct in all
material respects and presents fairly in all material respects the consolidated
financial condition of the Company and its Subsidiaries as of such date as if
the transactions contemplated by this Agreement had occurred immediately prior
to such date, and such balance sheet contains all pro forma adjustments
necessary in order to fairly reflect such assumption.
7.1O. Disclosure. Neither this Agreement nor any of the exhibits,
----------
schedules, attachments, written statements, documents, certificates or other
items supplied to any Investor by or on behalf of the Company with respect to
the transactions contemplated hereby contain any untrue statement of a material
fact or omit a material fact necessary to make each statement contained herein
or therein not misleading; provided that with respect to the financial
--------
projections furnished to the Investors by the Company, the Company represents
and warrants only that such projections were based upon assumptions reasonably
believed by the Company to be reasonable and fair as of the date the projections
were prepared in the context of the Company's history and current and reasonably
foreseeable business conditions. There is no fact which the Company has not
disclosed to the Investors in writing and of which any of its officers,
directors or executive employees is aware and which would reasonably be expected
to have a material adverse effect upon the expected financial condition or
business prospects of the Company and its Subsidiaries taken as a whole.
-23-
<PAGE>
SECTION 8. REPRESENTATIONS AND WARRANTIES OF THE INSTITUTIONAL
---------------------------------------------------
INVESTORS. As a material inducement to the Company and the Executive Investors
- ---------
to enter into this Agreement and to engage in the transactions and enter into
the agreements contemplated hereby, each of the Institutional Investors
represents and warrants for itself, severally and not jointly, that:
8.1A. Assets. Such Institutional Investor has sufficient capital and
------
liquidity (including undrawn commitments) to fulfill its capital contribution
obligations under the Initial Business Plan and any Subsequent Business Plan,
pursuant to the terms and subject to the conditions set forth herein.
8.1B. Initial Business Plan. Such Institutional Investor is
---------------------
sophisticated in financial matters and sophisticated in the industry in which
the Company contemplates doing business and has had an opportunity to evaluate
the Initial Business Plan of the Company.
8.1C. Authorization. The execution, delivery and performance of this
-------------
Agreement and the other agreements contemplated hereby to which the such
Institutional Investor is a party by such Institutional Investor and the
consummation of the transactions contemplated hereby and thereby have been duly
and validly authorized by all requisite action on the part of such Institutional
Investor and the partners thereof, and no other proceedings on its or their part
(other than giving notice of drawdowns on commitments) is necessary to authorize
the execution, delivery or performance of this Agreement. This Agreement
constitutes, and each of the other agreements contemplated hereby to which such
Institutional Investor is a party will when executed constitute, a valid and
binding obligation of such Institutional Investor, enforceable in accordance
with their terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditors' rights
generally and limitations on the availability of equitable remedies.
SECTION 9. MISCELLANEOUS PROVISIONS.
------------------------
9.1A. Expenses. The Company shall pay, and hold each Institutional
--------
Investor harmless against liability for the payment of, the out-of-pocket
expenses of the Institutional Investors, including the reasonable fees and
expenses of MDCP's special counsel, Kirkland & Ellis, and their special
telecommunications counsel, Skadden, Arps, Slate, Meagher & Flom, arising in
connection with (i) the performance of due diligence investigations concerning
the Company, the negotiation and execution of this Agreement, and the
consummation of the transac tions to occur at the Initial Closing or any
Subsequent Closing as contemplated hereby, (ii) any amendments or waivers
(whether or not the same become effective) under or in respect of this
Agreement, the agreements contemplated hereby or the Certificate of
Incorporation, (iii) the enforcement of the rights granted under this Agreement,
the agreements contemplated hereby and the Certificate of Incorporation, (iv)
any filing with any governmental agency with respect to such Institutional
Investor's investment in the Company or in any other filing with any
governmental agency with respect to the Company which mentions such
Institutional Investor, and (v) stamp and other taxes which may be payable by
the Institutional Investors in respect of the execution and delivery of this
Agreement or the issuance, delivery or acquisition of any Investor Stock.
-24-
<PAGE>
9.1B. Remedies.
--------
(i) Each holder of Investor Stock shall have all rights and
remedies set forth in this Agreement and the Certificate of Incorporation and
all rights and remedies which such holders have been granted at any time under
any other agreement or contract and all of the rights which such holders have
under any law. Any Person having any rights under any provision of this
Agreement shall be entitled to enforce (upon demonstration of irreparable harm)
such rights specifically (without posting a bond or other security), to recover
damages by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law.
(ii) If at any Subsequent Closing, after all conditions to such
Subsequent Closing set forth in Section 3 hereof have been either satisfied or
waived pursuant to paragraph 3I, any Investor refuses to tender such Investor's
Specified Contribution for such Subsequent Closing, the Company shall have the
right, in addition to the remedies available under subparagraph 9B(i) above, to
repurchase all shares of Investor Stock held by such refusing Investor or its
Affiliates for an aggregate price equal to such Investor's Initial Contribution
and all Specified Contributions made by such Investor at prior Subsequent
Closings, each with respect to such repurchased shares. The Company shall have
the option to pay such repurchase price in the form of a promissory note with
the following terms: (a) principal equal to such Investor's Initial Contribution
and all prior Specified Contributions made by such Investor, each with respect
to such repurchased shares; (b) liquidation preference junior to all senior debt
obligations of the Company then or thereafter incurred, and to the Distribution
Preference of the holders of Class A Common under the Certificate of
Incorporation; (c) simple annual interest equal to the prime rate issued by
Citibank from time to time; and (d) all principal and accrued interest due and
payable on the first to occur of (1) the closing of a Public Offering, (2) a
Sale of the Company (as defined in the Stockholders Agreement), and (3) the
fifth anniversary of the issuance of such note; provided that such note shall
--------
not be repaid until the Distribution Preference of the holders of Class A Common
under the Certificate of Incorporation has been fully satisfied. If an
Investor's holdings of Investor Stock are repurchased pursuant to this
paragraph, such Investor and its Affiliates shall thereafter retain no further
right to enforce or benefit from the provisions of this Agreement or any other
agreement contemplated hereby to which such Investor is a party other than the
promissory note described above, and such Investor and its Affiliates shall
retain no further obligation under this Agreement to make Specified
Contributions at any Subsequent Closing.
9.1C. Investor's Investment Representations. Each Investor hereby
-------------------------------------
represents that it is acquiring the Restricted Securities purchased hereunder or
acquired pursuant hereto for its own account with the present intention of
holding such securities for purposes of investment, and that it has no intention
of selling such securities in a public distribution in violation of the federal
securities laws or any applicable state securities laws; provided that nothing
--------
contained herein shall prevent any Investor and subsequent holders of Restricted
Securities from transferring such securities in compliance with the provisions
of Section 6 hereof. Each certificate or instrument representing Restricted
Securities shall be imprinted with a legend in substantially the following form:
-25-
<PAGE>
"The securities represented by this certificate were originally
issued on November 27, 1996, and have not been registered under
the Securities Act of 1933, as amended. The transfer of the
securities represented by this certificate is subject to the
conditions specified in the Stock Purchase Agreement dated as of
November 27, 1996, as amended and modified from time to time,
between the issuer (the "Company") and certain investors. The
Company reserves the right to refuse the transfer of such
securities until such conditions have been fulfilled with respect
to such transfer. A copy of the Stock Purchase Agreement shall be
furnished by the Company to the holder hereof upon written
request and without charge."
9.1D. Consent to Amendments. Except as otherwise expressly provided
---------------------
herein, the provisions of this Agreement may be amended and the Company may take
any action herein prohibited, or omit to perform any act herein required to be
performed by it, only if the Company has obtained the written consent of the
holders of at least 67% of the Institutional Investor Stock, and the holders of
a majority of the Executive Stock, outstanding at the time such amendment or
waiver becomes effective. No course of dealing between the Company and the
holder of any Investor Stock or any delay by such holder in exercising any
rights hereunder or under the Certificate of Incorporation shall operate as a
waiver of any rights of such holder.
9.1E. Survival of Representations and Warranties. All
------------------------------------------
representations and warranties contained herein or made in writing by any party
in connection herewith shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby,
regardless of any investigation made by any Investor or on its behalf.
9.1F. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of the
respective successors and assigns of the parties hereto whether so expressed or
not; provided that a party's obligation to make Specified Contributions at
--------
Subsequent Closings shall be binding on such party's successors and assigns only
to the extent set forth in an express written assignment signed by such party.
In addition, and whether or not any express assignment has been made, the
provisions of this Agreement which are for any Investor's benefit as an Investor
or holder of Investor Stock are also for the benefit of, and enforceable by, any
subsequent holder of such Investor Stock. Notwithstanding the foregoing, the
rights of the holders of the Investor Stock under this Agreement, the
Stockholders Agreement or the Registration Agreement shall not be exercisable by
or for the benefit of any subsequent holder of Investor Stock if, directly or
indirectly, the assignment of Investor Stock to such subsequent holder breached
any material provision of this Agreement or the Stockholders Agreement.
9.1G. Capital and Surplus; Special Reserves. The Company agrees that
-------------------------------------
the capital of the Company (as such term is used in Section 154 of the General
Corporation Law of Delaware) in respect of the shares of Class A Common issued
pursuant to this Agreement shall be equal to the aggregate par value of such
shares and that it shall not increase the capital of the Company with respect to
any shares of the Company's capital stock at any time on or after the date of
this Agreement. The Company also agrees that it shall not create any special
reserves
-26-
<PAGE>
under Section 171 of the General Corporation Law of Delaware without the prior
written consent of the holders of at least 67% of the outstanding Institutional
Investor Stock.
9.1H. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
9.1I. Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
9.1J. Descriptive Headings; Interpretation. The descriptive headings
------------------------------------
of this Agreement are inserted for convenience only and do not constitute a
substantive part of this Agreement. The use of the word "including" in this
Agreement shall be by way of example rather than by limitation.
9.1K. Governing Law. The corporate law of the State of Delaware
-------------
shall govern all issues and questions concerning the relative rights and
obligations of the Company and its stockholders. All other issues and questions
concerning the construction, validity, enforcement and interpretation of this
Agreement and the exhibits and schedules hereto shall be governed by, and
construed in accordance with, the laws of the State of Illinois, without giving
effect to any choice of law or conflict of law rules or provisions (whether of
the State of Illinois or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of Illinois.
9.1L. Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient, one business day after they are sent to the recipient by
reputable overnight courier service (charges prepaid) or three business days
after they are mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid. Such notices, demands and other
communications shall be sent to each Investor at the address indicated on the
Schedule of Investors with a copy to
Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
Attention: Emile Karafiol
and to the Company at the address indicated below:
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<PAGE>
Focal Communications Corporation
300 W. Washington Blvd., Suite 1408
Chicago, Illinois 60606
Attention: President
with a copy to Bischoff, Kenney, and Niehaus
5630 North Main Street
Sylvania, Ohio 43560
Attention: Charles Niehaus
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
9.1M. Understanding among the Investors. The determination of each
---------------------------------
Investor to purchase the Investor Stock pursuant to this Agreement has been made
by such Investor independently of any other Investor and independently of any
statements or opinions as to the advisability of such purchase or as to the
properties, business, prospects or condition (financial or otherwise) of the
Company which may have been made or given by any other Investor or by any agent
or employee of any other Investor. In addition, it is acknowledged by each of
the other Investors that MDCP has not acted as an agent of such Investor in
connection with making its investment hereunder and that MDCP shall not be
acting as an agent of such Investor in connection with monitoring its investment
hereunder.
9.1N. No Strict Construction. The parties hereto have participated
----------------------
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto, and no presumption or
burden of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any of the provisions of this Agreement.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
/s/ Brian F. Addy MADISON DEARBORN CAPITAL PARTNERS, L.P.
- ----------------------------
Brian F. Addy By Madison Dearborn Partners, L.P., its
General Partner
By Madison Dearborn Partners, Inc., its
General Partner
/s/ John R. Barnicle By /s/ James N. Perry, Jr.
- ---------------------------- ----------------------------------
John R. Barnicle Its Vice President
----------------------------------
/s/ Joseph Beatty
- ----------------------------
Joseph Beatty FRONTENAC VI, L.P.
By Frontenac Company, its General Partner
/s/ Robert C. Taylor, Jr. By /s/ James E. Crawford III
- ---------------------------- ----------------------------------
Robert C. Taylor, Jr. Its General Partner
----------------------------------
BATTERY VENTURES III, L.P.
By Battery Partners III, L.P., its General
Partner
By /s/ Richard D. Frisbie
-----------------------------------
Its Managing Partner
-----------------------------------
FOCAL COMMUNICATIONS CORPORATION
By /s/ Robert C. Taylor, Jr.
-----------------------------------
Its President
-----------------------------------
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<PAGE>
APPENDIX A
----------
INDEX OF DEFINITIONS
--------------------
For the purposes of this Agreement, the following terms have the
meanings set forth below:
"Addy" has the meaning set forth in the preamble.
----
"Affiliate" of any particular Person means any other Person
---------
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.
"Agreement" has the meaning set forth in the preamble.
---------
"Barnicle" has the meaning set forth in the preamble.
--------
"Beatty" has the meaning set forth in the preamble.
------
"Board" has the meaning set forth in paragraph 1D.
-----
"BV" has the meaning set forth in the preamble.
--
"Bylaws" has the meaning set forth in paragraph 2C.
------
"Cash" has the meaning set forth in paragraph 1C.
----
"Certificate of Incorporation" has the meaning set forth in paragraph
----------------------------
2B.
"Chicago Common Carrier Status" has the meaning set forth in paragraph
-----------------------------
2H.
"Class A Common" has the meaning set forth in paragraph 1A.
--------------
"Class B Common" has the meaning set forth in paragraph 7B(i).
--------------
"Class C Common" has the meaning set forth in paragraph 7B(i).
--------------
"Common Stock" has the meaning set forth in paragraph 7B(i).
------------
"Company" has the meaning set forth in the preamble.
-------
"Executive Investor" has the meaning set forth in the preamble.
------------------
"Executive Stock" has the meaning ascribed to such term in the
---------------
Executive Stock Agreements.
-S1-
<PAGE>
"Executive Stock Agreements" has the meaning set forth in paragraph
--------------------------
2E.
"Exercise Notice" has the meaning set forth in paragraph 5A.
---------------
"Frontenac" has the meaning set forth in the preamble.
---------
"Indebtedness" means at a particular time, without duplication, (i)
------------
any indebtedness for borrowed money or issued in substitution for or exchange of
indebtedness for borrowed money, (ii) any indebtedness evidenced by any note,
bond, debenture or other debt security, (iii) any indebtedness for the deferred
purchase price of property or services with respect to which a Person is liable,
contingently or otherwise, as obligor or otherwise (including, without
limitation, vendor Financing), (iv) any commitment by which a Person assures a
creditor against loss (including, without limitation, contingent reimbursement
obligations with respect to letters of credit), (v) any indebtedness guaranteed
in any manner by a Person (including, without limitation, guarantees in the form
of an agreement to repurchase or reimburse), (vi) any obligations under
capitalized leases with respect to which a Person is liable, contingently or
otherwise, as obligor, guarantor or otherwise, or with respect to which
obligations a Person assures a creditor against loss, (vii) any indebtedness
secured by a Lien on a Person's assets; and (viii) any unsatisfied obligation
for "withdrawal liability" to a "multiemployer plan" as such terms are defined
under ERISA.
"Initial Business Plan" has the meaning set forth in the preamble.
---------------------
"Initial Closing" has the meaning set forth in paragraph 1C.
---------------
"Initial Closing Date" has the meaning set forth in paragraph 1C.
--------------------
"Initial Contribution" has the meaning set forth in paragraph 1B.
--------------------
"Institutional Investor" has the meaning set forth in the preamble.
----------------------
"Institutional Investor Stock" means (i) the Class A Common issued to
----------------------------
the Institutional Investors hereunder, (ii) any securities repurchased by an
Institutional Investor pursuant to paragraph 3(e)(i) of any Executive Stock
Agreement, and (iii) any securities issued directly or indirectly with respect
to the foregoing securities by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular shares of Institutional Investor
Stock, such shares shall forever cease to be Institutional Investor Stock when
they have (a) been effectively registered under the Securities Act and disposed
of in accordance with the registration statement covering them, (b) been sold
pursuant to Rule 144 (or any similar provision then in force) under the
Securities Act, or (c) been forfeited pursuant to the provisions of any Vesting
Agreement.
"Intellectual Property Rights" means all (i) patents, patent
----------------------------
applications, patent disclosures and inventions, (ii) trademarks, service marks,
trade dress, trade names, logos and corporate names and registrations and
applications for registration thereof together with all of the goodwill
associated therewith, (iii) copyrights (registered or unregistered) and
copyrightable works and registrations and applications for registration thereof,
(iv) mask works and registrations and applications for registration thereof, (v)
computer software, data, data bases and documen-
-A2-
<PAGE>
tation thereof, (vi) trade secrets and other confidential information
(including, without limitation, ideas, formulas, compositions, inventions
(whether patentable or unpatentable and whether or not reduced to practice),
know-how, manufacturing and production processes and techniques, research and
development information, drawings, specifications, designs, plans, proposals,
technical data, copyrightable works, financial and marketing plans and customer
and supplier lists and information), (vii) other intellectual property rights
and (viii) copies and tangible embodiments thereof (in whatever form or medium).
"Interconnection Agreement" has the meaning set forth in paragraph 2H.
-------------------------
"Investment" as applied to any Person means (i) any direct or indirect
----------
purchase or other acquisition by such Person of any notes, obligations,
instruments, stock, securities or ownership interest (including partnership
interests and joint venture interests) of any other Person and (ii) any capital
contribution by such Person to any other Person.
"Investor" has the meaning set forth in the preamble.
--------
"Investor Stock" means (i) the Class A Common issued hereunder, (ii)
--------------
any securities repurchased by an Institutional Investor pursuant to paragraph
3(e)(i) of an Executive Stock Agreement, and (iii) any securities issued
directly or indirectly with respect to the foregoing securities by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to any
particular shares of Investor Stock, such shares shall forever cease to be
Investor Stock when they have (a) been effectively registered under the
Securities Act and disposed of in accordance with the registration statement
covering them, (b) been sold pursuant to Rule 144 (or any similar provision then
in force) under the Securities Act, or (c) been forfeited pursuant to the
provisions of any Vesting Agreement.
"IRC" means the Internal Revenue Code of 1986, as amended, and any
---
reference to any particular IRC section shall be interpreted to include any
revision of or successor to that section regardless of how numbered or
classified.
"IRS" means the United States Internal Revenue Service.
---
"Lien" means any mortgage, pledge, security interest, encumbrance,
----
lien or charge of any kind (including, without limitation, any conditional sale
or other title retention agreement or lease in the nature thereof), any sale of
receivables with recourse against the Company, any Subsidiary or any Affiliate,
any filing or agreement to file a financing statement as debtor under the
Uniform Commercial Code or any similar statute other than to reflect ownership
by a third party of property leased to the Company or any Subsidiaries under a
lease which is not in the nature of a conditional sale or title retention
agreement, or any subordination arrangement in favor of another Person (other
than any subordination arising in the ordinary course of business).
"Majority Holders" has the meaning set forth in paragraph 5A.
----------------
"Management" has the meaning set forth in paragraph 3A.
----------
"Maximum Commitment" has the meaning set forth in paragraph 1D.
------------------
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<PAGE>
"MDCP" has the meaning set forth in the preamble.
----
"MSA"has the meaning set forth in the preamble.
---
"Note" has the meaning set forth in paragraph 1C(ii).
----
"Officer's Certificate" means a certificate signed by the Company's
---------------------
president or its chief financial officer, stating that (i) the officer signing
such certificate has made or has caused to be made such investigations as are
reasonably necessary in order to permit him to verify the accuracy of the
information set forth in such certificate and (ii) to the best of such officer's
knowledge, such certificate does not misstate any material fact and does not
omit to state any fact necessary to make the certificate not misleading.
"Permitted Lien" means:
--------------
(i) tax liens with respect to taxes not yet due and payable or
which are being contested in good faith by appropriate proceedings and for
which appropriate reserves have been established in accordance with
generally accepted accounting principles, consistently applied;
(ii) deposits or pledges made in connection with, or to secure
payment of, utilities or similar services, workers' compensation,
unemployment insurance, old age pensions or other social security
obligations;
(iii) purchase money security interests in any property acquired
by the Company or any Subsidiary to the extent permitted by this Agreement;
(iv) interests or title of a lessor under any lease permitted
by this Agreement;
(v) mechanics', materialmen's or contractors' liens or
encumbrances or any similar lien or restriction for amounts not yet due and
payable;
(vi) easements, rights-of-way, restrictions and other similar
charges and encumbrances not interfering with the ordinary conduct of the
business of the Company and its Subsidiaries or detracting from the value
of the assets of the Company and its Subsidiaries; and
(vii) liens outstanding on the date hereof which secure
Indebtedness and which are described in the schedules to this Agreement.
"Permitted Stock Option Plan" has the meaning set forth in paragraph
---------------------------
4C(xix).
"Person" means an individual, a partnership, a corporation, a limited
------
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
-A4-
<PAGE>
"Public Offering" means any underwritten sale of the company's common
---------------
stock pursuant to an effective registration statement under the Securities Act
filed with the Securities and Exchange Commission on Form S-1 (or a successor
form adopted by the Securities and Exchange Commission); provided that the
--------
following shall not be considered a Public Offering: (i) any issuance of common
stock as consideration or financing for a merger or acquisition, and (ii) any
issuance of common stock or rights to acquire common stock to employees of the
Company or its Subsidiaries as part of an incentive or compensation plan.
"Qualified Holder" has the meaning set forth in paragraph 4A.
----------------
"Registration Agreement" has the meaning set forth in paragraph 2F.
----------------------
"Repurchase Closing" has the meaning set forth in paragraph 5D.
------------------
"Repurchase Notice" has the meaning set forth in paragraph 5A.
-----------------
"Repurchase Price" has the meaning set forth in paragraph 5C.
----------------
"Restricted Securities" means (i) the Class A Common issued hereunder,
---------------------
and (ii) any securities issued with respect to the securities referred to such
Class A Common by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization. As to any particular Restricted Securities, such securities
shall cease to be Restricted Securities when they have (a) been effectively
registered under the Securities Act and disposed of in accordance with the
registration statement covering them, (b) become eligible for sale pursuant to
Rule 144 (or any similar provision then in force) under the Securities Act or
(c) been otherwise transferred and new certificates for them not bearing the
Securities Act legend set forth in paragraph 9C have been delivered by the
Company in accordance with paragraph 6B. Whenever any particular securities
cease to be Restricted Securities, the holder thereof shall be entitled to
receive from the Company, without expense, new securities of like tenor not
bearing a Securities Act legend of the character set forth in paragraph 9C.
"Revised Repurchase Notice" has the meaning set forth in paragraph 5A.
-------------------------
"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
similar federal law then in force.
"Securities and Exchange Commission" includes any governmental body or
----------------------------------
agency succeeding to the functions thereof.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
-----------------------
as amended, or any similar federal law then in force.
"Specified Contribution" has the meaning set forth in paragraph 1D.
----------------------
"Stockholders Agreement" has the meaning set forth in paragraph 2D.
----------------------
"Subsequent Business Plan" has the meaning set forth in paragraph 3A.
------------------------
-A5-
<PAGE>
"Subsequent Closings" has the meaning set forth in paragraph 1D.
-------------------
"Subsidiary" means, with respect to any Person, any corporation,
----------
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that Person or a combination thereof. For purposes hereof, a
Person or Persons shall be deemed to have a majority ownership interest in a
limited liability company, partnership, association or other business entity if
such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control any managing director or general partner of such limited
liability company, partnership, association or other business entity.
"Taylor" has the meaning set forth in the preamble.
------
"Vesting Agreement" has the meaning set forth in paragraph 2G.
-----------------
"Wholly-Owned Subsidiary" means, with respect to any Person, a
-----------------------
Subsidiary of which all of the outstanding capital stock or other ownership
interests are owned by such Person or another Wholly-Owned Subsidiary of such
Person.
-A6-
<PAGE>
APPENDIX B
----------
SCHEDULE OF INVESTORS
---------------------
<TABLE>
<CAPTION>
Number of Initial Purchase Investor's
Names and Shares of Price for Maximum
Addresses Class A Common Class A Common Commitment
--------- -------------- ---------------- ------------
<S> <C> <C> <C>
Madison Dearborn Capital Partners, L.P. 46, 153.85 $2,325,581.40 $15,000,000
Three First National Plaza, Suite 1330
Chicago, Illinois 60670
Tel. (312) 732-5400
Fax (312) 732-4098
Attention: James N. Perry, Jr.
and Paul Finnegan
Frontenac VI, L.P. 21,538.46 $1,085,271.32 $ 7,000,000
135 South LaSalle Street, Suite 3800
Chicago, Illinois
Tel. (312) 368-0044
Fax (312) 368-9520
Attention: James Crawford
Battery Ventures III, L.P. 10, 769.23 $ 542, 635.66 $ 3,500,000
20 William Street, Suite 200
Wellesley, Massachusetts 02181
Tel. (617) 237-1001
Fax (617) 237-7788
Attention: Richard Frisbie
Brian F. Addy 230.77 $ 11, 627.91 $ 75,000
300 Washington Blvd., Suite 1408
Chicago, Illinois 60606
(312) 578-8400
John R. Barnicle 230.77 $ 11,627.91 $ 75,000
300 Washington Blvd., Suite 1408
Chicago, Illinois 60606
(312) 578-8400
Joseph Beatty 230.77 $ 11,627.91 $ 75,000
300 Washington Blvd., Suite 1408
Chicago, Illinois 60606
(312) 578-8400
Robert C. Taylor, Jr. 230.77 $ 11,627.91 $ 75,000
300 Washington Blvd., Suite 1408
Chicago, Illinois 60606
(312) 578-8400
--------------- ---------------- ------------
TOTAL 79,384.62 $4,000,000.02 $25,800,000
</TABLE>
-B1-
<PAGE>
EXHIBITS TO STOCK PURCHASE AGREEMENT
Exhibit 1 - The Initial Business Plan
Exhibit 2 - Restated Certificate of Incorporation, dated November 26, 1996 -
Previously filed as Exhibit 3.1 to the Form S-4 Registration
Statement on April 3, 1998.
Exhibit 3 - Form of Promissory Note
Exhibit 4 - Form of Executive Investor Stock Pledge Agreement -Previously
filed as Exhibits 4.7- 4.10 to the Form S-4 Registration Statement
on April 3, 1998.
Exhibit 5 - Bylaws Amendment - Previously filed as Exhibit 3.2 to the Form S-4
Registration Statement on April 3, 1998.
Exhibit 6 - Stockholders Agreement by and among Focal, MDCP, Frontenac, BV,
Addy, Barnicle, Beatty and Taylor - Previously filed as Exhibit
4.11 to the Form S-4 Registration Statement on April 3, 1998.
Exhibit 7 - Form of Executive Stock Agreement and Employment Agreement -
Previously filed as Exhibits 4.12-4.15 to the Form S-4
Registration Statement on April 3, 1998.
Exhibit 8 - Registration Agreement by and among Focal, MDCP, Frontenac, BV,
Addy, Barnicle, Beatty and Taylor - Previously filed as Exhibit
4.16 to the Form S-4 Registration Statement on April 3, 1998.
Exhibit 9 - Form of Vesting Agreement
Exhibit 10 - Interconnection Agreement by and among Ameritech Statement on
April 3, 1998. Information Industry Services and Focal, dated
October 28, 1996- Previously filed as Exhibit 10.1 to the Form S-4
Registration
Exhibit 11 - Form of Opinion of Bischoff, Kenney & Niehaus (Initial Closing)
Exhibit 12 - Form of Opinion of Bischoff, Kenney & Niehaus (Subsequent
Closings)
Exhibit 13 - Form of Nondisclosure and Noncompetition Agreement
<PAGE>
EXHIBIT 1 TO STOCK PURCHASE AGREEMENT
-------------------------------------
INITIAL BUSINESS PLAN
---------------------
The financial statements and projections attached hereto represent a
financial model for implementing the business of the Company in the Chicago
MSA-1 market. The Company shall use such funds contemplated hereunder
(specifically, initial capital of $4,000,000; $8,000,000 in the aggregate) to
obtain necessary assets (through purchase or lease), engage personnel, and take
all actions necessary to provide facilities-based and resold, switched and
dedicated, local exchange services in the identified market and interexchange
services throughout Illinois.
<PAGE>
Focal Communications Corp. Initial Business Plan
Chicago Financial Plan
9/23/96
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year5
<S> <C> <C> <C> <C> <C>
Income Statement:
Corp/VAR acct revenue 208,701 2,524,442 6,231,920 17,352,528 29,902,725
ISP revenue 592,391 4,494,017 6,394,925 17,950,505 26,749,132
Total Revenue 801,093 7,018,459 16,626,846 35,303,032 56,651,857
Carrier settlements 431,926 2,178,197 4,595,682 8,609,522 14,047,349
Sales & customer service expense 2,707,161 4,149,763 6,829,377 10,932,858 14,072,091
General & administrative expense 286,700 376,457 475,305 592,647 689,639
Gross Profit (1,624,694) 316,022 4,726,480 15,168,006 27,842,777
Corporate Overhead 1,371,360 1,820,232 1,693,627 1,970,692 2,241,253
(Total Cash Expenses) 3,797,147 8,522,669 13,793,991 22,105,718 31,060,333
EBITDA (2,996,054) (1,504,210) 2,832,853 13,197,314 25,601,524
Depreciations & Amortization 344,617 687,304 1,079,449 1,666,301 2,231,059
Operating income (3,340,671) (2,191,514) 1,753,404 11,531,013 23,370,466
Other income (net) 0 0 0 0 0
Interest Expense 81,329 49,251 114,846 (53,333) (87,979)
Income Taxes 0 0 0 2,953,540 8,445,040
Net Income (3,442,000) (2,240,755) 1,638,758 8,630,806 15,013,405
Gross margin neg 5% 28% 43% 49%
EBITDA margin neg neg 17% 37% 45%
Operating margin neg neg 11% 33% 41%
Total customers
Total lines 2,426 7,087 13,240 22,730 33,926
Total MOUs (millions) 50.2 410.7 674.3 2159.4 3580.7
Total employees 27 43 55 74 89
Statement of Cash Flows:
Net income (3,422,000) (2,240,765) 1,638,758 8,630,806 15,013,405
Depreciation & amortization 344,617 687,304 1,079,449 1,666,301 2,231,059
Change in working capital 24,033 210,554 498,805 1,059,091 1,699,556
Other non-cash items 0 0 0 0 0
Cash from Operations (3,053,350) (1,342,907) 3,217,012 11,356,198 18,944,019
Capital expenditures (4,736,879) (2,253,685) (5,191,502) (7,615,744) (8,870,517)
Other investments 0 0 0 0 0
Cash for investing (4,736,879) (2,253,685) (5,191,502) (7,615,744) (8,870,517)
Secured financing 2,672,651 2,253,685 5,191,502 0 0
Debt repayment (355,331) (926,397) (1,826,444) (2,529,460) (2,174,128)
Other debt financing 0 0 0 0 0
Common A 6,000,000 2,000,000 0 0 0
Other equity 0 0 0 0 0
Other 0 0 0 0 0
Cash from Financing 8,317,319 3,327,288 3,365,059 (2,529,460) (2,174,128)
Beg. cash balance 0 527,090 257,785 1,648,354 2,659,349
Change in cash 527,090 (269,305) 1,390,569 1,210,995 7,899,373
Ending Cash Balance 527,090 257,785 1,648,354 2,859,349 10,758,722
</TABLE>
<PAGE>
Focal Communications Corp. Initial Business Plan
Chicago Financial Plan
9/23/96
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 8
<S> <C> <C> <C> <C> <C>
Cash Summary:
Cash from Operations (3,053,350) (1,342,907) 3,217,012 11,356,198 16,944,019
Cash for Investing (4,736,879) (2,253,885) (5,191,502) (7,615,744) (8,870,517)
Net Cash Flow (7,790,229) (3,596,592) (1,974,490) 3,740,454 10,073,502
Cash from Financing 8,317,319 3,327,288 3,365,059 (2,529,460) (2,174,128)
Cumulative Net Cash 527,090 257,785 1,648,354 2,859,349 10,758,722
Balance Sheet:
Cash & mkt. securities 527,090 257,785 1,648,354 2,859,349 10,758,722
Accounts receivable 268,493 843,030 1,787,551 2,565,788 3,897,172
Other current assets 0 0 0 0 0
Current Assets 795,583 1,100,816 3,435,905 5,425,137 14,655,894
Gross PPE 4,684,369 6,592,675 10,840,120 16,167,068 20,484,404
Accum depreciation 344,617 1,031,921 2,111,370 3,777,671 6,008,730
Net PPE 4,339,752 5,560,754 8,728,750 12,389,397 14,475,674
Goodwill & other intangibles 0 0 0 0 0
Other non-current assets (1,510,236) (2,749,367) (5,343,769) (3,105,690) 1,910,691
Non-current Assets 2,829,518 2,811,387 3,384,981 9,283,707 16,386,365
Total Assets 3,625,099 3,912,203 6,820,888 14,708,844 31,042,260
Accounts Payable 605,635 1,018,110 1,586,689 2,521,808 3,492,442
Debt maturities 102,258 100,604 257,077 (209,354) (166,174)
Other accrued expenses 50,470 84,842 132,224 210,151 291,037
Current Liabilities 758,363 1,203,556 1,975,990 2,522,605 3,617,305
Secured debt 238,268 286,589 736,878 (630,711) (486,285)
Other long-term debt 0 0 0 0 0
Other non-current liab. 50,470 84,842 132,224 210,151 291,037
Non-Current Liabilities 288,736 371,412 868,902 (420,560) (195,248)
Common stock A 6,000,000 8,000,000 8,000,000 8,000,000 8,000,000
Other common stock 0 0 0 0 0
Additional paid-in capital 0 0 0 0 0
Retained earnings (deficit) (3,422,000) (5,662,765) (4,024,007) 4,606,799 19,620,204
Shareowners Equity 2,578,000 2,337,235 3,975,993 12,606,799 27,620,204
Total Liabilities & Shareowners
Equity 3,625,099 3,912,203 6,820,886 14,708,844 31,042,260
Financial Ratios:
EBITDA/Cash Interest (36.8) (30.5) 24.7 NA NA
EBITDA-Capital Cash Interest (95.1) (76.3) (20.6) NA NA
EBITDA/Interest (36.8) (30.5) 24.7 (247.5) (291.0)
EBITDA-Capital Interest (95.1) (76.3) (20.6) (104.7) (190.2)
Debt/EBITDA (0.0) (0.0) 0.0 (0.0) (0.0)
Total Debt 340,524 387,173 993,755 (840,065) (652,460)
</TABLE>
<PAGE>
Focal Communications Corp. Initial Business Plan
Chicago Financial Plan
9/23/96
<TABLE>
<CAPTION>
Year 1
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement:
Corp/VAR acct revenue 0 0 0 0 0 0 4,575 13,988
ISP revenue 0 0 0 0 0 0 12,855 40,379
Total Revenue 0 0 0 0 0 0 17,430 54,367
Carrier settlements 0 0 0 0 0 0 33,422 49,232
Sales & customer service
expense 28,986 45,112 54,640 82,010 102,573 137,080 166,816 192,035
General & administrative
expenses 20,500 20,500 20,500 20,500 20,500 23,100 26,850 26,850
Gross Profit (49,486) (65,612) (75,140) (102,510) (123,073) (160,180) (209,658) (213,750)
Corporate Overhead 75,250 92,750 112,001 115,751 121,951 121,951 121,951 121,951
(Total Cash Expenses) 124,736 158,362 187,141 218,261 245,024 282,131 349,039 390,068
EBITDA (124,736) (158,362) (187,141) (218,261) (245,024) (282,132) (331,609) (335,701)
Depreciation & Amortization 4,281 6,561 8,842 11,123 31,404 33,684 35,965 38,246
Operating income (129,017) (164,923) (195,983) (229,384) (276,427) (315,815) (367,574) (373,947)
Other income (net) 0 0 0 0 0 0 0 0
Interest Expense 1,026 2,576 3,359 3,730 9,654 15,342 13,636 10,485
Income Taxes 0 0 0 0 0 0 0 0
Net Income (130,042) (167,500) (199,341) (233,114) (286,082) (331,157) (381,210) (384,431)
Gross margin NA NA NA NA NA NA neg neg
EBITDA margin NA NA NA NA NA NA neg neg
Operating margin NA NA NA NA NA NA neg neg
Total customers
Total lines 0 0 0 0 0 0 264 619
Total MOUs (millions) 00 00 00 00 00 00 1.0 3.2
Total employees 7 12 15 20 23 24 27 27
Statement of Cash Flows:
Net income (130,042) (167,500) (199,341) (233,114) (286,062) (331,157) (381,210) (384,431)
Depreciation & amortization 4,281 6,561 8,842 11,123 31,404 33,684 35,965 38,248
Change in working capital 0 0 0 0 0 0 523 1,631
Other non-cash items 0 0 0 0 0 0 0 0
Cash from Operations (125,762) (160,938) (190,499) (221,991) (254,678) (297,473) (344,722) (344,555)
Capital expenditures (428,073) (228,073) (228,073) (228,073) (2,028,073) (228,073) (228,073) (228,073)
Other investments 0 0 0 0 0 0 0 0
Cash for investing (428,073) (228,073) (228,073) (228,073) (2,028,073) (228,073) (228,073) (228,073)
Secured financing 214,037 114,037 114,037 114,037 1,318,248 114,037 114,037 114,037
Debt repayment 0 (4,459) (6,835) (9,211) (11,586) (39,050) (41,426) (43,801)
Other debt financing
Common A 4,000,000
Other equity
Other
Cash from Financing 4,214,037 109,578 107,202 104,826 1,306,661 74,987 72,611 70,235
Beg cash balance 0 3,660,202 3,380,768 3,069,397 2,724,159 1,748,069 1,297,510 797,326
Change in cash 3,660,202 (279,434) (311,371) (345,238) (976,090) (450,559) (500,184) (502,393)
Ending Cash Balance 3,660,202 3,380,768 3,069,397 2,724,159 1,748,069 1,297,510 797,326 294,933
<CAPTION>
Year 1
Month 9 Month 10 Month 11 Month 12
<S> <C> <C> <C> <C>
Income Statement:
Corp/VAR acct revenue 25,794 39,243 54,451 70,650
ISP revenue 75,694 114,669 150,952 197,842
Total Revenue 101,488 153,912 205,403 268,493
Carrier settlements 67,276 76,199 94,127 111,669
Sales & customer service
expense 208,257 219,786 225,642 244,226
General & administrative
expenses 26,850 26,850 26,850 26,850
Gross Profit (200,895) (168,924) (141,216) (114,252)
Corporate Overhead 121,951 121,951 121,951 121,951
(Total Cash Expenses) 424,334 444,787 468,570 504,696
EBITDA (322,848) (290,876) (263,167) (238,203)
Depreciation & Amortization 40,405 42,558 44,704 46,844
Operating income (363,251) (333,432) (307,870) (283,047)
Other income (net) 0 0 0 0
Interest Expense 7,737 5,755 4,437 3,592
Income Taxes 0 0 0 0
Net Income (370,988) (339,168) (312,308) (286,639)
Gross margin neg neg neg neg
EBITDA margin neg neg neg neg
Operating margin neg neg neg neg
Total customers
Total lines 1,065 1,469 1,929 2,426
Total MOUs (millions) 6.2 9.7 12.9 17.2
Total employees 27 27 27 27
Statement of Cash Flows:
Net income (370,988) (339,188) (312,308) (286,839)
Depreciation & amortization 40,405 42,558 44,704 46,844
Change in working capital 3,045 4,617 6,162 8,055
Other non-cash items 0 0 0 0
Cash from Operations (327,539) (292,013) (261,442) (231,740)
Capital expenditures (228,073) (228,073) (228,073) (228,073)
Other investments 0 0 0 0
Cash for investing (228,073) (228,073) (228,073) (228,073)
Secured financing 114,037 114,037 114,037 114,037
Debt repayment (46,177) (48,553) (50,929) (53,304)
Other debt financing
Common A 2,000,000
Other equity
Other
Cash from Financing 2,067,859 65,484 63,108 60,732
Beg cash balance 294,933 1,807,181 1,352,578 926,172
Change in cash 1,512,247 (454,602) (426,407) (399,081)
Ending Cash Balance 1,807,181 1,352,578 926,172 527,090
</TABLE>
<PAGE>
FOCEL COMMUNICATIONS CORP. INITIAL BUSINESS PLAN
CHICAGO FINANCIAL PLAN
9/23/96
<TABLE>
<CAPTION>
YEAR 1
Month 1 Month 2 Month 3 Month 4 Month 5 Month 6
<S> <C> <C> <C> <C> <C> <C>
Cash Summary:
Cash from Operations (125,762) (160,938) (190,499) (221,991) (254,678) (297,473)
Cash for investing (428,073) (228,073) (228,073) (228,073) (2,028,073) (228,073)
Net Cash Flow (553,835) (389,011) (418,573) (450,064) (2,282,751) (525,546)
Cash from Financin 4,214,037 109,578 107,202 104,826 1,306,661 74,987
Cumulative Net Cash 3,660,202 3,380,768 3,069,397 2,724,159 1,748,069 1,297,510
Balance Sheet:
Cash & mid securites 3,660,202 3,380,768 3,069,397 2,724,159 1,748,069 1,297,510
Accounts Receivable 0 0 0 0 0 0
Other Current Assets 0 0 0 0 0 0
Current Assets 3,660,202 3,380,768 3,069,397 2,724,159 1,748,069 1,297,510
Gross PPE 428,073 656,147 884,220 1,112,293 3,140,366 3,368,440
Accum. Depreciation 4,281 10,842 19,684 30,807 62,211 95,895
Net PPE 423,793 645,304 864,535 1,081,486 3,078,155 3,272,544
Goodwill & other intangibles 0 0 0 0 0 0
Other non-current Assets 174,630 221,707 208,488 171,152 114,294 65,936
Non-current Assets 598,423 867,011 1,073,023 1,252,638 3,192,449 3,338,480
Total Assets 4,258,625 4,247,779 4,142,420 3,976,797 4,940,518 4,635,990
Accounts Payable 149,683 190,034 224,569 261,913 294,028 338,557
Debt maturities 0 53,509 80,904 94,327 100,307 403,391
Other accrued expenses 12,474 15,836 18,714 21,828 24,502 28,213
Current Liabilities 162,157 259,380 324,186 378,066 418,838 770,161
Secured Debt 214,037 270,105 296,403 306,903 1,513,256 1,184,852
Other long-term debt 0 0 0 0 0 0
Other non-current liab 12,474 15,836 18,714 21,826 24,502 28,213
Non-current Liabilities 226,510 285,941 315,117 328,729 1,537,759 1,213,065
Common stock A 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
Other common stock 0 0 0 0 0 0
Additional paid-in capital 0 0 0 0 0 0
Retained earnings (deficit) (130,042) (297,542) (496,883) (729,997) (1,016,079) (1,347,236)
Shareowners Equity 3,869,958 3,702,458 3,503,117 3,270,003 2,983,921 2,652,764
Total Liab & Shareowners Equity 4,258,625 4,247,779 4,142,420 3,976,797 4,940,518 4,635,990
Financial Ratios:
EBITDA/Cash Interest (121.6) (61.5) (55.7) (58.5) (25.4) (18.4)
EBITDA-Capex/Cash Interest (539.0) (150.0) (123.6) (119.6) (235.5) (33.3)
EBITDA/Interest (121.6) (61.5) (55.7) (58.5) (25.4) (18.4)
EBITOA-Capex/Cash Interest (539.0) (150.0) (123.6) (119.6) (235.5) (33.3)
Debt/EBITDA (0.1) (0.2) (0.2) (0.2) (0.5) (0.5)
<CAPTION>
Year 1
Month 7 Month 8 Month 9 Month 10 Month 11 Month 12
<S> <C> <C> <C> <C> <C> <C>
Cash Summary:
Cash from Operations (344,722) (344,555) (327,539) (292,013) (261,442) (231,740)
Cash for investing (228,073) (228,073) (228,073) (228,073) (228,073) (228,073)
Net Cash Flow (572,795) (572,628) (555,612) (520,086) (489,515) (459,814)
Cash from Financin 72,611 70,235 2,067,859 65,484 63,108 60,732
Cumulative Net Cash 797,326 294,933 1,807,181 1,352,578 926,172 527,090
Balance Sheet:
Cash & mid securites 797,326 294,933 1,807,181 1,352,578 926,172 527,090
Accounts Receivable 17,430 54,367 101,488 153,912 205,403 268,493
Other Current Assets 0 0 0 0 0 0
Current Assets 814,756 349,300 1,908,669 1,506,490 1,131,575 795,583
Gross PPE 3,596,513 3,824,586 4,040,501 4,255,769 4,470,391 4,684,369
Accum. Depreciation 131,861 170,106 210,511 253,069 297,773 344,617
Net PPE 3,464,652 3,654,480 3,829,990 4,002,700 4,172,618 4,339,752
Goodwill & other intangibles 0 0 0 0 0 0
Other non-current Assets (261,736) (639,924) (944,325) (1,192,587) (1,374,525) (1,510,236)
Non-current Assets 3,202,916 3,014,555 2,885,665 2,810,113 2,798,093 2,829,516
Total Assets 4,017,672 3,363,855 4,794,334 4,316,603 3,929,668 3,625,099
Accounts Payable 418,846 468,081 509,201 533,744 562,284 605,635
Debt maturities 397,061 314,366 232,659 171,033 129,239 102,258
Other accrued expenses 34,904 39,007 42,433 44,479 46,857 50,470
Current Liabilities 850,811 821,454 784,294 749,255 738,380 758,363
Secured Debt 860,402 616,272 451,472 345,923 279,792 238,266
Other long-term debt 0 0 0 0 0 0
Other non-current liab 34,904 39,007 42,433 44,479 46,857 50,470
Non-current Liabilities 895,306 655,279 493,905 390,401 326,649 288,736
Common stock A 4,000,000 4,000,000 6,000,000 6,000,000 6,000,000 6,000,000
Other common stock 0 0 0 0 0 0
Additional paid-in capital 0 0 0 0 0 0
Retained earnings (deficit) (1,728,446) (2,112,877) (2,483,866) (2,823,053) (3,135,361) (3,422,000)
Shareowners Equity 2,271,554 1,887,123 3,516,134 3,176,947 2,864,639 2,578,000
Total Liab & Shareowners Equity 4,017,672 3,363,855 4,794,334 4,316,603 3,928,668 3,825,000
Financial Ratios:
EBITDA/Cash Interest (24.3) (32.0) (41.7) (50.5) (59.3) (65.8)
EBITDA-Capex/Cash Interest (41.0) (53.8) (71.2) (90.2) (110.7) (129.3)
EBITDA/Interest (24.3) (32.0) (41.7) (50.5) (59.3) (65.8)
EBITOA-Capex/Cash Interest (41.0) (53.8) (71.2) (90.2) (110.7) (129.3)
Debt/EBITDA (0.3) (0.2) (0.2) (0.1) (0.1) (0.1)
</TABLE>
<PAGE>
Focal Communications Corp. Initial Business Plan
Chicago Financial Plan
9/23/96
<TABLE>
<CAPTION>
Year 2
Month 13 Month 14 Month 15 Month 16 Month 17 Month 18 Month 19 Month 20
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement:
Corp/VAR acct revenue 93,163 110,249 129,314 148,541 168,614 191,320 214,176 238,277
ISP revenue 247,728 281,793 314,541 329,810 343,781 359,312 389,796 407,397
Total Revenue 340,891 392,042 443,856 478,351 512,595 550,632 603,972 645,674
Carrier settlements 117,265 128,004 143,166 145,160 157,212 172,847 186,496 191,738
Sales & customer service expense 323,718 309,271 316,260 304,864 310,872 338,990 361,521 356,398
General & administrative expenses 28,075 29,075 29,075 29,075 29,075 33,012 33,012 33,012
Gross Profit (129,167) (74,307) (44,645) (748) 15,437 5,783 22,942 64,526
Corporate Overhead 151,686 151,686 151,686 151,686 151,686 151,686 151,686 151,686
(Total Cash Expenses) 621,744 618,035 640,187 630,785 648,844 696,535 732,715 732,834
EBITDA (280,683) (225,993) (196,331) (152,434) (136,249) (145,903) (128,744) (87,160)
Depreciation & Amortization 48,478 50,104 51,723 53,333 54,935 56,529 58,115 59,693
Operating income (329,331) (276,097) (248,054) (205,767) (191,183) (202,432) (186,659) (146,852)
Other income (net) 0 0 0 0 0 0 0 0
Interest Expense 3,406 3,756 4,114 4,348 4,454 4,465 4,411 4,317
Income Taxes 0 0 0 0 0 0 0 0
Net Income (332,738) (279,853) (252,168) (210,114) (195,638) (205,896) (191,270) (151,170)
Gross margin neg neg neg neg 3% 1% 4% 10%
EBITDA margin neg neg neg neg neg neg neg neg
Operating margin neg neg neg neg neg neg neg neg
Total customers
Total lines 2,896 3,322 3,750 4,032 4,328 4,640 5,113 5,464
Total MOUs (millions) 21.0 24.3 27.4 29.7 31.2 32.8 25.3 37.8
Total employees 39 39 39 39 39 43 43 43
Statement of Cash Flows:
Net income (332,738) (279,853) (252,168) (210,114) (195,638) (206,896) (191,270) (151,170)
Depreciation & amortization 48,478 50,104 51,723 53,333 54,935 56,529 58,115 59,693
Change in working capital 10,227 11,761 13,316 14,351 15,378 16,519 18,119 19,370
Other non-cash items 0 0 0 0 0 0 0 0
Cash from Operations (274,033) (217,988) (187,130) (142,431) (125,325) (133,849) (115,036) (72,107)
Capital expenditures (187,807) (187,807) (187,807) (187,807) (187,807) (187,807) (187,807) (187,807)
Other investments 0 0 0 0 0 0 0 0
Cash for investing (187,807) (187,807) (187,807) (187,807) (187,807) (187,807) (187,807) (187,807)
Secured financing 187,807 187,807 187,807 187,807 187,807 187,807 187,807 187,807
Debt repayment (55,680) (59,593) (63,506) (67,418) (71,331) (75,243) (79,156) (83,069)
Other debt financing
Common A 2,000,000
Other equity
Other
Cash from Financing 2,132,127 128,214 124,302 120,389 116,476 112,564 108,651 104,738
Beg cash balance 527,090 2,197,377 1,919,796 1,669,161 1,459,312 1,262,656 1,053,564 859,372
Change in cash 1,670,287 (277,580) (250,635) (209,849) (196,656) (209,092) (194,192) (155,176)
Ending Cash Balance 2,197,377 1,919,796 1,669,161 1,459,312 1,262,656 1,053,564 859,372 704,196
<CAPTION>
Year 2
Month 21 Month 22 Month 23 Month 24
<S> <C> <C> <C> <C>
Income Statement:
Corp/VAR acct revenue 264,823 291,944 321,672 352,148
ISP revenue 425,248 442,807 460,921 490,882
Total Revenue 690,071 734,751 782,593 843,030
Carrier settlements 208,956 224,383 241,956 259,013
Sales & customer service expense 365,907 373,321 383,948 404,713
General & administrative expenses 33,012 33,012 33,012 33,012
Gross Profit 82,197 104,035 123,677 146,292
Corporate Overhead 151,686 151,686 151,686 151,686
(Total Cash Expenses) 759,561 782,402 810,602 848,425
EBITDA (69,489) (47,651) (28,009) (5,394)
Depreciation & Amortization 61,263 62,825 64,380 65,927
Operating income (130,752) (110,477) (92,389) (71,321)
Other income (net) 0 0 0 0
Interest Expense 4,200 4,068 3,928 3,783
Income Taxes 0 0 0 0
Net Income (134,952) (114,545) (96,317) (75,104)
Gross margin 12% 14% 16% 17%
EBITDA margin neg neg neg neg
Operating margin neg neg neg neg
Total customers
Total lines 5,835 6,224 6,635 7,067
Total MOUs (millions) 39.7 41.7 43.8 46.0
Total employees 43 43 43 43
Statement of Cash Flows:
Net income (134,952) (114,545) (96,317) (75,104)
Depreciation & amortization 61,263 62,825 64,380 65,927
Change in working capital 20,702 22,043 23,478 25,291
Other non-cash items 0 0 0 0
Cash from Operations (52,987) (29,677) (8,459) 16,113
Capital expenditures (187,807) (187,807) (187,807) (187,807)
Other investments 0 0 0 0
Cash for investing (187,807) (187,807) (187,807) (187,807)
Secured financing 187,807 187,807 187,807 187,807
Debt repayment (86,981) (90,894) (94,807) (98,719)
Other debt financing
Common A
Other equity
Other
Cash from Financing 100,826 96,913 93,000 89,088
Beg cash balance 704,196 564,228 443,657 340,391
Change in cash (139,968) (120,571) (103,266) (82,606)
Ending Cash Balance 564,228 443,657 340,391 257,785
</TABLE>
<PAGE>
Focal Communication Corp. Initial Business Plan
Chicago Financial Plan
9/23/96
<TABLE>
<CAPTION>
Year 2
Month 13 Month 14 Month 15 Month 16 Month 17 Month 18
<S> <C> <C> <C> <C> <C> <C>
Cash Summary:
Cash from Operations (274,033) (217,988) (187,130) (142,431) (125,325) (133,849)
Cash for Investing (187,807) (187,807) (187,807) (187,807) (187,807) (187,807)
Net Cash Flow (461,840) (405,795) (374,937) (330,238) (313,132) (321,656)
Cash from Financing 2,132,127 128,214 124,302 120,389 116,476 112,564
Cumulative Net Cash 2,197,377 1,919,796 1,669,161 1,459,312 1,262,656 1,053,564
Balance Sheet:
Cash & mkt securities 2,197,377 1,919,796 1,669,161 1,459,312 1,262,656 1,053,564
Accounts receivable 340,891 392,042 443,856 478,351 512,595 550,632
Other current assets 0 0 0 0 0 0
Current Assets 2,538,267 2,311,839 2,113,017 1,937,663 1,775,251 1,604,196
Gross PPE 4,847,815 5,010,444 5,172,260 5,333,266 5,493,468 5,652,869
Accum depreciation 393,095 443,199 494,922 548,255 603,189 659,718
Net PPE 4,454,720 4,567,245 4,677,338 4,785,012 4,890,279 4,993,151
Goodwill & other intangibles 0 0 0 0 0 0
Other non-current assets (1,506,890) (1,634,948) (1,735,672) (1,874,249) (1,982,279) (2,057,210)
Non-current Assets 2,947,830 2,932,296 2,941,665 2,910,763 2,908,000 2,935,941
Total Assets 5,486,097 6,244,135 5,054,682 4,848,426 4,683,252 4,540,137
Accounts Payable 746,093 741,642 768,224 756,942 778,613 835,842
Debt maturities 85,131 92,598 103,369 111,295 115,550 116,845
Other accured expense 62,174 61,804 64,019 63,079 64,884 69,654
Current Liabilities 893,398 896,044 935,612 931,316 959,047 1,022,341
Secured debt 285,262 320,878 341,811 350,905 351,831 347,549
Other long-term debt 0 0 0 0 0 0
Other non-current liab 62,174 61,804 64,019 63,079 64,884 69,654
Non-Current Liabilities 347,437 382,682 405,829 413,983 416,715 417,203
Common stock A 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000
Other common stock 0 0 0 0 0 0
Additional paid-in-capital 0 0 0 0 0 0
Retained earnings (deficit) (3,754,737) (4,034,591) (4,285,759) (4,496,873) (4,692,511 (4,899,407)
Shareowners Equity 4,245,263 3,965,409 3,713,241 3,503,127 3,307,489 3,100,593
Total Liabilities &
Shareowners Equity 5,486,097 5,244,135 6,054,682 4,848,426 4,683,252 4,540,137
Financial Ratios:
EBITDA/Cash Interest (82.4) (60.2) (47.7) (35.1) (30.6) (32.7)
EBITDA-Caper/Cash Interest (137.6) (110.2) (93.4) (78.3) (72.8) (74.7)
EBITDA/Interest (82.4) (60.2) (47.7) (35.1) (30.6) (32.7)
EBITDA-Capex/Interest (137.6) (110.2) (93.4) (78.3) (72.8) (74.7)
Debt/EBITDA (0.1) (0.2) (0.2) (0.3) (0.3) (0.3)
<CAPTION>
Year 2
Month 19 Month 20 Month 21 Month 22 Month 23 Month 24
<S> <C> <C> <C> <C> <C> <C>
Cash Summary:
Cash from Operations (115,036) ( 72,107) ( 52,987) ( 29,677) (8,459) 16,113
Cash for Investing (187,807) (187,807) (187,807) (187,807) (187,807) (187,807)
Net Cash Flow (302,843) (259,914) (240,794) (217,484) (196,266) (171,694)
Cash from Financing 108,651 104,738 100,826 96,913 93,000 89,088
Cumulative Net Cash 859,372 704,196 564,228 443,657 340,391 257,785
Balance Sheet:
Cash & mkt securities 859,372 704,196 564,228 443,657 340,391 257,785
Accounts receivable 603,972 645,674 690,071 734,751 782,593 843,030
Other current assets 0 0 0 0 0 0
Current Assets 1,463,343 1,349,871 1,254,299 1,178,408 1,122,984 1,100,816
Gross PPE 5,811,473 5,969,283 6,126,305 6,282,541 6,437,997 6,592,675
Accum depreciation 717,833 777,525 838,789 901,614 965,994 1,031,921
Net PPE 5,093,640 5,191,758 5,287,516 5,380,927 5,472,003 5,560,754
Goodwill & other intangibles 0 0 0 0 0 0
Other non-current assets (2,165,658) (2,312,668) (2,423,614) (2,537,997) (2,645,389) (2,749,367)
Non-current Assets 2,927,982 2,879,090 2,863,903 2,842,930 2,826,613 2,811,387
Total Assets 4,391,325 4,228,961 4,118,202 4,021,339 3,949,598 3,912,203
Accounts Payable 879,258 879,401 911,473 930,883 972,722 1,018,110
Debt maturities 116,099 114,050 111,210 107,904 104,330 100,604
Other accured expense 73,272 73,283 75,956 78,240 81,060 84,842
Current Liabilities 1,069,629 1,066,734 1,098,639 1,125,027 1,158,112 1,203,556
Secured debt 340,102 330,790 320,406 309,415 298,085 266,569
Other long-term debt 0 0 0 0 0 0
Other non-current liab 73,272 73,283 75,956 78,240 81,060 84,842
Non-Current Liabilities 413,373 404,073 396,362 387,655 379,146 371,412
Common stock A 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000
Other common stock 0 0 0 0 0 0
Additional paid-in-capital 0 0 0 0 0 0
Retained earnings (deficit) (5,090,677) (5,241,847) (5,376,799) (5,491,343) (5,587,660) (5,662,765)
Shareowners Equity 2,909,323 2,758,153 2,623,201 2,508,657 2,412,340 2,337,235
Total Liabilities &
Shareowners Equity 4,301,325 4,228,961 4,118,202 4,021,339 3,946,598 3,912,203
Financial Ratios:
EBITDA/Cash Interest (29.2) (20.2) (16.5) (11.7) (7.1) (1.4)
EBITDA-Caper/Cash Interest (71.8) (63.7) (61.3) (57.9) (54.9) (51.1)
EBITDA/Interest (29.2) (20.2) (16.5) (11.7) (7.1) (1.4)
EBITDA-Capex/Interest (71.8) (63.7) (61.3) (57.9) (54.9) (51.1)
Debt/EBITDA (0.3) (0.4) (0.5) (0.7) (1.2) (6.0)
</TABLE>
s
<PAGE>
<TABLE>
<CAPTION>
Focal Communications Corp. Initial Business Plan
Chicago Financial Plan
9/23/96 Year 3
Month 25 Month 26 Month 27 Month 28 Month 29 Month 30
<S> <C> <C> <C> <C> <C> <C>
Income Statement:
Corp/VAR acct revenue 475,218 508,798 543,624 580,873 618,646 657,821
ISP revenue 547,717 572,672 595,559 620,327 645,055 670,600
Total Revenue 1,022,935 1,081,470 1,139,184 1,201,200 1,263,701 1,328,421
Carrier settlements 284,021 292,895 309,464 329,449 347,570 366,250
Sales & customer service expense 618,718 505,566 513,294 526,278 535,573 547,581
General & administrative expenses 39,609 39,609 39,609 39,609 39,609 39,609
Gross Profit 80,588 243,400 276,817 306,864 340,949 374,982
Corporate Overhead 157,802 157,802 157,802 157,802 157,802 157,802
(Total Cash Expenses) 1,100,150 995,873 1,020,169 1,053,138 1,080,554 1,111,241
EBITDA (77,214) 86,597 119,015 148,062 183,147 217,180
Depreciation & Amortization 70,253 74,579 78,116 81,618 85,085 88,517
Operating income (147,467) 11,018 40,898 66,444 98,062 126,663
Other income (net) 0 0 0 0 0 0
Interest Expense 4,810 6,983 8,813 10,014 10,671 10,941
Income Taxes 0 0 0 0 0 0
Net Income (152,277) 4,035 32,085 56,430 87,391 117,722
Gross margin 8% 23% 24% 25% 27% 28%
EBITDA margin neg 8% 10% 12% 14% 16%
Operating margin neg 1% 4% 6% 8% 10%
Total customers
Total lines 7,602 8,014 8,442 8,888 9,352 9,834
Total MOUs (millions) 54.6 58.0 60.8 63.7 66.7 69.9
Total employees 55 55 55 55 55 55
Statement of Cash Flows:
Net income (152,277) 4,035 32,085 56,430 87,391 117,722
Depreciation & amortization 70,253 74,579 78,116 81,618 85,085 88,517
Change in working capital 30,688 32,444 34,176 36,036 37,911 39,853
Other non-cash items 0 0 0 0 0 0
Cash from Operations (51,336) 111,058 144,377 174,084 210,387 246,091
Capital expenditures (432,625) (432,625) (432,625) (432,625) (432,625) (432,625)
Other investments 0 0 0 0 0 0
Cash for investing (432,625) (432,625) (432,625) (432,625) (432,625) (432,625)
Secured financing 432,625 432,625 432,625 432,625 432,625 432,625
Debt repayment (102,632) (111,645) (120,658) (129,671) (138,684) 147,697
Other debt financing
Common A
Other equity
Other
Cash from Financing 329,993 320,980 311,967 302,954 293,941 284,928
Beg cash balance 257,785 103,817 103,231 126,950 171,362 243,065
Change in cash (153,968) (587) 23,719 44,413 71,703 98,394
Ending Cash Balance 103,817 103,231 126,950 171,362 243,055 341,460
<CAPTION>
Focal Communications Corp. Initial Business Plan
Chicago Financial Plan
9/23/96 Year 3
Month 31 Month 32 Month 33 Month 34 Month 35 Month 36
<S> <C> <C> <C> <C> <C> <C>
Income Statement:
Corp/VAR acct revenue 699,581 742,033 786,063 829,148 872,615 917,499
ISP revenue 712,924 743,930 774,210 804,647 837,231 870,052
Total Revenue 1,412,505 1,485,963 1,560,273 1,833,795 1,709,846 1,787,551
Carrier settlements 397,111 410,279 432,727 452,880 475,510 497,526
Sales & customer service expense 577,379 577,197 588,727 598,849 612,912 627,304
General & administrative expenses 39,609 39,609 39,609 39,609 39,609 39,609
Gross Profit 398,406 458,879 499,211 542,457 581,815 623,112
Corporate Overhead 157,802 157,802 157,802 157,802 157,802 157,802
(Total Cash Expenses) 1,171,901 1,184,887 1,218,865 1,249,140 1,285,833 1,322,241
EBITDA 240,604) 301,076 341,408 384,655 424,013 465,310
Depreciation & Amortization 91,915 95,279 98,609 101,906 105,170 108,401
Operating income 148,689 205,797 242,799 282,749 318,843 356,909
Other income (net) 0 0 0 0 0 0
Interest Expense 10,961 10,827 10,601 10,323 10,014 9,689
Income Taxes 0 0 0 0 0 0
Net income 137,728 194,971 232,198 272,426 308,829 347,220
Gross margin 28% 31% 32% 33% 34% 35%
EBITDA margin 17% 20% 22% 24% 25% 26%
Operating margin 11% 14% 16% 17% 19% 20%
Total customers
Total lines 10,479 11,006 11,554 12,096 12,658 13,240
Total MOUs (millions) 73.8 78.0 81.6 85.3 89.0 92.9
Total employees 55 55 55 55 55 55
Statement of Cash Flows:
Net income 137,728 194,971 232,198 272,426 308,829 347,220
Depreciation & amortization 91,915 95,279 98,609 101,906 105,170 108,401
Change in working capital 42,375 44,579 46,808 49,014 51,295 53,627
Other non-cash items 0 0 0 0 0 0
Cash from Operations 272,018 334,829 377,616 423,346 465,294 509,248
Capital expenditures (432,625) (432,625) (432,625) (432,625) (432,625) (432,625)
Other investments 0 0 0 0 0 0
Cash for investing (432,625) (432,625) (432,625) (432,625) (432,625) (432,625)
Secured financing 432,625 432,625 432,625 432,625 432,625 432,625
Debt repayment (156,710) (165,723) (174,736) (183,749) (192,762) (201,775)
Other debt financing
Common A
Other equity
Other
Cash from Financing 275,915 266,902 257,889 248,876 239,863 230,850
Beg cash balance 341,460 456,768 625,873 828,753 1,068,350 1,340,882
Change in cash 115,308 169,106 202,879 239,597 272,532 307,472
Ending Cash Balance 456,768 625,873 828,753 1,068,350 1,340,882 1,648,354
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Focal Communications Corp. Initial Business Plan
Chicago Financial Plan
9/23/96 Year 3
Month 25 Month 26 Month 27 Month 28 Month 29 Month 30
<S> <C> <C> <C> <C> <C> <C>
Cash Summary:
Cash from Operations (51,336) 111,058 144,377 174,084 210,387 246,091
Cash for investing (432,625) (432,625) (432,625) (432,625) (432,625) (432,625)
Net Cash Flow (483,961) (321,567) (288,248) (258,541) (222,238) (186,534)
Cash from Financing 329,993 320,980 311,967 302,954 293,941 284,928
Cumulative Net Cash 103,817 103,231 126,950 171,362 243,065 341,460
Balance Sheet:
Cash & mkt securities 103,817 103,321 126,950 171,362 243,065 341,460
Accounts receivable 1,022,935 1,081,470 1,139,184 1,201,200 1,263,701 1,328,421
Other current assets 0 0 0 0 0 0
Current Assets 1,126,753 1,184,701 1,266,133 1,372,562 1,506,766 1,669,681
Gross PPE 7,025,300 7,457,925 7,811,645 8,161,827 8,508,508 8,851,722
Accum depreciation 1,102,174 1,176,753 1,254,869 1,336,488 1,421,573 1,510,090
Net PPE 5,923,126 6,281,172 6,556,776 6,825,340 7,086,935 7,341,632
Goodwill & other intangibles 0 0 0 0 0 0
Other non-current assets (2,708,149) (3,041,908) (3,175,018) (3,354,658) (3,580,387) (3,825,422)
Non-current Assets 3,214,978 3,239,264 3,381,757 3,470,681 8,506,548 3,516,210
Total Assets 4,341,731 4,423,965 4,647,891 4,843,244 5,013,314 5,186,091
Accounts Payable 1,320,180 1,195,047 1,224,203 1,263,765 1,296,665 1,333,490
Debt maturities 96,793 154,141 210,187 249,644 272,836 283,910
Other accrued expenses 110,015 99,587 102,017 105,314 108,055 111,124
Current Liabilities 1,526,988 1,448,775 1,536,407 1,618,723 1,677,556 1,728,524
Secured debt 519,769 686,609 788,389 841,699 862,804 863,822
Other long-term debt 0 0 0 0 0 0
Other non-current liab 110,015 99,587 102,017 105,314 108,055 111,124
Non-Current Liabilities 629,784 786,196 890,406 947,013 970,860 974,946
Common stock A 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000
Other common stock 0 0 0 0 0 0
Additional paid-in capital 0 0 0 0 0 0
Retained earnings (deficit) (5,815,042) (5,811,007) (5,778,922) (5,722,492) (5,635,101) (5,517,380)
Shareowners Equity 2,184,958 2,188,993 2,221,078 2,277,508 2,364,899 2,482,620
Total Liabilities & Shareowners Equity 4,341,731 4,423,965 4,647,891 4,843,244 5,013,314 5,186,091
EBITDA/Cash Interest Ratios: (16.1) 12.3 13.5 14.8 17.2 19.8
EBITDA-Capex/Cash Interest (106.0) (49.7) (35.6) (28.4) (23.4) (19.7)
EBITDA/Interest (16.1) 12.3 13.5 14.8 17.2 19.8
EBITDA-Capex/Internet (106.0) (49.7) (35.6) (28.4) (23.4) (19.7)
Debt/EBITDA (0.7) 0.8 0.7 0.6 0.5 0.4
<CAPTION>
Focal Communications Corp. Initial Business Plan
Chicago Financial Plan
9/23/96 Year 3
Month 31 Month 32 Month 33 Month 34 Month 35 Month 36
<S> <C> <C> <C> <C> <C> <C>
Cash Summary:
Cash from Operations 272,018) 334,829 377,616 423,346 465,294 509,248
Cash for investing (432,625) (432,625) (432,625) (432,625) (432,625) (432,625)
Net Cash Flow (160,607) (97,797) (55,010) (9,279) 32,669 76,622
Cash from Financing 275,915 266,902 257,889 248,876 239,663 230,850
Cumulative Net Cash 456,768 625,873 828,753 1,068,350 1,340,882 1,648,354
Balance Sheet:
Cash & mkt securities 456,768 625,873 828,753 1,068,350 1,340,882 1,648,354
Accounts receivable 1,412,505 1,485,963 1,560,273 1,633,795 1,709,846 1,787,551
Other current assets 0 0 0 0 0 0
Current Assets 1,869,273 2,111,836 2,389,026 2,702,145 3,050,728 3,435,905
Gross PPE 9,191,504 9,527,888 9,860,906 10,190,596 10,516,990 10,840,120
Accum depreciation 1,602,005 1,697,284 1,795,893 1,897,799 2,002,969 2,111,370
Net PPE 7,589,499 7,830,604 6,065,015 8,292,799 8,514,022 8,728,750
Goodwill & other intangibles 0 0 0 0 0 0
Other non-current assets (4,058,024) (4,348,573) (4,607,451) (4,864,593) (5,107,502) (5,343,769)
Non-current Assets 3,531,475 3,482,031 3,457,564 3,428,206 3,406,520 3,365,981
Total Assets 5,400,748 5,593,867 5,846,590 6,130,351 6,457,248 6,820,886
Accounts Payable 1,406,282 1,421,864 1,462,638 1,498,968 1,543,000 1,586,689
Debt maturities 286,933 284,934 279,927 273,165 265,403 257,077
Other accrued expenses 117,190 118,489 121,886 124,914 128,583 132,224
Current Liabilities 1,810,405 1,825,287 1,864,451 1,897,047 1,936,986 1,975,990
Secured debt 852,804 834,772 812,734 788,445 762,906 736,678
Other long-term debt 0 0 0 0 0 0
Other non-current liab 117,190 118,489 121,886 124,914 128,583 132,224
Non-Current Liabilities 969,994 953,261 934,621 913,359 891,489 868,902
Common stock A 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000
Other common stock 0 0 0 0 0 0
Additional paid-in capital 0 0 0 0 0 0
Retained earnings (deficit) (5,379,651) (5,184,680) (4,952,482) (4,680,056) (4,371,227) (4,024,007)
Shareowners Equity 2,620,349 2,815,320 3,047,518 3,319,944 3,628,773 3,975,993
Total Liabilities & Shareowners Equity 5,400,748 5,593,867 5,846,590 6,130,351 6,457,248 6,820,886
EBITDA/Cash Interest Ratios: 22.0 27.8 32.2 37.3 42.3 48.0
EBITDA-Capex/Cash Interest (17.5) (12.2) (8.6) (4.6) (0.9) 3.4
EBITDA/Interest 22.0 27.8 32.2 37.3 42.3 46.0
EBITDA-Capex/Internet (17.5) (12.2) (8.6) (4.6) (0.9) 3.4
Debt/EBITDA (0.4) 0.3 0.3 0.2 0.2 0.2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Focal Communications Corp. Initial Business Plan
Chicago Financial Plan
9/23/96 Year 4
Month 37 Month 38 Month 39 Month 40 Month 41 Month 42 Month 43
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement:
Corp/VAR acct revenue 1,075,998 1,135,318 1,197,435 1,260,448 1,329,886 1,398,540 1,467,493
ISP revenue 1,193,032 1,245,673 1,295,504 1,346,238 1,399,894 1,455,720 1,526,037
Total Revenue 2,269,030 2,380,991 2,492,938 2,606,686 2,729,780 2,854,261 2,993,530
Carrier settlements 552,010 571,376 601,494 629,887 664,119 695,353 733,959
Sales & customer service expense 1,146,258 790,326 804,612 820,914 844,793 878,076 908,064
General & administrative expenses 46,855 46,855 46,855 46,855 46,855 51,196 51,196
Gross Profit 523,907 972,434 1,039,077 1,109,030 1,174,013 1,229,636 1,300,312
Corporate Overhead 164,224 164,224 164,224 164,224 164,224 164,224 164,224
(Total Cash Expenses) 1,909,348 1,572,781 1,617,185 1,661,880 1,719,991 1,788,849 1,857,443
EBITDA 359,682 808,210 875,763 944,806 1,009,789 1,065,412 1,136,088
Depreciation & Amortization 113,600 118,747 123,843 128,887 133,205 137,458 141,646
Operating income 246,082 689,462 751,910 815,918 876,584 927,953 994,440
Other income (net) 0 0 0 0 0 0 0
Interest Expense 7,282 2,839 (1,001) (3,731) (5,501) (6,588) (7,233)
Income Taxes 0 0 0 0 0 336,435 360,602
Net Income 238,801 689,623 752,912 819,649 882,084 598,106 641,071
Gross margin 23% 41% 42% 43% 43% 43% 43%
EBITDA margin 16% 34% 35% 36% 37% 37% 38%
Operating margin 11% 29% 30% 31% 32% 33% 33%
Total customers
Total lines 14,027 14,697 15,390 16,107 16,885 17,652 18,548
Total MOUs (millions) 139.8 147.1 153.6 160.3 167.4 174.7 182.9
Total employees 70 70 70 70 70 74 74
Statement of Cash Flows:
Net income 238,801 686,623 752,912 819,649 882,084 598,106 641,071
Depreciation & amortization 113,600 118,747 123,843 128,887 133,205 137,458 141,648
Change in working capital 68,071 71,430 74,788 78,201 81,893 85,628 89,806
Other non-cash items 0 0 0 0 0 0 0
Cash from Operations 420,472 876,800 951,542 1,026,737 1,097,183 821,193 872,524
Capital expenditures (634,645) (634,645) (634,645) (634,645) (634,645) (634,645) (634,645)
Other investments 0 0 0 0 0 0 0
Cash for investing (634,645) (634,645) (634,645) (634,645) (634,645) (634,645) (634,645)
Secured financing
Debt repayment (210,788) (210,788) (210,788) (210,788) (210,788) (210,788) (210,788)
Other debt financing
Common A
Other equity
Other
Cash from Financing (210,788) (210,788) (210,788) (210,788) (210,788) (210,788) (210,788)
Beg cash balance 1,648,354 1,223,392 1,254,758 1,360,867 1,542,171 1,793,920 1,769,679
Change in cash (424,962) 31,366 106,109 181,303 251,749 (24,241) 27,091
Ending Cash Balance 1,223,392 1,254,758 1,360,867 1,542,171 1,793,920 1,769,679 1,796,770
<CAPTION>
Focal Communications Corp. Initial Business Plan
Chicago Financial Plan
9/23/96 Year 4
Month 44 Month 45 Month 46 Month 47 Month 48
<S> <C> <C> <C> <C> <C>
Income Statement:
Corp/VAR acct revenue 1,544,164 1,622,928 1,697,557 1,772,477 1,850,283
ISP revenue 1,584,422 1,638,793 1,695,977 1,754,085 1,815,128
Total Revenue 3,128,587 3,261,720 3,383,534 3,526,563 3,665,412
Carrier settlements 763,777 798,667 831,107 865,080 902,693
Sales & customer service expense 918,509 931,388 945,003 961,521 983,393
General & administrative expenses 51,196 51,196 51,196 51,196 51,196
Gross Profit 1,395,104 1,480,470 1,566,228 1,648,766 1,728,129
Corporate Overhead 164,224 164,224 164,224 164,224 164,224
(Total Cash Expenses) 1,897,707 1,945,475 1,991,530 2,042,021 2,101,507
EBITDA 1,230,880 1,316,245 1,402,004 1,484,542 1,563,905
Depreciation & Amortization 145,774 149,839 153,843 157,786 161,671
Operating income 1,085,105 1,166,406 1,248,161 1,326,755 1,402,235
Other income (net) 0 0 0 0 0
Interest Expense (7,606) (7,818) (7,936) (8,002) (8,038)
Income Taxes 393,376 422,721 452,195 480,513 507,698
Net Income 699,335 751,503 803,902 854,245 902,574
Gross margin 45% 45% 46% 47% 47%
EBITDA margin 39% 40% 41% 42% 43%
Operating margin 35% 36% 37% 38% 38%
Total customers
Total lines 19,365 20,208 21,025 21,865 22,730
Total MOUs (millions) 191.3 198.9 206.6 214.4 222.5
Total employees 74 74 74 74 74
Statement of Cash Flows:
Net income 699,335 751,503 803,902 854,245 902,574
Depreciation & amortization 145,774 149,839 153,843 157,786 161,671
Change in working capital 93,858 97,852 101,806 105,797 109,962
Other non-cash items 0 0 0 0 0
Cash from Operations 938,967 999,194 1,059,551 1,117,828 1,174,207
Capital expenditures (634,645) (634,645) (634,645) (634,645) (634,645)
Other investments 0 0 0 0 0
Cash for investing (634,645) (634,645) (634,645) (634,645) (634,645)
Secured financing
Debt repayment (210,788) (210,788) (210,788) (210,788) (210,788)
Other debt financing
Common A
Other equity
Other
Cash from Financing (210,788) (210,788) (210,788) (210,788) (210,788)
Beg cash balance 1,796,679 1,890,303 2,044,064 2,258,181 2,530,575
Change in cash 93,534 153,760 214,117 272,394 328,774
Ending Cash Balance 1,890,303 2,044,064 2,258,181 2,530,575 2,859,349
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Focal Communications Corp. Initial Business Plan
Chicago financial Plan
9/23/96 Year 4
Month 37 Month 38 Month 39 Month 40
<S> <C> <C> <C> <C>
Cash Summary:
Cash from Operations 420,472 876,800 951,542 1,026,737
Cash for investing (634,645) (634,645) (634,645) (634,645)
Net Cash Flow (214,174) 242,155 316,897 392,092
Cash from Financing (210,788) (210,788) (210,788) (210,788)
Cumulative Net Cash 1,223,392 1,254,758 1,360,867 1,542,171
Balance Sheet:
Cash & mid securities 1,223,392 1,254,758 1,360,867 1,542,171
Accounts receivable 2,269,030 1,904,793 1,994,351 2,085,349
Other current assets 0 0 0 0
Current Assets 3,492,422 3,159,551 3,355,218 3,627,519
Gross PPE 11,360,017 11,874,716 12,384,268 12,888,724
Accum depreciation 2,224,970 2,343,717 2,467,560 2,596,447
Net PPE 9,135,047 9,530,999 9,916,708 10,292,277
Goodwill & other intangibles 0 0 0 0
Other non-current assets (5,213,699) (5,520,576) (5,629,136) (5,622,238)
Non-current Assets 3,921,348 4,010,422 4,287,572 4,670,039
Total Assets 7,413,771 7,169,973 7,642,790 8,297,558
Accounts Payable 2,291,217 1,887,338 1,940,622 1,994,256
Debt maturities 248,439 131,473 16,666 (68,899)
Other accrued expenses 190,935 157,278 161,719 166,188
Current Liabilities 2,730,591 2,176,088 2,119,007 2,091,545
Secured debt 277,451 (64,810) (292,264) (434,152)
Other long-term debt 0 0 0 0
Other non-current liab. 190,935 157,278 161,719 166,188
Non-Current Liabilities 468,386 92,469 (130,545) (267,964)
Common stock A 8,000,000 8,000,000 8,000,000 8,000,000
Other common stock 0 0 0 0
Additional paid-in capital 0 0 0 0
Retained earnings (deficit) (3,785,206) (3,098,583) (2,345,672) (1,526,022)
Shareowners Equity 4,214,794 4,901,417 5,654,328 6,473,978
Total Liabilities & Shareowners Equity 7,413,771 7,163,973 7,642,790 8,297,558
Financial Ratios:
EBITDA/Cash Interest 49.4 284.6 NA NA
EBITDA-Capex/Cash Interest (37.8) 61.1 NA NA
EBITDA/Interest 49.4 284.6 (874.8) (253.2)
EBITDA-Capex/Interest (37.8) 61.1 (240.8) (83.1)
Debt/EBITDA 0.1 0.0 (0.0) (0.0)
</TABLE>
<TABLE>
<CAPTION>
Focal Communications Corp. Initial Business Plan
Chicago financial Plan
9/23/96
Month 41 Month 42 Month 43 Month 44
<S> <C> <C> <C> <C>
Cash Summary:
Cash from Operations 1,097,183 821,193 872,524 938,967
Cash for investing (634,645) (634,645) (634,645) (634,645)
Net Cash Flow 462,538 186,547 237,879 304,322
Cash from Financing (210,788) (210,788) (210,788) (210,788)
Cumulative Net Cash 1,793,920 1,769,679 1,796,770 1,890,303
Balance Sheet:
Cash & mid securities 1,793,920 1,769,679 1,796,770 1,890,303
Accounts receivable 1,910,846 1,997,982 2,095,471 2,190,011
Other current assets 0 0 0 0
Current Assets 3,704,766 3,767,661 3,892,241 4,080,314
Gross PPE 13,320,519 13,745,837 14,164,775 14,577,429
Accum depreciation 2,729,652 2,887,111 3,008,759 3,154,533
Net PPE 10,590,866 10,878,726 11,156,016 11,422,896
Goodwill & other intangibles 0 0 0 0
Other non-current assets (5,176,523) (4,917,796) (4,632,117) (4,359,662)
Non-current Assets 5,414,343 5,960,930 6,523,899 7,063,234
Total Assets 9,119,109 9,728,591 10,416,140 11,143,548
Accounts Payable 2,063,989 2,146,619 2,228,932 2,277,249
Debt maturities (125,763) (161,235) (182,492) (194,880)
Other accrued expenses 171,999 178,885 185,744 189,771
Current Liabilities 2,110,226 2,164,269 2,232,184 2,272,140
Secured debt (519,178) (568,731) (597,028) (612,936)
Other long-term debt 0 0 0 0
Other non-current liab. 171,999 178,885 185,744 189,771
Non-Current Liabilities (347,179) (389,846) (411,283) (423,165)
Common stock A 8,000,000 8,000,000 8,000,000 8,000,000
Other common stock 0 0 0 0
Additional paid-in capital 0 0 0 0
Retained earnings (deficit) (643,938) (45,832) 595,239 1,294,574
Shareowners Equity 7,356,062 7,954,186 8,595,239 9,294,574
Total Liabilities & Shareowners Equity 9,119,109 9,728,591 10,416,140 11,143,548
Financial Ratios:
EBITDA/Cash Interest NA NA NA NA
EBITDA-Capex/Cash Interest NA NA NA NA
EBITDA/Interest (183.6) (161.7) (157.1) (161.8)
EBITDA-Capex/Interest (68.2) (65.4) (69.3) (78.4)
Debt/EBITDA (0.1) (0.1) (0.1) (0.1)
</TABLE>
<TABLE>
<CAPTION>
Focal Communications Corp. Initial Business Plan
Chicago financial Plan
9/23/96 Year 4
Month 45 Month 46 Month 47 Month 48
<S> <C> <C> <C> <C>
Cash Summary:
Cash from Operations 999,194 1,059,551 1,117,828 1,174,207
Cash for investing (634,645) (634,645) (634,645) (634,645)
Net Cash Flow 364,549 424,906 483,183 539,562
Cash from Financing (210,788) (210,788) (210,788) (210,788)
Cumulative Net Cash 2,044,064 2,258,181 2,530,575 2,859,349
Balance Sheet:
Cash & mid securities 2,044,064 2,258,181 2,530,575 2,859,349
Accounts receivable 2,283,204 2,375,474 2,468,594 2,565,788
Other current assets 0 0 0 0
Current Assets 4,327,268 4,633,655 4,999,169 5,425,137
Gross PPE 14,983,893 15,384,260 15,778,622 16,167,068
Accum depreciation 3,304,372 3,458,214 3,616,001 3,777,671
Net PPE 11,679,521 11,926,046 12,162,621 12,389,397
Goodwill & other intangibles 0 0 0 0
Other non-current assets (4,060,771) (3,754,137) (3,436,152) (3,105,690)
Non-current Assets 7,618,750 8,171,909 8,726,469 9,283,707
Total Assets 11,946,018 12,805,564 13,726,838 14,708,844
Accounts Payable 2,334,570 2,389,837 2,450,425 2,521,808
Debt maturities (201,954) (205,931) (208,140) (209,354)
Other accrued expenses 194,548 199,153 204,202 210,151
Current Liabilities 2,327,164 2,383,058 2,446,488 2,522,605
Secured debt (621,770) (626,628) (629,276) (630,711)
Other long-term debt 0 0 0 0
Other non-current liab. 194,548 199,153 204,202 210,151
Non-Current Liabilities (427,223) (427,475) (425,074) (420,560)
Common stock A 8,000,000 8,000,000 8,000,000 8,000,000
Other common stock 0 0 0 0
Additional paid-in capital 0 0 0 0
Retained earnings (deficit) 2,046,078 2,849,980 3,704,225 4,606,799
Shareowners Equity 10,046,078 10,849,980 11,704,225 12,606,799
Total Liabilities & Shareowners Equity 11,946,018 12,805,564 13,725,638 14,708,844
Financial Ratios:
EBITDA/Cash Interest NA NA NA NA
EBITDA-Capex/Cash Interest NA NA NA NA
EBITDA/Interest (168.4) (176.7) (185.5) (194.6)
EBITDA-Capex/Interest (87.2) (96.7) (106.2) (115.6)
Debt/EBITDA (0.1) (0.0) (0.0) (0.0)
</TABLE>
<PAGE>
Focal Communications Corp. Initial Business Plan
Chicago Financial Plan
9/23/96
<TABLE>
<CAPTION>
Year 5
Month 49 Month 50 Month 51 Month 52 Month 53 Month 54
<S> <C> <C> <C> <C> <C> <C>
Income Statement:
Corp/VAR acct revenue 2,062,858 2,140,241 2,218,239 2,297,708 2,378,677 2,462,299
ISP revenue 1,827,145 1,895,007 1,960,737 2,028,783 2,098,091 2,170,683
Total Revenue 3,890,003 4,035,247 4,178,976 4,326,491 4,476,767 4,632,983
Carrier settlements 971,754 1,000,600 1,037,545 1,075,406 1,112,755 1,153,710
Sales & customer service expense 1,117,839 1,053,647 1,067,607 1,087,196 1,106,095 1,180,484
General & administrative expenses 54,811 54,811 54,811 54,811 54,811 59,369
Gross Profit 1,745,599 1,926,189 2,019,013 2,109,077 2,203,106 2,239,420
Corporate Overhead 186,771 186,771 185,771 186,771 186,771 186,771
(Total Cash Expenses) 2,331,175 2,295,830 2,346,734 2,404,185 2,460,432 2,580,334
EBITDA 1,558,828 1,739,418 1,832,242 1,922,308 2,016,335 2,052,649
Depreciation & Amortization 165,682 169,612 173,464 177,239 180,939 184,564
Operating income 1,393,147 1,569,805 1,658,776 1,745,067 1,835,397 1,868,084
Other income (net) 0 0 0 0 0 0
Interest Expense (8,057) (8,047) (7,998) (7,930) (7,851) (7,646)
Income Taxes 504,434 568,027 600,039 631,079 663,569 675,263
Net Income 896,771 1,009,825 1,066,737 1,121,918 1,179,678 1,200,467
Gross margin 45% 48% 48% 49% 49% 48%
EBITDA margin 40% 43% 44% 44% 45% 44%
Operating margin 36% 39% 40% 40% 41% 40%
Total customers
Total lines 23,703 24,559 25,438 26,341 27,268 28,220
Total MOUs (millions) 244.2 254.0 263.0 272.3 281.9 291.8
Total employees 82 82 82 82 82 89
Statement of Cash Flows:
Net income 896,771 1,009,825 1,066,737 1,121,918 1,179,678 1,200,467
Depreciation & amortization 165,682 169,612 173,464 177,239 180,939 184,564
Change in working capital 116,700 121,057 125,369 129,795 134,303 138,989
Other non-cash items 0 0 0 0 0 0
Cash from Operations 1,179,152 1,300,495 1,365,570 1,428,952 1,494,920 1,524,021
Capital expenditures (739,210) (739,210) (739,210) (739,210) (739,210) (739,210)
Other investments 0 0 0 0 0 0
Cash for investing (739,210) (739,210) (739,210) (739,210) (739,210) (739,210)
Secured financing
Debt repayment (210,788) (206,329) (203,953) (201,578) (199,202) (171,738)
Other debt financing
Common A
Other equity
Other
Cash from Financing (210,788) (208,329) (203,953) (201,578) (199,202) (171,738)
Beg cash balance 2,859,349 3,088,503 3,443,459 3,865,656 4,354,031 4,910,539
Change in cash 229,154 354,956 442,407 488,165 556,508 613,073
Ending Cash Balance 3,088,503 3,443,459 3,865,866 4,354,031 4,910,539 5,523,611
<CAPTION>
Year 5
Month 55 Month 56 Month 57 Month 58 Month 59 Month 60
<S> <C> <C> <C> <C> <C> <C>
Income Statement:
Corp/VAR acct revenue 2,535,601 2,609,906 2,684,248 2,759,642 2,837,229 2,915,075
ISP revenue 2,263,071 2,346,741 2,427,925 2,502,034 2,576,603 2,652,313
Total Revenue 4,799,672 4,956,647 5,112,174 5,261,678 5,413,832 5,567,389
Carrier settlements 1,195,463 1,225,631 1,263,634 1,297,091 1,337,470 1,376,091
Sales & customer service expense 1,208,503 1,216,803 1,233,445 1,245,573 1,266,762 1,280,137
General & administrative expenses 59,369 59,369 59,369 59,369 59,369 59,369
Gross Profit 2,336,337 2,454,844 2,555,526 2,659,843 2,750,231 2,843,791
Corporate Overhead 186,771 186,771 186,771 186,771 186,771 186,771
(Total Cash Expenses) 2,650,106 2,688,574 2,143,419 2,788,804 2,650,372 2,910,350
EBITDA 2,149,566 2,268,073 2,348,766 2,472,872 2,563,460 2,657,020
Depreciation & Amortization 188,117 191,599 195,011 198,355 201,632 204,844
Operating income 1,961,449 2,076,474 2,173,744 2,274,517 2,361,827 2,452,176
Other income (net) 0 0 0 0 0 0
Interest Expense (7,317) (7,018) (6,777) (6,589) (6,438) (6,311)
Income Taxes 708,756 750,057 764,988 821,198 852,574 885,056
Net Income 1,260,011 1,333,435 1,395,533 1,459,908 1,515,690 1,573,432
Gross margin 49% 50% 50% 51% 51% 51%
EBITDA margin 45% 46% 46% 47% 47% 48%
Operating margin 41% 42% 43% 43% 44% 44%
Total customers
Total lines 29,267 30,197 31,151 32,056 32,980 33,926
Total MOUs (millions) 302.8 313.9 313.9 334.3 344.1 354.2
Total employees 89 89 89 89 89 89
Statement of Cash Flows:
Net income 1,260,011 1,333,435 1,395,533 1,459,906 1,515,690 1,573,432
Depreciation & amortization 188,117 191,599 195,011 198,355 201,632 204,844
Change in working capital 143,990 148,699 153,365 157,850 157,415 167,022
Other non-cash items 0 0 0 0 0 0
Cash from Operations 1,592,118 1,673,733 1,743,910 1,816,113 1,879,737 1,945,298
Capital expenditures (739,210) (739,210) (739,210) (739,210) (739,210) (739,210)
Other investments 0 0 0 0 0 0
Cash for investing (739,210) (739,210) (739,210) (739,210) (739,210) (739,210)
Secured financing (169,363) (166,987) (164,611) (162,235) (159,860) (157,484)
Debt repayment
Other debt financing
Common A
Other equity
Other
Cash from Financing (169,363) (166,987) (164,611) (162,235) (159,860) (157,484)
Beg cash balance 5,523,611 6,207,157 6,974,693 7,814,782 8,729,450 9,710,118
Change in cash 683,545 767,537 840,089 914,668 980,668 1,048,604
Ending Cash Balance 6,207,157 6,974,693 7,814,782 8,729,450 9,710,118 10,758,722
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Focal Communications Corp. Initial Business Plan
Chicago financial Plan
9/23/96 Year 5
Month 49 Month 50 Month 51 Month 52
<S> <C> <C> <C> <C>
Cash Summary:
Cash from Operations 1,179,152 1,300,495 1,365,570 1,428,952
Cash for investing (739,210) (739,210) (739,210) (739,210)
Net Cash Flow 439,943 561,285 626,360 689,742
Cash from Financing (210,788) (206,329) (203,953) (201,578)
Cumulative Net Cash 3,088,503 3,443,459 3,865,866 4,354,031
Balance Sheet:
Cash & mid securities 3,088,503 3,443,459 3,865,866 4,354,031
Accounts receivable 2,723,002 2,824,673 2,925,283 3,028,544
Other current assets 0 0 0 0
Current Assets 5,811,505 6,268,132 6,791,149 7,382,574
Gross PPE 16,568,152 16,961,215 17,346,416 17,723,914
Accum depreciation 3,943,353 4,112,965 4,286,429 4,463,568
Net PPE 12,624,800 12,848,250 13,059,987 13,260,245
Goodwill & other intangibles 0 0 0 0
Other non-current assets (2,510,590) (2,226,638) (1,816,967) (1,398,426)
Non-current Assets 10,114,210 10,621,612 11,243,020 11,661,819
Total Assets 15,925,715 16,889,745 18,034,169 19,244,383
Accounts Payable 2,797,410 2,754,995 2,816,081 2,885,022
Debt maturities (210,016) (210,375) (209,453) (207,848)
Other accrued expenses 233,117 229,583 234,673 240,418
Current Liabilities 2,820,511 2,774,204 2,841,301 2,917,592
Secured debt (631,483) (627,437) (621,938) (615,668)
Other long-term debt 0 0 0 0
Other non-current liab. 233,117 229,583 234,673 240,418
Non-Current Liabilities (398,365) (397,854) (387,264) (375,249)
Common stock A 8,000,000 8,000,000 8,000,000 8,000,000
Other common stock 0 0 0 0
Additional paid-in capital 0 0 0 0
Retained earnings (deficit) 5,503,570 6,513,395 7,580,132 8,702,050
Shareowners Equity 13,503,570 14,513,395 15,580,132 16,702,050
Total Liabilities & Shareowners Equity 16,926,716 16,889,745 18,034,169 19,244,393
Financial Ratios:
EBITDA/Cash Interest NA NA NA NA
EBITDA-Capex/Cash Interest NA NA NA NA
EBITDA/Interest (193.5) (216.2) (229.1) (242.4)
EBITDA-Capex/Interest (101.7) (124.3) (136.7) (149.2)
Debt/EBITDA (0.0) (0.0) (0.0) (0.0)
</TABLE>
<TABLE>
<CAPTION>
Focal Communications Corp. Initial Business Plan
Chicago financial Plan
9/23/96
Month 53 Month 54 Month 55 Month 56
<S> <C> <C> <C> <C>
Cash Summary:
Cash from Operations 1,494,920 1,524,021 1,592,118 1,673,733
Cash for investing (739,210) (739,210) (739,210) (739,210)
Net Cash Flow 755,710 784,811 852,908 934,523
Cash from Financing (199,202) (171,738) (169,363) (166,987)
Cumulative Net Cash 4,910,539 5,523,611 6,207,157 6,974,693
Balance Sheet:
Cash & mid securities 4,910,539 5,523,611 6,207,157 6,974,693
Accounts receivable 3,133,737 3,243,088 3,359,771 3,469,653
Other current assets 0 0 0 0
Current Assets 8,044,278 8,766,699 9,566,927 10,444,346
Gross PPE 18,093,861 18,456,409 18,811,707 19,159,898
Accum depreciation 4,644,607 4,829,171 5,017,288 5,208,887
Net PPE 13,449,254 13,627,238 13,794,419 13,951,011
Goodwill & other intangibles 0 0 0 0
Other non-current assets (982,066) (480,004) (55,366) 326,108
Non-current Assets 12,467,188 13,147,235 13,739,053 14,277,119
Total Assets 20,511,463 21,913,934 23,305,980 24,721,465
Accounts Payable 2,952,518 3,096,401 3,180,127 3,226,289
Debt maturities (205,879) (203,717) (195,182) (186,594)
Other accrued expenses 246,043 258,033 265,011 268,857
Current Liabilities 2.992,683 3,150,717 3,249,956 3,308,552
Secured debt (608,991) (577,012) (551,192) (531,585)
Other long-term debt 0 0 0 0
Other non-current liab. 246,043 258,033 265,011 268,857
Non-Current Liabilities (362,948) (318,978) (286,182) (262,728)
Common stock A 8,000,000 8,000,000 8,000,000 8,000,000
Other common stock 0 0 0 0
Additional paid-in capital 0 0 0 0
Retained earnings (deficit) 9,881,728) 11,082,195 12,342,206 13,675,641
Shareowners Equity 17,881,728 19,082,195 20,342,206 21,675,641
Total Liabilities & Shareowners Equity 20,511,463 21,913,934 23,305,880 24,721,465
Financial Ratios:
EBITDA/Cash Interest NA NA NA NA
EBITDA-Capex/Cash Interest NA NA NA NA
EBITDA/Interest (256.8) (268.5) (293.8) (323.2)
EBITDA-Capex/Interest (162.7) (171.8) (192.7) (217.9)
Debt/EBITDA (0.0) (0.0) (0.0) (0.0)
</TABLE>
<TABLE>
<CAPTION>
Focal Communications Corp. Initial Business Plan
Chicago financial Plan
9/23/96 Year 5
Month 57 Month 58 Month 59 Month 60
<S> <C> <C> <C> <C>
Cash Summary:
Cash from Operations 1,743,910 1,816,113 1,879,737 1,945,298
Cash for investing (739,210) (739,210) (739,210) (739,210)
Net Cash Flow 1,004,700 1,076,903 1,140,528 1,206,088
Cash from Financing (164,611) (162,235) (159,860) (157,484)
Cumulative Net Cash 7,814,782 8,729,450 9,710,118 10,758,722
Balance Sheet:
Cash & mid securities 7,814,782 8,729,450 9,710,118 10,758,722
Accounts receivable 3,578,522 3,683,173 3,789,683 3,897,172
Other current assets 0 0 0 0
Current Assets 11,393,304 12,412,623 13,499,801 14,655,894
Gross PPE 19,501,126 19,835,529 20,163,244 20,484,404
Accum depreciation 5,403,898 5,602,253 5,803,886 6,008,730
Net PPE 14,097,227 14,233,275 14,359,358 14,475,674
Goodwill & other intangibles 0 0 0 0
Other non-current assets 725,233 1,110,621 1,513,437 1,910,691
Non-current Assets 14,822,460 15,343,897 15,872,795 16,386,365
Total Assets 26,215,764 27,756,520 29,372,595 31,042,260
Accounts Payable 3,292,103 3,346,565 3,420,447 3,492,442
Debt maturities (179,545) (174,049) (169,722) (166,174)
Other accrued expenses 274,342 278,880 285,037 291,037
Current Liabilities 3,386,900 3,451,396 3,535,762 3.617,305
Secured debt (516,652) (504,838) (494,976) (486,285)
Other long-term debt 0 0 0 0
Other non-current liab. 274,342 278,880 285,037 291,037
Non-Current Liabilities (242,310) (225,958) (209,939) (195,248)
Common stock A 8,000,000 8,000,000 8,000,000 8,000,000
Other common stock 0 0 0 0
Additional paid-in capital 0 0 0 0
Retained earnings (deficit) 15,071,174 16,531,082 18,046,771 19,620,204
Shareowners Equity 23,071,174 24,531,082 26,046,771 27,620,204
Total Liabilities & Shareowners Equity 26,215,764 27,756,520 29,372,595 31,042,260
Financial Ratios:
EBITDA/Cash Interest NA NA NA NA
EBITDA-Capex/Cash Interest NA NA NA NA
EBITDA/Interest (349.5) (375.3) (398.2) (421.0)
EBITDA-Capex/Interest (240.4) (263.1) (283.4) (303.9)
Debt/EBITDA (0.0) (0.0) (0.0) (0.0)
</TABLE>
<PAGE>
EXHIBIT 2 TO STOCK PURCHASE AGREEMENT
-------------------------------------
Restated Certificate of Incorporation, dated November 26, 1996 - Previously
filed as Exhibit 3.1 to the Form S-4 Registration Statement on April 3, 1998.
<PAGE>
EXHIBIT 3 TO STOCK PURCHASE AGREEMENT
Form of Promissory Note
<PAGE>
PROMISSORY NOTE
---------------
$5,627.91 November 27, 1996
For value received, Brian F. Addy (the "Executive Investor") hereby
------------------
promises to pay to the order of Focal Communications Corporation, a Delaware
corporation (the "Company"), the principal amount of $5,627.91, together with
-------
interest thereon calculated from the date hereof in accordance with the
provisions of this promissory note (this "Note"). This Note is issued pursuant
----
to the stock purchase agreement of even date herewith, by and between the
Company, the Executive Investor, and certain other investors listed on the
signature pages attached thereto (as amended from time to time pursuant to its
terms, the "Stock Purchase Agreement"). The amounts due under this Note are
------------------------
secured by a pledge of all Company common stock held by the Executive Investor
during the period of this Note, pursuant to the terms of a pledge agreement of
even date herewith, by and between the Company and the Executive Investor (the
"Executive Investor Stock Pledge Agreement").
-----------------------------------------
Interest shall accrue on a daily basis on the outstanding principal
amount of this Note at a rate per annum equal to the applicable federal rate
for obligations of similar duration, published monthly by the Internal Revenue
Service, and such interest shall be due and payable at such time as the
principal amount of this Note becomes due and payable, or, if earlier, at such
time as the principal amount of this Note is paid in full.
The Executive Investor shall repay the entire unpaid principal amount of
this Note and any accrued and unpaid interest thereon on the 90th day after the
date first written above (the "Maturity Date"). The Executive Investor may, at
-------------
any time and from time to time, without premium or penalty, prepay all or any
portion of the outstanding principal amount of this Note; provided that any
--------
prepayment shall first be applied to any accrued but unpaid interest.
In the event the Executive Investor fails to pay any amounts due
hereunder when due, the Executive Investor shall pay to the holder hereof, in
addition to such amounts due, all costs of collection, including reasonable
attorneys fees.
The Executive Investor, or his successors and assigns, hereby waives
diligence, presentment, protest and demand and notice of protest, demand,
dishonor and nonpayment of this Note, and expressly agrees that this Note, or
any payment hereunder, may be extended from time to time and that the holder
hereof may accept security for this Note or release security for this Note, all
without in any way affecting the liability of the Executive Investor hereunder.
This Note shall be governed by the internal laws, and not the laws of
conflicts, of the State of Illinois.
/s/ Brian F. Addy
----------------------------------------
Brian F. Addy
<PAGE>
PROMISSORY NOTE
---------------
$5,627.91 November 27, 1996
For value received, John R. Barnicle (the "Executive Investor") hereby
------------------
promises to pay to the order of Focal Communications Corporation, a Delaware
corporation (the "Company"), the principal amount of $5,627.91, together
-------
with interest thereon calculated from the date hereof in accordance with the
provisions of this promissory note (this "Note"). This Note is issued pursuant
----
to the stock purchase agreement of even date herewith, by and between the
Company, the Executive Investor, and certain other investors listed on the
signature pages attached thereto (as amended from time to time pursuant to its
terms, the "Stock Purchase Agreement"). The amounts due under this Note are
------------------------
secured by a pledge of all Company common stock held by the Executive Investor
during the period of this Note, pursuant to the terms of a pledge agreement of
even date herewith, by and between the Company and the Executive Investor (the
"Executive Investor Stock Pledge Agreement").
- ------------------------------------------
Interest shall accrue on a daily basis on the outstanding principal
amount of this Note at a rate per annum equal to the applicable federal rate for
obligations of similar duration, published monthly by the Internal Revenue
Service, and such interest shall be due and payable at such time as the
principal amount of this Note becomes due and payable, or, if earlier, at such
time as the principal amount of this Note is paid in full.
The Executive Investor shall repay the entire unpaid principal amount of
this Note and any accrued and unpaid interest thereon on the 90th day after the
date first written above (the "Maturity Date"). The Executive Investor may, at
-------------
any time and from time to time, without premium or penalty, prepay all or any
portion of the outstanding principal amount of this Note; provided that any
--------
prepayment shall first be applied to any accrued but unpaid interest.
In the event the Executive Investor fails to pay any amounts due
hereunder when due, the Executive Investor shall pay to the holder hereof, in
addition to such amounts due, all costs of collection, including reasonable
attorneys fees.
The Executive Investor, or his successors and assigns, hereby waives
diligence, presentment, protest and demand and notice of protest, demand,
dishonor and nonpayment of this Note, and expressly agrees that this Note, or
any payment hereunder, may be extended from time to time and that the holder
hereof may accept security for this Note or release security for this Note, all
without in any way affecting the liability of the Executive Investor hereunder.
This Note shall be governed by the internal laws, and not the laws of
conflicts, of the State of Illinois.
/s/ John R. Barnicle
----------------------------------------
John R. Barnicle
<PAGE>
PROMISSORY NOTE
---------------
$5,627.91 November 27, 1996
For value received, Joseph A. Beatty (the "Executive Investor") hereby
------------------
promises to pay to the order of Focal Communications Corporation, a Delaware
corporation (the "Company"), the principal amount of $5,627.91, together with
-------
interest thereon calculated from the date hereof in accordance with the
provisions of this promissory note (this "Note"). This Note is issued pursuant
----
to the stock purchase agreement of even date herewith, by and between the
Company, the Executive Investor, and certain other investors listed on the
signature pages attached thereto (as amended from time to time pursuant to its
terms, the "Stock Purchase Agreement"). The amounts due under this Note are
------------------------
secured by a pledge of all Company common stock held by the Executive Investor
during the period of this Note, pursuant to the terms of a pledge agreement of
even date herewith, by and between the Company and the Executive Investor (the
"Executive Investor Stock Pledge Agreement").
- ------------------------------------------
Interest shall accrue on a day basis on the outstanding principal amount
of this Note at a rate per annum equal to the applicable federal rate for
obligations of similar duration, published monthly by the Internal Revenue
Service, and such interest shall be due and payable at such time as the
principal amount of this Note becomes due and payable, or, if earlier, at such
time as the principal amount of this Note is paid in full.
The Executive Investor shall repay the entire unpaid principal amount of
this Note and any accrued and unpaid interest thereon on the 90th day after the
date first written above (the "Maturity Date"). The Executive Investor may, at
-------------
any time and from time to time, without premium or penalty, prepay all or any
portion of the outstanding principal amount of this Note; provided that any
--------
prepayment shall first be applied to any accrued but unpaid interest.
In the event the Executive Investor fails to pay any amounts due
hereunder when due, the Executive Investor shall pay to the holder hereof, in
addition to such amounts due, all costs of collection, including reasonable
attorneys fees.
The Executive Investor, or his successors and assigns, hereby waives
diligence, presentment, protest and demand and notice of protest, demand,
dishonor and nonpayment of this Note, and expressly agrees that this Note, or
any payment hereunder, may be extended from time to time and that the holder
hereof may accept security for this Note or release security for this Note, all
without in any way affecting the liability of the Executive Investor hereunder.
This Note shall be governed by the internal laws, and not the laws of
conflicts, of the State of Illinois.
/s/ Joseph A. Beatty
----------------------------------------
Joseph A. Beatty
<PAGE>
PROMISSORY NOTE
---------------
$5,627.91 November 27, 1996
For value received, Robert C. Taylor, Jr. (the "Executive Investor")
------------------
hereby promises to pay to the order of Focal Communications Corporation, a
Delaware corporation (the "Company"), the principal amount of $5,627.91,
together with interest thereon calculated from the date hereof in accordance
with the provisions of this promissory note (this "Note"). This Note is issued
----
pursuant to the stock purchase agreement of even date herewith, by and between
the Company, the Executive Investor, and certain other investors listed on the
signature pages attached thereto (as amended from time to time pursuant to its
terms, the "Stock Purchase Agreement"). The amounts due under this Note are
------------------------
secured by a pledge of all Company common stock held by the Executive Investor
during the period of this Note, pursuant to the terms of a pledge agreement of
even date herewith, by and between the Company and the Executive Investor (the
"Executive Investor Stock Pledge Agreement").
- ------------------------------------------
Interest shall accrue on a daily basis on the outstanding principal
amount of this Note at a rate per annum equal to the applicable federal rate for
obligations of similar duration, published monthly by the Internal Revenue
Service, and such interest shall be due and payable at such time as the
principal amount of this Note becomes due and payable, or, if earlier, at such
time as the principal amount of this Note is paid in full.
The Executive Investor shall repay the entire unpaid principal amount of
this Note and any accrued and unpaid interest thereon on the 90th day after the
date first written above (the "Maturity Date"). The Executive Investor may, at
-------------
any time and from time to time, without premium or penalty, prepay all or any
portion of the outstanding principal amount of this Note; provided that any
--------
prepayment shall first be applied to any accrued but unpaid interest.
In the event the Executive Investor fails to pay any amounts due
hereunder when due, the Executive Investor shall pay to the holder hereof, in
addition to such amounts due, all costs of collection, including reasonable
attorneys fees.
The Executive Investor, or his successors and assigns, hereby waives
diligence, presentment, protest and demand and notice of protest, demand,
dishonor and nonpayment of this Note, and expressly agrees that this Note, or
any payment hereunder, may be extended from time to time and that the holder
hereof may accept security for this Note or release security for this Note, all
without in any way affecting the liability of the Executive Investor hereunder.
This Note shall be governed by the internal laws, and not the laws of
conflicts, of the State of Illinois.
/s/ Robert C. Taylor, Jr.
----------------------------------------
Robert C. Taylor, Jr.
<PAGE>
EXHIBIT 4 TO STOCK PURCHASE AGREEMENT
-------------------------------------
Form of Executive Investor Stock Pledge Agreement - Exhibits 4.7-4.10 to the
Form S-4 Registration Statement filed on April 3, 1998 are Executive Investor
Stock Pledge Agreements executed by Addy, Barnicle, Beatty, and Taylor, Jr.,
respectively.
<PAGE>
EXHIBIT 5 TO STOCK PURCHASE AGREEMENT
-------------------------------------
Bylaws Amendment - Previously filed as Exhibit 3.2 to the Form S-4 Registration
Statement on April 3, 1998.
<PAGE>
EXHIBIT 6 TO STOCK PURCHASE AGREEMENT
-------------------------------------
Stockholders Agreement by and among Focal, MDCP, Frontenac, BV, Addy, Barnicle,
Beatty and Taylor - Previously filed as Exhibit 4.11 to the Form S-4
Registration Statement on April 3, 1998.
<PAGE>
EXHIBIT 7 TO STOCK PURCHASE AGREEMENT
-------------------------------------
Form of Executive Stock Agreement and Employment Agreement - Exhibits 4.12-4.15
to the Form S-4 Registration Statement filed on April 3, 1998 are Executive
Stock Agreement and Employment Agreements executed by Addy, Barnicle, Beatty and
Taylor, Jr., respectively.
<PAGE>
EXHIBIT 8 TO STOCK PURCHASE AGREEMENT
-------------------------------------
Registration Agreement by and among Focal, MDCP, Frontenac, BV, Addy, Barnicle,
Beatty and Taylor - Previously filed as Exhibit 4.16 to the Form S-4
Registration Statement on April 3, 1998.
<PAGE>
EXHIBIT 9 TO STOCK PURCHASE AGREEMENT
Form of Vesting Agreement
<PAGE>
VESTING AGREEMENT
-----------------
THIS VESTING AGREEMENT (this "Agreement") is made as of November 27, 1996,
---------
by and among Battery Ventures III, L.P. (the "New Capital Investor"), Focal
--------------------
Communications Corporation (the "Company"), and each of Robert C. Taylor, Jr.,
-------
John R. Barnicle, Brian F. Addy and Joseph Beatty (individually an "Executive
---------
Investor" and collectively the "Executive Investors").
- -------- -------------------
The execution and delivery of this Agreement is a condition to the purchase
of the Company's Class A Common Stock, par value $.01 per share (the "Class A
-------
Common"), by the New Capital Investor, the Executive Investors and certain other
- ------
investors (collectively, the "Investors"), pursuant to a Stock Purchase
---------
Agreement of even date herewith by and among the Company and such Investors (the
"Stock Purchase Agreement"). Capitalized terms used but not otherwise defined
------------------------
herein are used herein with the meanings ascribed to such terms in Sections 2
and 3 below.
NOW, THEREFORE, in consideration of the mutual premises made herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
Section 1. Vesting and Forfeiture.
----------------------
1A. Vesting and Forfeiture upon a Sale. Contemporaneously with any sale
----------------------------------
or transfer by the New Capital Investor to any person of any shares of Qualified
Common (including by way of merger or consolidation, but excluding (i) any sale
or transfer of shares to a Successor Fund upon such Successor Fund's execution
of a counterpart to this Agreement agreeing to be bound by the provisions hereof
and to succeed to the rights and obligations of New Capital Investor hereunder
with respect to the shares of Qualified Common sold or transferred to such
Successor Fund, and (ii) any recapitalization or other reorganization in which
the New Capital Investor's holdings of the Company's equity immediately after
such transaction are equal to the New Capital Investor's holdings of the
Company's equity immediately prior to such transaction) (a "Sale"):
----
(a) a number (if any) of the shares of Unvested Class C
Common held by each holder of Unvested Class C Common shall vest equal to
the product obtained by multiplying (x) the number of shares of Qualified
Common being transferred in such Sale, times (y) such holder's Applicable
-----
Percentage for such Sale;
(b) a number (if any) of the New Capital Investor's shares
of Nonqualified Common equal to the product obtained by multiplying (i) the
number of shares of Qualified Common being transferred in such Sale, times
(ii) the sum of the Applicable Percentages for all holders of Unvested
Class C Common for such Sale, shall without further action by the Company
or the New Capital Investor automatically be deemed forfeited, and the New
Capital Investor shall thereafter no longer exercise nor have the right to
exercise any of its rights with respect to such forfeited shares; and
(c) a number of the shares of Unvested Class C Common held
by each holder of Unvested Class C Common equal to the difference (if any)
obtained by subtracting
<PAGE>
(i) the number of such holder's shares of Unvested Class C Common that are
to vest as a result of such Sale, from (ii) the number of such holder's
shares of Unvested Class C Common that would vest as a result of such Sale
if the Return Multiple for such Sale were 35, shall without further action
by the Company or such holder automatically be deemed forfeited and such
holder shall thereafter no longer exercise nor have the right to exercise
any of its rights with respect to such forfeited shares.
1B. Vesting and Forfeiture upon Election Notice following a Rule 144
----------------------------------------------------------------
Quarter. If, within 10 business days after any calendar quarter (following the
- -------
consummation of the Company's initial Public Offering) during which any shares
of Qualified Common then held by the New Capital Investor (excluding (i) shares
sold or transferred pursuant to a Sale during such calendar quarter, and (ii)
shares the transfer of which during such calendar quarter would have been
restricted under any hold-back agreement entered into with, or for the benefit
of, the Company or its underwriters) are eligible to be transferred pursuant to
Rule 144 promulgated by the Securities Exchange Commission under the Securities
Act of 1933, as amended, or any successor rule or rules then in effect ("Rule
----
144") as of the last business day of such calendar quarter (such a calendar
- ---
quarter, a "Rule 144 Quarter") (such eligible shares, the "Rule 144 Eligible
---------------- -----------------
Shares"), any holder of Unvested Class C Common gives written notice to the New
- ------
Capital Investor setting forth the number of Rule 144 Eligible Shares for such
Rule 144 Quarter, such holder's estimated calculation of the Fair Market Value
of such Rule 144 Eligible Shares (including all market information necessary to
enable the New Capital Investor to perform such calculation), and such holder's
estimated calculation of the number of such holder's shares of Unvested Class C
Common that will vest pursuant to paragraph I B(a) with respect to such Rule 144
Quarter ("Election Notice"), then on the 20th business day following such Rule
---------------
144 Quarter:
(a) a number (if any) of the shares of Unvested Class C Common
held by each such electing holder shall vest equal to the product obtained
by multiplying (x) the number of Rule 144 Eligible Shares for such Rule 144
Quarter, times (y) such holder's Applicable Percentage for such Rule 144
Quarter;
(b) a number (if any) of the New Capital Investor's shares of
Nonqualified Common equal to the product obtained by multiplying (x) the
number of Rule 144 Eligible Shares for such Rule 144 Quarter, times (y) the
-----
sum of the Applicable Percentages for such Rule 144 Quarter for all holders
of Unvested Class C Common giving Election Notice with respect to such Rule
144 Quarter, shall without further action by the Company or the New Capital
Investor automatically be deemed forfeited, and the New Capital Investor
shall thereafter no longer exercise nor have the right to exercise any of
its rights with respect to such forfeited shares;
(c) a number of the shares of Unvested Class C Common held by
each holder of Unvested Class C Common giving Election Notice with respect
to such Rule 144 Quarter equal to the difference (if any) obtained by
subtracting (i) the number of such holder's shares of Unvested Class C
Common that are to vest as a result of giving such
-2-
<PAGE>
Election Notice, from (ii) the number of such holder's shares of Unvested
Class C Common that would vest as a result of giving such Election Notice
if the Return Multiple for such Rule 144 Quarter were 35, shall without
further action by the Company or such holder automatically be deemed
forfeited, and such holder shall thereafter no longer exercise nor have the
right to exercise any of its rights with respect to such forfeited shares.
1C. Vesting and Forfeiture upon Liquidation. Contemporaneously with
---------------------------------------
a complete liquidation of the Company (the "Liquidation"):
-----------
(a) a number (if any) of the shares of Unvested Class C Common
held by each holder of Unvested Class C Common shall vest equal to the
product obtained by multiplying (x) the number of shares of Qualified
Common held by New Capital Investor as of the date of the Liquidation,
times (y) such holder's Applicable Percentage for such Liquidation;
-----
(b) a number (if any) of the New Capital Investor's shares of
Nonqualified Common equal to the product obtained by multiplying (i) the
number of shares of Qualified Common held by the New Capital Investor as of
the date of the Liquidation, times (ii) the sum of the Applicable
-----
Percentages for all holders of Unvested Class C Common for such
Liquidation, shall without further action by the Company or the New Capital
Investor automatically be deemed forfeited, and the New Capital Investor
shall thereafter no longer exercise nor have the right to exercise any of
its rights with respect to such forfeited shares.
(c) a number of the shares of Unvested Class C Common held by
each holder of Unvested Class C Common equal to the difference (if any)
obtained by subtracting (i) the number of such holder's shares of Unvested
Class C Common that are to vest as a result of such Liquidation, from (ii)
the number of such holders shares of Unvested Class C Common that would
vest as a result of such Liquidation if the Return Multiple for such
Liquidation were 35, shall without further action by the Company or such
holder automatically be deemed forfeited, and such holder shall thereafter
no longer exercise nor have the right to exercise any of its rights with
respect to such forfeited shares.
1D. Forfeiture upon Termination of this Agreement. Upon the seventh
---------------------------------------------
anniversary of the date hereof, all Unvested Class C Common then outstanding
shall without further action by the Company or any holder of such Unvested Class
C Common automatically be deemed forfeited, and each such holder shall
thereafter no longer exercise nor have the right to exercise any of its rights
with respect to such forfeited shares.
1E. Forfeiture Procedure. Upon any forfeiture of any shares of
--------------------
Unvested Class C Common or Nonqualified Common pursuant to this Agreement, the
holder of such forfeited shares shall promptly submit the certificate or
certificates representing such forfeited shares to the Company for cancellation.
Upon such submission, the Company shall take all actions necessary to retire
such forfeited shares and to cause such shares to resume the status of
authorized and unissued shares. The
-3-
<PAGE>
Company shall promptly cancel the submitted certificate(s) and issue to such
holder (i) a certificate, bearing the legend set forth in paragraph 5B below,
representing the number of shares (if any) of Unvested Class C Common or
Nonqualified Common, as applicable, which were evidenced by the submitted
certificate(s) but which were not forfeited, and (ii) a certificate, not bearing
the legend set forth in paragraph 4B below, representing the number of shares
represented by the submitted certificate(s) that were not forfeited and that in
connection with such forfeiture ceased to be Nonqualified Common or became
Vested Class C Common. as applicable.
Section 2. Calculation of Each Holder's Applicable Percentage.
2A. Applicable Percentage. For each Sale, Liquidation, or Rule 144
---------------------
Quarter, the "Applicable Percentage" for each holder of Unvested Class C Common
---------------------
shall be equal to the percentage obtained by multiplying:
(a) 25% (or if such holder is no longer employed by the Company
or any of its Subsidiaries ("Termination"), the product of (i) 25%, times
-----------
(ii) a fraction, the numerator of which is the number of shares of Unvested
Class C Common held by such holder immediately prior to Termination that
were not elected to be repurchased pursuant to an Executive Stock Agreement
as a result of such Termination, and the denominator of which is the number
of shares of Unvested Class C Common held by such holder immediately prior
to such Termination); times
(b) the quotient obtained by dividing (x) the Return Multiple
for such Sale, Liquidation, or Rule 144 Quarter minus 20 (provided that
----- --------
such difference shall not be less than zero nor greater than 15), by (y)
65.
2B. Calculation of the Return Multiple.
----------------------------------
(a) The "Return Multiple" for each Sale shall be equal to the
---------------
quotient obtained by dividing:
(i) the Fair Market Value of all consideration that the New
Capital Investor will receive in such Sale in exchange for the shares of
Qualified Common to be transferred or sold by the New Capital Investor in
such Sale, by
(ii) the Total Cost and Contributions for the shares of
Qualified Common to be transferred or sold by the New Capital Investor in
such Sale (as well as any shares of Nonqualified Common that will be
forfeited pursuant to this Agreement in connection with such Sale).
(b) The "Return Multiple" for each Liquidation shall be equal to the
---------------
quotient obtained by dividing:
-4-
<PAGE>
(i) the Fair Market Value of all consideration to be
distributed in such Liquidation to the New Capital Investor with respect to
the shares of Qualified Common held by the New Capital Investor as of the
date of such Liquidation, by
(ii) the Total Cost and Contributions for the shares of
Qualified Common held by the New Capital Investor as of the date of such
Liquidation (as well as any shares of Nonqualified Common that will be
forfeited pursuant to this Agreement in connection with such Liquidation).
(c) The "Return Multiple" for each Rule 144 Quarter shall be equal to
---------------
the quotient obtained by dividing:
(i) the Fair Market Value of all of the New Capital Investor's
Rule 144 Eligible Shares for such Rule 144 Quarter, by
(ii) the Total Cost and Contributions for the New Capital
Investor's Rule 144 Eligible Shares for such Rule 144 Quarter (as well as
any shares of Nonqualified Common to be forfeited pursuant to this
Agreement by virtue of all Election Notices filed with respect to such Rule
144 Quarter).
Section 3. Definitions.
"Executive Stock Agreements" means the executive stock agreements of
-------------------------
even date herewith, each by and between the Company and one Executive Investor,
as amended from time to time pursuant to their terms.
"Fair Market Value" shall mean:
-----------------
(i) with respect to any Rule 144 Eligible Share, the weighted
average (based on the volume of trading in shares of the class of the
Company's common stock that includes the Rule 144 Eligible Shares (the
Company's "Common Stock") on each business day during the Rule 144 Quarter)
------------
over all of the business days during such Rule 144 Quarter, of the average
of the closing prices of the sales of such Common Stock on all securities
exchanges on which such Common Stock may at that time be listed, or, if
there have been no sales on any such exchange on any day, the average of
the highest bid and lowest asked prices on all such exchanges at the end of
such day, or, if on any day the Common Stock is not so listed, the average
of the representative bid and asked prices quoted in the NASDAQ System as
of 4:00 P.M., New York time, or, if on any day the Common Stock is not
quoted in the NASDAQ System, the average of the highest bid and lowest
asked prices on such day in the domestic over-the-counter market as
reported by the National Quotation Bureau Incorporated, or any similar
successor organization; and
-5-
<PAGE>
(ii) with respect to consideration received in a Sale or
Liquidation, the amount of all cash consideration received plus the fair
market value of all other consideration received (as shall be determined in
good faith by the New Capital Investor).
"Nonqualified Common" means 2,019.23 of the shares of Class A Common
-------------------
purchased by the New Capital Investor under the Stock Purchase Agreement
(together with any shares issued with respect to such shares of Nonqualified
Common, including any stock splits, stock dividends, or recapitalizations);
provided that
- --------
(i) contemporaneously with a Sale, the number of shares of
Nonqualified Common that would be forfeited in connection with such Sale if
the Return Multiple for such Sale were 35 shall (whether or not actually
forfeited in connection with such Sale) forever cease to be Nonqualified
Common,
(ii) if any holder or holders of Unvested Class C Common give(s)
Election Notice with respect to a Rule 144 Quarter, the number of shares of
Nonqualified Common that would be forfeited in connection with such Rule
144 Quarter if the Return Multiple for such Rule 144 Quarter were 35 shall
(whether or not actually forfeited in connection with such Rule 144
Quarter) forever cease to be Nonqualified Common, and
(iii) contemporaneously with a Liquidation or termination of
this Agreement, any and all shares of Nonqualified Common then held by the
New Capital Investor shall forever cease to be Nonqualified Common,
(iv) if any shares of an Executive Investor's Unvested Class C
Common are repurchased pursuant to the provisions of an Executive Stock
Agreement, or if any Executive Investor waives (pursuant to paragraph 5G
below) his right to have any of his shares of Unvested Class C Common vest,
a number of New Capital Investor's shares of Nonqualified Common shall vest
equal to the number of shares of Unvested Class C Common so repurchased or
of which the rights to vest are so waived.
"Public Offering" means the initial underwritten sale of the company's
---------------
common stock pursuant to an effective registration statement under the
Securities Act filed with the Securities and Exchange Commission on Form S- I
(or a successor form adopted by the Securities and Exchange Commission);
provided that the following shall not be considered a Public Offering: (i) any
- --------
issuance of common stock as consideration or financing for a merger or
acquisition, and (ii) any issuance of common stock or rights to acquire common
stock to employees of the Company or its Subsidiaries as part of an incentive or
compensation plan.
"Qualified Common" means 8,750 of the shares of Class A Common
----------------
purchased by the New Capital Investor under the Stock Purchase Agreement
(together with any shares issued with respect to such shares of Qualified
Common, including by any stock splits, stock dividends, or recapitalizations),
provided that any such share shall forever cease to be Qualified Common (i) upon
- --------
-6-
<PAGE>
a Liquidation, (ii) when such share has been sold or transferred in a Sale, or
(iii) upon termination of this Agreement; and further provided further that if
------------------------
any holder of Unvested Class C Common gives Election Notice with respect to a
Rule 144 Quarter, all Rule 144 Eligible Shares for such Rule 144 Quarter shall,
for all purposes as to such electing holder, thereafter forever cease to be
Qualified Common.
"Successor Fund" means, with respect to the New Capital Investor, any
--------------
private equity fund formed for the principal purpose of making equity
investments, where such fund is managed by the same principal parties having
management responsibility for the New Capital Investor.
"Total Cost and Contributions" means, with respect to each share of
----------------------------
Qualified Common or Nonqualified Common held by the New Capital Investor on any
specified date, the sum of (i) the New Capital Investors Initial Contribution
(as that term is defined in the Stock Purchase Agreement) divided by the
-------
aggregate number of shares of Class A Common purchased by the New Capital
Investor under the Stock Purchase Agreement (as adjusted for stock splits,
stock dividends, recapitalizations, and other reorganizations, the
"Original Class A Common"), and (ii) for all Subsequent Contributions (as that
-----------------------
term is defined in the Stock Purchase Agreement) made by the New Capital
Investor from the date hereof through such specified date, the quotient obtained
by dividing (x) the amount of each such Subsequent Contribution by the aggregate
number of shares of Original Class A Common held by the New Capital Investor as
of the date of each such Subsequent Contribution.
"Unvested Class C Common" means, as to each Executive Investor,
-----------------------
504.8075 of the shares of Class C Common issued as of the date hereof (together
with shares issued with respect to such shares of Unvested Class C Common as
part of any stock split, stock dividend. or recapitalization); provided that any
--------
such share shall forever cease to be Unvested Class C Common when it has been
(i) repurchased by the Company, an Investor, or an executive employee of the
Company or its Subsidiaries pursuant to paragraph 3 of an Executive Stock
Agreement, (ii) forfeited pursuant to -the terms of this Agreement or (iii)
vested pursuant to the terms of this Agreement (at which time, such share shall
become Vested Class C Common).
"Vested Class C Common" means all shares of Unvested Class C Common
---------------------
that have vested pursuant to the terms of this Agreement (and thereby ceased to
be Unvested Class C Common).
Section 4. Pledge of Unvested Class C Common
---------------------------------
4A. Pledge. Each Executive Investor hereby initially pledges to the
------
New Capital Investor, and grants to the New Capital Investor a security interest
in such Executive Investor's Unvested Class C Common (such Executive Investor's
"Pledged Shares") as security for its duties and obligations pursuant to this
--------------
Agreement.
-7-
<PAGE>
4B. Delivery of Pledged Shares. Upon the execution of this Agreement,
--------------------------
each Executive Investor shall deliver to the New Capital Investor the
certificate(s) representing such Executive Investor's Pledged Shares, together
with duly executed forms of assignment sufficient to transfer title thereto to
the New Capital Investor.
4C. Status as Holder. For purposes of determinations and
----------------
calculations under this Agreement, each Executive Investor shall be deemed to be
the holder of such Executive Investor's Pledged Shares.
4D. Distributions, Other Certificates, etc. If any Executive
---------------------------------------
Investor becomes entitled to receive or receives any securities or other
property with respect to, in substitution of, or in exchange for any of such
Executive Investor's Pledged Shares (whether as a distribution in connection
with any recapitalization, reorganization or reclassification, a stock dividend
or otherwise), or any certificate(s) representing any of such Executive
Investor's Pledged Shares, such Executive Investor shall accept such securities,
property, or certificate(s) on behalf of and for the benefit of the New Capital
Investor as additional security for such Executive Investor's obligations
hereunder and shall promptly deliver such additional security to the New Capital
Investor together with duly executed forms of assignment, and such additional
security shall be deemed to be part of such Executive Investor's Pledged Shares.
4E. Delivery to and by the New Capital Investor. If the Company
-------------------------------------------
issues any certificate representing Pledged Shares, the Company shall in keeping
with the purpose of paragraph 4D deliver such certificate directly to the New
Capital Investor. If the holder of such Pledged Shares is required pursuant to
the terms of this Agreement to transfer any certificate representing Pledged
Shares to the Company for cancellation the New Capital Investor shall transfer
such certificate to the Company on behalf of such holder.
4F. Release of Pledged Shares upon Vesting. Upon any of Executive
--------------------------------------
Investor's Pledged Shares becoming Vested Class C Common pursuant to this
Agreement, the New Capital Investor shall deliver to such Executive Investor the
certificate or certificates representing such shares of Vested Class C Common
(or, if necessary, the New Capital Investor shall submit the certificate or
certificates representing such Vested Class C Common to the Company, and the
Company shall issue to such Executive Investor a certificate representing the
number of shares of Vested Class C Common represented by such submitted
certificate(s), and shall deliver to the New Capital Investor a certificate
(issued in such Executive Investor's name) representing the number of shares of
Class C Common which were represented by such submitted certificate(s) but which
were not Vested Class C Common and not forfeited), and such Vested Class C
Common shall no longer constitute part of such Executive Investor's Pledged
Shares.
4G. Voting Proxy. Each Executive Investor hereby appoints the New
------------
Capital Investor as his true and lawful proxy and attorney-in-fact, with full
power of substitution, to vote all of such Executive Investor's Pledged Shares
on all matters to be voted on by the Company's shareholders. These proxies and
powers granted by each Executive Investor pursuant to this
-8-
<PAGE>
paragraph 4G are coupled with an interest, and are given to secure each
Executive Investor's obligations to the New Capital Investor under this
Agreement. Such proxies and powers shall be irrevocable with respect to each
such Pledged Share (and shall survive the death, disability, incompetency, or
bankruptcy of such Executive Investor) until such time as such Pledged Share
becomes Vested Class C Common pursuant to the provisions of this Agreement and
thereby ceases to be a Pledged Share, at which time such proxy shall be deemed
revoked with respect to such share (but not with respect to any shares of such
holder that remain Pledged Shares).
4H. Further Assurance. Each Executive Investor agrees that at any
-----------------
time and from time to time upon the request of the New Capital Investor, such
Executive Investor shall execute and deliver such further documents and take
such further actions as the New Capital Investor may reasonably request in order
to effect the purpose of this Agreement.
Section 5. Miscellaneous.
-------------
5A. New Capital Investor Determinations. All calculations and other
-----------------------------------
determinations under provisions of this Agreement (including the final
determination of the Fair Market Value of Rule 144 Eligible Shares) shall be
performed and made in good faith by the New Capital Investor, and such good
faith determinations shall be binding on all parties hereto. The Company and
the Executive Investors shall deliver to the New Capital Investor such
information as the New Capital Investor may reasonably request in connection
with performing such calculations or making such determinations.
5B. Restrictive Legend. Each certificate evidencing shares of
------------------
Nonqualified Common and Unvested Class C Common shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
FORFEITURE PROVISIONS SET FORTH IN A VESTING AGREEMENT DATED AS OF
NOVEMBER 27, 1996, BY AND AMONG THE ISSUER OF SUCH SECURITIES, AND
CERTAIN PERSONS LISTED ON THE SIGNATURE PAGES ATTACHED THERETO, AS
AMENDED FROM TIME TO TIME PURSUANT TO ITS TERMS, A COPY OF SUCH
VESTING AGREEMENT SHALL BE FURNISHED WITHOUT CHARGE BY THE COMPANY TO
THE HOLDER HEREOF UPON WRITTEN REQUEST."
The legend set forth above shall be removed from the certificates evidencing any
of the above shares when such shares cease to be Nonqualified Common or Unvested
Class C Common, as applicable.
5C. Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements
-9-
<PAGE>
or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
5D. Counterparts. This Agreement may be executed in separate
------------
counterparts, none of which need contain the signature of more than one party
hereto but each of which shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
5E. Successors and Assigns. Except as otherwise provided herein,
----------------------
this Agreement shall bind the parties hereto and their respective successors and
assigns and shall inure to the benefit of and be enforceable by the parties
hereto and their respective successors and assigns. Notwithstanding the
foregoing, the Executive Investors shall not transfer any Unvested Class C
Common to any person, except (i) pursuant to the pledge and forfeiture
provisions of this Agreement, or (ii) to the executor of such Executive
Investor's estate, at which time such executor shall sign a counterpart to this
Agreement agreeing to stand in the place of the Executive Investor and be bound
by the provisions hereof with respect to such shares of Unvested Class C Common.
5F. Choice of Law. The corporate law of the State of Delaware shall
-------------
govern all questions concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement and the exhibits hereto shall
be governed by the internal law, and not the law of conflicts, of the State of
Illinois.
5G. Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company, the New
Capital Investor and the holders of a majority of the shares of Unvested Class C
Common then outstanding, and such an amendment or waiver shall be binding on all
parties; provided that any holder of Unvested Class C Common may waive the
--------
rights under this Agreement to have the shares of Unvested Class C Common held
by such holder vest (upon such waiver, such shares the rights to vest of which
are waived shall be treated for purposes of this Agreement (including paragraph
2A(c) and Section 3) as if they had been repurchased pursuant to the repurchase
provisions of an Executive Stock Agreement.
5H. Notice. Any notice provided for in this Agreement shall be in
------
writing and shall be deemed to have been given when personally delivered to the
recipient, three business days after being mailed to the recipient by first
class mail (postage prepaid and return receipt requested), or one business day
after being sent to the recipient by reputable overnight courier service
(charges prepaid). Such notices shall be sent to each recipient at the address
specified for such recipient in the Stock Purchase Agreement, or to such other
address or to the attention of such other person as the recipient party shall
have specified by prior written notice to the sending party. Any notice given by
a holder of Unvested Class C Common pursuant to paragraph I B hereof shall, in
addition to the other requirements for such notice set forth in paragraph I B,
state in a conspicuous manner that, subject to the conditions and determinations
contemplated thereby, the events described therein are
-10-
<PAGE>
scheduled to occur on the 20th day following the end of the Rule 144 Quarter
(and the notice shall conspicuously specify the actual date that is such 20th
day).
5I. Remedies. Each of the parties to this Agreement shall be
--------
entitled to enforce its rights under this Agreement specifically, to recover
damages and costs (including reasonable attorney's fees) caused by any breach of
any provision of this Agreement and to exercise all other rights existing in its
favor. The parties hereto agree and acknowledge that money damages would not be
an adequate remedy for any breach of the provisions of this Agreement and that
any party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or deposit) for specific
performance and/or other injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement
5J. Termination. The provisions of this Agreement shall terminate
-----------
upon the earlier of (i) the first date upon which there remains either no
Unvested Class C Common outstanding, and (ii) the seventh anniversary of the
date hereof; provided that the obligations under this Agreement with respect to
any events resulting in the termination hereof shall survive such termination.
* * * *
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
BATTERY VENTURES III, L.P.
By Battery Partners, III, L.P.
By:
--------------------------------------
Its:
-------------------------------------
/s/ Brian F. Addy
-----------------------------------------
Brian F. Addy
/s/ John R. Barnicle
-----------------------------------------
John R. Barnicle
/s/ Joseph Beatty
-----------------------------------------
Joseph Beatty
/s/ Robert C. Taylor, Jr.
-----------------------------------------
Robert C. Taylor, Jr.
FOCAL COMMUNICATIONS CORPORATION
By: /s/ Robert C. Taylor, Jr.
--------------------------------------
Its: President
-------------------------------------
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first Written above.
-----------------------------------------
New Capital Investor
By: /s/
--------------------------------------
Its: GP
-------------------------------------
-----------------------------------------
Brian F. Addy
-----------------------------------------
John R. Barnicle
-----------------------------------------
Joseph Beatty
-----------------------------------------
Robert C. Taylor, Jr.
FOCAL COMMUNICATIONS CORPORATION
By:
--------------------------------------
Its:
-------------------------------------
-13-
<PAGE>
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, Brian F. Addy hereby sells, assigns and transfers unto
Battery Ventures III, L.P., Five Hundred Four and 8075/10,000 (504.8075) shares
of the Class C Common Stock, par value $.01 per share, of Focal Communications
Corporation, a Delaware corporation (the "Corporation") standing in his name on
the books of said Corporation represented by Certificate Number C-9, and does
hereby irrevocably constitute and appoint _____________________ attorney to
transfer the said stock on the books of the Corporation with full power of
substitution in the premises.
Dated: November 27, 1996
/s/ Brian F. Addy
--------------------------------
Brian F. Addy
<PAGE>
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, John R. Barnicle hereby sells, assigns and transfers
unto Battery Ventures III, L.P., Five Hundred Four and 8075/10,000 (504.8075)
shares of the Class C Common Stock, par value $.01 per share, of Focal
Communications Corporation, a Delaware corporation (the "Corporation") standing
in his name on the books of said Corporation represented by Certificate Number
C-10, and does hereby irrevocably constitute and appoint _____________________
attorney to transfer the said stock on the books of the Corporation with full
power of substitution in the premises.
Dated: November 27, 1996
/s/ John R. Barnicle
-----------------------------------
John R. Barnicle
<PAGE>
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, Joseph Beatty hereby sells, assigns and transfers unto
Battery Ventures III, L.P., Five Hundred Four and 8075/10,000 (504.8075) shares
of the Class C Common Stock, par value $.01 per share, of Focal Communications
Corporation, a Delaware corporation (the "Corporation") standing in his name on
the books of said Corporation represented by Certificate Number C-11, and does
hereby irrevocably constitute and appoint _____________________ attorney to
transfer the said stock on the books of the Corporation with full power of
substitution in the premises.
Dated: November 27, 1996
/s/ Joseph Beatty
---------------------------------
Joseph Beatty
<PAGE>
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, Robert C. Taylor, Jr. hereby sells, assigns and
transfers unto Battery Ventures III, L.P., Five Hundred Four and 8075/10,000
(504.8075) shares of the Class C Common Stock, par value $.01 per share, of
Focal Communications Corporation, a Delaware corporation (the "Corporation")
standing in his name on the books of said Corporation represented by Certificate
Number C-12, and does hereby irrevocably constitute and appoint
_____________________ attorney to transfer the said stock on the books of the
Corporation with full power of substitution in the premises.
Dated: November 27, 1996
/s/ Robert C. Taylor, Jr.
-----------------------------------
Robert C. Taylor, Jr.
<PAGE>
EXHIBIT 10 TO STOCK PURCHASE AGREEMENT
--------------------------------------
Interconnection Agreement by and among Ameritech Information Industry Services
and Focal, dated October 28, 1996 - Previously filed as Exhibit 10.1 to the Form
S-4 Registration Statement on April 3, 1998.
<PAGE>
Exhibit 11 to Stock Purchase Agreement
Form of Opinion of Bischoff, Kenney & Niehaus (Initial Closing)
<PAGE>
[Letterhead of Bischoff, Kenney & Niehaus]
November 27, 1996
James N. Perry, Jr.
Madison Dearborn Capital Partners, L.P.
Three First National Plaza, Suite 3800
Chicago, Illinois 60670
Gentlemen:
We are counsel to Focal Communications Corporation (the "Company") in
connection with a transaction whereby the capital structure of the Company will
be recapitalized, the Restated Certificate of Incorporation will be amended and
new shareholders will be issued certain classes of Common Stock, all pursuant to
agreements dated herewith by and among all or some Focal Communications
Corporation, Madison Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
Battery Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph A. Beatty,
and Robert C. Taylor, Jr. and described as follows: Stock Purchase Agreement,
Executive Stock Agreement and Employment Agreement, Stockholders Agreement,
Registration Agreement, and Vesting Agreements (hereinafter all commonly
referred to as the "Agreements" and the transaction hereinafter commonly
referred to as the "Transaction"). This opinion is being delivered to you
pursuant to Paragraph 2K of the Stock Purchase Agreement.
For purposes of this opinion, we have examined the corporate records of the
Company, including but not limited to the Certificate of Incorporation, the
Restated Certificate of Incorporation, the Bylaws in effect prior to the date
hereof and the Bylaws adopted as of the date hereof, the Resolutions of
Shareholders and the Board of Directors, and such other documents as we have
deemed necessary under the circumstances. In making our examination, we have
assumed the genuineness of the signatures on all original documents, and the
conformity to original documents of all copies submitted to us as facsimile,
photostatic or conformed copies. We have assumed that the amended and Restated
Certificate of Incorporation, which shall be filed as of the date herewith,
shall be accepted and duly recorded by the Secretary of State of Delaware as of
the date hereof. As to various questions of fact material to our opinion, we
have relied upon statements or certificates of officers or representatives of
the Company and others. As to various questions of fact and law material to our
opinion, we have relied upon statements or certificates of public officials.
Based upon and subject to the foregoing, it is our opinion that:
<PAGE>
James N. Perry, Jr.
Madison Dearborn Capital Partners, L.P.
November 27, 1996
Page 2
(i) The Company has been duly incorporated and organized, and is validly
existing and in good standing, under the laws of the State of Delaware, and the
Company has all necessary corporate power and authority and all material
licenses, permits and authorizations necessary to own its properties in the
locations presently owned and to conduct its business in the manner and in the
locations now conducted;
(ii) The Company has all necessary corporate power and authority to
execute, deliver and perform its obligations under the Agreements;
(iii) The Interconnection Agreement and the Agreements have been duly
authorized, executed and delivered by the Company, and each Agreement is a valid
and binding obligation of the Company, enforceable in accordance with its terms;
(iv) The execution and delivery by the Company of the Agreements, the
offering, sale and issuance of the Class A Common, and the fulfillment of and
the compliance with the respective terms thereof by the Company do not and shall
not (A) conflict with or result in a breach of the terms, conditions or
provisions of, (B) constitute a default under, (C) result in the creation of any
lien, mortgage, security interest, charge or other encumbrance upon the
Company's capital stock or assets pursuant to, (D) give any third party the
right to accelerate any obligation under, (E) result in a violation of, or (F)
require any authorization, consent, approval, exemption or other action by or
notice to any court or administrative or governmental body pursuant to, the
Company's Restated Certificate of Incorporation, the Company's Bylaws, any law,
statute, rule or regulation to which the Company is subject, or any material
agreement, indenture, instrument, order, judgment or decree to which the Company
is subject;
(v) Brian F. Addy, John R. Barnicle, Joseph A. Beatty, and Robert C.
Taylor, Jr., have each executed and delivered an Executive Stock Agreement and
Employment Agreement and the Stockholders Agreement, and each such agreement is
a valid and binding obligation of each such person, enforceable in accordance
with its terms;
(vi) In November, 1996, the Illinois Commerce Commission certified the
Company to provide facilities-based and resold, switched and dedicated, local
exchange services in those portions of MSA-1 served by Ameritech and Centel, and
interexchange services throughout Illinois:
(1) such certification has not been conditioned, restricted,
withdrawn, and is not presently under challenge;
(2) the Company has filed all statements and reports, obtained all
consents, licenses, and approvals, and taken all other material actions
required by the ICC, FCC, or other laws or regulations, necessary to
maintain such certification and to provide such services in the Chicago
MSA;
<PAGE>
James N. Perry, Jr.
Madison Dearborn Capital Partners, L.P.
November 27, 1996
Page 3
(3) neither the Company's entering into the Stock Purchase Agreement
or any of the other agreements of even date therewith to which the Company
is party, nor the transactions contemplated by such agreements, will result
in the conditioning, restriction, or withdrawal of such certification;
(vii) The restatement to the Company's Certificate of Incorporation
containing the provisions set forth in Exhibit 2 to the Stock Purchase Agreement
has been duly adopted by the Company, has been duly filed with the Secretary of
State of Delaware, has become effective under the laws of Delaware and
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms;
(viii) The certificates representing the Class A Common purchased at the
Closing have been duly authorized, executed and delivered by the Company, such
Class A Common has been validly issued and is outstanding, fully paid and
nonassessable, and there are no statutory, or contractual, preemptive rights of
stockholders or rights of first refusal with respect to the issuance of such
Class A Common;
(ix) The offering, sale and issuance of the Class A Common under the
Stock Purchase Agreement and the other securities issued by the Company at the
Closing do not require registration under the Securities Act or registration or
qualification under any state securities laws;
(x) The Capitalization Schedule attached to the Stock Purchase Agreement
correctly sets forth the number of shares of each class of the Company's
authorized capital stock and the number of outstanding shares of each such class
as of the Closing;
This opinion has been furnished to you in accordance with Paragraph 2K of
the Stock Purchase Agreement and may not be relied upon by any other person or
for any other purpose. This opinion is based on existing Delaware and federal
laws, rules and regulations.
We express no opinion as to laws, rules or regulations other than these.
This opinion is limited to those matters expressly stated and no opinion shall
be inferred or applied beyond such matters.
BISCHOFF, KENNEY & NIEHAUS
By: /s/ Charles D. Niehaus
-------------------------------------
Charles D. Niehaus
<PAGE>
[Letterhead of Bischoff, Kenney & Niehaus]
November 27, 1996
Frontenac VI, L.P.
135 South LaSalle Street, Suite 3800
Chicago, Illinois 60670
Gentlemen:
We are counsel to Focal Communications Corporation (the "Company") in
connection with a transaction whereby the capital structure of the Company will
be recapitalized, the Restated Certificate of Incorporation will be amended and
new shareholders will be issued certain classes of Common Stock, all pursuant to
agreements dated herewith by and among all or some Focal Communications
Corporation, Madison Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
Battery Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph A. Beatty,
and Robert C. Taylor, Jr. and described as follows: Stock Purchase Agreement,
Executive Stock Agreement and Employment Agreement, Stockholders Agreement,
Registration Agreement, and Vesting Agreements (hereinafter all commonly
referred to as the "Agreements" and the transaction hereinafter commonly
referred to as the "Transaction"). This opinion is being delivered to you
pursuant to Paragraph 2K of the Stock Purchase Agreement.
For purposes of this opinion, we have examined the corporate records of the
Company, including but not limited to the Certificate of Incorporation, the
Restated Certificate of Incorporation, the Bylaws in effect prior to the date
hereof and the Bylaws adopted as of the date hereof, the Resolutions of
Shareholders and the Board of Directors, and such other documents as we have
deemed necessary under the circumstances. In making our examination, we have
assumed the genuineness of the signatures on all original documents, and the
conformity to original documents of all copies submitted to us as facsimile,
photostatic or conformed copies. We have assumed that the amended and Restated
Certificate of Incorporation, which shall be filed as of the date herewith,
shall be accepted and duly recorded by the Secretary of State of Delaware as of
the date hereof. As to various questions of fact material to our opinion, we
have relied upon statements or certificates of officers or representatives of
the Company and others. As to various questions of fact and law material to our
opinion, we have relied upon statements or certificates of public officials.
Based upon and subject to the foregoing, it is our opinion that:
(i) The Company has been duly incorporated and organized, and is
validly existing and in good standing, under the laws of the State of Delaware,
and the Company has all necessary corporate power and authority and all material
licenses, permits and authorizations necessary to own its properties in the
locations presently owned and to conduct its business in the manner and in the
locations now conducted;
<PAGE>
Frontenac, VI L.P.
135 South LaSalle Street, Suite 3800
Chicago, Illinois 60670
Page 2
(ii) The Company has all necessary corporate power and authority to
execute, deliver and perform its obligations under the Agreements;
(iii) The Interconnection Agreement and the Agreements have been duly
authorized, executed and delivered by the Company, and each Agreement is a valid
and binding obligation of the Company, enforceable in accordance with its terms;
(iv) The execution and delivery by the Company of the Agreements, the
offering, sale and issuance of the Class A Common, and the fulfillment of and
the compliance with the respective terms thereof by the Company do not and shall
not (A) conflict with or result in a breach of the terms, conditions or
provisions of, (B) constitute a default under, (C) result in the creation of any
lien, mortgage, security interest, charge or other encumbrance upon the
Company's capital stock or assets pursuant to, (D) give any third party the
right to accelerate any obligation under, (E) result in a violation of, or (F)
require any authorization, consent, approval, exemption or other action by or
notice to any court or administrative or governmental body pursuant to, the
Company's Restated Certificate of Incorporation, the Company's Bylaws, any law,
statute, rule or regulation to which the Company is subject, or any material
agreement, indenture, instrument, order, judgment or decree to which the Company
is subject;
(v) Brian F. Addy, John R. Barnicle, Joseph A. Beatty, and Robert C.
Taylor, Jr., have each executed and delivered an Executive Stock Agreement and
Employment Agreement and the Stockholders Agreement, and each such agreement is
a valid and binding obligation of each such person, enforceable in accordance
with its terms;
(vi) In November, 1996, the Illinois Commerce Commission certified the
Company to provide facilities-based and resold, switched and dedicated, local
exchange services in those portions of MSA-1 served by Ameritech and Centel, and
interexchange services throughout Illinois:
(1) such certification has not been conditioned, restricted,
withdrawn, and is not presently under challenge;
(2) the Company has filed all statements and reports, obtained all
consents, licenses, and approvals, and taken all other material actions
required by the ICC, FCC, or other laws or regulations, necessary to
maintain such certification and to provide such services in the Chicago
MSA;
(3) neither the Company's entering into the Stock Purchase
Agreement or any of the other agreements of even date therewith to which
the Company is party, nor the
<PAGE>
Frontenac VI L.P.
135 South LaSalle Street, Suite 3800
Chicago, Illinois 60670
Page 3
transactions contemplated by such agreements, will result in the
conditioning, restriction, or withdrawal of such certification;
(vii) The restatement to the Company's Certificate of Incorporation
containing the provisions set forth in Exhibit 2 to the Stock Purchase Agreement
has been duly adopted by the Company, has been duly filed with the Secretary of
State of Delaware, has become effective under the laws of Delaware and
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms;
(viii) The certificates representing the Class A Common purchased at the
Closing have been duly authorized, executed and delivered by the Company, such
Class A Common has been validly issued and is outstanding, fully paid and
nonassessable, and there are no statutory, or contractual, preemptive rights of
stockholders or rights of first refusal with respect to the issuance of such
Class A Common;
(ix) The offering, sale and issuance of the Class A Common under the
Stock Purchase Agreement and the other securities issued by the Company at the
Closing do not require registration under the Securities Act or registration or
qualification under any state securities laws;
(x) The Capitalization Schedule attached to the Stock Purchase
Agreement correctly sets forth the number of shares of each class of the
Company's authorized capital stock and the number of outstanding shares of each
such class as of the Closing;
This opinion has been furnished to you in accordance with Paragraph 2K of
the Stock Purchase Agreement and may not be relied upon by any other person or
for any other purpose. This opinion is based on existing Delaware and federal
laws, rules and regulations.
We express no opinion as to laws, rules or regulations other than these.
This opinion is limited to those matters expressly stated and no opinion shall
be inferred or applied beyond such matters.
BISCHOFF, KENNEY & NIEHAUS
By: /s/ Charles D. Niehaus
---------------------------------
Charles D. Niehaus
<PAGE>
[Letterhead of Bischoff, Kenney & Niehaus]
November 27, 1996
Battery Ventures III, L.P.
20 William Street, Suite 200
Wellesley, Massachusetts 02181
Gentlemen:
We are counsel to Focal Communications Corporation (the "Company") in
connection with a transaction whereby the capital structure of the Company will
be recapitalized, the Restated Certificate of Incorporation will be amended and
new shareholders will be issued certain classes of Common Stock, all pursuant to
agreements dated herewith by and among all or some Focal Communications
Corporation, Madison Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
Battery Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph A. Beatty,
and Robert C. Taylor, Jr. and described as follows: Stock Purchase Agreement,
Executive Stock Agreement and Employment Agreement, Stockholders Agreement,
Registration Agreement, and Vesting Agreements (hereinafter all commonly
referred to as the "Agreements" and the transaction hereinafter commonly
referred to as the "Transaction"). This opinion is being delivered to you
pursuant to Paragraph 2K of the Stock Purchase Agreement.
For purposes of this opinion, we have examined the corporate records of the
Company, including but not limited to the Certificate of Incorporation, the
Restated Certificate of Incorporation, the Bylaws in effect prior to the date
hereof and the Bylaws adopted as of the date hereof, the Resolutions of
Shareholders and the Board of Directors, and such other documents as we have
deemed necessary under the circumstances. In making our examination, we have
assumed the genuineness of the signatures on all original documents, and the
conformity to original documents of all copies submitted to us as facsimile,
photostatic or conformed copies. We have assumed that the amended and Restated
Certificate of Incorporation, which shall be filed as of the date herewith,
shall be accepted and duly recorded by the Secretary of State of Delaware as of
the date hereof. As to various questions of fact material to our opinion, we
have relied upon statements or certificates of officers or representatives of
the Company and others. As to various questions of fact and law material to our
opinion, we have relied upon statements or certificates of public officials.
Based upon and subject to the foregoing, it is our opinion that:
(i) The Company has been duly incorporated and organized, and is validly
existing and in good standing, under the laws of the State of Delaware, and the
Company has all necessary corporate power and authority and all material
licenses, permits and authorizations necessary to own its properties in the
locations presently owned and to conduct its business in the manner and in the
locations now conducted;
<PAGE>
Battery Ventures III, L.P.
20 William Street, Suite 200
Wellesley, Massachusetts 02181
Page 2
(ii) The Company has all necessary corporate power and authority to
execute, deliver and perform its obligations under the Agreements;
(iii) The Interconnection Agreement and the Agreements have been duly
authorized, executed and delivered by the Company, and each Agreement is a valid
and binding obligation of the Company, enforceable in accordance with its terms;
(iv) The execution and delivery by the Company of the Agreements, the
offering, sale and issuance of the Class A Common, and the fulfillment of and
the compliance with the respective terms thereof by the Company do not and shall
not (A) conflict with or result in a breach of the terms, conditions or
provisions of, (B) constitute a default under, (C) result in the creation of any
lien, mortgage, security interest, charge or other encumbrance upon the
Company's capital stock or assets pursuant to, (D) give any third party the
right to accelerate any obligation under, (E) result in a violation of, or (F)
require any authorization, consent, approval, exemption or other action by or
notice to any court or administrative or governmental body pursuant to, the
Company's Restated Certificate of Incorporation, the Company's Bylaws, any law,
statute, rule or regulation to which the Company is subject, or any material
agreement, indenture, instrument, order, judgment or decree to which the Company
is subject;
(v) Brian F. Addy, John R. Barnicle, Joseph A. Beatty, and Robert C.
Taylor, Jr., have each executed and delivered an Executive Stock Agreement and
Employment Agreement and the Stockholders Agreement, and each such agreement is
a valid and binding obligation of each such person, enforceable in accordance
with its terms;
(vi) In November, 1996, the Illinois Commerce Commission certified the
Company to provide facilities-based and resold, switched and dedicated, local
exchange services in those portions of MSA-1 served by Ameritech and Centel, and
interexchange services throughout Illinois:
(1) such certification has not been conditioned, restricted,
withdrawn, and is not presently under challenge;
(2) the Company has filed all statements and reports, obtained all
consents, licenses, and approvals, and taken all other material actions
required by the ICC, FCC, or other laws or regulations, necessary to
maintain such certification and to provide such services in the Chicago
MSA;
(3) neither the Company's entering into the Stock Purchase Agreement
or any of the other agreements of even date therewith to which the Company
is party, nor the
<PAGE>
Battery Ventures III, L.P.
20 William Street, Suite 200
Wellesley, Massachusetts 02181
Page 3
transactions contemplated by such agreements, will result in the
conditioning, restriction, or withdrawal of such certification;
(vii) The restatement to the Company's Certificate of Incorporation
containing the provisions set forth in Exhibit 2 to the Stock Purchase Agreement
has been duly adopted by the Company, has been duly filed with the Secretary of
State of Delaware, has become effective under the laws of Delaware and
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms;
(viii) The certificates representing the Class A Common purchased at the
Closing have been duly authorized, executed and delivered by the Company, such
Class A Common has been validly issued and is outstanding, fully paid and
nonassessable, and there are no statutory, or contractual, preemptive rights of
stockholders or rights of first refusal with respect to the issuance of such
Class A Common;
(ix) The offering, sale and issuance of the Class A Common under the
Stock Purchase Agreement and the other securities issued by the Company at the
Closing do not require registration under the Securities Act or registration or
qualification under any state securities laws;
(x) The Capitalization Schedule attached to the Stock Purchase Agreement
correctly sets forth the number of shares of each class of the Company's
authorized capital stock and the number of outstanding shares of each such class
as of the Closing;
This opinion has been furnished to you in accordance with Paragraph 2K of
the Stock Purchase Agreement and may not be relied upon by any other person or
for any other purpose. This opinion is based on existing Delaware and federal
laws, rules and regulations.
We express no opinion as to laws, rules or regulations other than these.
This opinion is limited to those matters expressly stated and no opinion shall
be inferred or applied beyond such matters.
BISCHOFF, KENNEY & NIEHAUS
By: /s/ Charles D. Niehaus
-----------------------------------
Charles D. Niehaus
<PAGE>
[Letterhead of Bischoff, Kenney & Niehaus]
November 27, 1996
Brian F. Addy
Focal Communications Corporation
300 West Washington Street, Suite 1408
Chicago, Illinois 60601
Gentlemen:
We are counsel to Focal Communications Corporation (the "Company") in
connection with a transaction whereby the capital structure of the Company will
be recapitalized, the Restated Certificate of Incorporation will be amended and
new shareholders will be issued certain classes of Common Stock, all pursuant to
agreements dated herewith by and among all or some Focal Communications
Corporation, Madison Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
Battery Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph A. Beatty,
and Robert C. Taylor, Jr. and described as follows: Stock Purchase Agreement,
Executive Stock Agreement and Employment Agreement, Stockholders Agreement,
Registration Agreement, and Vesting Agreements (hereinafter all commonly
referred to as the "Agreements" and the transaction hereinafter commonly
referred to as the "Transaction"). This opinion is being delivered to you
pursuant to Paragraph 2K of the Stock Purchase Agreement.
For purposes of this opinion, we have examined the corporate records of the
Company, including but not limited to the Certificate of Incorporation, the
Restated Certificate of Incorporation, the Bylaws in effect prior to the date
hereof and the Bylaws adopted as of the date hereof, the Resolutions of
Shareholders and the Board of Directors, and such other documents as we have
deemed necessary under the circumstances. In making our examination, we have
assumed the genuineness of the signatures on all original documents, and the
conformity to original documents of all copies submitted to us as facsimile,
photostatic or conformed copies. We have assumed that the amended and Restated
Certificate of Incorporation, which shall be filed as of the date herewith,
shall be accepted and duly recorded by the Secretary of State of Delaware as of
the date hereof. As to various questions of fact material to our opinion, we
have relied upon statements or certificates of officers or representatives of
the Company and others. As to various questions of fact and law material to our
opinion, we have relied upon statements or certificates of public officials.
Based upon and subject to the foregoing, it is our opinion that:
(i) The Company has been duly incorporated and organized, and is
validly existing and in good standing, under the laws of the State of Delaware,
and the Company has all necessary corporate power and authority and all material
licenses, permits and authorizations necessary to own its properties in the
locations presently owned and to conduct its business in the manner and in the
locations now conducted;
<PAGE>
Brian F. Addy
Focal Communications Corporation
Page 2
(ii) The Company has all necessary corporate power and authority to
execute, deliver and perform its obligations under the Agreements;
(iii) The Interconnection Agreement and the Agreements have been duly
authorized, executed and delivered by the Company, and each Agreement is a valid
and binding obligation of the Company, enforceable in accordance with its terms;
(iv) The execution and delivery by the Company of the Agreements, the
offering, sale and issuance of the Class A Common, and the fulfillment of and
the compliance with the respective terms thereof by the Company do not and shall
not (A) conflict with or result in a breach of the terms, conditions or
provisions of, (B) constitute a default under, (C) result in the creation of any
lien, mortgage, security interest, charge or other encumbrance upon the
Company's capital stock or assets pursuant to, (D) give any third party the
right to accelerate any obligation under, (E) result in a violation of, or (F)
require any authorization, consent, approval, exemption or other action by or
notice to any court or administrative or governmental body pursuant to, the
Company's Restated Certificate of Incorporation, the Company's Bylaws, any law,
statute, rule or regulation to which the Company is subject, or any material
agreement, indenture, instrument, order, judgment or decree to which the Company
is subject;
(v) Brian F. Addy, John R. Barnicle, Joseph A. Beatty, and Robert C.
Taylor, Jr., have each executed and delivered an Executive Stock Agreement and
Employment Agreement and the Stockholders Agreement, and each such agreement is
a valid and binding obligation of each such person, enforceable in accordance
with its terms;
(vi) In November, 1996, the Illinois Commerce Commission certified the
Company to provide facilities-based and resold, switched and dedicated, local
exchange services in those portions of MSA-1 served by Ameritech and Centel, and
interexchange services throughout Illinois:
(1) such certification has not been conditioned, restricted,
withdrawn, and is not presently under challenge;
(2) the Company has filed all statements and reports, obtained all
consents, licenses, and approvals, and taken all other material actions
required by the ICC, FCC, or other laws or regulations, necessary to
maintain such certification and to provide such services in the Chicago
MSA;
(3) neither the Company's entering into the Stock Purchase Agreement
or any of the other agreements of even date therewith to which the Company
is party, nor the transactions contemplated by such agreements, will result
in the conditioning, restriction, or withdrawal of such certification;
<PAGE>
Brian F. Addy
Focal Communications Corporation
Page 3
(vii) The restatement to the Company's Certificate of Incorporation
containing the provisions set forth in Exhibit 2 to the Stock Purchase Agreement
has been duly adopted by the Company, has been duly filed with the Secretary of
State of Delaware, has become effective under the laws of Delaware and
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms;
(viii) The certificates representing the Class A Common purchased at the
Closing have been duly authorized, executed and delivered by the Company, such
Class A Common has been validly issued and is outstanding, fully paid and
nonassessable, and there are no statutory, or contractual, preemptive rights of
stockholders or rights of first refusal with respect to the issuance of such
Class A Common;
(ix) The offering, sale and issuance of the Class A Common under the Stock
Purchase Agreement and the other securities issued by the Company at the Closing
do not require registration under the Securities Act or registration or
qualification under any state securities laws;
(x) The Capitalization Schedule attached to the Stock Purchase Agreement
correctly sets forth the number of shares of each class of the Company's
authorized capital stock and the number of outstanding shares of each such class
as of the Closing;
This opinion has been furnished to you in accordance with Paragraph 2K of
the Stock Purchase Agreement and may not be relied upon by any other person or
for any other purpose. This opinion is based on existing Delaware and federal
laws, rules and regulations.
We express no opinion as to laws, rules or regulations other than these.
This opinion is limited to those matters expressly stated and no opinion shall
be inferred or applied beyond such matters.
BISCHOFF, KENNEY & NIEHAUS
By: /s/ Charles D. Niehaus
----------------------------------------------------
Charles D. Niehaus
<PAGE>
[Letterhead of Bischoff, Kenney & Niehaus]
November 27, 1996
John Barnicle, Executive Vice President
Focal Communications Corporation
300 West Washington, Suite 1408
Chicago, Illinois 60601
Gentlemen:
We are counsel to Focal Communications Corporation (the "Company") in
connection with a transaction whereby the capital structure of the Company will
be recapitalized, the Restated Certificate of Incorporation will be amended and
new shareholders will be issued certain classes of Common Stock, all pursuant to
agreements dated herewith by and among all or some Focal Communications
Corporation, Madison Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
Battery Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph A. Beatty,
and Robert C. Taylor, Jr. and described as follows: Stock Purchase Agreement,
Executive Stock Agreement and Employment Agreement, Stockholders Agreement,
Registration Agreement, and Vesting Agreements (hereinafter all commonly
referred to as the "Agreements" and the transaction hereinafter commonly
referred to as the "Transaction"). This opinion is being delivered to you
pursuant to Paragraph 2K of the Stock Purchase Agreement.
For purposes of this opinion, we have examined the corporate records of the
Company, including but not limited to the Certificate of Incorporation, the
Restated Certificate of Incorporation, the Bylaws in effect prior to the date
hereof and the Bylaws adopted as of the date hereof, the Resolutions of
Shareholders and the Board of Directors, and such other documents as we have
deemed necessary under the circumstances. In making our examination, we have
assumed the genuineness of the signatures on all original documents, and the
conformity to original documents of all copies submitted to us as facsimile,
photostatic or conformed copies. We have assumed that the amended and Restated
Certificate of Incorporation, which shall be filed as of the date herewith,
shall be accepted and duly recorded by the Secretary of State of Delaware as of
the date hereof. As to various questions of fact material to our opinion, we
have relied upon statements or certificates of officers or representatives of
the Company and others. As to various questions of fact and law material to our
opinion, we have relied upon statements or certificates of public officials.
Based upon and subject to the foregoing, it is our opinion that:
(i) The Company has been duly incorporated and organized, and is validly
existing and in good standing, under the laws of the State of Delaware, and the
Company has all necessary corporate power and authority and all material
licenses, permits and authorizations necessary to own its properties in the
locations presently owned and to conduct its business in the manner and in the
locations now conducted;
<PAGE>
John Barnicle, Executive Vice President
Focal Communications Corporation
Page 2
(ii) The Company has all necessary corporate power and authority to
execute, deliver and perform its obligations under the Agreements;
(iii) The Interconnection Agreement and the Agreements have been duly
authorized, executed and delivered by the Company, and each Agreement is a valid
and binding obligation of the Company, enforceable in accordance with its terms;
(iv) The execution and delivery by the Company of the Agreements, the
offering, sale and issuance of the Class A Common, and the fulfillment of and
the compliance with the respective terms thereof by the Company do not and shall
not (A) conflict with or result in a breach of the terms, conditions or
provisions of, (B) constitute a default under, (C) result in the creation of any
lien, mortgage, security interest, charge or other encumbrance upon the
Company's capital stock or assets pursuant to, (D) give any third party the
right to accelerate any obligation under, (E) result in a violation of, or (F)
require any authorization, consent, approval, exemption or other action by or
notice to any court or administrative or governmental body pursuant to, the
Company's Restated Certificate of Incorporation, the Company's Bylaws, any law,
statute, rule or regulation to which the Company is subject, or any material
agreement, indenture, instrument, order, judgment or decree to which the Company
is subject;
(v) Brian F. Addy, John R. Barnicle, Joseph A. Beatty, and Robert C.
Taylor, Jr., have each executed and delivered an Executive Stock Agreement and
Employment Agreement and the Stockholders Agreement, and each such agreement is
a valid and binding obligation of each such person, enforceable in accordance
with its terms;
(vi) In November, 1996, the Illinois Commerce Commission certified the
Company to provide facilities-based and resold, switched and dedicated, local
exchange services in those portions of MSA-1 served by Ameritech and Centel, and
interexchange services throughout Illinois:
(1) such certification has not been conditioned, restricted,
withdrawn, and is not presently under challenge;
(2) the Company has filed all statements and reports, obtained all
consents, licenses, and approvals, and taken all other material actions
required by the ICC, FCC, or other laws or regulations, necessary to
maintain such certification and to provide such services in the Chicago
MSA;
(3) neither the Company's entering into the Stock Purchase Agreement
or any of the other agreements of even date therewith to which the Company
is party, nor the transactions contemplated by such agreements, will result
in the conditioning, restriction, or withdrawal of such certification;
<PAGE>
John Barnicle, Executive Vice President
Focal Communications Corporation
Page 3
(vii) The restatement to the Company's Certificate of Incorporation
containing the provisions set forth in Exhibit 2 to the Stock Purchase Agreement
has been duly adopted by the Company, has been duly filed with the Secretary of
State of Delaware, has become effective under the laws of Delaware and
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms;
(viii) The certificates representing the Class A Common purchased at the
Closing have been duly authorized, executed and delivered by the Company, such
Class A Common has been validly issued and is outstanding, fully paid and
nonassessable, and there are no statutory, or contractual, preemptive rights of
stockholders or rights of first refusal with respect to the issuance of such
Class A Common;
(ix) The offering, sale and issuance of the Class A Common under the Stock
Purchase Agreement and the other securities issued by the Company at the Closing
do not require registration under the Securities Act or registration or
qualification under any state securities laws;
(x) The Capitalization Schedule attached to the Stock Purchase Agreement
correctly sets forth the number of shares of each class of the Company's
authorized capital stock and the number of outstanding shares of each such class
as of the Closing;
This opinion has been furnished to you in accordance with Paragraph 2K of
the Stock Purchase Agreement and may not be relied upon by any other person or
for any other purpose. This opinion is based on existing Delaware and federal
laws, rules and regulations.
We express no opinion as to laws, rules or regulations other than these.
This opinion is limited to those matters expressly stated and no opinion shall
be inferred or applied beyond such matters.
BISCHOFF, KENNEY & NIEHAUS
By: /s/ Charles D. Niehaus
----------------------------------------------------
Charles D. Niehaus
<PAGE>
[Letterhead of Bischoff, Kenney & Niehaus]
November 27, 1996
Robert C. Taylor, Jr., President
Focal Communications Corporation
300 West Washington Street, Suite 1408
Chicago, Illinois 60601
Gentlemen:
We are counsel to Focal Communications Corporation (the "Company") in
connection with a transaction whereby the capital structure of the Company will
be recapitalized, the Restated Certificate of Incorporation will be amended and
new shareholders will be issued certain classes of Common Stock, all pursuant to
agreements dated herewith by and among all or some Focal Communications
Corporation, Madison Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
Battery Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph A. Beatty,
and Robert C. Taylor, Jr. and described as follows: Stock Purchase Agreement,
Executive Stock Agreement and Employment Agreement, Stockholders Agreement,
Registration Agreement, and Vesting Agreements (hereinafter all commonly
referred to as the "Agreements" and the transaction hereinafter commonly
referred to as the "Transaction"). This opinion is being delivered to you
pursuant to Paragraph 2K of the Stock Purchase Agreement.
For purposes of this opinion, we have examined the corporate records of the
Company, including but not limited to the Certificate of Incorporation, the
Restated Certificate of Incorporation, the Bylaws in effect prior to the date
hereof and the Bylaws adopted as of the date hereof, the Resolutions of
Shareholders and the Board of Directors, and such other documents as we have
deemed necessary under the circumstances. In making our examination, we have
assumed the genuineness of the signatures on all original documents, and the
conformity to original documents of all copies submitted to us as facsimile,
photostatic or conformed copies. We have assumed that the amended and Restated
Certificate of Incorporation, which shall be filed as of the date herewith,
shall be accepted and duly recorded by the Secretary of State of Delaware as of
the date hereof. As to various questions of fact material to our opinion, we
have relied upon statements or certificates of officers or representatives of
the Company and others. As to various questions of fact and law material to our
opinion, we have relied upon statements or certificates of public officials.
Based upon and subject to the foregoing, it is our opinion that:
(i) The Company has been duly incorporated and organized, and is
validly existing and in good standing, under the laws of the State of Delaware,
and the Company has all necessary corporate power and authority and all material
licenses, permits and authorizations necessary to own its properties in the
locations presently owned and to conduct its business in the manner and in the
locations now conducted;
<PAGE>
Robert C. Taylor, Jr., President
Focal Communications Corporation
Page 2
(ii) The Company has all necessary corporate power and authority to
execute, deliver and perform its obligations under the Agreements;
(iii) The Interconnection Agreement and the Agreements have been duly
authorized, executed and delivered by the Company, and each Agreement is a valid
and binding obligation of the Company, enforceable in accordance with its terms;
(iv) The execution and delivery by the Company of the Agreements, the
offering, sale and issuance of the Class A Common, and the fulfillment of and
the compliance with the respective terms thereof by the Company do not and shall
not (A) conflict with or result in a breach of the terms, conditions or
provisions of, (B) constitute a default under, (C) result in the creation of any
lien, mortgage, security interest, charge or other encumbrance upon the
Company's capital stock or assets pursuant to, (D) give any third party the
right to accelerate any obligation under, (E) result in a violation of, or (F)
require any authorization, consent, approval, exemption or other action by or
notice to any court or administrative or governmental body pursuant to, the
Company's Restated Certificate of Incorporation, the Company's Bylaws, any law,
statute, rule or regulation to which the Company is subject, or any material
agreement, indenture, instrument, order, judgment or decree to which the Company
is subject;
(v) Brian F. Addy, John R. Barnicle, Joseph A. Beatty, and Robert C.
Taylor, Jr., have each executed and delivered an Executive Stock Agreement and
Employment Agreement and the Stockholders Agreement, and each such agreement is
a valid and binding obligation of each such person, enforceable in accordance
with its terms;
(vi) In November, 1996, the Illinois Commerce Commission certified the
Company to provide facilities-based and resold, switched and dedicated, local
exchange services in those portions of MSA-1 served by Ameritech and Centel, and
interexchange services throughout Illinois:
(1) such certification has not been conditioned, restricted,
withdrawn, and is not presently under challenge;
(2) the Company has filed all statements and reports, obtained all
consents, licenses, and approvals, and taken all other material actions
required by the ICC, FCC, or other laws or regulations, necessary to
maintain such certification and to provide such services in the Chicago
MSA;
(3) neither the Company's entering into the Stock Purchase Agreement
or any of the other agreements of even date therewith to which the Company
is party, nor the transactions contemplated by such agreements, will result
in the conditioning, restriction, or withdrawal of such certification;
<PAGE>
Robert C. Taylor, Jr., President
Focal Communications Corporation
Page 3
(vii) The restatement to the Company's Certificate of Incorporation
containing the provisions set forth in Exhibit 2 to the Stock Purchase Agreement
has been duly adopted by the Company, has been duly filed with the Secretary of
State of Delaware, has become effective under the laws of Delaware and
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms;
(viii) The certificates representing the Class A Common purchased at the
Closing have been duly authorized, executed and delivered by the Company, such
Class A Common has been validly issued and is outstanding, fully paid and
nonassessable, and there are no statutory, or contractual, preemptive rights of
stockholders or rights of first refusal with respect to the issuance of such
Class A Common;
(ix) The offering, sale and issuance of the Class A Common under the Stock
Purchase Agreement and the other securities issued by the Company at the Closing
do not require registration under the Securities Act or registration or
qualification under any state securities laws;
(x) The Capitalization Schedule attached to the Stock Purchase Agreement
correctly sets forth the number of shares of each class of the Company's
authorized capital stock and the number of outstanding shares of each such class
as of the Closing;
This opinion has been furnished to you in accordance with Paragraph 2K of
the Stock Purchase Agreement and may not be relied upon by any other person or
for any other purpose. This opinion is based on existing Delaware and federal
laws, rules and regulations.
We express no opinion as to laws, rules or regulations other than these.
This opinion is limited to those matters expressly stated and no opinion shall
be inferred or applied beyond such matters.
BISCHOFF, KENNEY & NIEHAUS
By: /s/ Charles D. Niehaus
----------------------------------------------------
Charles D. Niehaus
<PAGE>
[Letterhead of Bischoff, Kenney & Niehaus]
November 27, 1996
Joseph Beatty
Focal Communications Corporation
300 West Washington, Suite 1408
Chicago, Illinois 60601
Gentlemen:
We are counsel to Focal Communications Corporation (the "Company") in
connection with a transaction whereby the capital structure of the Company will
be recapitalized, the Restated Certificate of Incorporation will be amended and
new shareholders will be issued certain classes of Common Stock, all pursuant to
agreements dated herewith by and among all or some Focal Communications
Corporation, Madison Dearborn Capital Partners, L.P., Frontenac VI, L.P.,
Battery Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph A. Beatty,
and Robert C. Taylor, Jr. and described as follows: Stock Purchase Agreement,
Executive Stock Agreement and Employment Agreement, Stockholders Agreement,
Registration Agreement, and Vesting Agreements (hereinafter all commonly
referred to as the "Agreements" and the transaction hereinafter commonly
referred to as the "Transaction"). This opinion is being delivered to you
pursuant to Paragraph 2K of the Stock Purchase Agreement.
For purposes of this opinion, we have examined the corporate records of the
Company, including but not limited to the Certificate of Incorporation, the
Restated Certificate of Incorporation, the Bylaws in effect prior to the date
hereof and the Bylaws adopted as of the date hereof, the Resolutions of
Shareholders and the Board of Directors, and such other documents as we have
deemed necessary under the circumstances. In making our examination, we have
assumed the genuineness of the signatures on all original documents, and the
conformity to original documents of all copies submitted to us as facsimile,
photostatic or conformed copies. We have assumed that the amended and Restated
Certificate of Incorporation, which shall be filed as of the date herewith,
shall be accepted and duly recorded by the Secretary of State of Delaware as of
the date hereof. As to various questions of fact material to our opinion, we
have relied upon statements or certificates of officers or representatives of
the Company and others. As to various questions of fact and law material to our
opinion, we have relied upon statements or certificates of public officials.
Based upon and subject to the foregoing, it is our opinion that:
(i) The Company has been duly incorporated and organized, and is validly
existing and in good standing, under the laws of the State of Delaware, and the
Company has all necessary corporate power and authority and all material
licenses, permits and authorizations necessary to own its properties in the
locations presently owned and to conduct its business in the manner and in the
locations now conducted;
<PAGE>
Joseph Beatty
Focal Communications Corporation
Page 2
(ii) The Company has all necessary corporate power and authority to
execute, deliver and perform its obligations under the Agreements;
(iii) The Interconnection Agreement and the Agreements have been duly
authorized, executed and delivered by the Company, and each Agreement is a valid
and binding obligation of the Company, enforceable in accordance with its terms;
(iv) The execution and delivery by the Company of the Agreements, the
offering, sale and issuance of the Class A Common, and the fulfillment of and
the compliance with the respective terms thereof by the Company do not and shall
not (A) conflict with or result in a breach of the terms, conditions or
provisions of, (B) constitute a default under, (C) result in the creation of any
lien, mortgage, security interest, charge or other encumbrance upon the
Company's capital stock or assets pursuant to, (D) give any third party the
right to accelerate any obligation under, (E) result in a violation of, or (F)
require any authorization, consent, approval, exemption or other action by or
notice to any court or administrative or governmental body pursuant to, the
Company's Restated Certificate of Incorporation, the Company's Bylaws, any law,
statute, rule or regulation to which the Company is subject, or any material
agreement, indenture, instrument, order, judgment or decree to which the Company
is subject;
(v) Brian F. Addy, John R. Barnicle, Joseph A. Beatty, and Robert C.
Taylor, Jr., have each executed and delivered an Executive Stock Agreement and
Employment Agreement and the Stockholders Agreement, and each such agreement is
a valid and binding obligation of each such person, enforceable in accordance
with its terms;
(vi) In November, 1996, the Illinois Commerce Commission certified the
Company to provide facilities-based and resold, switched and dedicated, local
exchange services in those portions of MSA-1 served by Ameritech and Centel, and
interexchange services throughout Illinois:
(1) such certification has not been conditioned, restricted,
withdrawn, and is not presently under challenge;
(2) the Company has filed all statements and reports, obtained all
consents, licenses, and approvals, and taken all other material actions
required by the ICC, FCC, or other laws or regulations, necessary to
maintain such certification and to provide such services in the Chicago
MSA;
(3) neither the Company's entering into the Stock Purchase Agreement
or any of the other agreements of even date therewith to which the Company
is party, nor the transactions contemplated by such agreements, will result
in the conditioning, restriction, or withdrawal of such certification;
<PAGE>
Joseph Beatty
Focal Communications Corporation
Page 3
(vii) The restatement to the Company's Certificate of Incorporation
containing the provisions set forth in Exhibit 2 to the Stock Purchase Agreement
has been duly adopted by the Company, has been duly filed with the Secretary of
State of Delaware, has become effective under the laws of Delaware and
constitutes a valid and binding obligation of the Company, enforceable in
accordance with its terms;
(viii) The certificates representing the Class A Common purchased at the
Closing have been duly authorized, executed and delivered by the Company, such
Class A Common has been validly issued and is outstanding, fully paid and
nonassessable, and there are no statutory, or contractual, preemptive rights of
stockholders or rights of first refusal with respect to the issuance of such
Class A Common;
(ix) The offering, sale and issuance of the Class A Common under the Stock
Purchase Agreement and the other securities issued by the Company at the Closing
do not require registration under the Securities Act or registration or
qualification under any state securities laws;
(x) The Capitalization Schedule attached to the Stock Purchase Agreement
correctly sets forth the number of shares of each class of the Company's
authorized capital stock and the number of outstanding shares of each such class
as of the Closing;
This opinion has been furnished to you in accordance with Paragraph 2K of
the Stock Purchase Agreement and may not be relied upon by any other person or
for any other purpose. This opinion is based on existing Delaware and federal
laws, rules and regulations.
We express no opinion as to laws, rules or regulations other than these.
This opinion is limited to those matters expressly stated and no opinion shall
be inferred or applied beyond such matters.
BISCHOFF, KENNEY & NIEHAUS
By: /s/ Charles D. Niehaus
----------------------------------------------------
Charles D. Niehaus
<PAGE>
EXHIBIT 12 TO STOCK PURCHASE AGREEMENT
FORM OF OPINION FOR SUBSEQUENT CLOSINGS
---------------------------------------
It is our opinion that:
(i) The Company has been duly incorporated and organized, and is
validly existing and in good standing, under the laws of the State of
Delaware, and the Company has all necessary corporate power and authority
and all material licenses, permits and authorizations necessary to own its
properties in the locations presently owned and to conduct its business in
the manner and in the locations now conducted;
(ii) Each of the Interconnection Agreement, [other material
Interconnection Agreements], the Stock Purchase Agreement, the Registration
Agreement, the Stockholders Agreement, and the other agreements
contemplated by the Stock Purchase Agreement to which the Company and Brian
F. Addy, John R. Barnicle, Joseph A. Beatty, and Robert C. Taylor, Jr. is a
party has been duly authorized by such person and remains a valid and
binding obligation of such person, enforceable in accordance with its
terms;
(iii) In _____________, the __________ Commerce Commission certified
the Company to provide facilities-based and resold, switched and dedicated,
local exchange services in those portions of ________ served by ________,
and interexchange services throughout ________;
(1) such certification has not been conditioned, restricted,
withdrawn, and is not presently under challenge;
(2) the Company has filed all statements and reports,
obtained all consents, licenses, and approvals, and taken all other
material actions required by the _CC, FCC, or other laws or
regulations, necessary to maintain such certification and to provide
such services in the _______ MSA;
(3) neither the Company's entering into the Stock Purchase
Agreement or any of the other agreements of even date therewith to
which the Company is party, nor the transactions contemplated by such
agreements, will result in the conditioning, restriction, or
withdrawal of such certification;
(iv) The Capitalization Schedule attached to _______ correctly sets
forth the number of shares of each class of the Company's authorized
capital stock and the number of outstanding shares of each such class as of
the Closing;
This opinion has been furnished to you in accordance with Paragraph 3F of
the Stock Purchase Agreement and may not be relied upon by any other person or
for any other purpose. This opinion is based on existing Delaware and federal
laws, rules and regulations. We express no opinion
<PAGE>
as to laws, rules or regulations other than these. This opinion is limited to
those matters expressly stated and no opinion shall be inferred or applied
beyond such matters.
<PAGE>
EXHIBIT 13 TO THE STOCK PURCHASE AGREEMENT
CONFIDENTIALITY
---------------
AND
---
NONCOMPETITION AGREEMENT
------------------------
This Agreement ("Agreement") made this ___ day of ___________, 19__, by and
between Focal Communications Corporation, a Delaware corporation (the "Company")
and ___________, an individual resident of the State of ___________ (the "Key
Employee").
WHEREAS, the Key Employee is desirous of being in the Company's employment
as an at-will employee based upon the conditions set forth in this Agreement;
and
WHEREAS, the Key Employee will have access to and be entrusted with
confidential and proprietary information of the Company; and
WHEREAS, the Company wishes to employ the Key Employee as an at-will
employee, but is willing to do so only if the Key Employee agrees to be bound by
the terms of this Agreement, and, in further consideration of the Key Employee's
execution hereof, the Company will pay to the Key Employee the sum of $1,000.00
upon the execution of this Agreement.
NOW, THEREFORE, in consideration of being in the Company's employment as an
at-will employee, in that the employment may be terminated by the Key Employee
or the Company at any time, for any reason or no reason, with or without notice,
and in further consideration of the material covenants and agreements contained
herein, including the Company's payment to the Key Employee of $_______________
upon execution of this Agreement, the parties hereto, each intending to be
legally bound, covenant and agree as follows:
Section 1. At-will Employment. In consideration of being employed as an
--------- ------------------
at-will employee, in that the Key Employee or the Company can terminate
employment at any time, for any reason or no reason, with or without notice, the
employee agrees to the at-will employment condition as set forth herein, as well
as all conditions as are or may be from time to time promulgated by the Company.
<PAGE>
Section 2. Covenant not to Compete. Key Employee acknowledges and agrees
--------- -----------------------
that if, after the termination of his employment, he performs certain services
for any entity that is engaged in a similar business or entity competing with
the Company, that such any entity would obtain an unfair advantage over the
Company due to the knowledge and management information that the Key Employee
has gained by reason of his employment hereunder. Key Employee acknowledges and
agrees that the Company has a legitimate interest in being protected from the
Key Employee's employment by an entity that engages in a similar business or
competes with the Company. Key Employee hereby agrees to the following
restrictions (in addition to those contained in Sections 3, 4, 5 and 6): During
the term of his employment pursuant hereto and for a period of eighteen (18)
months after the termination of employment (the "Noncompetition Period"), the
Key Employee will not, directly or indirectly, (whether as sole proprietor,
partner or venturer, stockholder, director, officer, employee or consultant or
any other capacity as principal or agent or through any person, subsidiary or
employee acting as nominee or agent):
(a) Conduct or engage in or be interested or associated with any
person, firm, association, partnership, corporation, or other entity which
conducts or engages in a similar business or competes with the Company in any
geographic area where the Company is conducting business at the time of the
termination of the Key Employee's employment, or in any geographic area where
the Company has planned to conduct business and such Key Employee has knowledge
of such plan(s). (The Restricted Area);
(b) Take any action, directly or indirectly, to finance, guarantee,
or provide any other material assistance to any person, firm, association,
partnership, corporation, or other entity which conducts or engages in a similar
business or competes with the Company in the Restricted Area;
(c) Influence or attempt to influence any person, firm, association,
partnership, corporation, or other entity who is a contracting party with the
Company at any time during the Noncompetition Period to terminate any written or
oral agreement with the Company;
(d) Hire or attempt to hire for employment any person who is employed
by the Company or attempt to influence any such person to terminate employment
with the Company; or
(e) Call on, solicit, or take away as a client or customer or attempt
to call on, solicit or take away as a client or customer any person, firm,
association, partnership, corporation, or other entity that was a client or
customer of the Company, including actively sought prospective customers, with
whom the Key Employee had material contact during the term of his employment
that
<PAGE>
was serviced by or under the supervision of the Key Employee during the term of
such employment; provided, however, that nothing herein shall prohibit the Key
Employee from general advertising and marketing efforts not specifically
targeting such clients or customers of the Company.
This covenant shall apply and inure to the benefit of any assignee of the
Company. The restrictive provisions of this Agreement shall not prohibit Key
Employee from having an equity interest in the securities of any corporation
engaged in a similar business to that of the Company, which are listed on a
recognized securities exchange or traded in the over-the-counter market to the
extent that such interest does not exceed one percent (1%) of such corporation
or does not constitute control of such corporation.
Section 3. Confidential Information. Key Employee acknowledges and agrees
--------- ------------------------
that all nonpublic information concerning the Company's business relating,
without limitation, to (i) products or services, (ii) fees, costs and pricing
structures, (iii) designs, (iv) analysis, (v) drawings, photographs and reports,
(vi) computer software, including operating systems, applications and program
listings, (vii) flow charts, manuals and documentation, (viii) data basis, (ix)
accounting and business methods, (x) inventions, devices, new developments,
methods and processes, whether patentable or unpatentable and whether or not
reduced to practice, (xi) customers and clients and customer or client lists,
(xii) copyrightable works, (xiii) all technology and trade secrets (xiv)
business plans and financial models, and (xv) all similar and related
information in whatever form (collectively, the "Confidential Information") is
and shall remain the property of the Company. The Key Employee recognizes and
agrees that all of the Confidential Information, whether developed by Key
Employee or made available to Key Employee, other than information that is
generally known to the public, is a unique asset of the Company, the disclosure
of which would be damaging to the Company. Key Employee agrees that he will
not at any time during the term of his employment or for a period of eighteen
(18) months after the termination of employment, directly or indirectly,
disclose to any person any Confidential Information of the Company, other than
information that is already know to the public, except as may be required in the
ordinary course of business of the Company or as may be required by law.
Section 4. Property of the Company. Key Employee acknowledges that from
--------- -----------------------
time to time in the course of providing services pursuant to this Agreement, he
shall have the opportunity to inspect and use certain property, both tangible
and intangible, of the Company, including Confidential Information, and Key
Employee hereby agrees that such property shall remain the exclusive property of
the Company.
<PAGE>
Section 5. Intangible Assets. Key Employee shall never at any time have or
--------- ----------------
claim any right, title, or interest in any trade name, trademark, copyright,
patent, whether registered or unregistered, or other similar rights belonging to
or used by the Company and shall never have or claim rights, title, or interest
in any material matter of any sort prepared for or used in connection with the
business or promotion of the Company, whether produced, prepared, or published
in whole or in part by the Company.
Section 6. The Company Ownership of Intellectual Property.
--------- ----------------------------------------------
(a) Acknowledgment of Company Ownership. In the event that Key Employee,
-----------------------------------
as part of his activities on behalf of the Company, generates, authors or
contributes to any invention, design, new development, device, product, method
or process (whether or not patentable or reduced to practice or constituting
Confidential Information), any copyrightable work (whether or not constituting
Confidential Information) or any other form of Confidential Information relating
directly or indirectly to the Company's business as now or hereinafter conducted
(collectively, "Intellectual Property"), Key Employee acknowledges that such
Intellectual Property is the exclusive property of the Company and hereby
assigns all right, title and interest in and to such Intellectual Property to
the Company. Any copyrightable work prepared in whole or in part by Key
Employee will be deemed "a work made for hire" under Section 201(b) of the 1976
Copyright Act, and the Company shall own all of the rights comprised by the
copyright therein. Key Employee shall promptly and fully disclose all
Intellectual Property to the Company and shall cooperate with the Company to
protect the Company's interests in and rights to such Intellectual Property
(including, without limitation, providing reasonable assistance in securing
patent protection and copyright registrations and executing all documents as
reasonably requested by the Company, whether such requests occur prior to or
after termination of Key Employee's employment with the Company).
(b) Delivery of Materials Upon Termination of Employment. As requested
----------------------------------------------------
by the Company from time to time and upon the termination of Key Employee's
employment with the Company, Key Employee shall promptly deliver to the Company
all copies and embodiments, in whatever form, of all Confidential Information
and Intellectual Property in Key Employee's possession or within his control
(including, but not limited to, written records, notes, photographs, manuals,
notebooks, documentation, program listings, flow charts, magnetic media, disks,
diskettes, tapes and all other materials containing any Confidential Information
or Intellectual Property) irrespective of the
<PAGE>
location or form of such material and, if requested by the Company, shall
provide the Company with written confirmation that all such materials have been
delivered to the Company.
Section 7. Remedies. The parties hereby acknowledge and agree that the
--------- --------
services to be rendered by the Key Employee and the various rights granted to
the Key Employee hereunder are special, unique and of extraordinary character
which gives a peculiar value to the Company which is impossible of replacement
and for the loss of which the Company cannot reasonably or adequately be
compensated in damages, and Key Employee acknowledges and agrees that a breach
by him/her of this Agreement will cause the Company irreparable injury and
damage. Therefore, Key Employee expressly agrees that in the event of a breach
by the Key Employee of the provisions of Sections 2, 3, 4, 5 or 6 hereunder, the
Company shall be entitled to injunctive and other equitable relief to remedy
such breach of this Agreement, or any part thereof, and to secure its
enforcement, in addition to any other remedy to which the Company might be
entitled.
Section 8. Waiver. No delay or failure on the part of any party hereto in
--------- ------
exercising any right, power, or privilege under this Agreement or any other
documents furnished in connection with or pursuant to this Agreement shall
impair any such right, power, or privilege or be construed as a waiver of any
default or any acquiescence therein. No single or partial exercise of any such
right, power, or privilege shall preclude the further exercise of such right,
power, or privilege, or the exercise of any other right, power, or privilege.
No waiver shall be valid against any party hereto unless made in writing and
signed by the party against whom enforcement of such waiver is sought and then
only to the extent expressly specified therein.
Section 9. Governing Law. This Agreement, the rights and obligations of
--------- -------------
the parties hereto, and any claims or any disputes related hereto, shall be
governed by and construed in accordance with the laws of the State of _________.
Section 10. Binding Effects. Subject to any provisions hereof restricting
---------- ---------------
assignment, this Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors, heirs, executors,
administrators, legal representatives and assigns.
Section 11. Acknowledgment. The Key Employee has been provided a
---------- --------------
reasonable amount of time to have this document reviewed by legal counsel, has
been fully made aware of his rights, duties and obligations hereunder, or has
elected not to have such reviewed by counsel but fully understands the terms and
conditions of this Agreement and the ramifications of breaching this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement,
or have caused this Agreement to be duly executed on their behalf as of the day
and year first above written.
WITNESSES: FOCAL COMMUNICATIONS CORPORATION
By:
- ---------------------------------- ---------------------------------
Print Name:
- ---------------------------------- -------------------------
Print Title:
------------------------
KEY EMPLOYEE
By:
- ---------------------------------- ---------------------------------
- ----------------------------------
<PAGE>
DISCLOSURE SCHEDULES TO STOCK PURCHASE AGREEMENT
Licenses Schedule
Capitalization Schedule
Liabilities Schedule
Assets Schedule
Contracts Schedule
Intellectual Property Schedule
Litigation Schedule
Consents Schedule
Affiliated Transcations Schedule
<PAGE>
7A. LICENSES SCHEDULE
---------------------
1. Permit to conduct business in the city of Chicago.
<PAGE>
7B(i). CAPITALIZATION SCHEDULE
------------------------------
As of November 25, 1996, the Capital Stock of the Company is as follows:
Common Stock, no par
Authorized Shares 1,500
Outstanding Shares 1,500
As of the initial Closing and immediately thereafter, the capital stock of the
Company shall be as follows:
Class A Common, $.01 par value
Authorized Shares 80,000
Outstanding Shares 79,384.62
Class B Common, $.01 par value
Authorized Shares 20,000
Outstanding Shares 20,000
Class C Common, $.01 par value
Authorized Shares 15,000
Outstanding Shares 14,711.54
<PAGE>
7D. LIABILITIES
---------------
Prior to the Initial Closing, the Company has incurred the following expenses,
obligations or liabilities:
Liabilities:
Reed, Smith, Shaw & McClay $12,656.74
Swidler & Berlin $ 598.84
Kirkland & Ellis Unknown as of Closing
Skadden, Arps, Slate, Meagher & Flom Unknown as of Closing
Arthur Andersen L.P. Unknown as of Closing
Bischoff, Kenney & Niehaus Unknown as of Closing
<PAGE>
7E. ASSETS SCHEDULE
-------------------
General office materials and equipment, the value of which does not exceed
$1,000.00.
<PAGE>
7G. CONTRACTS SCHEDULE
----------------------
Prior to Initial Closing, the Company and/or any subsidiary is a party to or
bound by the following written and/or oral agreements:
1. Letter of Intent with Data Center Design and Development for design
and construction of central office space, November 18, 1996.
2. Letter of Intent with Northern Telecom, Inc. for procurement of one
DMS-500 central office switching system, October 9, 1996.
3. Letter of firm commitment with Northern Telecom, Inc. to purchase
minimum of six DMS-500 central office switching systems, October 9, 1996.
4. Interconnection Agreement with Ameritech Information Industry
Services, October 28, 1996.
5. Letter of Intent with Miglin-Beitler Management Corporation to lease
200 N. LaSalle for central office and general corporate office space, October
24, 1996.
6. Employee health insurance agreement with Brockford & Company,
August 1, 1996.
7. Enhanced 9-1-1 Service Agreement with Ameritech Infomation Industry
Services, October 28, 1996.
8. Directory Assistance Agreement with Ameritech Information Services,
October 28, 1996.
9. Switched Access Meet Point Billing Agreement with Ameritech
Information Industry Services, October 28, 1996.
<PAGE>
7H. INTELLECTUAL PROPERTY SCHEDULE
----------------------------------
(a) Patented or registered Intellectual Property Rights owned or used by the
Company or any Subsidiary:
NONE
(b) Pending patent applications for registration of other Intellectual
Property Rights filed by the Company or any Subsidiary:
(1) Federal application for service mark:
FOCAL COMMUNICATIONS CORPORATION
(2) Federal application for service mark:
FOCAL
(3) Federal application for service mark:
FOCAL AND DESIGN (Logo)
(c) Unregistered trade names and corporate names owned or used by the Company
or any Subsidiary:
NONE
(d) Unregistered trademarks and service marks:
(1) Slogan:
FOCUSED ON LOCAL COMMUNICATIONS
(2) Slogan:
FUNCTIONALLY EQUIVALENT, TECHNICALLY
SUPERIOR, LOW COST TELECOMMUNICATIONS
SERVICES
<PAGE>
7I. LITIGATION SCHEDULE
-----------------------
NO EXCEPTION
<PAGE>
7K. CONSENTS SCHEDULE
---------------------
SEE ALSO LICENSES SCHEDULE
-----------------
1. Permit to conduct business in the City of Chicago.
2. Building Permits as necessary from the City of Chicago.
3. Permits, if any, required from other jurisdictions upon implementation of
such Subsequent Business Plan(s) contemplated hereunder.
<PAGE>
7M. AFFILIATED TRANSACTIONS SCHEDULE
------------------------------------
NO EXCEPTION
<PAGE>
*Certain portions of this Exhibit have been omitted where indicated by an "*"
pursuant to a request for confidential treatment, and the omitted portions have
been separately filed with the Commission.
Exhibit 10.5
NETWORK PRODUCTS PURCHASE AGREEMENT
Northern Telecom Inc., a Delaware corporation having offices at 2350 Lakeside
Bvld., Richardson, TX, 75082 ("Nortel") and Focal Communications Corporation, a
Delaware corporation, having its principal offices and place of business at 300
W. Washington Street, Suite 1408, Chicago, IL 60606 ("Buyer") agree as follows:
1. SCOPE
1.1 Certain terms used in this Agreement shall be defined as set
forth in Exhibit A.
1.2 The terms and conditions of this Agreement shall apply to the
purchase by Buyer and the sale by Nortel of Equipment and
Services and the licensing of Software furnished in connection
with such Equipment. The terms and conditions contained in a
Product Attachment shall modify and/or supplement the other
terms and conditions of this Agreement, only with respect to
the Product Line and Services described in the Product
Attachment, subject to Section 18.6 herein.
1.3 All Products and Services obtained by Buyer pursuant to this
Agreement shall be obtained by Buyer solely for initial use by
Buyer in its internal business to provide services available
through its networks, and not as stock in trade or inventory
which is intended for resale by Buyer to any third party as
new and unused material. All such Products shall be installed
in the United States.
2. TERM
2.1 This Agreement shall be in effect during the period that any
Product Attachment is in effect. Each Product Attachment shall
be in effect during its Product Attachment Term. This
Agreement or any part thereof may be terminated in accordance
with the express provisions of this Agreement concerning
termination or by written agreement of the parties.
2.2 The termination of this Agreement or any part thereof shall
not affect the obligations of either party thereunder which
have not been fully performed with respect to any accepted
Order, unless such Order is expressly terminated in accordance
with this Agreement or by written agreement of the parties.
3. ORDERING
All purchases pursuant to this Agreement shall be made by means of
Orders issued from time to time by Buyer and accepted by Nortel in
writing within fifteen (15) days. Otherwise, any such Order shall be
deemed to be void. Should Nortel not accept an Order, Nortel shall
advise the Buyer in writing of the reason or reasons that the Order was
not accepted and shall
<PAGE>
provide the Buyer the opportunity to correct the Order so that it may
be accepted by Nortel. All Orders shall reference this Agreement and
the applicable Product Attachment and shall be governed solely by the
terms and conditions set forth herein as modified and/or supplemented
pursuant to Section 1.2 by the terms and conditions of any applicable
Product Attachments.
4. PRICES
4.1 The prices, charges, and fees applicable to Orders shall be
set forth in the appropriate Product Attachments and may be
revised in accordance with the provisions stated therein.
Buyer shall pay transportation charges, including insurance,
in accordance with the applicable Product Attachment.
4.2 Until the total of all prices, charges and fees for Products
and related Services furnished hereunder shall have been paid
to Nortel, Buyer shall cooperate with Nortel in perfecting
Nortel's purchase money security interest in such Products and
Buyer shall promptly execute all documents and take all
actions required by Nortel in connection therewith. Unless
otherwise agreed in writing Buyer shall not sell, lease or
otherwise transfer such Products or any portion thereof or
allow any liens or encumbrances to attach to such Products or
any portion thereof prior to payment in full to Nortel of the
total of all such prices, charges, and fees.
5. TERMS OF PAYMENT
5.1 The amounts payable for Products and/or Services may be
invoiced by Nortel to Buyer in accordance with the applicable
Product Attachments. All amounts payable and properly invoiced
pursuant to this Agreement shall be paid by Buyer to Nortel
within thirty (30) days from the date of Nortel's invoice in
accordance with the payment instructions contained in such
invoice.
5.2 Overdue payments, excluding those which are the subject of a
good faith dispute, shall be subject to interest charges,
calculated daily commencing on the 31st day after the date of
the invoice, at one and one half percent (11/2%) per month or
such lesser rate as may be the maximum permissible rate under
applicable law.
6. TAXES
Buyer shall at Nortel's direction promptly pay to Nortel or pay
directly to the applicable government or taxing authority, if requested
by Nortel, all taxes and charges, including, without limitation,
penalties and interest, which may be imposed by any federal, state, or
local governmental or taxing authority arising hereunder, such as, but
not limited to all such taxes and charges relating to the purchase,
license, ownership, possession, use, operation and/or relocation of any
Equipment, Software, or Services furnished by Seller pursuant to
2
<PAGE>
this Agreement, excluding, however, all taxes computed upon the net
income of Nortel. Buyer's obligations pursuant to this Section 6 shall
survive any termination of this Agreement.
7. RISK OF LOSS, TITLE
7.1 Risk of loss or damage to Products shall pass to Buyer upon
delivery to the loading dock at the installation site or other
delivery location specified by Buyer in its Order, and Buyer
shall keep such Products fully insured for the total amount
then due Nortel for such Products. Nortel shall bear the risk
of loss or damage to the Products if the loss or damages is
the result of Nortel's negligence or willful misconduct.
7.2 Good title to Equipment furnished hereunder which shall be
free and clear of all liens and encumbrances shall vest in
Buyer upon full payment by Buyer of the total prices, charges
and fees payable by Buyer for such Equipment and any related
Software or Services furnished by Nortel in connection with
such Equipment.
7.3 Buyer shall receive a license to use Software subject to the
terms set forth in Exhibit B.
8. TESTING, TURNOVER AND ACCEPTANCE
8.1 If Nortel installs any Products furnished hereunder, the
rights and obligations of the parties with respect to testing,
turnover and acceptance of such Products shall be as set forth
in the applicable Product Attachment.
8.2 If Nortel does not install Products furnished hereunder,
Nortel shall prior to delivery of the Products perform such
factory tests as Nortel determines to be appropriate in order
to confirm that such Products shall be in accordance with the
applicable Specifications. Buyer shall be deemed to have
accepted the Products upon completion of such tests.
8.3 In the event that Buyer places Products into
revenue-generating service, such Products shall be deemed to
have been accepted by Buyer without limitation or restriction.
8.4 Acceptance of the Products by Buyer shall not constitute a
waiver by Buyer of its rights under the Warranty provisions
set forth in Exhibit D of this Agreement.
9. DISCLAIMERS OF WARRANTIES AND REMEDIES
THE WARRANTIES AND REMEDIES SET FORTH IN EXHIBIT D AND IN ANY
PRODUCT ATTACHMENT CONSTITUTE THE ONLY WARRANTIES OF
3
<PAGE>
NORTEL WITH RESPECT TO THE PRODUCTS AND SERVICES AND BUYER'S
EXCLUSIVE REMEDIES IN THE EVENT SUCH WARRANTIES ARE
BREACHED. THEY ARE IN LIEU OF ALL OTHER WARRANTIES WRITTEN OR
ORAL. STATUTORY, EXPRESS OR IMPLIED. INCLUDING WITHOUT
LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE. NORTEL SHALL NOT BE LIABLE FOR ANY
INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY NATURE
WHATSOEVER. BEFORE OR AFTER THE PLACING OF ANY PRODUCT INTO
SERVICE.
10. LIABILITY FOR BODILY INJURY, PROPERTY DAMAGE AND PATENT
INFRINGEMENT
10.1 A party hereto shall defend the other party against any suit,
claim, or proceeding brought against the other party for
direct damages due to bodily injuries (including death) or
damage to tangible property which allegedly result from the
negligence or willful misconduct of the defending party in the
performance of this Agreement. The defending party shall pay
all litigation costs, reasonable attorney's fees, settlement
payments and such direct damages awarded or resulting from any
such suit, claim or proceeding.
10.2 Nortel shall defend Buyer against any suit, claim or
proceeding brought against Buyer alleging that any Products,
excluding Vendor Items, furnished hereunder infringe any
United States patent. Nortel shall pay all litigation costs,
reasonable attorney's fees, settlement payments and any
damages awarded or resulting from any such suit, claim or
proceeding. With respect to Vendor Items, Nortel shall assign
any rights with respect to infringement of U.S. patents
granted to Nortel by the supplier of such Vendor Items to the
extent of Nortel's right to do so.
10.3 The party entitled to defense pursuant to Section 10.1 or 10.2
shall promptly advise the party required to provide such
defense of the applicable suit, claim, or proceeding and shall
cooperate with such party in the defense or settlement
thereof. The party required to provide such defense shall have
sole control of the defense of the applicable suit, claim, or
proceeding and of all negotiations for its settlement or
compromise.
10.4 If an injunction is obtained against Buyer's use of any
Products as a result of any suit, claim, or proceeding
described in Section 10.2, Nortel shall at Nortel's option use
its reasonable efforts to either:
10.4.1 procure for Buyer the right to continue using the
portions of the Products enjoined from use; or
4
<PAGE>
10.4.2 within a reasonable time, replace or modify the same
with equivalent or better Products so that Buyer's
use is not subject to any such injunction.
10.5 If Nortel cannot perform under Section 10.4.1 or 10.4.2, Buyer
shall have the right to return the infringing Products to
Nortel upon written notice to Nortel, and in the event of such
return, neither party shall have any further liabilities or
obligations under this Agreement on account of such
infringement or return, except Nortel shall refund the
depreciated value of such Products carried on Buyer's books at
the time of such return, less any outstanding monies due
Nortel hereunder.
10.6 The obligations of Nortel hereunder with respect to any suit,
claim, or proceeding described in Section 10.2 shall not apply
with respect to Products which are (a) manufactured or
supplied by Nortel in accordance with any design or any
special instruction furnished by Buyer, (b) used by Buyer in a
manner or for a purpose not contemplated by this Agreement,
(c) located by Buyer outside the United States, or (d) used by
Buyer in combination with other products not provided by
Nortel, including, without limitation, any software developed
solely by Buyer through the permitted use of Products
furnished hereunder, provided the infringement arises from
such combination or the use thereof. Buyer shall indemnify and
hold Nortel harmless against any loss, cost, expense, damage,
settlement or other liability, including, but not limited to,
attorneys' fees, which may be incurred by Nortel with respect
to any suit, claim, or proceeding described in this Section
10.6.
10.7 Notwithstanding the above, Nortel shall have no obligation or
liability with regard to any patent infringement suit, claim,
or proceeding that may be made or brought against Buyer (i)
alleging that method of use claims in such patent are
infringed by any service offering and/or by any use by Buyer
of Products furnished hereunder to make such service offering
available or (ii) resulting in a settlement payment, or award
of damages, or accounting of profits, where such settlement,
award, or accounting is based on the revenues or profits
earned or other value obtained by Buyer from its use of such
Products and/or is based on the lost revenues or profits of
third parties arising from Buyer's use of such Products.
10.8 If Nortel determines that any Products are or may become the
subject of a suit, claim, or proceeding as described in
Section 10.7, Nortel may provide Buyer with notice to that
effect. Nortel shall have no liability to Buyer pursuant to
Section 10.2,10.4, or 10.5 with respect to Buyer's use of such
Products which occurs subsequent to such notice. In addition
to its obligations pursuant to Section 10.3, if Buyer becomes
aware that any Products may become the subject of any such
suit, claim, or proceeding before receiving any such notice
from Nortel, Buyer shall provide Nortel with notice to that
effect.
5
<PAGE>
10.9 After receipt of notice from Nortel pursuant to Section 10.8,
Buyer shall have the option to return to Nortel the applicable
Products identified in such notice and Nortel shall refund the
depreciated value (as carried on the books of Buyer) of the
returned Products to Buyer as more fully set forth in Section
10.5.
10.10 The provisions of Sections 10.2 through 10.9 state the entire
liability of Nortel and its suppliers and the exclusive remedy
of Buyer with respect to any suits, claims, or proceedings of
the nature described in Section 10.2.
10.11 Each party's respective obligations pursuant to this Section
shall survive any termination of this Agreement.
11. REMEDIES AND LIMITATION OF LIABILITY
11.1 Nortel shall have the right to suspend its performance by
written notice to Buyer and forthwith remove and take
possession of all Products that shall have been delivered to
Buyer, if, prior to payment to Nortel of any amounts due
pursuant to this Agreement with respect to such Products,
Buyer shall (a) become insolvent or bankrupt or cease, be
unable, or admit in writing its inability, to pay all debts as
they mature, or make a general assignment for the benefit of,
or enter into any arrangement with, creditors, (b) authorize,
apply for, or consent to the appointment of, a receiver,
trustee, or liquidator of all or a substantial part of its
assets or have proceedings seeking such appointment commenced
against it which are not terminated within ninety (90) days of
such commencement, or (c) file a voluntary petition under any
bankruptcy or insolvency law or under the reorganization or
arrangement provisions of the United States Bankruptcy Code or
any similar law of any jurisdiction or have proceedings under
any such law instituted against it which are not terminated
within ninety (90) days of such commencement.
11.2 In the event of any material breach of this Agreement which
shall continue for thirty (30) or more days after written
notice of such breach (including a reasonably detailed
statement of the nature of such breach) shall have been given
to the breaching party by the aggrieved party, the aggrieved
party shall be entitled at its option to avail itself of any
and all remedies available at law or equity, except as
otherwise provided in this Agreement.
11.3 Nothing contained in Section 11.2 or elsewhere in this
Agreement shall make Nortel liable for any incidental,
indirect, consequential or special damages of any nature
whatsoever for any breach of this Agreement whether the claims
for such damages arise in tort, contract, or otherwise, or
shall increase the liability of Nortel under Section 9 or 10
or Exhibit D beyond that prescribed therein.
6
<PAGE>
11.4 Nortel shall not be liable for any additional costs, expenses,
losses or damages resulting from errors, acts or omissions of
Buyer, including, but not limited to, inaccuracy,
incompleteness or untimeliness in the provision of information
by Buyer to Nortel or fulfillment by Buyer of any of its
obligations under this Agreement.
11.5 Any action for breach of this Agreement or to enforce any
right hereunder shall be commenced within two (2) years after
the cause of action accrues or it shall be deemed waived and
barred, except any action for nonpayment by Buyer of any
prices, charges, or fees payable hereunder may be brought by
Nortel at any time permitted by applicable law.
11.6 The limitations on Nortel's liability and other obligations
set forth in Sections 9,10, and 11 shall survive any
termination of this Agreement.
12. FORCE MAJEURE
If the performance by a party of any of its obligations under this
Agreement shall be interfered with by reason of any circumstances
beyond the reasonable control of that party, including without
limitation, unavailability of supplies or sources of energy, power
failure, breakdown of machinery, or labor difficulties, including
without limitation, strikes, slowdowns, picketing or boycotts, then
that party shall be excused from such performance for a period equal to
the delay resulting from the applicable circumstances and such
additional period as may be reasonably necessary to allow that party to
resume its performance. With respect to labor difficulties as described
above, a party shall not be obligated to accede to any demands being
made by employees or other personnel.
13. CONFIDENTIAL INFORMATION
13.1 Each party which receives the other party's Confidential
Information shall use reasonable care to hold such
Confidential Information in confidence and not disclose such
Confidential Information to anyone other than to its employees
and employees of its affiliates with a need to know. A party
that receives the other party's Confidential Information shall
not reproduce such Confidential Information, except to the
extent reasonably required for the performance of its
obligations pursuant to this Agreement and in connection with
any permitted use of such Confidential Information.
13.2 Buyer shall take reasonable care to use Nortel's Confidential
Information only for study, operating, or maintenance purposes
in connection with Buyer's use of Products furnished by Nortel
pursuant to this Agreement.
13.3 Nortel shall take reasonable care to use Buyer's Confidential
Information only to perform Nortel's obligations to provide
Products and/or Services to Buyer, provided
7
<PAGE>
Nortel may use any of Buyer's Confidential Information for the
development, manufacture, marketing and maintenance of new
products and/or services and/or changes or modifications to
the existing Products and/or Services, which Nortel may, in
either case, provide to third parties without restriction.
13.4 The obligations of either party pursuant to this Section 13
shall not extend to any Confidential Information which
recipient can demonstrate through written documentation was
already known to the recipient prior to its disclosure to the
recipient, was known or generally available to the public at
the time of disclosure to the recipient, becomes known or
generally available to the public (other than by act of the
recipient) subsequent to its disclosure to the recipient, is
disclosed or made available in writing to the recipient by a
third party having a bona fide right to do so, or is required
to be disclosed by process of law, provided that the recipient
shall notify the disclosing party promptly upon any request or
demand for such disclosure.
13.5 The parties' obligations pursuant to this Section 13 shall
survive any termination of this Agreement.
14. BUYER'S RESPONSIBILITIES
14.1 All sites at which the Products shall be delivered or
installed shall be prepared by Buyer in accordance with
Nortel's standards, including, without limitation,
environmental requirements.
14.2 Buyer shall provide Nortel-designated personnel access to the
Products during the times deemed necessary by Nortel to
install, maintain and service the Products in accordance with
Nortel's obligations. Nortel personnel shall comply with
Buyer's reasonable site and security regulations, provided
Nortel receives written notice of any such regulations
reasonably in advance of the arrival of Nortel's personnel at
the site.
14.3 Buyer shall provide reasonable working space and facilities,
including heat, light, ventilation, telephones, electrical
current, trash removal and other necessary utilities for use
by Nortel-designated maintenance personnel, and adequate
secure storage space, if required by Nortel, for Products and
materials. Buyer shall also provide adequate security for the
Products while on Buyer's site.
14.4 Buyer shall obtain all necessary governmental permits
applicable to Buyer in connection with the installation,
operation, and maintenance of Products furnished hereunder,
excluding any applicable permits required in the normal course
of Nortel's doing business.
8
<PAGE>
14.5 Any information which Nortel reasonably requests from Buyer
and which is necessary for Nortel to properly install or
maintain the Products shall be provided by Buyer to Nortel in
a timely fashion and in a form reasonably specified by Nortel.
15. HAZARDOUS MATERIALS
15.1 Prior to issuing any Order for Services to be performed at
Buyer's facilities, Buyer shall identify and notify Nortel in
writing of the existence of all Hazardous Materials which
Nortel may encounter during the performance of such Services,
including, without limitation, any Hazardous Materials
contained within any equipment to be removed by Nortel.
15.2 If Buyer breaches its obligations pursuant to Section 15.1,
(a) Nortel may discontinue the performance of the appropriate
Services until all the applicable Hazardous Materials have
been removed or abated to Nortel's satisfaction by Buyer at
Buyer's sole expense, and (b) Buyer shall defend, indemnify
and hold Nortel harmless from any and all damages, claims,
losses, liabilities and expenses, including, without
limitation, attorneys' fees, which arise out of Buyer's breach
of such obligations. Buyer's obligations pursuant to this
Section 15.2 shall survive any termination of this Agreement.
16. SUBCONTRACTING
Nortel may subcontract any of its obligations under this Agreement, but
no such subcontract shall relieve Nortel of primary responsibility for
performance of its obligations.
17. REGULATORY COMPLIANCE
In the event of any change in the Specifications or Nortel's
manufacturing or delivery processes for any Products as a result of the
imposition of requirements by any government, Nortel may upon notice to
Buyer, increase its prices, charges and fees to cover the added costs
and expenses directly incurred by Nortel as a result of such change.
18. GENERAL
18.1 If any of the provisions of this Agreement shall be invalid or
unenforceable under applicable law and a party deems such
provisions to be material, that party may terminate this
Agreement upon notice to the other party. Otherwise, such
invalidity or unenforceability shall not invalidate or render
this Agreement unenforceable, but this Agreement shall be
construed as if not containing the particular invalid or
unenforceable provision and the rights and obligations of the
parties shall be construed and enforced accordingly.
9
<PAGE>
18.2 A party shall not release without the prior written approval
of the other party any advertising or other publicity relating
to this Agreement wherein such other party may reasonably be
identified. In addition each party shall take reasonable
precautions to keep the existence and the contents of this
Agreement confidential so long as this Agreement remains in
effect *________________________________.
18.3 The construction, interpretation and performance of this
Agreement shall be governed by the laws of the State of North
Carolina, except for its rules with respect to the conflict of
laws.
18.4 Neither party may assign or transfer this Agreement or any of
its rights hereunder without the prior written consent of the
other party, such consent not to be unreasonably withheld,
except Buyer's consent shall not be required for any
assignment or transfer by Nortel (a) to any Affiliate of all
or any part of this Agreement or of Nortel's rights hereunder,
or (b) to any third party of Nortel's right to receive any
monies which may become due to Nortel pursuant to this
Agreement.
18.5 Notices and other communications shall be transmitted in
writing by certified United States Mail, postage prepaid,
return receipt requested, by guaranteed overnight delivery, or
by facsimile addressed to the parties as follows:
To Buyer: Focal Communications Corporation
300 W. Washington St. Suite 1408
Chicago, IL 60606
Attention: Executive Vice President
Facsimile: (312) 578-8403
To Nortel: Northern Telecom Inc.
2221 Lakeside Blvd.
Richardson,TX 75083
Attention: General Manager, Carrier
Networks Facsimile: (972) 684-8845
In addition, notices submitted by Buyer to Nortel specific to
any Product Attachment shall be delivered to the address
stated in the applicable Product Attachment along with a copy
submitted to Nortel at the address stated above.
Any notice or communication sent under this Agreement shall be
deemed given upon receipt, as evidenced by the United States
Postal Service return receipt Mail if given by certified
United States Mail, on the following business day if sent by
guaranteed overnight delivery, or on the transmission date if
given by facsimile during the receiving party's normal
business hours.
10
<PAGE>
The address information listed for a party in this Section or
any Product Attachment may be changed from time to time by
that party by giving notice to the other as provided above.
18.6 In the event of a conflict between the provisions of this
Agreement which are not contained in a Product Attachment and
the provisions of a Product Attachment, the provisions of the
Product Attachment shall prevail with respect to the Product
Line and Services described in that Product Attachment.
18.7 All headings used herein are for index and reference purposes
only, and shall not be given any substantive effect. This
Agreement has been created jointly by the parties, and no rule
of construction requiring interpretation against the drafter
of this Agreement shall apply in its interpretation.
18.8 Buyer shall not export any technical data received from Nortel
pursuant to this Agreement, or release any such technical data
with the knowledge or intent that such technical data will be
exported or transmitted to any country or to foreign nationals
of any country, except in accordance with applicable U.S. law
concerning the exporting of such technical data. Buyer shall
obtain all authorizations from the U.S. government in
accordance with applicable law prior to exporting or
transmitting any such technical data as described above.
18.9 Any changes to this Agreement may only be effected if agreed
upon in writing by duly authorized representatives of the
parties hereto. No agency, partnership, joint venture, or
other similar business relationship shall be or is created by
this Agreement.
11
<PAGE>
18.10 This Agreement, including all Product Attachments and Exhibits
constitutes the entire agreement of the parties with respect
to the subject matter hereof.
NORTHERN TELECOM INC. FOCAL COMMUNICATIONS
CORPORATION
By: /s/ Vickie Yohe By: /s/ John Barnicle
-------------------------------- -------------------------------
(Signature) (Signature)
Name: Vickie Yohe Name: John Barnicle
-------------------------------- ----------------------------
(Print) (Print)
Title: V.P. and General Manager Title: Executive Vice President
-------------------------------- ----------------------------
Date: January 21, 1997 Date: January 17, 1997
-------------------------------- ----------------------------
12
<PAGE>
EXHIBIT A
DEFINITIONS
As used in the Agreement (as defined below), the following initially capitalized
terms shall have the following meanings:
"Affiliate" shall mean Nortel's parent corporation, Northern Telecom Limited and
any corporation controlled directly or indirectly by Northern Telecom Limited
through the ownership or control of shares or other securities in such
corporation.
"Agreement" shall mean the Agreement to which this Exhibit is attached, and all
Exhibits and Product Attachments.
"Confidential Information" shall mean all information, including, without
limitation, specifications, drawings, documentation, know-how and pricing
information, of every kind or description which may be disclosed by either party
or an Affiliate to the other party in connection with this Agreement, provided
the disclosing party shall clearly mark any such information which is disclosed
in writing as the confidential property of the disclosing party and the
disclosing party shall identify the confidential nature of any such information
which it orally discloses at the time of such disclosure and shall provide a
written summary of the orally disclosed information to the recipient within
fifteen (15) days of such disclosure.
"Equipment" shall mean the hardware listed or otherwise identified in, or
pursuant to, any Product Attachment.
"Exhibits" shall mean Exhibits A, B, C, and D attached hereto, and any
additional Exhibits which Nortel and Buyer subsequently agree in writing shall
be incorporated into, and made a part of the Agreement by reference.
"Hazardous Materials" shall mean any pollutants or dangerous, toxic or hazardous
substances (including, without limitation, asbestos) as defined in, or pursuant
to, the OSHA Hazard Communication Standard (29 CFR Part 1910, Subpart Z), the
Resource Conservation and Recovery Act of 1976 (42 USC Section 6901, et seq.),
the Toxic Substances Control Act (15 USC Section 2601, et seq.), the
Comprehensive Environmental Response Compensation and Liability Act (42 USC
Section 9601, et seq.), and any other federal, state or local environmental law,
ordinance, rule or regulation.
"Order" shall mean a written purchase order issued by Buyer to Nortel. Each
Order shall specify on the face of the Order the types and quantities of
Products and/or Services to be furnished by Nortel pursuant to the Order, the
applicable prices, charges and/or fees with respect to such Products and/or
Services, Buyer's facility to which the Products are to be delivered, the
delivery and/or completion schedule, and any other information which may be
required to be included in an Order in accordance with the provisions of this
Agreement.
<PAGE>
"Product Attachments" shall mean any Product Attachments which the parties agree
in writing shall be incorporated into, and made a part of, this Agreement.
"Product Attachment Term" shall mean the period specified in a Product
Attachment during which that Product Attachment shall be in effect.
"Product Line" shall mean the Products described in and which may be furnished
pursuant to a specific Product Attachment.
"Products" shall mean any Equipment and/or Software which may be provided under
this Agreement.
"Services" shall mean all services listed or otherwise identified in, or
pursuant to, any Product Attachment which may be purchased from or provided by
Nortel and which are associated with the Product Line described in that Product
Attachment.
"Software" shall mean (a) programs in machine-readable code or firmware which
(i) are owned by, or licensed to, Nortel or any of its Affiliates, (ii) reside
in Equipment memories, tapes, disks or other media, and (iii) provide basic
logic operating instructions and user-related application instructions, and (b)
documentation associated with any such programs which may be furnished by Nortel
to Buyer from time to time.
"Specifications" shall mean, with respect to any Product Line, the
specifications identified in the applicable Product Attachment, provided Nortel
shall have the right at its sole discretion to modify, change or amend such
specifications at any time.
"Third Party Software Vendor" shall mean any supplier of programs contained in
the Software which is not an Affiliate.
"Vendor Items" shall mean, with respect to a Product Line, those portions of the
Product which are identified in the applicable Product Attachment as Vendor
Items.
"Warranty Period" shall mean, with respect to a Product Line, the Warranty
Period specified in the applicable Product Attachment.
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EXHIBIT B
SOFTWARE LICENSE
1. Buyer acknowledges that the Software may contain programs which have
been supplied by, and are proprietary to, Third Party Software Vendors.
In addition to the terms and conditions herein, Buyer shall abide by
any additional terms and conditions provided by Nortel to Buyer with
respect to any Software provided by any Third Party Software Vendor.
2. Upon Buyer's payment to Nortel of the applicable fees with respect to
any Software furnished to Buyer pursuant to this Agreement, Buyer shall
be granted a personal, non-exclusive, paid-up license to use the
version of the Software furnished to Buyer only in conjunction with
Buyer's use of the Equipment with respect to which such Software was
furnished for the life of that Equipment as it may be repaired or
modified. Buyer shall be granted no title or ownership rights to the
Software, which rights shall remain in Nortel or its suppliers.
3. As a condition precedent to this license and to the supply of Software
by Nortel pursuant to the Agreement, Nortel requires Buyer to give
proper assurances to Nortel for the protection of the Software.
Accordingly, all Software supplied by Nortel under or in implementation
of the Agreement shall be treated by Buyer as the exclusive property,
and as proprietary and a TRADE SECRET, of Nortel and/or its suppliers,
as appropriate, and Buyer shall: a) hold the Software, including,
without limitation, any methods or concepts utilized therein in
confidence for the benefit of Nortel and/or its suppliers, as
appropriate; b) not provide or make the Software available to any
person except to its employees on a 'need to know' basis; c) not
reproduce, copy, or modify the Software in whole or in part except as
authorized by Nortel; d) not attempt to decompile, reverse engineer,
disassemble, reverse translate, or in any other manner decode the
Software; e) issue adequate instructions to all persons, and take all
actions reasonably necessary to satisfy Buyer's obligations under this
license; and f) forthwith return to Nortel, or with Nortel's consent
destroy, any magnetic tape, disc, semiconductor device or other memory
device or system and/or documentation or other material, including, but
not limited to all printed material furnished by Nortel to Buyer which
shall be replaced, modified or updated.
4. The obligations of Buyer hereunder shall not extend to any information
or data relating to the Software which is now available to the general
public or becomes available by reason of acts or failures to act not
attributable to Buyer.
5. Buyer shall not assign this license or sublicense any rights herein
granted to any other party without Nortel's prior written consent.
6. Buyer shall indemnify and hold Nortel and its suppliers, as
appropriate, harmless from any loss or damage resulting from a breach
of this Exhibit B. The obligations of Buyer under this Exhibit B shall
survive the termination of the Agreement and shall continue if the
Software is removed from service.
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EXHIBIT C
STORAGE
If Buyer notifies Nortel prior to the scheduled shipment date of Products that
Buyer does not wish to receive such Products on the date agreed by the parties,
or the installation site or other delivery location is not prepared in
sufficient time for Nortel to make delivery in accordance with such date, or
Buyer fails to take delivery of any portion of such Products, Nortel may place
the applicable Products in storage. In that event Buyer shall be liable for all
additional costs thereby incurred by Nortel. Delivery by Nortel of any Products
to a storage location as provided above shall be deemed to constitute delivery
of the Products to Buyer for purposes of this Agreement, including, without
limitation, provisions for payment, invoicing, passage of risk of loss, and
commencement of the Warranty Period.
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EXHIBIT D
LIMITED WARRANTS AND REMEDIES
1. Nortel warrants that the Equipment supplied hereunder will under normal
use and service be free from defective material and faulty workmanship
and will conform to the applicable Specifications for the Warranty
Period specified in the Product Attachment with respect to such
Equipment. The foregoing warranty shall not apply to items normally
consumed in operation, such as, but not limited to, lamps and fuses or
to Vendor Items. Any installation Services performed by Nortel with
respect to such Equipment shall be free from defects in workmanship for
the Warranty Period set forth in the applicable Product Attachment.
2. Nortel's sole obligation and Buyer's exclusive remedy under the
warranty set forth in Section 1 above shall be limited to the
replacement or repair, at Nortel's option and expense, of the defective
Equipment, or correction of the defective installation Services.
Replacement Equipment may be new or reconditioned at Nortel's option.
3. Nortel warrants that any Software licensed by Nortel to Buyer under
this Agreement shall function during the Warranty Period of the
Equipment with respect to which such Software is furnished without any
material, service affecting nonconformance to the applicable
Specifications, provided that Buyer shall have paid all Software
support fees specified in the applicable Product Attachment. If the
Software fails to so function, Buyer's sole remedy and Nortel's sole
obligation under this warranty is for Nortel to correct such failure
through, at Nortel's option, the replacement or modification of the
Software or such other actions as Nortel reasonably determines to be
appropriate.
4. Unless otherwise stated in a Product Attachment, (a) Nortel's
warranties in Section 3 above shall only apply to the portion of the
Software actually developed by Nortel or its Affiliates, (b) all other
Software shall be provided by Nortel "AS IS", (c) Nortel shall assign
to Buyer on a nonexclusive basis any warranty on such other Software
provided to Nortel by the developer of such other Software to the
extent of Nortel's legal right to do so.
5. The obligations and remedies set forth in Sections 1, 2, and 3 above
shall be conditional upon: the Equipment not having been altered or
repaired, the Software not having been modified, and the Products not
having been installed outside the United States; any defect or
nonconformance not being the result of mishandling, abuse, misuse,
improper storage, improper performance of installation, other services,
maintenance or operation by other than Nortel (including use in
conjunction with any product which is incompatible with the applicable
Equipment or Software or of inferior performance), and/or any error,
act, or omission of Buyer described in Section 11.4; the Product not
having been damaged by fire, explosion, power failure, power surge, or
other power irregularity, lightning, failure to comply with all
applicable environmental requirements for the Products specified by
Nortel or any other applicable supplier, such as but not limited to
temperature or humidity ranges,
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or any act of God, nature or public enemy; and written notice of the
defect having been given to Nortel within the applicable Warranty
Period.
6. The performance by Nortel of any of its obligations described in
Section 2 or 3 of this Exhibit D shall not extend the applicable
Warranty Period except to the extent specified in the applicable
Product Attachment.
7. Upon expiration of the applicable Warranty Period for Equipment
furnished hereunder, repair and replacement Service for such Equipment
shall be available to Buyer from Nortel in accordance with Nortel's
then-current terms, conditions and prices. Such repair and replacement
Service and notice of any discontinuance of such repair and replacement
Service shall be available for a minimum period set forth in the
Product Attachment applicable to such Equipment. This provision shall
survive the expiration of this Agreement.
8. Unless Nortel elects to repair or replace defective Equipment at
Buyer's facility, all Equipment to be repaired or replaced, whether in
or out of warranty, shall be packed by Buyer in accordance with
Nortel's instructions stated in the applicable Product Attachment and
shipped at Buyer's expense and risk of loss to a location designated by
Nortel. Replacement Equipment shall be returned to Buyer at Nortel's
expense and risk of loss. Buyer shall ship the defective Equipment to
Nortel within thirty (30) days of receipt of the replacement Equipment.
In the event Nortel fails to receive such defective Equipment within
such thirty (30) day period, Nortel shall invoice Buyer for the
replacement Equipment at the then current price in effect therefor.
9. With respect to any Vendor Item furnished by Nortel to Buyer pursuant
to this Agreement, Nortel shall assign to Buyer on a nonexclusive basis
any warranty granted by the party that supplied such Vendor Item to
Nortel to the extent of Nortel's right to do so.
10. Neither Nortel nor Nortel's suppliers, as appropriate, shall have any
responsibility for warranties offered by Buyer to any of its customers.
Buyer shall indemnify Nortel and Nortel's suppliers, as appropriate,
with respect thereto.
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PRODUCT ATTACHMENT
CARRIER NETWORKS PRODUCTS
Northern Telecom Inc. ("Nortel") and Focal Communications Corporation ("Buyer")
agree as follows:
1. INCORPORATION BY REFERENCE
This Product Attachment shall be incorporated into and made a part of
Network Products Purchase Agreement No. JRD0197FCC between Nortel and
Buyer.
2. DEFINITIONS
For purposes of this Product Attachment:
"Acceptance Criteria" shall mean, with respect to any Products
installed by Nortel hereunder, the standards and specifications
contained in the Nortel Installation Manuals which are applicable to
such Products.
"Equipment" shall mean the equipment listed in Schedule A.
"Extension" shall mean Equipment and/or Software which Nortel engineers
and installs and which is added to an Initial System after the Turnover
Date of the Initial System.
"Initial System" shall mean the Equipment and Software which is
included in any configuration identified in Schedule A as an "Initial
System."
"Installation Site" shall mean Buyer's facility identified in an Order
to which the applicable Products identified in such Order shall be
delivered or at which the applicable Services, if any, are to be
performed, respectively.
"Merchandise" shall mean any Equipment which is not part of a System
and with respect to which no engineering or installation Services shall
be provided by Nortel.
"Product Attachment Term" shall mean the period which shall commence on
the date this Product Attachment is executed by the latter of the
parties and shall expire thirty six (36) months thereafter.
"Services" shall mean the services described in Schedule B.
"Software" shall mean the software listed in Schedule A.
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"Specifications" shall mean with respect to any Products furnished
hereunder, the specifications published by Nortel which Nortel
identifies as its standard performance specifications for such Products
as of the date of Buyer's Order for such Products.
"System" shall mean any Initial System or Extension.
"Turnover Date" shall mean, with respect to any Products installed by
Nortel hereunder, the date on which Nortel provides the Turnover Notice
to Buyer pursuant to Section 8.a. of this Product Attachment.
"Warranty Period" shall mean, with respect to:
(a) Any System, the period which shall commence upon the Turnover
Date with respect to such System and shall expire twelve (12)
months thereafter,
(b) Merchandise, the period which shall commence upon the date of
shipment with respect to such Merchandise by Nortel to Buyer
and shall expire ninety (90) days thereafter,
(c) Installation Services involving any System, the period which
shall commence upon the Turnover Date with respect to such
System and shall expire twelve (12) months thereafter,
(d) Equipment which is repaired or replaced pursuant to Nortel's
obligations under Exhibit D to the Agreement, the period
commencing five (5) days after (i) shipment of the replacement
Equipment to Buyer or (ii) completion of the repair at the
Installation Site of the applicable Equipment and which shall
expire on the later of ninety (90) days thereafter or the last
day of the original Warranty Period with respect to the
Equipment which was repaired or replaced, and
(e) Software which was corrected pursuant to Nortel's obligations
under Exhibit D to the Agreement, the period commencing upon
delivery of the corrected Software by Nortel to Buyer and
expiring on the later of ninety (90) days thereafter or the
last day of the original Warranty Period with respect to such
Software.
3. SCOPE
a. Buyer shall during the Product Attachment Term issue Orders for a
minimum of *_______ DMS-500 Initial Systems as described in Schedule A
for delivery and installation in Buyer's facilities designated by
Buyer. Buyer may during the Product Attachment Term issue Orders for
additional DMS-500 Initial Systems and Extensions as described in
Schedule A for delivery and installation in Buyer's facilities. Buyer
shall pay the prices, fees and charges set forth in Schedule A for the
Initial Systems and the Extensions in accordance with Section 7 of this
Product Attachment.
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b. During the Product Attachment Term Buyer shall purchase from Nortel
*_____________ "Class 4" and "Class 5" switches (as those terms are
used in the telecommunications industry), except that Buyer shall be
relieved of its obligation to purchase *______________ "Class 4" and
"Class 5" switches in the event the Buyer acquires a company through
a merger or acquisition and which, at the time of the merger or
acquisition, operates for "Class 4" and "Class 5" switches not
manufactured by Nortel.
c. In the event Nortel fails, through no fault other than its own, to
effect turnover of an Initial System within *___________________
following the date that Buyer approves in writing the floor plans
prepared by Nortel for installation of the applicable Initial System,
or the date that Buyer agrees in writing to the final hardware
configuration for the applicable Initial systems (that date being the
same date on which Buyer signs the completed Customer Information
("CI")), whichever occurs later, then Nortel shall pay Buyer, as
liquidated damages and not as a penalty, and as Buyer's sole and
exclusive remedy, the amount of *________________ per day for each day
that Turnover is delayed beyond such *_________________ day. In no
event shall Nortel's liability under this clause exceed *__________ for
each Initial System ordered by Buyer pursuant to Section 3a above.
4. SCHEDULES
The following Schedules which are attached hereto are an integral part
of the Product Attachment and are incorporated herein by reference:
Schedule A - Products, Prices, and Fees
Schedule B - Services and Charges
Schedule C - Delivery
Schedule D - Documentation
5. ORDERING
With respect to Section 3, ORDERING of the Agreement the following
additional terms shall apply:
a. Buyer shall identify in each Order for Products whether the Products
constitute an Initial System, Extension, or Merchandise. All Orders for
Merchandise and/or any Services other than engineering and installation
Services provided by Nortel in connection with an Order for an Initial
System and/or an Extension shall be subject to written agreement of
Buyer and Nortel on the applicable prices, charges and fees with
respect thereto as required pursuant to Section 6, PRICING, of this
Product Attachment.
b. Notwithstanding Exhibit C to the Agreement, Buyer may by written notice
to Nortel cancel without charge any Order for Products and/or Services
prior to the delivery date of the applicable Products set forth in such
Order or the agreed date for the commencement by Nortel of the
applicable Services ("Service Commencement Date"), except that if Buyer
cancels such Order within six (6) weeks or less of any such date, a
cancellation fee of *___________ of the aggregate price of all Products
and/or Services included in such cancelled Order shall be payable by
Buyer. Nortel may invoice such amount upon receipt of Buyer's notice of
cancellation of the Order.
c. Notwithstanding Exhibit C to the Agreement, Buyer may by written notice
to Nortel not less than six (6) weeks prior to the delivery date of any
Products set forth in an Order and/or the Service Commencement Date of
the applicable Services, delay the delivery date of such Products
and/or the Service Commencement Date of such Services for a period
which shall not exceed ninety (90) days from the date such Products
were originally scheduled to be delivered or ninety (90) days from the
Service Commencement Date, subject to the availability from Nortel of
the applicable Products and/or Services after such period of delay.
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d. Except as set forth in Sections 5.b. and 5.c. of this Product
Attachment, any change to an Order after Nortel's acceptance of such
Order shall require written agreement of Nortel and Buyer upon a
written change to the Order ("Change Order") which shall reference the
original Order and be executed by the parties. No such changes shall be
implemented until the applicable Change Order has been executed by the
parties.
e. With respect to each Order for Products which is accepted by Nortel,
Buyer may make a written request at least ninety (90) days prior to the
scheduled shipment date of such Products for a change ("Change")
consisting of certain addition(s) or deletion(s) to such Products.
After receipt of such request, Nortel shall submit a Job Change Order
("JCO") to Buyer for Buyer's approval with respect to the requested
Change. Each JCO shall state whether the requested Change shall
increase or decrease the Price and/or time required by Nortel for any
aspect of its performance under the Agreement with respect to such
Order. Buyer shall accept or reject the JCO in writing within ten (10)
days of receipt thereof. Failure of the Buyer to accept or reject the
JCO in writing as described above shall be deemed a rejection of the
JCO by Buyer. In the event an accepted JCO involves the return to
Nortel of any Equipment which shall have been previously delivered to
Buyer, Nortel may invoice and Buyer shall pay the transportation costs
and Nortel's then-current restocking charge for the returned Equipment,
such restocking charge shall not exceed *____________ of the list price
for the returned Equipment.
f. Any increase or decrease in the Price with respect to an Order
hereunder which is occasioned by an accepted JCO shall be added to or
subtracted from, as applicable, the amount of the last payment due
pursuant to Section 6 with respect to such Order.
g. If Buyer rejects a proposed JCO, then the rights and obligations of the
parties with respect to the applicable Order shall not be subject to
Buyer's requested Changes. Nortel shall be entitled to an extension of
the dates for performance of its obligations with respect to the
applicable Order as a result of any delays in such performance which
result from the foregoing.
6. PRICING
With respect to Section 4, PRICES of the Agreement, the following
additional terms shall apply:
a. The prices set forth in Schedule A with respect to any Initial System
and/or Extension shall be in effect for the Product Attachment Term.
The prices listed in Schedule A shall apply to any Order for an Initial
System and/or an Extension listed in Schedule A which shall be received
by Nortel during the Product Attachment Term, provided that the
delivery date for such Initial System and/or Extension as set forth in
the applicable Order shall be not more than one hundred twenty (120)
days after Nortel's acceptance of such Orders.
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b. The prices for Equipment, the fees for the right to use the Software,
prices for any Merchandise, and charges for any Services, other than
engineering and installation Services provided with any Initial System
and/or an Extension shall be as subsequently agreed in writing by
Nortel and Buyer.
c. Shipment of the Product shall be F. O. B. the Installation Site
7. TERMS OF PAYMENT
With respect to Section 5, TERMS OF PAYMENT, the following additional
terms shall apply:
a. With respect to each Initial System and/or Extension furnished
hereunder by Nortel to Buyer the price listed in Schedule A shall be
invoiced by Nortel in accordance with the following schedule:
(i) Twenty percent (20%) of such price may be invoiced upon
Nortel's acceptance of the Order for such Initial System
and/or Extension,
(ii) Fifty percent (50%) of such price may be invoiced on the date
of shipment by Nortel to Buyer of the switch component of such
Initial System and/or the Equipment of such Extension,
(iii) Twenty percent (20%) of such price may be invoiced on the
Turnover Date of such Initial System and/or Extension, and
(iv) Ten percent (10%) of such price may be invoiced on the date of
Acceptance of such Initial System and/or Extension.
b. Except as may be otherwise agreed in writing by the parties Nortel's
prices for Merchandise and charges for any Services determined in
accordance with Section 6.b. above may be respectively invoiced upon
delivery of such Merchandise and upon performance of such Services by
Nortel.
8. TESTING, TURNOVER, AND ACCEPTANCE
Pursuant to Section 8.1 of the Agreement, the rights and obligations of
the parties with respect to testing, turnover and acceptance of any
Products furnished hereunder and installed by Nortel shall be as
follows:
a. Nortel shall provide Buyer with five (5) days written notice prior to
commencing final commissioning and testing of any Products installed by
Nortel. Buyer shall cause an authorized representative of Buyer to be
present at the applicable Installation Site to witness such final
commissioning and testing, provided that in the event such
representative fails to
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be present for any reason, Nortel shall not be required to delay
performance of such final commissioning and testing. In connection with
the final commissioning and testing of such Products, Nortel shall test
the Products for conformity with the applicable Acceptance Criteria.
When such tests have been successfully completed, Nortel shall provide
Buyer with written notice ("Turnover Notice") that the applicable
Products meet such Acceptance Criteria and are ready for Buyer's
testing for compliance with such Acceptance Criteria. Buyer shall
promptly complete and return to Nortel Buyer's acknowledgment of
receipt of such Turnover Notice.
b. Following the Turnover Date, Buyer may test the applicable Products for
compliance with the Acceptance Criteria using the tests and test
procedures contained in Nortel's Installation Manuals with respect to
such Products. Within thirty (30) days following the Turnover Date of
the applicable Products, Buyer shall notify Nortel either that Buyer
has accepted such Products in writing using Nortel's standard
Acceptance Notice form or that Buyer has not accepted such Products in
which case Buyer shall also provide Nortel with a written notice
("Notice of Deficiency") which shall provide in reasonable detail the
manner in which Buyer asserts that the Products failed to meet the
Acceptance Criteria. With respect to any such details with which Nortel
agrees, Nortel shall promptly proceed to take appropriate corrective
action and following correction, Buyer may retest the Products in
accordance with this Section. Buyer shall accept the Products in
writing without delay when the tests pursuant to this Section indicate
that the Products comply with the Acceptance Criteria.
c. With respect to any points of disagreement between Nortel and Buyer
concerning any Notice of Deficiency which are not resolved by Nortel
and Buyer within twenty (20) days after the effective date of the
Notice of Deficiency, Buyer, at its option, may waive any rights it may
have on account of any such points of disagreement, or require that the
disputed points be resolved by arbitration.
d. Buyer shall notify Nortel in writing of its election pursuant to
Section 8.c. not later than twenty (20) days after the effective date
of the Notice of Deficiency, if any, given to Nortel by Buyer. Such
twenty (20) day period may be extended by mutual agreement in writing
signed by the parties. Upon expiration of such twenty (20) day period,
or any extension mutually agreed to by the parties, unless Buyer has
notified Nortel to the contrary, Buyer shall be deemed to have elected
to waive its right with respect to any points of disagreement then
existing between it and Nortel with respect to such Notice of
Deficiency.
e. If Buyer makes timely election to require arbitration of such disputed
points, the arbitrator shall be chosen by mutual agreement. If the
parties cannot agree upon an arbitrator within three (3) days of
Buyer's election to arbitrate, each party shall within three (3) days
thereafter select an independent and an unaffiliated person to be an
arbitrator. These two (2) persons selected shall select a third person,
independent and unaffiliated with either party, as a third arbitrator.
The arbitration shall be conducted in accordance with the Rules of the
American Arbitration Association, provided, however that the
Arbitrator(s) shall be empowered to
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reduce the Prices of Products only to the extent that the Arbitrator(s)
find that the benefit of Buyer's bargain has been reduced. The
Arbitrator(s) shall not have any authority to grant partial or total
rescission unless the Arbitrator(s) determine that (i) Buyer has not
substantially received the benefit of its bargain; and (ii) money
damages will not provide an adequate remedy. Judgment upon the award
rendered by the Arbitrator(s) may be entered in any Court of competent
jurisdiction.
f. For purposes of this Product Attachment, "Acceptance" of the applicable
Products shall occur upon the earliest of the following and Buyer shall
upon request sign Nortel's Acceptance Notice confirming such
Acceptance:
(i) The date on which Buyer accepts such Products pursuant to
Section 8.b. of this Product Attachment;
(ii) The failure of Buyer to provide Nortel with any notice
required by Section 8.b. of this Product Attachment, with
respect to such Products;
(iii) Use by Buyer of such Products or any portion thereof in
revenue producing service at any time; or
(iv) Waiver by Buyer of its rights pursuant to Section 8.c. or 8.d.
g. Acceptance by Buyer of such Products pursuant to Section 8.f. of this
Product Attachment above shall not be withheld or postponed due to:
(i) Deficiencies of such Products resulting from causes not
attributable to Nortel, such as, but not limited to (A)
inaccuracy of information provided by Buyer, (B) inadequacy or
deficiencies of any materials, facilities or services provided
directly or indirectly by Buyer and tested in conjunction with
the applicable Products, or (C) spurious outputs from adjacent
material; or
(ii) Minor deficiencies or shortages with respect to such Products
which are attributable to Nortel, but of a nature that do not
prevent full and efficient operation of the Products.
h. With respect to any deficiencies of the type described in Section
8.g.(i), Nortel shall at Buyer's request and expense assist Buyer in
the elimination or minimization of any such deficiencies. With respect
to any deficiencies or shortages as described in the Section 8.g.(ii),
Nortel shall, at Nortel's expense, take prompt and effective action to
correct any such deficiencies or shortages.
i. In the event Buyer's Acceptance of any Products is withheld or
postponed due to any deficiencies of the type described in Section
8.g.(i), Nortel shall invoice and Buyer shall pay
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Nortel's charges and reasonable expenses incurred by Nortel associated
with Nortel's investigation of the reasons for Buyer's withholding or
postponement of such Acceptance.
9. WARRANTIES AND REMEDIES
With respect to Exhibit D, LIMITED WARRANTIES AND REMEDIES, the
following additional terms shall apply:
a. Except as set forth in Section 9.b. below, Nortel shall in performance
of its obligations under Section 2 of Exhibit D to the Agreement, (i)
ship replacement Equipment or complete the repair within fifteen (15)
days of Nortel's receipt of the Equipment to be replaced or repaired,
and (ii) commence the correction of the applicable installation
Services within fifteen (15) days of receipt of notice from Buyer
pursuant to Section 5 of Exhibit D to the Agreement.
b. For emergency warranty service situations involving the Equipment,
Nortel shall during the applicable Warranty Period use all reasonable
efforts to ship replacement Equipment within twenty-four (24) hours of
notification of the applicable warranty defect by Buyer pursuant to
Section 5 of Exhibit D to the Agreement, provided that Buyer shall have
requested such emergency service. Nortel may invoice Buyer and Buyer
shall pay Nortel's surcharge for emergency warranty services, such
surcharge shall not exceed *____________________. If Nortel determines
that due to the particular circumstances, onsite technical assistance
is necessary, Nortel shall use all reasonable efforts to dispatch
emergency service personnel to the applicable Installation Site within
twenty-four (24) hours of receipt of notice from Buyer as described
above.
c. All Products to be repaired or replaced, both within and outside of the
applicable Warranty Period, shall be packed by Buyer in accordance with
Nortel's then current instructions.
d. No later than ninety (90) days prior to the expiration of the Warranty
Period with respect to any Initial System, Nortel shall offer to Buyer
post-warranty support by means of an extended service plan or other
terms, provided that neither party shall have any obligation with
respect thereto except as may be agreed upon in writing by the parties.
Should Nortel fail to provide such notice of offering a post-warranty
support, Buyer shall have sixty (60) days after expiration of the
Warranty Period, in which to purchase such post-warranty support.
10. NOTICES
Pursuant to Section 18.5 of the Agreement, any notices by Buyer to
Nortel which are specific to this Product Attachment shall be delivered
to the following address:
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Northern Telecom Inc.
2350 Lakeside Blvd.
Richardson, Texas 75082-4399
Attn: Vice President, Carrier Networks
11. ADDITIONAL TERMS
The following additional terms shall apply to the Agreement:
a. With respect to Section 14, BUYER'S RESPONSIBILITIES, the following
additional terms shall apply:
(i) Buyer shall be responsible for ordering and coordinating with
each applicable local telephone company the installation of
all central office trunks and test trunks and Buyer shall be
responsible for all utility charges associated with the
installation, testing, operation and maintenance of Products
furnished hereunder, including, but not limited to, all
applicable charges for such central office trunks, test trunks
and any tie lines.
b. Nortel shall provide documentation with respect to the Products in
accordance with Schedule D to this Product Attachment.
c. In consideration of Buyer's commitment under Section 3, Nortel hereby
grants Buyer *___________ worth of credits (each, a "Credit"). Each
Credit shall have a value of One Dollar ($1.00). Buyer may use the
credits any time during the Product Attachment Term. *________________
of the *________________ worth of credits may be used for the purchase
of ClusterVision services, a module of the LaserGuided Marketing
services, as those services are described and priced in Nortel
publication number 5004.15/09-96 titled "LaserGuided Marketing
ClusterVision Price List". The remaining *_______________ of the
*______________ worth of credits may be used during the Product
Attachment Term to purchase Total Network Solution services, as those
services are generally described and priced in Nortel's proposal dated
January 13, 1997, which proposal shall be subject to revision. The
purchase of those services shall be covered by a separate agreement,
the terms and conditions of which shall be mutually agreed upon. The
Credits may not be redeemed for cash or used for the purchase of any
other products or services, and Buyer shall not be entitled to any
refund for any Credits not used prior to the expiration of the Product
Attachment Term.
d. In the event Nortel decides to discontinue the manufacture of any
Schedule A Products during the period of seven (7) years following the
Turnover Date of each Initial System Ordered under this Product
Attachment, then Nortel shall give Buyer written notice of such intent
at least twelve (12) months prior to the date of such discontinuance.
Buyer may, during
9
<PAGE>
the twelve month period following noticaftion, order and Nortel shall
deliver as much of such Schedule A Products as Buyer needs at the then
current prices and/or license fees. Nothing herein shall be construed
to require Nortel to continue to manufacture any Schedule A Products.
NORTHERN TELECOM INC. FOCAL COMMUNICATIONS
CORPORATION
By: /s/ Vickie Yohe By: /s/ John Barnicle
-------------------------------- -------------------------------
(Signature) (Signature)
Name: Vickie Yohe Name: John Barnicle
-------------------------------- ----------------------------
(Print) (Print)
Title: V.P. and General Manager Title: Executive Vice President
-------------------------------- ----------------------------
Date: January 21, 1997 Date: January 17, 1997
-------------------------------- ----------------------------
10
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
PAGE 1
PRODUCT ATTACHMENT
S/DMS ACCESSNODE PRODUCTS
Northern Telecom Inc. ("Nortel") and Focal Communications Corporation ("Buyer")
agree as follows:
NOW, THEREFORE Buyer and Nortel agree as follows:
1. INCORPORATION BY REFERENCE
This Product Attachment shall be incorporated into and made a part
of Network Products Purchase Agreement No. JRD0197FCC between
Nortel and Buyer.
2. DEFINITIONS
For purposes of this Product Attachment:
"Equipment" shall mean the equipment listed in Schedule A.
"Product Attachment Term" shall mean the period which shall
commence on the date this Product Attachment is executed by the
latter of the parties and shall expire December 31, 2000.
"Services" shall mean the services described in Schedule B.
"Software" shall mean the software listed in Schedule A.
"Specifications" shall mean Nortel's standard published
performance specifications for the Products.
"Warranty Period" shall mean *_______ months from the date of
shipment stamped on the Equipment or, if the date of shipment is
not marked on the Equipment, *______ months from the date of
manufacture. In the event Nortel performs installation Services,
the Equipment warranty shall be *______ months from the date of
acceptance as set forth in Section 7 herein.
3. SCHEDULES
The following Schedules which are attached hereto are an integral
part of the Product Attachment and are incorporated herein by
reference:
Schedule A - Products, Prices, and Fees
Schedule B - Services and Charges
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
PAGE 2
Schedule C - Delivery Intervals
Schedule D - Forecast
4. ORDERING
4.1 All Orders shall specify the Products required and the
Services, Nortel is to perform, if any.
4.2 Any change to the original Order initiated by Buyer
after Nortel's acceptance of the Order and any
resulting adjustments to prices, schedule and/or other
requirements of the Order shall be negotiated, mutually
agreed upon and subsequently detailed in a written
change to the Order ("Change Order"), referencing the
original Order and executed by authorized
representatives of Buyer and Nortel. The adjustment of
the Order prices for Products and charges for any
Services, as applicable, in a Change Order shall be
established on the basis of Nortel's then current
merchandise prices for such Products and/or charges for
Services. In the event that the Change Order affects
work already performed, the adjustment of the Order
price shall include reasonable charges incurred by
Nortel related to such work. No such changes shall be
performed until a Change Order has been executed by
Nortel and Buyer as described above.
5. PRICING
5.1 During the Product Attachment Term, Pricing for
Equipment and Software shall be as set forth in
Schedule A.
5.2 The prices for engineering, installation and/or system
line-up and testing ("SLAT") Services performed by
Nortel with respect to an accepted Order shall be as
quoted by Nortel and agreed to by Buyer prior to
issuance of the applicable Order.
5.3 Nortel will prepay freight charges and the cost of any
insurance requested by Buyer and invoice Buyer for
these items at Nortel's actual cost. These charges will
appear as separate line items on Nortel's invoice.
6. TERMS OF PAYMENT
Nortel shall invoice Buyer for the price of the Products as well as
any prepaid freight and insurance charges upon shipment of the
Products. Any Services provided hereunder shall be invoiced to
Buyer upon Nortel's completion of such Services.
7. TESTING, TURNOVER AND ACCEPTANCE
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
PAGE 3
7.1 When Nortel installs the Products, Buyer's acceptance
of the Products and Services shall take place, or be
deemed to have taken place, upon completion by Nortel
of installation and SLAT Services in accordance with
Nortel's standard procedures and practices, as
evidenced by the acceptance test results showing that
the Products meet and perform in accordance with the
applicable Specifications. Upon such acceptance, Nortel
shall provide Buyer with a turnover notice to be
acknowledged in writing by Buyer. By providing the
turnover notice, Nortel certifies that the Products
meet and perform in accordance with the applicable
Specifications. Acceptance of the Products shall not be
withheld or postponed due to:
a) deficiencies of the Products or any other product with
which such Products are used or operated, resulting
from causes not attributable to Nortel, such as but not
limited to (i) inaccuracy of information provided by
Buyer, (ii) inadequacy or deficiencies of product,
facilities or services provided by Buyer or a third
party and tested in conjunction with the Products, or
(iii) other conditions, external to the Products
provided by Nortel, which are beyond limits specified
herein and are used by Nortel in performance
calculations and spurious outputs from adjacent
product. Nortel shall, however, at Buyer's expense,
assist Buyer in the elimination or minimization of such
deficiencies; or
b) minor deficiencies or shortages, attributable to
Nortel, of a nature that do not prevent full and
efficient commercial operation of the Products. Nortel
shall, however, at its expense, take prompt and
effective action to correct any such deficiencies or
shortages.
7.2 The effort associated with Nortel's investigation of
any deficiencies not attributable to Nortel shall be
billed to Buyer.
8. WARRANTIES AND REMEDIES
8.1 The repair or replacement of Equipment and the
correction of defective installation Services shall be
warranted for a period of *___ days or the remainder of
the original Warranty Period whichever is longer.
8.2 Nortel shall provide Buyer with repair and replacement
service for a minimum period of seven (7) years from
the commencement date of this Product Attachment,
subject to the condition that should Nortel discontinue
manufacture or repair of the Product or portions
thereof prior to the expiration of such seven (7) year
period (such right of discontinuance being expressly
reserved by Nortel), Nortel shall provide Buyer with a
twelve (12) month prior written notice of any
discontinuance so as to enable Buyer to
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
PAGE 4
place an order for its requirements or to enter into
any other mutually satisfactory agreement with Nortel
prior to such discontinuance. This provision shall
survive the expiration of this Product Attachment.
9. NOTICES
Pursuant to Section 18.5 of the Agreement, any notices by Buyer to
Nortel which are specific to this Product Attachment shall be
delivered to the following address:
Northern Telecom Inc.
5555 Windward Parkway, Suite B
Alpharetta, Georgia 30201-3895
Attn: Vice President and General Manager,
Access Networks
10. ADDITIONAL TERMS
10.1 Nortel may, from time to time, issue updates to the
Software and, upon Buyer's payment of applicable Right
to Use Fees or Software License Fees, if any, shall
license these updates to Buyer. Nortel shall classify
such updates as either: 1) Incremental Software
Upgrades ("ISUs"), designed to correct any
nonconformance to the applicable Software
specifications or 2) enhancements which will provide
additional features ("Enhancements"). Updates to
Software, classified as ISUs by Nortel, will be
provided at no cost to Buyer. Notwithstanding the
foregoing, ISUs and Enhancements shall not include the
cost of any associated hardware that may be required to
update such ISUs. Updates classified as Enhancements,
which will be used by Buyer in its operations shall be
made available to Buyer on a billable basis. In the
event Nortel determines that the update includes both
ISUs and Enhancements which will be used by Buyer in
its operations, such update shall be made available to
Buyer. If Buyer elects to receive the update, Nortel
shall invoice Buyer only for the amount determined by
Nortel to be attributed to the Enhancements contained
in such update.
10.2 In order to allow Nortel to meet its delivery
requirements, Buyer shall issue a forecast showing the
specific types and quantities of Products to be
released and the dates such Products will be released
throughout the Product Attachment Term. Buyer shall
update such forecasts quarterly with each forecast
stating the specific types of Products and quantities
of Products to be released during the next quarter. The
initial forecast shall be as set forth in Schedule D.
In the event Buyer does not meet its obligation to
update its forecast quarterly, then Nortel shall not be
obligated to meet its forecasted delivery intervals as
stated in Schedule C.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
PAGE 5
Nortel's only obligation regarding such delivery
intervals shall be to meet delivery dates set forth in
an accepted Order. If Nortel, prior to acceptance of an
Order, advises Buyer that it cannot meet a delivery
date shown in an Order, both parties will negotiate a
revised date prior to acceptance of the Order by
Nortel. The installation and SLAT intervals applicable
to an Order will be quoted by Nortel and agreed to by
Buyer and Nortel prior to issuance of such Order.
10.3 If Nortel is providing Buyer with installation
Services, Buyer shall be responsible for having all
installation sites ready on time and in accordance with
Nortel's requirements. Buyer shall be responsible for
any expense incurred by Nortel as a result of Buyer's
failure to meet the foregoing obligations.
11. EXCLUSIVITY
During the Product Attachment Term, Buyer shall purchase from
Nortel *_________________ digital loop carriers ("DLCs") or
*__________ of Products, whichever is less. Buyer shall be relieved
of its obligation to purchase its requirements for DLCs from Nortel
in the event Buyer acquires a company through a merger or
acquisition and which, at the time of the merger or acquisition,
operates DLCs not manufactured by Nortel.
12. HOST DIGITAL TERMINALS
12.1 Buyer shall issue an Order for a voice module ("Voice
Module") and host digital terminal ("HDT") in
accordance with Section 4, ORDERING, and the pricing
set forth in Schedule A. *____________________ Each HDT
supports up to fourteen (14) Voice Modules in the AN14
Software release therefore, 70% full shall equal ten
(10) Voice Modules interfacing the HDT. For the AN16
Software release, the HDT supports up to twenty-eight
(28) Voice Modules therefore, 70% full shall equal
twenty (20) Voice Modules interfacing the HDT. The
most recently ordered HDT shall be seventy percent
(70%) of full capacity and HDTs previously ordered
shall be one hundred percent (100%) of full capacity
before additional HDTs may be ordered by Buyer.
12.2 One week after Buyer's acceptance of the HDT and
AccessNode Express as described in Section 7, TESTING,
TURNOVER, AND ACCEPTANCE, Nortel shall provide an
instructor for one (1) on-site training course for a
maximum of ten (10) people on AccessNode Express, at no
charge, for each new metropolitan area where a Nortel
switch with an AccessNode Express is deployed by Buyer.
Nortel shall be responsible for travel and living
expenses of the course instructor and Buyer shall be
responsible for travel and living expenses of course
attendees.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
PAGE 6
NORTHERN TELECOM INC. FOCAL COMMUNICATIONS
CORPORATION
By: /s/ Martin Rist By: /s/ John R. Barnicle
--------------------------- ----------------------------
Signature Signature
Name: Martin Rist Name: John R. Barnicle
--------------------------- ----------------------------
Print Print
Title: V.P. Marketing Title: E.V.P. - C.O.O.
--------------------------- ----------------------------
Date: February 20, 1998 Date: February 17, 1998
--------------------------- ----------------------------
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE A
PAGE 1 OF 1
PRODUCTS, PRICING AND FEES
SECTION
1 Pricing for Stock Models
2 Merchandise List
* FIFTEEN PAGES REGARDING PRICING AND
MERCHANDISE LISTINGS ARE SUBJECT TO
FOCAL'S CONFIDENTIALITY REQUEST AND
HAVE BEEN OMITTED FROM THIS FILING
<PAGE>
AGREEMENT NO. JRD0971FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B
PAGE 1 OF 1
SERVICES AND CHARGES
SECTION
1 Repair/Replacement Procedures
2 Equipment Support
3 Training
4 Service Charges
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 1
PAGE 1 OF 7
REPAIR/REPLACEMENT PROCEDURES
1. GENERAL
Nortel's Replacement-Repair Service Center located in Nashville,
Tennessee, handles all repairs for Broadband/AccessNode Equipment.
Broadband/AccessNode Equipment processed through Nortel is
typically handled on a "Replacement-Repair" basis.
2. REPAIR SERVICES - EQUIPMENT
2.1 Normal Replacement Intervals
Normally, Nortel will ship a replacement unit within
thirty (30) calendar days after receipt of a defective
unit.
2.2 On-Site Repair
The nature of some Equipment may make it more feasible
to effect the repairs on the Buyer's premises. These
arrangements will be made through the Nortel's Global
Product Support ("GPS") group serving the Buyer's area.
2.3 Emergency Replacement
Defective Equipment vital to the call processing
ability of a system qualifies for emergency service.
This service is not intended to take the place of
normal replacement service. Emergency replacement will
be provided under the following conditions:
a. The last spare circuit pack has been used
to replace a defective pack in a system and
all similar packs in the system are
carrying live traffic.
b. Nortel's ETAS group advises that an
emergency situation exists and certain
Equipment is required to correct the
situation.
Nortel provides emergency replacement Equipment (new,
repaired, or functionally equivalent) at the service
charges set forth in Section 4 of this Schedule within
twenty-four (24) hours of a verbal request from the
Buyer. This service is available twenty-four (24) hours
a day, including holidays. Upon receiving verbal
request, a replacement unit will be shipped to the
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 1
PAGE 2 OF 7
Buyer. Written confirmation of the verbal request must
be forwarded to Nortel within three (3) working days
of the verbal request for replacement. To request
emergency replacement service, phone 1-800-251-1758,
option 8 or 1-800- 423-9658.
2.4 Upgrade to a Later Vintage Level
If requested by the Buyer, an upgrade may be applied to
a Buyer's unit submitted to Nortel for repair, provided
that the Equipment is upgradeable to the requested
vintage. Typically, the Buyer will be billed at normal
repair prices for this service. The Buyer shall make
prior arrangements with the appropriate service center
to obtain this service.
2.5 Vendor Products (OEM)
The repair of most OEM equipment can be coordinated
through the Replacement-Repair Service Center in
Nashville, Tennessee. Upon receipt from the Buyer of
defective OEM equipment, Nortel will arrange the repair
and return of these units by the OEM vendor.
3. SOFTWARE SERVICE
3.1 New Software Updates
New Software Updates will be introduced via Nortel's
established Product Change Notice (PCN) routine. At
least sixty (60) days prior to field introduction,
notification of these changes will be provided to Buyer
by Nortel in writing.
3.2 Software Updates
Software updates can be performed in-service on the
system without site visits. The policy for
compatibility over time is that a single step
in-service update will be supported for a period of two
(2) years from the general availability date of the
product release. Upgrading a system to the most recent
update from a product release beyond the two (2) year
window may involve an intermediate step (i.e.,
upgrading the system to an intermediate update) and the
purchase by Buyer of additional Equipment.
3.3 Software Update Fees
Updates which are classified as Enhancements by Nortel
will be made available to Buyer at a price determined
by Nortel at the time such Software
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 1
PAGE 3 OF 7
Update is offered to Buyer. Updates which are
classified as ISUs by Nortel will be provided at no
cost to the Buyer. Notwithstanding the foregoing, ISUs
and Enhancements shall not include the cost of any
associated hardware that may be required.
4. BUYER PROCEDURE FOR REPLACEMENT-REPAIR SERVICE
Two types of Replacement-Repair services are offered to Buyer:
a. Direct mail-in Replacement-Repair
b. Advance Authorization Replacement-Repair
Buyer may have Replacement-Repair service
pre-authorized and initiated within Nortel by a
telephone call to Nortel's Replacement Repair Service
Center.
The decision on which procedure to use is the Buyer's. (Emergency
service is handled as Advance Authorization Replacement-Repair
only). Regardless of the procedure selected, certain guidelines as
prescribed below are to be followed.
4.1 Direct Mail-In Procedure for Replacement-Repair
a. For each defective unit, failure tags
should be completed and attached to the
Equipment.
b. Two copies of Nortel's mail-in form, or an
equivalent form approved by Nortel, should
be completed and enclosed with each
shipment.
c. The following data must be provided on the mail-in
form:
o Buyer's shipping address and phone number to
contact in case of a shipping discrepancy;
o Buyer's billing address, billing contact, and
phone number;
o Buyer's Order number and authorization;
o Shipping instructions;
o Unit identification (Nortel Product Engineering
Code);
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 1
PAGE 4 OF 7
o Quantity of units;
o Date shipped.
d. Defective units are to be packaged for
shipment following the procedures outlined
in Section 4.3 and shipped to Nortel in
accordance with Section 4.4.
e. Defective units are to be shipped to:
Northern Telecom Nashville Service Center
917 Air Park Center Drive, Dock F
Nashville, Tennessee 37217
Attention: Repair and Return
Any discrepancy in the above procedure will be brought
to the attention of the Buyer upon Nortel's receipt of
the defective Equipment.
Buyer's inquiries related to Direct Mail-In service
must reference the Buyer's Order number.
4.2 Advance Authorization Procedure for Replacement-Repair
a. Upon Buyer's identification of defective
units, Nortel's Replacement-Repair Service
Center can be contacted as follows:
o Monday through Friday, excepting
holidays, from 7:00 am to 6:00 pm,
central standard time, telephone
1-800-251-1758, option 8 or
1-800-423-9658. The call will be received
directly by a Customer Service
Representative.
b. The following information must be provided
by the Buyer when calling:
o Buyer's ship to address;
o Buyer's billing address;
o Buyer's Purchase Order number and authorization
number;
o Urgency of request (normal or emergency);
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 1
PAGE 5 OF 7
o Shipping instructions;
o Unit identification (Nortel Product Engineer
Code);
o Quantity of units.
c. A unique repair order identification number
will be issued by Nortel's
Replacement-Repair Service Center for each
order. Please reference this number on all
inquiries.
d. Failure tags should be completed and
attached to each defective unit.
e. Defective units are to be packaged and
shipped in accordance with the procedures
outlined in the following Sections. The
repair order identification number should
be clearly marked on the outside of cartons
and on all paperwork.
4.3 Packaging
Defective Equipment should be packaged in anti-static
containers, preferably of standardized design for
circuit packs. (Buyer shall consult with Nortel's
Customer Service Representative for information on
approved containers.)
Note: Neither bubble pack nor Styrofoam chips
should be used as packaging material. Use
of such material may generate static
electricity which could severely damage a
circuit pack. Use of this material may, at
Nortel's discretion, result in shipments
being refused and/or warranties being
voided.
Failure tags should be completed and attached to each
unit. Each unit should be wrapped individually.
Note: Failure tags should be attached to the
lock latch of a circuit pack. Please do
not attach the tag to any component on
the circuit pack as this could result in
damage to the Equipment.
A copy of the packing list should be placed inside each
box to further ensure proper receipt of a multiple box
shipment.
4.4 Basic Shipping Procedure
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 1
PAGE 6 OF 7
a. Buyer shall bear risk of loss and damage on
shipments to Nortel. Nortel shall bear risk
of loss or damage on shipments to Buyer.
b. The Mail-In Form or a packing list (where
advance authorization is required) must be
included. The following information is
required by Nortel:
o Repair order identification (if advance
authorization replace-ment-repair service
is used);
o Buyer's Order number;
o Buyer's name, ship to address, and
telephone number to contact in case of a
shipping discrepancy;
o Buyer's bill-to address, contact person,
and telephone number;
o Date shipped;
o Unit identification (Nortel's Product
Engineering Code);
o Quantity shipped.
Note: Failure to provide the above
information could result in a delay
in processing the Order.
c. Buyer shall select an appropriate carrier
based upon the weight and size of shipment.
4.5 Shipping Costs
a. In Warranty and Out of Warranty
1. Buyer shall return defective
Equipment to Nortel prepaid.
2. Nortel shall ship the
replacement Equipment to Buyer
prepaid using an appropriate
surface carrier. Arrangements
can be made for air shipments
at Buyer's expense.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 1
PAGE 7 OF 7
4.6 Unrepairable Equipment
a. In Warranty
In the event Equipment under warranty is
returned to Nortel and is judged by
Nortel to be beyond repair due to faulty
material or workmanship, Nortel will
replace the defective Equipment with a
new, repaired, or functionally equivalent
unit at no cost to Buyer.
b. Out of Warranty
In the event Equipment not covered by
warranty is returned to Nortel and is
judged by Nortel to be beyond repair, it
will be returned to the Buyer. Nortel
will replace the defective Equipment at
Buyer's request, and invoice the Buyer at
the then current price for such new
Equipment.
4.7 Non-Return of Defective Units - Buyer Responsibility
When Nortel has shipped a replacement unit to Buyer
after verbal notification of a defective unit, Buyer is
responsible for returning the associated defective
Equipment to Nortel within thirty (30) calendar days of
the shipping date of its replacement. If Buyer's
defective Equipment is not received within such thirty
(30) calendar day period, Buyer shall be invoiced the
then current price of new Equipment plus fifteen
percent (15%). Consequently, an open Purchase Order
number must be provided by the Buyer when obtaining a
Return Authorization number.
5. BUYER PROCEDURE FOR SOFTWARE UPDATES
Software updates are to be handled via the normal Advanced
Authorization Procedure as set forth in Section 4.2. The Basic
Shipping procedure contained in Section 4.4 shall be followed
except that the Software license(s) shall be returned to Nortel
via registered mail.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 2
PAGE 1 OF 5
EQUIPMENT/SOFTWARE SUPPORT
1. WARRANTY SUPPORT
1.1 Remote (off-site) Assistance
Technical support offered at no charge to Buyer during
the Warranty Period includes Remote (off-site)
assistance to Buyer's trained personnel in resolving
Equipment and Software operational and compatibility
problems.
Remote (off-site) assistance consists of one or more of
the following:
a. Over-the-phone consultations and guidance at
1-800-275-8726.
b. Interrogation and analysis of systems over
data lines from Nortel's service facility.
c. Other activity directly related to problem
resolution, where Nortel travel is not
involved.
If after investigation, Nortel determines that the
problem was caused by equipment, software, or
conditions not attributable to Nortel then such
technical assistance shall be billable to Buyer in
accordance with Nortel's current rates and procedures
as set forth in Section 3 of this Schedule.
Calls to Nortel's service facilities during Nortel's
off-hours shall be limited to Equipment or Software
failures directly affecting service that Buyer could
not resolve by following standard troubleshooting
procedures, covered by NTPs.
1.2 Local (on-site) Assistance
Local (on-site) assistance by Nortel field engineers is
also available as part of the warranty support. To
qualify for Local (on-site) assistance without charge,
the following efforts must have been exhausted prior to
the field trip:
a. Buyer has determined that the Equipment or Software
is the source of the problem; and
b. Buyer was unable to resolve the problem by
using standard troubleshooting procedures
covered by applicable NTP's; and
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 2
PAGE 2 OF 5
c. Nortel 's engineer could not resolve the
problem remotely with full cooperation of
Buyer's personnel.
Local on-site assistance, provided at Buyer's request,
that does not meet above requirements is billable in
accordance with Nortel's current rates and procedures
as set forth in Section 3 of this Schedule. If after
investigation, Nortel determines that the need for
Local (on-site) assistance was not caused by the
Equipment, Software nor conditions attributable to
Nortel then, such technical assistance and associated
travel and living expenses shall be billable to Buyer
at Nortel's current rates and procedures as set forth
in Section 3 of this Schedule.
The following types of assistance fall outside the
scope of warranty support and are billable;
a. Local (on-site) assistance with system
verification and pre-service testing, where
required by the Buyer.
b. Local (on-site) assistance for Software
upgrades, where required by the Buyer.
c. Analysis to determine origins of the fault
and resolution of technical problems
associated with equipment or software not
furnished by Nortel.
d. Non-emergency calls for technical
assistance during Service Center off-hours.
e. Consultation in excess of 1/2 hour on
matters that are adequately covered by
standard documentation and/or for which
training programs are available, including
Software upgrades.
2. OUT-OF-WARRANTY SUPPORT
Technical assistance as set forth in Section 1 of this Schedule is
available for out-of-warranty Equipment and is billable at the
current rates and procedures as set forth in Section 1 of this
Schedule.
3. TECHNICAL SERVICE RATES
All billable technical services are billed at hourly rate plus
expenses as defined herein.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 2
PAGE 3 OF 5
Billable expenses include travel, meals and lodging costs for
Nortel's service representatives, long distance telephone and data
link charges and other costs which are directly related to the
service effort. These expenses shall be augmented by fifteen
percent (15%) handling and administration charge.
For Local (on-site) assistance service, both work and travel time
are included and charged as applicable. Minimum charge for Local
(on-site) assistance service is eight (8) hours plus expenses.
Minimum charge for Remote assistance service shall be one (1) hour,
billable according to the rate structure listed below.
The following standard rates are in effect for these procedures:
i) REGULAR WORKING HOURS (STD) - * ______
ii) OVERTIME 1 RATE (OTT) - * ______
iii) OVERTIME 2 RATE (OT2) - *
______
<TABLE>
<CAPTION>
Buyer's Local Time 00000 0800 16:30 2400
Midnight 8:00 a.m. 4:30 p.m. Midnight
- -------------------- ---------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
MON-FRI OT1 STD OT1
- ---------------------------------------------------------------------------------------
SAT OT1 OT1
- ---------------------------------------------------------------------------------------
SUN/HOLIDAYS OT2
- ---------------------------------------------------------------------------------------
</TABLE>
NOTE: Nortel observed holidays are. New Year's Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and the day after,
and Christmas week.
The telephone number for the Broadband Technical Support Group is as follows:
Non-Emergency Support: 1-800-ASK TRAN (1-800-27~8726)
Emergency Support: 1-800ASK ETAS (1-800-27~3827)
4. TECHNICAL PROBLEM RESOLUTION OBJECTIVES
As different types of problems require different levels of
reaction, a Nortel Priority Classification system is set up to
establish a relationship between the reported problems and
appropriate level of reaction and resolution. The Priority System
is based upon problem's direct or potential effect upon subscriber
service. Each reported problem is assigned priority rating
accordingly.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 2
PAGE 4 OF 5
The Priority System has five levels:
E1 - Emergency: Severe Degradation or Outage
E2 - Emergency: Potential Degradation or Outage
S1 - Non-Emergency: Service-Affecting Problem
S2 - Non-Emergency: Intermittently Service Affecting
NS - Non-Service Affecting Problem
The resolution objective for E1 or E2 Emergency classification is
immediate and continuous assistance until the service level is
restored to pre-incident operation. For assistance in such E1 or E2
Emergency, please call 1-800-275-3827. The resolution objective for
non-emergency condition is to provide a status response in two (2)
weeks and solution to the problem in four (4) weeks for S1
Classification or eight (8) weeks for S2. The resolution objective
for non-service affecting condition is to provide a status response
in six (6) weeks and a fix, if applicable, will be scheduled for
future standard hardware, software or documentation update or
revision.
THESE OBJECTIVES DO NOT CONSTITUTE CONTRACTUAL OBLIGATION UPON
NORTEL, BUT ARE GENERALLY IN SUPPORT OF THE TERMS AND CONDITIONS OF
THIS AGREEMENT. NORTEL RESERVES THE RIGHT TO EXERCISE JUDGMENT ON
THE ECONOMIC OR STRATEGIC BENEFITS OF EXECUTING ACTIONS ON ALL
REPORTED OR ANTICIPATED PROBLEMS. THIS MAY RESULT IN AN ACTION
DIFFERENT FROM THOSE DESCRIBED. IN SUCH CASE, THE CUSTOMER WILL BE
INFORMED.
The following is a detailed description of priority ratings:
E1 - Emergency: Severe Degradation or Outage
i) System ceased call processing
ii) 10% or more subscribers out of service;
iii) 50% or more trunk circuits out of service;
E2 - Emergency: Potential Degradation or Outage
i) Redundant Common Equipment inoperable
ii) 20% or more trunk circuits out of service;
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 2
PAGE 5 OF 5
S1 - Service Affecting Problem
i) Problems directly and continuously affecting
subscriber service, not
specified under E1 or E2;
ii) Problems that will seriously impair service after
in-service date;
S2 - Intermittently Service Affecting Problem
i) Software and hardware faults that only
intermittently affect service;
ii) Documentation errors that result or lead to service
impairments;
iii)Problems where operating company can show
significant impact upon plant and traffic
operations;
NS - Non-Service Affecting Problem
i) Service analysis, operational
measurements, or system related
documentation inaccuracies that do not
affect call processing or revenue
collection capabilities;
ii) Non-service affecting software inconsistencies;
iii)Loss of test facilities for which manual
procedures or alternate test equipment can
be readily substituted.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 3
PAGE 1 OF 2
TRAINING
The Nortel training program offers Buyer courses for all S/DMS AccessNode
Product covered by this Agreement at Nortel's then current charge for such
courses.
"In-house" courses are given at training facilities located at Nortel's Regional
Training Centers. Fully equipped with captive systems covered in the course
offering, the student gains extensive "hands-on" experience at the Nortel
training facilities. Courses may also be given at a customer's "on-site"
location where appropriate facilities and equipment are available. Nortel
recommends students attending "In-house" courses when possible as "on-site"
courses generally do not offer as effective a presentation environment and also
limits "hands-on" experience.
All courses offer students with standard training material presented by
qualified instructors. Maintenance courses cover an explanation of the
transmission principles involved, installation, operation, maintenance
(including fault locate procedures for trouble-shooting equipment and circuit
replacement), and a thorough review of Nortel's product documentation (NTP's).
For scheduling of courses, determining presentation locations, and availability
of seats, please contact Nortel's Training Coordinator in Raleigh, North
Carolina at (919) 859-8400.
"IN-HOUSE" TRAINING
Courses are offered at the Nortel Regional Training Center located in Raleigh,
North Carolina.
"In-house" training courses normally accommodate up to eight (8) students with
seats filled on a "first come/first served" basis. Courses may be subject to
rescheduling if a minimum class size is not met.
Course charges are per student for each course with travel and living expenses
paid by Buyer. Nortel will provide information on local accommodations.
Nortel will confirm in writing the course dates for each student. After
confirmation, cancellation requires at least two (2) weeks notice prior to
course commencement.
"ON-SITE" TRAINING
Many of the training courses may be conducted at the Buyer's facilities
"on-site". Two (2) months advance notice is required to schedule these courses
with Buyer providing access to working equipment. Buyer also provides all test
equipment for training. Nortel can arrange for test equipment to be available at
additional charges of up to $2000 if Buyer does not have all requisite
equipment.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 3
PAGE 2 OF 2
Charges for "on-site" training are on a per-course basis with a maximum of ten
(10) students to attend such courses unless otherwise stated. The course fee
does not cover the instructor's travel and living expenses. If Buyer cannot
provide suitable training facilities including audio/visual equipment, charges
for such equipment incurred by Nortel will be billed to the Buyer.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE B, SECTION 4
PAGE 1 OF 1
SERVICE CHARGES
1. REPAIR/REPLACEMENT - EQUIPMENT
<TABLE>
<CAPTION>
IN-WARRANTY* OUT-OF-WARRANTY*
------------ ----------------
<S> <C> <C>
Normal Service No charge Standard unit charges
(30 days) per current price list
Emergency Service (24 hours)
1. Requested 8:00 AM- $50 surcharge $50 surcharge
6:00 PM EST weekdays per unit per unit plus standard
unit charges per
current price list
2. Requested weekends, $100 surcharge $100 surcharge per unit
holidays, and weekdays per unit plus standard unit charges
6:01 PM - 7:59 AM EST per current price list
</TABLE>
*Maximum charge is $250 for items on the same Order requiring emergency service.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE C
PAGE 1 OF 1
DELIVERY INTERVALS
PRODUCT FORECASTED UNFORECASTED
- ------- ---------- ------------
S/DMS AccessNode * *
------------- -------------------
Notes:
1. All After Receipt of Order ("AROCHEM") intervals are based on
standard type Product.
<PAGE>
AGREEMENT NO. JRD0197FCC
ACCESSNODE PRODUCT ATTACHMENT
SCHEDULE D
PAGE 1 OF 1
FORECAST
TO BE PROVIDED BY CUSTOMER
<PAGE>
*Certain portions of this Exhibit have been omitted where indicated by
an "*" pursuant to a request for confidential treatment, and the omitted
portions have been separately filed with the Commission.
Exhibit 10.6
AMENDMENTS No. 1 & 2 TO THE
NETWORK PRODUCTS PURCHASE AGREEMENT
BETWEEN
NORTHERN TELECOM INC.
AND
FOCAL COMMUNICATIONS CORPORATION --
DELETED FOR SEC CONFIDENTIALITY
THIS AMENDMENT No. 1 TO NETWORK PRODUCTS PURCHASE AGREEMENT, Carrier
Networks Products, is dated effective as of the date executed by the latter of
the parties below, (the "Amendment No. 1"), is by and between Northern Telecom
Inc. ("Nortel") and Focal Communications Corporation ("Buyer"), and amends the
Network Products Purchase Agreement Number JRD0197FCC, dated January 21, 1997
("NPPA"), by and between Nortel and Buyer;
WHEREAS, the parties wish to amend the NPPA to reflect a change in the
address of the Buyer; and
NOW, THEREFORE, for the consideration shown below, the parties hereby amend
the NPPA as follows:
1. The Buyer's address for purposes of billing and notice pursuant to the
preamble and Section 18.5, is amended and restated as follows:
Focal Communications Corporation
200 N. LaSalle Street
Chicago, Illinois 60601
Attn.: Executive Vice President
Facsimile: (312) 895-8403
<PAGE>
NORTHERN TELECOM INC. FOCAL COMMUNICATIONS
CORPORATION
By: /s/ Vickie Yohe By: /s/ John R. Barnicle
-------------------------------- -----------------------------
Signature Signature
Name: Vickie Yohe Name: John R. Barnicle
------------------------------ ---------------------------
Print Print
Title: Group VP, Carrier Networks Title: E.V.P. - C.O.O.
----------------------------- ---------------------------
Date: March 6, 1998 Date: February 17, 1998
------------------------------ ---------------------------
-2-
<PAGE>
AMENDMENT No. 2 TO PRODUCT ATTACHMENT
CARRIER NETWORKS PRODUCTS
BETWEEN
NORTHERN TELECOM INC.
AND
FOCAL COMMUNICATIONS CORPORATION
THIS AMENDMENT No. 2 TO PRODUCT ATTACHMENT, Carrier Networks Products, is
dated effective as of the date executed by the latter of the parties below, (the
"Amendment No. 2"), is by and between Northern Telecom Inc. ("Nortel") and Focal
Communications Corporation ("Buyer"), and amends the Product Attachment, dated
January 21, 1997 (the "Product Attachment"), as amended by Amendment No. 1 to
Product Attachment, dated June 10, 1997 (the "Amendment No. 1"), which are
attached to the Network Products Purchase Agreement Number JRD0197FCC, dated
January 21, 1997 ("NPPA"), by and between Nortel and Buyer;
WHEREAS, the parties wish to amend the Product Attachment and the Schedule
A attached thereto to reflect a change in Buyer's commitment and Buyer's desire
to purchase additional Products and Services from Nortel; and
NOW, THEREFORE, for the consideration shown below, the parties hereby amend
the Product Attachment and Schedule A as follows:
1. "Product Attachment Term", as defined in Section 2.0, "Definitions" is
amended and restated to read:
"Product Attachment Term" shall mean the period of time which shall
commence on the date this Amendment No. 2 to Product Attachment is executed
by the latter of the parties and shall expire thirty six (36) months
thereafter.
2. Section 3, entitled "Scope", in the Product Attachment is amended and
restated as follows:
(a) Buyer shall issue Orders for delivery and installation of the Products
listed in the attached Schedule A, in the minimum amount of
*_________________________ every twelve (12) months during the Product
Attachment Term, for a total minimum commitment amount of
*_______________________________ during the Product Attachment Term
(the "Commitment Amount"). Included within the Commitment Amount,
Buyer shall purchase a minimum of *_______________ DMS-500 Initial
Systems, as
<PAGE>
described in the attached Schedule A, Part I, Section 1.0. Buyer shall
pay the prices, fees and charges for the Products in accordance with
Section 7 of this Product Attachment.
(b) In the event that Buyer does not purchase a minimum of
*__________________ in Product every twelve months during the Product
Attachment Term, Nortel shall invoice annually and Buyer shall pay
*_______________ percent _______ of the difference between
*_______________________ and the amount actually spent by the Buyer
during that twelve (12) month period of time, within thirty (30) days
from the date of invoice.
(c) In the event that Buyer exceeds the purchase amount of *____________
in Product every *__________________________ during the Product
Attachment Term, Buyer shall receive an annual credit to be applied to
Buyer's purchase of an Optional Software described in Schedule A, Part
III, Section 1.0 and to any Software Upgrades described in Schedule A,
Part I, Section 1.4 excluding any required hardware for feature
functionality (the "Software Credit"). Such Software Credit shall be
equal to *____________________________________________ up to a maximum
of *________________________________________. Upon the expiration of
the Product Attachment Term contemplated by this Amendment No. 2, all
remaining Software Credits shall expire.
(d) Buyer may issue Orders for the DMS-500 Optional Software described in
the attached Schedule A, Part III, Section 1.0, from time to time
during the Product Attachment Term. Buyer shall receive a
*_______________________ discount on the prices, fees and charges set
forth in the attached Schedule A, Part m, Section 1.0, on any DMS-500
Optional Software Order included within or submitted in connection
with Buyer's Order for a DMS-500 Initial System described in Schedule
A, Part I, Section 1.0. Otherwise, Buyer shall receive a
*_________________ discount on the prices, fees and charges set forth
in the attached Schedule A, Part III, Section 1.0, on any DMS-500
Optional Software Order issued at any other time during the Product
Attachment Term.
(e) Buyer shall receive a one (1) time forty five percent (45%) discount
on the initial Merchandise Order issued by Buyer during each quarter
during the Product Attachment Term, and a thirty percent (30%)
discount on all subsequent Merchandise Orders issued by the Buyer
during each quarter during the Product Attachment Term.
(f) No later than November 1st of each year during the Product Attachment
Term, Buyer shall provide to Nortel a written forecast listing the
Products that Buyer intends to order for delivery and installation
during the following twelve (12) months of the Product Attachment Term
(the "Annual Forecast"). The initial Annual Forecast is set forth in
the attached Schedule C. Buyer may revise its then-current Annual
Forecast from time to time, and, upon submission of the revised Annual
Forecast to Nortel, each such revised Annual Forecast shall supersede
all Annual Forecasts that were previously submitted to Nortel.
(g) Nortel shall perform an in-process and final audit for each and every
Initial System purchased and installed hereunder prior to the Turnover
Date as described in Section 8 of this Product Attachment. Also,
Nortel shall perform a final audit for each and every Extension
purchased and installed hereunder prior to the Turnover Date.
-2-
<PAGE>
(h) During the Product Attachment Term, Buyer shall purchase from Nortel
*_____________ "Class 4" and "Class 5" switches (as those terms are used in the
telecommunications industry), except that Buyer shall be relieved of Buyer's
obligation to purchase *_____________________ "Class 4" and "Class 5" switches
in the event that Buyer acquires or merges with an entity which, at the time of
the merger and acquisition, operates "Class 4" and "Class 5" switches not
manufactured by Nortel.
(i) In the event that Nortel, through no fault other than its own, fails
to effect Turnover of an Initial System no later than *_______________________
after the date upon which the Installation Services commenced, Nortel shall pay
to Buyer, as liquidated damages and not as a penalty, and as Buyer's sole and
exclusive remedy, the amount of *_______________________________ per day for
each day that Turnover is delayed beyond such *_______________________________.
In no event shall Nortel's liability under this provision exceed *___________
for each Initial System ordered by Buyer hereunder.
3. Section 11, entitled "Additional Terms", in the Product Attachment is
amended and restated as follows:
(c) In the event that Nortel elects to discontinue the manufacture of any
Product described in the attached Schedule A at any time during the
seven (7) years following the Turnover Date of each Initial System
ordered hereunder, then Nortel shall provide Buyer with written notice
of such discontinuance at least twelve (12) months prior to the
scheduled date of such discontinuance. During the twelve (12) month
period following Buyer's receipt of such notification from Nortel,
Buyer may order and Nortel shall deliver as much of the Products
described in the attached Schedule A as Buyer reasonably requires at
the then current prices and/or licensing fees. Nothing herein shall be
construed so as to require Nortel to continue to manufacture any
Products described in the attached Schedule A.
(d) Deleted.
4. All provisions of Schedule A as attached to the Product Attachment and
Amendment No. 1 are hereby deleted and replaced with the Schedule A
attached hereto.
5. Schedule C to the Product Attachment is hereby deleted and replaced with
the Schedule C attached hereto.
-3-
<PAGE>
NORTHERN TELECOM INC. FOCAL COMMUNICATIONS
CORPORATION
By: /s/ Vickie Yohe By: /s/ John R. Barnicle
-------------------------------- -----------------------------
Signature Signature
Name: Vickie Yohe Name: John R. Barnicle
------------------------------ ---------------------------
Print Print
Title: Group VP, Carrier Networks Title: E.V.P. - C.O.O.
----------------------------- --------------------------
Date: March 6, 1998 Date: February 17, 1998
------------------------------ ---------------------------
-1-
<PAGE>
SCHEDULE C
---------
SWITCH DELIVERY FORECAST
------------------------
Purchase
Switch Type/# Destination Delivery Date Ports Price*
* The entire Section C is subject to Focal's Confidentiality Request and has
been omitted from this Filing.
* Denotes ports and price for each DMS-500 and/or Extension.
<PAGE>
Schedule A
Part I. DMS-500 Initial System
(DMS-500 Switching System)
Nortel shall engineer each Initial System ordered hereunder in accordance with
Nortel's standard engineering practices and procedures, and thereafter Nortel
shall provide Buyer with a detailed list of the components of such Initial
System.
1.0 Initial System DMS-500
1.1 The following represents the SuperNode Equipment that will be delivered
with the Initial System DMS-500 switch:
Information from Section 1.1 has been deleted.* (Two pages of
information have been deleted from section 1.1).
1.2 Initial System DMS-500
The price for the Initial System DMS-500 equipped and wired as
described in Section 1.1 above, and the fee for the license of the
Software is *___________.
1.3 Power Plant to support the above DMS-500 Initial System (Optional):
1.3.1 Power Plant
*Information from Section 1.3.1 has been deleted.
1.3.2 Battery Distribution Fuse Bay
*Information from Section 1.3.2 has been deleted.
1.4 Software Upgrades for the DMS-500 Initial System (Optional):
*Information from Section 1.4 has been deleted.
1.4.1 The price for the NCS05 (LLTOB005-Local/Toll) to NCS06
(LLDOB006-Local/Toll) Software Upgrade is *___________________.
1.4.2 The price for the NCS05 (LLTOB005-Local/Toll) to NCS07
(LLTOB007-Local/Toll) Software Upgrade is *___________________.
1.4.3 The price for the NCS05 (LLTOB005-Local/Toll) to NCS08
(LLTOB008-Local/Toll) Software Upgrade is *___________________.
1.4.4 The price for the NCS06 (LLDOB006-Local/Toll) to NCS08
(LLTOB008-Local/Toll) Software Upgrade is *___________________.
- 2 -
<PAGE>
1.4.5 The price for the NCS07 (LLTOB007-Local/Toll) to NCS08
(LLTOB008-Local/Toll) Software Upgrade is *___________________.
Schedule A
Part II. DMS-500 Standard Software Features
(DMS-500 System)
1.0 DMS-500 Standard Software Features
1.1 Nortel may deliver Software ordered hereunder in a single Software
load which may include Software which Buyer has not yet licensed
("Non-licensed Software"). Except as set forth in Section 1.2 below,
Buyer shall not be entitled to use such Non-licensed Software, until
such time as the applicable right to use fees are paid by Buyer
pursuant to Section 1.5.
1.2 Upon Buyer's placement of any Non-licensed Software in revenue
generating service, Buyer shall pay the applicable right-to-use fees
for such Non-licensed Software pursuant to this Agreement, except as
described in Section 1.2. Buyer shall also have the option to pay the
applicable right-to-use fees for any Non-licensed Software upon
installation of a Software load containing such Non-licensed Software.
For any Non-licensed Software that is installed and added pursuant to
a product computing module load ("PCL") and or non-computing module
load ("NCL"), if any, the right-to-use fees shall be the list price
for such feature in effect as of the date of activation.
1.3 To ensure Buyer's proper activation and/or usage of the appropriate
Software, Buyer shall properly notify Nortel at the address specified
in Section 9 of this Product Attachment to the attention of Director,
Sales Engineering, prior to the activation and/or usage by Buyer of
any Software. Buyer shall identify all Software being activated and/or
used (including the number of units activated, if applicable) in each
Initial System.
1.4 Nortel shall promptly review notification from Buyer provided pursuant
to Section 1.4 above and identify any applicable prerequisite
Equipment or Software required by Buyer prior to activation and/or
usage of the applicable Software. Nortel shall respond to Buyer's
written notice by means of a price quotation. Such price quotation
shall include Nortel's consent to activate and/or use such Software or
notification that such Software requires engineering to determine
whether the current switch configuration will require additional
Equipment prior to activation and/or usage. Upon Buyer's written
acceptance of Nortel's price quotation, Nortel shall grant its consent
to Buyer to activate and/or use such Software prior to payment of the
applicable right-to-use fees. However, under no circumstances shall
such Software be activated and/or used by Buyer prior to Buyer's
acceptance of Nortel's price quotation. Nortel shall invoice Buyer for
all applicable right to use fees and associated feature
<PAGE>
activation engineering charges. One hundred percent (100%) of such
invoiced right to use fees and engineering charges shall be due and
payable within thirty (30) days of the date of Nortel's invoice
therefor.
1.5 Notwithstanding the foregoing, Buyer shall not be required to pay
additional right to use fees associated with the Software licensed
prior to the initial date of this Product Attachment.
1.6 Nortel reserves the right, every six (6) months to submit a written
report for each site containing a Software load. The written report
shall identify all Software activated and/or used (including the
number of incremental units activated, if applicable) by Buyer during
the applicable reporting period. Buyer shall audit the report against
Purchase Order(s) which have been submitted by Buyer and accepted by
Nortel during the applicable period to determine the existence of any
discrepancies. Buyer shall submit such audited written report to
Nortel at the address specified in Section 9 of this Product
Attachment to the attention of Director, Sales Engineering, within
thirty (30) days from receipt of such request.
1.7 Nortel also reserves the right to access by remote polling or to
conduct an on-site inspection of any site in which a Software load is
installed and/or to perform an on-site review of Buyer's books and
records related to such site to verify activation and/or usage of
Software.
1.8 Nortel shall issue invoices, for any applicable prices, charges or
fees, in addition to those amounts previously invoiced, as a result of
Buyer's activation and/or usage of any Software that does not appear
on Nortel's written report or that appear as a result of Nortel's
remote polling of an Initial Systems.
1.9 Upon payment of the applicable right to use fees for Software
activated and/or used by Buyer, Buyer shall receive a non-exclusive
paid-up license to use such Software in accordance with the provisions
of this Agreement. Nortel may immediately terminate the applicable
license granted hereunder for Buyer's failure to pay the applicable
right to use fees for such Software which has been activated and/or
used.
1.10 The obligations of Buyer under this Section 1 shall without limitation
survive the termination of this Agreement and shall continue if the
Software is removed from service. Buyer agrees to indemnify Nortel or
Third Party Software Vendors as appropriate for any loss or damage
resulting from a breach of this Section 1.
2.0 LLDOB008 Software included in the DMS-500 Initial System
- 2 -
<PAGE>
2.1 Software included in the DMS-500 Initial System
The following represents the LLDOB008 Software packages that are
included in the price of the DMS-500 Initial System, described in
Schedule A, Part 1, Section 1.0. The following is a list of Software
only and does not include any/all required Equipment to provide
feature functionality.
S/W Package Description
----------- -----------
*The information from this section has been deleted.
- 3 -
<PAGE>
Schedule A
Part III. DMS-500 Complete (Optional and Standard) Software Features
(DMS-500 System)
1.0 LLDOB008 Complete Software Features
1.1 Complete Software Features
The following represents all of the LLWB008 software packages that can
be licensed on a DMS500 System. The following is a list of Software
only and does not include any/all required Equipment to provide
feature functionality.
1.1.1 Standard Software Features
If the Software package IS LISTED in Schedule A, Part II,
and CONTAINS an "L" in the "License Status" column, such
Software packages ARE LICENSED to the Buyer as part of the
Standard Software load for the DMS-500 Initial System. The
price of that Software package IS INCLUDED in the price of
the DMS-500 Initial System set forth in Schedule A, Part I,
Section 1.2.
1.1.2 Optional Software Features
If the Software package IS NOT LISTED in Schedule A, Part II
and DOES NOT CONTAIN an "L" in the "License Status" column,
such Software packages IS NOT LICENSED to the Buyer as part
of the Standard Software load for the DMS-500 Initial
System. The price of that Software package IS NOT INCLUDED
in the price of the DMS-500 Initial System set forth in
Schedule A, Part I, Section 1.2. Such Software Package may
be purchased by the Buyer under the Product Attachment as
Optional Software for the DMS-500 Initial System.
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
L BASE0001 BASE See Note The Office license fee is:
Local/ Local:$90,000;
Toll only Toll: $194,800
Local/Toll/TOPS:$196,300;
STP:$62,500; LD:$179,300;
Local/Toll/TOPS/LD:$214,230;
GSP:$194,800;
GWY:$193,000;
LD/GWY:$197,400
BASE0011 BASE CO Data Chg Capture $50,000
BASE0005 BASE SN SR50 Processor $633,000 The upgrade fee if previously
licensed from: BASE0004 =
$208,000 BASE0003 =
$388,000 BASE0002 =
$602,000
BASE0006 BASE SN SR60 Processor $696,000 The upgrade fee if previously
licensed from: BASE0005 =
$63,000BASE0004 = $271,000
BASE0003 = $451,000
BASE0002 = $665,000
L BASE0009 BASE SN SR70 Processor $881,000 The upgrade fee if previously
licensed from: BASE0006
=$185,000 BASE0005 =
$248,000BASE0004 =
$456,000 BASE0003
=$636,000 BASE0002 =
$850,000
BASE0008 BASE SNSE SR60 Processor $350,000 The upgrade fee if previously
licensed from: BASE0007 =
$350,000
BASE0010 BASE SNSE SR70 Processor $440,000 The upgrade fee if previously
licensed from: BASE0008 =
$90,000 BASE0007 =
$440,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
ACD00001 ACD ACD Base See Note The fee is $500 per ACD line
plus $5,000 per ACD user
group.
ACD00017 ACD Agent Increase See Note The fee is $500 per ACD line for
agents 5,001 to 10,000.
ACD00016 ACD Group Increase See Note The fee is $5,000 per ACD
user group for groups 257 to
1024.
ACD00005 ACD MIS See Note The fee is $250 per ACD line.
ACD00006 ACD Miscellaneous $52,000
ACD00011 ACD Routing Enh. $6,000
ACD00019 ACD CompuCall Agt Desktp See Note The fee is $2,000 per Switched
Virtual Circuit.
ACD00002 ACD Compucall See Note The fee is $7,500 per switched
virtual circuit.
ACD00014 ACD CompuCALL RSBBScr See Note The fee is $50.00 per ACD
line.
ACD00013 ACD CompuCALL SCallCtrl See Note The fee is $2,000 per Switched
Virtual Circuit.
ACD00007 ACD Compucall-Func See Note The fee is $42,000 per
switched virtual circuit.
ACD00008 ACD Ctrx Coord V&Dta See Note The fee is $5,000 per 100
Centrex Iines.
ACD00004 ACD Networking See Note The fee is $25,000 for the first
100 Network ACD lines plus
$500.00 per Network ACD line
over the first 100.
ACD00010 ACD Network ACD on PRI See Note The fee is $400.00 per ACD
line.
ACD00009 ACD Network ACD on SS7 See Note The fee is $400.00 per ACD
line.
AIN00002 AIN Essentials $700,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
AIN00001 AIN Primer See Note The fee is $80,000 Net (not
subject to any discounts) to be
paid annually.
AMA0001 AMA BASE No Charge
AMA0004 AMA MOD [CAMA 13,000
MODULES]
AMA0002 AMA MOD [LAMA $11,000
MODULES]
L BAS00001 BAS AMA-Cook $9,000
L BAS00028 BAS High Capacity DPP $15,000
L BAS00002 BAS ANI $30,000
L BAS00004 BAS Generic - OAM $15,000
BAS00050 BAS 56Kb/S Trk Tst prt $15,000
BAS00024 BAS Offnet Access Svcs See Note The fee is $22,960 per Switch
and $11,500 per DTC.
L BAS00003 BAS Generic See Note The office license fee is:
Local/ Local:$297,700; Toll:$122,200;
Toll only Local/Toll:$299,200;
Toll/TOPS:$122,200;
Local/Toll/TOPS:$299,200;
Local/Toll/LD:$299,200;
Local/Toll/TOPS/LD:
$299,200. Plus a SMA license
fee of $10,000 per SMA and
SMA2 module.
BAS00049 BAS ABBT LM-Cut Re-wrt $8,000
BAS00062 BAS ANI for E911 Abandon $5,700
BAS00064 BAS Black Box Fraud $34,300
BAS00063 BAS Enh Line Card Mon $5,700
BAS00041 BAS Enh Permanent Signal $40,000
L BAS00020 BAS Flex Bellcore AMA $7,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
BAS00021 BAS MAP TELNET Access No Charge
BAS00022 BAS SDM Table Access No Charge
L BAS00007 BAS Logs $10,000
BAS00009 BAS RSC-S See Note The fee is $120,000 per
module incremental.
BAS00012 BAS Remotes Generic See Note The fee is $22,500 plus
$700.00 per LCM/LCME in
the Remote office plus
$5,500/Remote
DTP00001 DTP Datapath $17,500
DTP00003 DTP DataCall Tester No Charge
ENS00005 ENS E911 $15,000
ENS00002 ENS ACD PSAP See Note The fee is $47,000 plus $2,000
per E911 position. The fee is
$32,000 plus $2,000 per E911
position if ENS00001 has been
previously licensed.
ENS00009 ENS Conf Compatibility $20,000
ENS00008 ENS Enha Called Pty Hld $30,000
ENS00001 ENS LDTPSAP $125,000
ENS00004 ENS Large SRDB See Note If more than 1 million records
are required the fee is
$195,000. If less than 1 million
records are required the fee is
$145,000.
L EQA00001 EQA Local See Note The fee is $52,000 plus $4,800
per LGC/LGCI, $4,800 per
LTC/LTCI, and $1,600 per
LME. The total fee shall not
exceed $72,000 per office.
L EQA00006 EQA C71SUPlrita CntnEAEO $1 00,000
EQA00004 EQA Cellular Interconnect $25,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
EQA00003 EQA Cellular Interconnect-EO $15,000
EQA00007 EQA EA Alt Sw Point $35,000
EQA00025 EQA EQA Call Attrb Ctl $8,000
EQA00010 EQA Enh WATS $20,000
opratn[POTS
EQA00011 EQA Equal Access OSS $8,000
EQA00009 EQA IBN iraLATA $20,000
PIC EAEO
EQA00026 EQA International PIC $40,000
EQA00015 EQA IntraLATA PIC Enh Ph1 $20,000
EQA00019 EQA IntraLATA PIC Ph2 $9,500
EQA00024 EQA Override LPIC Priv $12,000
L EQA00008 EQA POTS IraLATA PlCeaeo $20,000
EQA00002 EQA Toll See Note The fee is $100,000 plus
$4,800 per DTC/DTCI, $1,200
per DCM and $300.00 per TM.
The total fee shall not exceed
$190,000 per office.
EQA00012 EQA C71SUPlerLta Conn AT $120,000
EQA00005 EQA Intermediate Tandem $20,000
ICM00020 ICM Call Queue Managemt See Note The fee $250 per ACD Agent and/or
Centrex line.
ICM00010 ICM Call Center Server See Note The fee $250 per ACD Agent
ICM00001 ICM Call Manager l/F See Note The fee $18,750 per switch
plus $125 per ACD Agent
and/or Centrex line.
ISDN0003 ISDN Line Drawer No Charge
ISDN0004 ISDN Line Drawer Nl-1 Enh No Charge
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
ISUP0001 ISUP Cellular $150,000
LEA00002 LEA LEAS Local $22,500
LEA00001 LEA LEAS Toll See Note The fee is $145,000 for the
first 50,000 Directory numbers
plus $20,000 for each
additional Group of 10,000
Directory numbers over the
first 50,000.
LEA00003 LEA SS7 I/W with LEAS $30,000
LOC00002 LOC Carrier Parameter $20,000
LOC00005 LOC Dial Plan Transl Enh $18,000
LOC00011 LOC End Office OA AMA $10,000
L LOC00001 LOC Services $10,000
LOC00006 LOC Intersw Call Trace $20,000
MDC00002 MDC - MDC MSAC $21,700
MDC00027 MDC Att Cons CF Recall $2,000
100 MDC00001 MDC - MDC Minimum See Note The fee is $49,250 plus $1,750
per group of 100 MDC lines,
not to exceed $404,000 per
office. The first 100 MDC lines
are included in the base price.
MDC00050 MDC Cl Com-CFX Table Chg $7,000
MDC00056 MDC Code Restriction Grp $2,000
L MDC00003 MDC - MDC Standard $173,500
MDC00038 MDC CDAR-1A $7,500
TRANSPARENCY
MDC00042 MDC Call Forward Timed $7,000
MDC00020 MDC Personal Call Screen $5,000
MDC00004 MDC CLASS on MDC $23,500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
MDC00010 MDC CLASS on MDC/ $25,000
MVP II
MDC00053 MDC CSMI No Charge
MDC00040 MDC SCWID/DSCWID No Charge
MDC00035 MDC Teen Service See Note The fee is $5,000 per 100
MDC lines
MDC00005 MDC MBG Min $73,500
MDC00006 MDC MBG Std $167,500
MDC00055 MDC Auto Attndnt -RLT $2,000
MDC00045 MDC Conn Nm Disply Blkng $10,000
MDC00025 MDC NETNAME Expand $2,000
MDC00007 MDC MBS Minimum $9,900
MDC00008 MDC MBS STD $50,000
MDCOOOO9 MDC MDC PRO $239,200
MDC00034 MDC Enhanced WATS $20,000
MDC00018 MDC MDR VIA AMA $20,000
STREAM
MDC00033 MDC Name/DN Blkng $15,000
MDC00011 MDC PVN $195,000
MDC00036 MDC SMDR for PVN $15,000
MDC00044 MDC Per Ln Feature Cntrl $12,500
MDC00024 MDC TCAP Name Delivery $37,000
MDC00012 MDC Tailored MDC 1 $26,500
MDC00013 MDC Tailored MDC 2 $40,000
MDC00019 MDC MBS installer Tools $30,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
MDC00014 MDC Tailored MDC 3 $45,000
MDC00015 MDC Tailored MDC 4 $30,000
MDC00016 MDC Tailored NARS $50,000
MISC0003 MISC ISDN Enhancements No Charge
Nl000003 NlO DPN Support $10,000
Nl000004 NIODWS See Note The fee is $50,000 plus
$11,500 per DWS Access link.
Nl000028 NlO DWS Carrier Acc $50,000
Nl000027 NlO DWS Flexible Acc $71,500
Nl000023 NlO Intertol ISUP & SS7 $200,000
Nl000002 NlO DataSPAN See Note The fee is $20,000 per LPP
cabinet.
1,100 Nl000007 NlO ISDN BASE See Note The fee is $68,500 plus $500
per 100 ISDN Unes plus $250
for each 2B+D line and $100
for each 1B+D line
L Nl000022 NlO ISDN PRI BASE See Note The fee is $30,000 plus $2,000
per PRI link.
Nl000025 Nl0 Nl-1 PRI CLG SCRN $15,000
Nl000050 Nl0 Nl 2/3 BRI Svcs Ph I See Note The fee is $140 per ISDN BRI
line.
L Nl000009 Nl0 Nl-1 BRI Enhancd Mtc $68,000
1,100 Nl000008 Nl0 Nl-1 BRI See Note The fee is $251,000 per switch
plus $7,200 per each increment
of 480 lines.
Nl000013 Nl0 Nl-1 PRI Ntwrkng See Note The fee is $25,000 plus $3,750
per PRl-Link. This
functionality can be added on a
per link basis.
Nl000012 Nl0 Nl-1 PRI i/w 4E/5ESS $50,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
L Nl000011 Nl0 Nl-1 PRI See Note The fee is $66,500 plus $3,000
per Nl0 Nl-1 PRl_Link. This
Functionality can be added on
a per link basis.
2 Nl000010 Nl0 Nl-1 Packet See Note The license fee is $75,000
NTFX10's includes 2: NTFX10's (x.25
100 D and/or x.75 protocols), plus
10 B 100 'D' and 10 'B' terminals.
An additional $35,000 per NTFX10,
plus a license fee of $8,000 per
100 'D' and $5,000 per 10 'B"
terminals
Nl000014 Nl0 Nl-1 Tandem $60,000
Nl000015 Nl0 Nl-2 PRI Base Vrt See Note The fee is $55,000 plus $2,000
per existing PRl_Link and
$7,000 per added PRl_Link.
Nl000017 Nl0 Call by Call Nl-2 See Note The fee is $2,000 per Call by
Call PRl_Link. This
functionality can be added on a
per link basis.
Nl000016 Nl0 D ch Backup Nl-2 See Note The fee is $30,000 plus $500
per PRl_Link.
Nl000051 Nl0 Nl-2/3 BRI Svs Ph II See Note The fee is $140 per ISDN BRI
line.
RES00001 RES Access Management $8,000
RES00043 RES Ntwk Suprsd Ringing $25,000
RES00052 RES Office Convrsn Enhmnt $15,000
RES00010 RES Telemetry Applic See Note The fee is $30,000 plus $5,000
per utility telemetry trunk.
RES00012 RES Univ Acc to 3WC $75,000
RES00011 RESUnivAcc to CLASS See Note The fee is $169,500 for the
first 5000 equipped lines plus
$90,000 for each additional
5000 equipped lines over the
first 5000.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
RES00002 RES Advncd Cstm Calling See Note The fee is $15,000 for the first
100 Advanced Custom Calling
featured lines plus $2,500 for
each additional 100 featured
lines. This capability is sold in
increments of 100 featured
lines.
RES00018 RES & MDC Warm Line $5,000
RES00077 RES Access to Messaging See Note The fee is $12,000 per 5,000
Equipped Lines. The fee is
$6,000 per 5,000 Equipped
Lines if MSA00006 or
RES00076 have been
previously or concurrently
licensed.
RES00074 RES CFW Fraud Prevention $12,000
RES00019 RES Call FWD Remote Act $27,000
RES00047 RES Call Screening $20,000
RES00014 RES Call Wake Up Svc $15,000
RES00054 RES EXB Simpified S`vOrd $7,500
RES00053 RES Enhanced CSMI $10,000
RES00016 RES Expansion Svcs See Note The fee is $20,000 for the first
100 Single Line Variety pack
featured lines plus $1,500 for
each additional 100 featured
lines over the first 100 featured
lines. This capability is sold in
increments of 100 featured
lines.
RES00013 RES Ext Bridged Svcs $7,500
RES00078 RES Fax-Thru Service See Note The fee is $12,000 per switch.
The fee is No Charge if
MSA00005 has been
previously licensed unless
additional equipped lines are
added.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
RES00059 RESLDA Enhancements See Note The fee is $15,000 per 5,000
equipped lines not to exceed
$60,000 per switch. If
RES00038 has been previously
purchased, there is no charge
for RES00059.
RES00070 RES Remote Message Ind $12,000
RES00037 RES Sbscr Prgmbl Rng Ctl $13,000
RES00015 RES Sub Act Code Biking $20,000
RES00017 RES Teen Service See Note The fee is $11,500 for the first
100 Teen lines plus $1,500 for
each additional 100 Teen lines
over the first 100.
RES00060 RES Use Sensitive Cal Fwd See Note The fee is $12,000 per 5,000
equipped lines.
100 RES00003 RES Disp Funct &Prvcy See Note The fee is $30,000 for the first
100 Call Number Display and
Blocking featured lines plus
$1,500 for each additional 100
featured lines over the first 100
featured lines. This capability
is sold in blocks of 100
featured lines.
RES00021 RES Anonym Caller Rej $30,000
100 RES00023 RES Call Nm Disp SW/TCAP See Note The fee is $20,000 for the first
100 Calling Name Displayed
featured lines plus $3,000 for
each additional 100 featured
lines over the first 100. This
capability is sold in increments
of 100 featured lines.
RES00025 RES Call Waiting Display See Note The fee is $15,000 for the first
5000 EQUIPPED lines plus
$15,000 for each additional
5000 EQUIPPED lines over the
first 5000. This capability is
sold in increments of 5,000
equipped lines.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
RES00040 RES Call Wtg Delux [TR] See Note The fee is $20,000 for the first
5,000 lines plus $20,000 for
each additional 5,000 lines
over the first 5,000. If
RES00026 is licensed the fee is
$10,000 for the first 5,000
lines plus $10,000 for each
additional 5,000 lines over the
first 5,000.
L RES00022 RES Calling Na Del Blkng $8,000
RES00024 RES VSLE & Call Logging $50,000
RES00027 RES Visual Msg Waiting $10,000
L RES00004 RES MDC Voice Mail $35,000
RES00023 RES Bulk Call Line ID See Note The fee is $20,000 for the first
50 data links plus $10,000 for
each additional 25 links over
the first 50.
RES00020 RES Rem Call Fwd Enh $12,500
RES00039 RES SMDI CLID Suppr $12,000
RES00005 RES Non-Display Services See Note The fee is $15,000 for the first
100 Non-Display Service
featured lines plus $1,500 for
each additional 100 featured
lines over the first 100 featured
lines. This feature is sold in
increments of 100 featured
lines.
RES00029 RES Auto Recall $5,000
RES00036 RES Auto-Recall Blocking See Note The fee is $1.00 (Net Price -
not subject to any discount) per
wired line.
RES00031 RES Cust Tracing Enh $3,500
RES00030 RES Customer Tracing $3,500
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
RES00034 RES Dist Ring Call Wtg See Note The fee is $10,000 for the first
100 Distinctive Ring Call
Waiting featured lines plus
$1,500 for each additional 100
featured lines over the first 100
featured lines. This capability
is sold in increments of 100
featured lines.
RES00076 RES Enh Busy Call Retum See Note The fee is $14,000 per 5,000
Equipped Lines. Replaces
MSA00001 which has been
MD'd.
RES00073 RES SLE/ACBAR NO TCAP $10,000
RES00035 RES Select Call Accept See Note The fee is $3,000 for the first
100 SCA lines plus $3,000 for
each additional 100 SCA lines
over the first 100.
RES00032 RES Selective Call Fwd See Note The fee is $10,000 for the first
100 Selective Call Forwarding
featured lines plus $1,500 for
each additional 100 featured
lines lines over the first 100
featured lines. This capability
is sold in increments of 100
featured lines.
RES00033 RES Selective Call Rej See Note The fee is $10,000 for the first
100 Selective Call Rejection
featured lines plus $1,500 for
each additional 100 featured
lines over the first 100 featured
lines. This capability is sold in
increments of 100 featured
lines.
L RES00006 RES Service Enablers $31,000
RES00007 RES Signing Routng OAM $20,000
SAID0001 SAID Essentials $100,000
SAID0003 SAID ESP $60,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
SAID0005 SAID ESP Phase 2 $15,000
SAID0002 SAID Plus $30,000
SAID0004 SAID Universal $60,000
SERV0001 SERVSERVORD No Charge
Enhancements
L WLC00001 WLC Enhanced $25,000
WLC00004 WLC 40mA current limit $5,000
WLC00002 WLC Line Admin $20,000
AIN00010 AIN Default Routing $65,000
AIN00018 AIN ACB/AR Premium $5,000
AIN00006 AIN Call Management $200,000
AIN00007 AIN Call Model Cntrl $190,000
AIN00008 AIN Display Services $130,000
AIN00022 AIN Maint Enhancements $22,000
AIN00026 AIN Transitns Simplifctn $15,000
AIN00015 AIN Ntwk Srvcs Enhncmnts $45,000
AIN00027 AIN Office Trigger Flex $15,000
AIN00011 AIN SSP Svcs Enhcemnts $40,000
AIN00220 AIN Service Enablers R2 See Note Option 1: $44,000 (List) plus
$.005 (Net) per each Call
Related Office or Subscription
Msg with a msg fee cap of
$344,000 (Net). Option 2: One
time RTU fee of $312,000
(List)
AIN00210 AIN Service Enablers See Note Option 1: $22,000 (List) plus
$.005 (Net) per each Call
Related Office Msg with a msg
fee cap of $144,000 (Net).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
Option 2: One time RTU fee of
$1 31,000 (List)
AIN00009 AIN Services Supporting $50,000
BAS00015 BAS RSC-S Sync $30,000
BAS00016 BAS SCM/SMS/SMU $11,000
BAS00027 BAS SCM-SLC96 Spec Svcs $12,000
CDD00004 CDD Trnk Grp Mem Usage $22,500
L LNP00100 LNPLRN $125,000
LNP00101 LNPQoR See Note The fee is $120,000 per switch.
If purchased coincidentally
with LRN (LNP00100) for
network-wide deployment, the
fee is $70,000 per switch.
LOC00010 LOC Expand POSNAME $11,400
Table
LOC00004 LOC Intl 15-Dgt Dial $75,000
Nl000024 Nl0 RLT on Nl-1 PRI See Note The fee is $12,000 per office plus
$1,000 per PRI link.
NTS00022 NTS 800 Expand - 822 Cod $10,000
NTS00021 NTS 800 Expand - 833 Cod $10,000
NTS00020 NTS 800 Expand - 844 Cod $10,000
NTS00019 NTS 800 Expand - 855 Cod $10,000
NTS00018 NTS 800 Expand - 866 Cod $10,000
NTS00017 NTS 800 Expand - 877 Cod $10,000
L NTS00023 NTS 800 Expand - 888 Cod $50,000
NTS00016 NTS 888 Expansion for AT $100,000
L NTS00005 NTS E800-US $60,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
NTS00012 NTS Extended Capability $15,000
OAM00004 OAM EADAS DC and No Charge
HW Inv
OAM00007 OAM Enhanced E/DC Buffer $6,900
OAM00005 OAM EADAS NM l/f No Charge
SMA00012 SMA SMA2 with ICB See Note The fee is $71,420 per SMA2
for the 1st through 3rd SMA2
per site. There is No Charge
beyond the 3rd SMA2 at the
same site.
SMA00007 SMA PLATFORM No Charge
ENHANCEMENT
SMA00001 SMA TR303 I/F See Note The fee is $50,000 per SMA or
SMA2/SMA2 module.
SMA00002 SMA MBS/TR303 Access $67,500
SMA00010 SMA RDT Refresh $6,500
L UDD00001 UDD Services $9,200
L TEL00001 TEL Telecom Layer See Note The office license fee is:
Local:$217,500; Toll:$162,300
Local/Toll:$1 98,200;
Toll/TOPS:$162,300;
Local/Toll/TOPS:$198,200;
STP:$25,000; LD:$159,000;
Local/Toll/TOPS/LD:$214,100;
GSP:$162,300;
GWY:$270,000;
LD/GWY:$270,000
1. Toll and Local/Toll offices:
$15,000 per group of 500 wired Toll
trunks in the office. The total
incremental fee for such wired
trunks will not exceed a total of
$741,300.
2. ENET: the fee is $6.00 per
channel for the first 3,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
channels and $28.00 per each
channel over 3,000.
3. DAT: the fee is $20,000 for
the first occurance of
NT9X9OBA.
4. LPP: the fee is $200,000 for the
first occurance of NT9X70_. The fee
is $75,000 if NTEX01_ or NT9X7204
and NT9X01MB have been previously
purchased. The fee is $75,000 if
TEL00008 or Nl000010 have been
previously or is concurrently
licensed.
5. FLIS: the fee is $125,000 for
the first occurance of NTEX01_. The
fee is no charge if NT9X7204 and
NT9X01MB have been previously or
are concurrently purchased.
6. SNSE LIS: the fee is $125,000 if
NT9X7204 and NT9X01MB are purchased
concurrently for the first time.
The fee is $50,000 if TEL00008 is
concurrently licensed.
7. Channelized access: the fee is
$20,000 for the first occurance of
NTEX28_. The fee is no charge if
Nl000010 is concurrently licensed.
8. Ethernet: the fee is $90,000 for
the first occurance of N9X84_. The
fee is $55,000 if STPM0001 is
concurrently licensed. The fee is
$13,750 if NTRX70_ is concurrently
purchased. The fee is no
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
charge if
DMS mail is concurrently licensed.
L TEL00002 TEL C7 Chan-lized Access $30,000
TEL00007 TEL C7 Link Flt. Locator $90,000
TEL00006 TEL C7 Link Prot. Tester $36,000
TELOOOO9 TEL C7 Network Integrity $76,000
Items
TEL00004 TEL C7 Routset Increment See Note The fee is no charge for the
first 256 Route Sets. The fee is
$200,000 for the second group
of 256 Route Sets plus $25,000
for each additional group of
256 Route Sets.
L TEL00008 TELCCS7 Base $400,000 The fee is $125,000 if
STPB0001 has been or is
concurrently licensed.
TEL00003 TEL Gateway Screening $120,000
CAIN0001 CAIN Base No Charge
CAIN0500 CAIN CUSTDP Trigger $100,000
CAIN0600 CAIN Con Digit Collect $125,000
CAIN0602 CAIN EDPs $50,000
CAIN0200 CAIN Extension Parms $50,000
CAIN0605 CAIN Global IMT Support $125,OO0
CAIN0604 CAIN Inter IMT Support $125,000
CAIN0700 CAIN LNP QOO $125,000
CAIN0100 CAIN Messages No Charge
CAIN0506 CAIN NETBUSY Trigger $100,000
CAIN0507 CAIN OCLDBUSY Trigger $100,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
CAIN0502 CAIN OFFHKIM Trigger $100,000
CAIN0508 CAIN OFTRREQ Trigger $100,000
CAIN0505 CAIN ONOANSWER Trigger $100,000
CAIN0504 CAIN PRIBCHNLTrigger $100,000
CAIN0300 CAIN SCP Simulator $30,000
CAIN0601 CAIN SCP Trigger Sub $50,000
CAIN0503 CAIN SlOTRKTrigger $100,000
CAIN0501 CAIN SPECDIG Trigger $100,000
CAIN0603 CAIN STR Connection $50,000
CAIN0400 CAIN Test Query Tool $30,000
CRDS0001 CRDS Card Services $120,000
CRDS0004 CRDS CLG/CLD Number $15,000
Query
CRDS0003 CRDS MVP Card Services $50,000
CRDS0002 CRDS TCAP Card Services $25,000
EOPS0001 EOPS EOPS Base S100,000
NOOR0100 NOO Routing Base No Charge
NOOR0001 NOOR NOO Routing $100,000
NOOR0002 NOOR NOOINXX TCAP $125,000
SERVICE
NPRI0001 NPRI PRI Netwk Interface $25,000
NSER0003 NSER Inter/lntra IMT $50,000
NSER0001 NSER Network Services $100,000
NSER0002 NSER TCAP Auth 8 $20,000
& Acct Val
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
PRLT0001 PRLT ISDN PRI RLT $175,000
UBFR0100 UBFR0 Bill and Fraud No Charge
UBFR0001 UBFR0 Flexible CDR $20,000
UCSB0001 UCSB UCS Base $286,700
UDWS0001 UDWS UCS DialableWidebnd $175,000
UOAM0100 UOAM UCS OAM Base No Charge
URLT0001 URLT0 SS7 RLT Base See Note The fee is $50,000. This
feature replaces ENSR0001
which has been MD'd in
UCS06, if ENSR0001 is
currently licensed then
URLT0001 is No Charge.
URLT0003 URLT0 Nonzero SS7 RLT See Note The fee is $35,000. This
feature replaces ENSR0003
which has been MD'd in
UCS06, if ENSR0003 is
currently licensed then
URLT0003 is No Charge.
URLT0004 URLT0 SS7 RLT Billing Enh $50,000
URLT0002 URLT0 SS7 RLT Enh Reorig See Note The fee is $75,000. This
feature replaces ENSR0002
which has been MD'd in
UCS06, if ENSR0002 is
currently licensed then
URLT0002 is No Charge.
UTRS0100 UTRS Base No Charge
UTRS0004 UTRS COS Screening Enh $50,000
UTRS0002 UTRS Flexible Dial Plans $75,000
UTRS0003 UTRS Routing Enh I $25,000
UTRS0001 UTRS UCS Trans & Rout $90,000
DCR00001 DCRDCR See Note One-time network software
license fee of $200,000 plus a
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
per switch license fee of
$50,000
DCR00003 DCR Dual X25 link See Note One-time network software
license fee of $20,000 plus a
per switch license fee of
$3,000
DCR00002 DCR Mult. Net. Access $75,000
DCR00004 DCR Univrsal Translation $16,000
ISP70001 ISP7 Base ISUP $83,000
ISP70003 ISP7 Aut Cngst Cntrls $25,000
ISP70002 ISP7 Hop Counter $46,000
ISP70004 ISP7 TFP/TFC Rtng Opts $15,000
OSEA0001 OSEA TOPS Equal Access $72,000
OSEA0003 OSEA Exc Acc Opr Svc Sig $12,000
OSEA0005 OSEA GR317/394 $160,000
ISUP/TOPS
OSEA0007 OSEA TOPS Carrier RLT $75,000
OSEA0006 OSEA TOPS ILP via OLNS $75,000
OSEA0004 OSEA TOPS Incom FGD Sig $87,500
OSEA0002 OSEA TOPS InterLATA Carr See Note The fee is $150,000 plus
$20,000 for each group of
10,000 Directory numbers. The
fee for the first 50,000
Directory numbers is included
in the $150,000 list price.
OSEA0008 OSEA TOPS LNP $350,000
ABS00001 ABS Atternate Bill Serv $425,000
ABS00006 ABS AABS Call Screening No Charge
ABS00011 ABS AABS Enh Srvcs Acc $263,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
ABS00004 ABS Account Code Billing $80,000
ABS00002 ABS Auto Altr Billing Svc $750,000
ABS00014 ABS Disallowed Card Issue $100,000
ABS00005 ABS French/English AABS No Charge
ABS00003 ABS Op Hand-off to MBS $250,000
ABS00013 ABS TOPS Auth Code Billng $96,000
ABS00008 ABS TOPS Com Cre Card $125,000
Spt
ABS00007 ABS TOPS DN Call Scming $60,000
ABS00012 ABS TOPS OLNS Interface $200,000
ADVQ0001 ADVQ Advanced Queueing No Charge
ADVQ0005 ADVQ H/R Nwk by QueType $150,000
ADVQ0003 ADVQ Host Que Mgmt Sys See Note The fee is $55,000 for the first
15 queues plus $50,000 for
each group of 10 queues over
the first 15 queues.
ADVQ0006 ADVQ QMS Cust Service $50,000
Enh
ADVQ0004 ADVQ Rem QueMgmtSys See Note The fee is $25,000 for the first
15 queues plus $25,000 for
each group of 10 queues over
the first 15 queues.
ADVQ0002 ADVQ TOPS Close Down $25,000
ENSV0001 ENSV Enhanced Services No Charge
ENSV0011 ENSV Enh OC-lncr Rem Supt $25,000
ENSV0006 ENSV 2 Digit ANT-TOPS $25,000
Off
ENSV0002 ENSV Auto Coin Toll Serv $60,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
ENSV0010 ENSV Auto Country Direct $150,000
ENSV0017 ENSV Branding via SPID $80,000
ENSV0008 ENSV Enh TOPS OperCentra $50,000
ENSV0018 ENSV Est Call Charges $30,000
ENSV0005 ENSV Ext Aud Rep $20,000
Host&Rem
ENSV0009 ENSV Externl RTRS Intrfce $170,000
ENSV0014 ENSV Operator Srvcs AIN See Note The fee is $65,000 plus $2.00
per 1,000 messages.
ENSV0007 ENSV Pre Paid Coin $88,000
ENSV0004 ENSV Screened Serv Rout $70,400
ENSV0003 ENSV TOPS Alternate Ann $5,000
ENSV0013 MDS- Offer of Service See Note The fee of $295,000 applies to
host Prompt TOPS switches
physically connnected to
Audiogram Delivery Service
node(s). TOPS switches not
physically connected to ADS
will be No Charge.
EWSS0001 EWSS Enhancd W/S $50,000
Software
EWSS0002 EWSS Auto OIA Sess Start $30,000
EWSS0006 EWSS TMS Networking See Note The fee is $15,000 for 0-96
positions.
EWSS0007 EWSS TMS Proc Upgrade See Note The fee is $10,000 for 0-96
positions.
EWSS0003 EWSS TOPS DASubtenTMS See Note The fee is $90,000 per 96
positions. The fee is no charge
if NTXJ67AA or NTXA83AA
have been previously licensed.
EWSS0005 EWSS TOPS Incr Multiplex $116,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
License Order ProductName List Price Pricing Notes
- ------- ----- ----------- ---------- -------------
Status Code
- ------ ----
<S> <C> <C> <C> <C>
EWSS0004 EWSS TOPS Open PosProt See Note The fee is $150,000 for the
first 100 positions plus $1,500
for each additional position
over the first 100.
OSB00001 OSB Oper Services Basic $151,200 This is a Net Price not subject
to any discounts. The fee is no
charge for extension offices.
OSDA0001 OSDA Directory Assistance See Note The fee is $150,000 plus
$2,000 per TOPS position.
OSDA0004 OSDA Auto DA Srvc $550,000
(ADAS)
OSDA0002 OSDA Auto DACC w/AltBill $215,000
OSDA0003 OSDA Auto Int Call Comp $400,000
OSDA0005 OSDA Cell/lXC/LEC ADACC $325,000
OSDA0006 OSDA DA Automation l/F $400,000
OSDA0008 OSDA LPP/APU Support $20,000
</TABLE>
<PAGE>
Schedule A
Part IV. DMS-500 Extensions
(DMS-500 System)
DMS-500 Extension Pricing
1.0 DTCVDTC7 Port Extension Pricing
1.1 DTCVDTC7 Port Extension Pricing
The DTCI provides DS-1 interconnect for ISDN PRI or MF Trunking. The
DTC7 provides DS-1 interconnect for SS7 or MF bunking. Each DTCI/DTC7
Port Extension is configured in minimum increments of nine hundred
sixty (960) ports, and is configured for SS7 or ISDN signaling at
FOCAL's request. The price for the DTCI/DTC7 Port Extensions includes
the following
a.) DTCI/DTC7 Equipment and XPM;
b.) Either UTR, STR, CTD as required for DTCs configured for SS7, or
UTR and ISDN pre-processor circuit pack configured for ISDN PRI
capability;
c.) Any required ENET, MS;
d.) Any required DMS-500 service/test circuits to support the
DTCI/DTC7 Port Extensions;
e.) Power Distribution Center (PDC) equipment as required to support
the DTEI Port Extensions;
f.) Spare circuit packs if required; and
g.) Wired ports contain all of the above except the DS-1 circuit
packs.
1.2 Initial Port Prices
Additional DTC7/DTCI ports may be Ordered and Installed with the
Initial System for the following listed prices:
<TABLE>
<CAPTION>
Minimum Port Price per
Description Increment Port
----------- ------------ ---------
<S> <C> <C>
DTC7 ports Wired & Equipped 960 *____
DTCI ports Wired & Equipped 960 *____
</TABLE>
<PAGE>
1.3 Extensions Port Prices
The price for DTCI/DTC7 Port Extensions Ordered in minimum increments
of 4800 ports over and above the initial configuration at any time
other than with an Order for an Initial System, are as follows:
<TABLE>
<CAPTION>
Minimum Port Price per
Description Increment Port
----------- --------- ----
<S> <C> <C>
DTC7 ports Wired & Equipped 4800 *___
DTCI ports Wired & Equipped 4800 *___
</TABLE>
The price for DTCI/DTC7 Port Extensions Ordered in increments of 960
up to 3840 ports over and above the initial configuration at any time
other than with an Order for an Initial System are *____ per port.
2.0 SMA2 Port Extension Pricing
2.1 SMA2 Ports
The SMA2 provides DS-1 interconnect for TR-303 interface. Each SMA2
Port Extensions is configured in minimum increments of nine hundred
sixty (960) ports. SMA2 is only available on DMS-100 and DMS-500
systems. The price for an SMA2 Port Extensions includes the following:
a) SMA2 Equipment;
b) Any required ENET, MS;
c) Any required DMS-500 service/test circuits to support the SMA2
Extensions;
d) Power Distribution Center (PDC) equipment as required to support
the SMA2 Extensions;
e) Spare circuit packs if required; and
f.) Wired ports contain all of the above except the DS-1 circuit
packs.
2.2 Initial Port Prices
- 2 -
<PAGE>
Additional SMA2 ports may be Ordered and Installed with the Initial
System at the following prices:
<TABLE>
<CAPTION>
Minimum Port Price per
Description Increment Port
----------- --------- ----
<S> <C> <C>
SMA2 ports Wired & Equipped 960 *___
</TABLE>
2.3 Extension Port Prices
Additional SMA2 ports may be Ordered in 1920 increments at any time
other than with the Initial System for the following prices:
<TABLE>
<CAPTION>
Minimum Port Price per
Description Increment Port
----------- -------- ----
<S> <C> <C>
SMA2 ports Wired & Equipped 1920 *___
SMA2 ports Wired & Equipped 960 *___
</TABLE>
3.0 Link Peripheral Processor (LPP)
3.1 Initial Channelized Access LIU 7 Interface Unit Pricing
Additional Channelized Access LIU7 Interface Units may be Ordered and
Installed with the Initial System for the price of *__________________
per unit. Channelized Access LIU7 Interface Unit consists of the
following:
Otv PEC Description
--- --- -----------
1 NTEX22BB IPF Integrated Proc & FBUS
1 NT9X76AA STP- Signalling Terminator CP
1 NTEX26AA LUI Channel Bus I/F
1 NT9X0193 STP Bulkhead Cable Assembly
3.2 Extension Channelized Access LIU 7 Interface Unit Pricing
Channelized Access LIU7 Interface Units may be Ordered at any time
other than with an Initial System for the price of *__________________
per unit. This price is for furnish only and does not include spares.
3.3 Initial Ethernet Interface Unit Pricing
- 3 -
<PAGE>
Additional Ethernet Interface Units may be Ordered and Installed with
the Initial System for the price of *____________________ per unit.
Ethernet Interface Unit consists of the following:
Qty PEC Description
--- --- -----------
1 NTEX22BB IPF Integrated Proc & FBUS
1 NT9X84AA Ethernet Interface Circuit Pack
1 NT9X85AA Ethernet Access Unit Interface PB
1 NT9X0190 Ethernet Cable Assembly
3.4 Extension Ethernet Interface Unit Pricing
Ethernet Interface Units may be Ordered at any time other than with an
Initial System for the price of *_________________________ per unit.
This price is for furnish only and does not include spares.
3.5 Initial Frame Relay Interface Unit (FRIU) Pricing
Additional Frame Relay Interface Units may be Ordered and Installed
with the Initial System for the price of *____________________ per
unit. Price does not include software. Frame Relay Interface Unit
consists of the following:
Otv PEC Description
--- --- -----------
1 NTEX22BB IPF Integrated Proc & FBUS
1 NTEX30AA Frame Relay T1 Access PB
1 NTEX31BA Frame Enhanced Relay Access Proc CP
2 NT9X0191 FRIU Cable Assembly
3.6 Extension Frame Relay Interface Unit (FRIU) Pricing
Frame Relay Interface Units may be Ordered at any time other than with
an Initial System for the price of *_______________________ per unit.
This price is for furnish only. Pricing does not include spares or
software.
3.7 Initial Packet Handler (XLIU) Pricing
Additional Packet Handlers may be Ordered and Installed with the
Initial System for the price of *_______________________ per unit.
Price does not include software. Packet Handler consists of the
following:
- 4 -
<PAGE>
Oty PEC Description
--- --- -----------
1 NTEX22BB IPF Integrated Proc & FBUS
1 NTFX09AA CBUS Interface PB
1 NTFX1OAA HDLC Frame Processor CP
3.8 Extension Packet Handler (XLIU) Pricing
Packet Handler may be Ordered at any time other than with an Initial
System for the price of *____________________ per unit. This price is
for furnish only. Pricing does not include spares or software.
3.9 Initial Network Interface Unit (NIU) Pricing
Additional Network Interface Units may be Ordered and Installed with
the Initial System for the price of *______________________ per unit.
Network Interface Unit consists of the following:
Qty PEC Description
--- --- -----------
2 NTEX22BB IPF Integrated Proc & FBUS
1 NTEX25AA Channel Bus Control Unit
1 NTEX25BA Channel Bus Control Unit
2 NTEX28AA DS30 Link Interface Unit
4 NT9X7020 Cable Assemblies
2 NT9X7021 NIU Inter CBC Cable
4.10 Extension Network Interface Unit (NIU) Pricing
Network Interface Unit may be Ordered at any time other than with an
Initial System for the price of *____________________ per unit. This
price is for furnish only.
- 5 -
<PAGE>
Exhibit 10.17
* Certain portions of this Exhibit have been omitted where indicated by
an "*" pursuant to a request for confidential treatment, and the
omitted portions have been separately filed with the Commission.
License Agreement # LA97-10
- ---------------------------
Licensee: FOCAL Communications Corporation
- ------------------------------------------
200 N. LaSalle Street
- ------------------------------------------
Chicago, Illinois 60601
- ------------------------------------------
SOFTWARE LICENSE
DPI/TFS, INC. ("DPI") and the Licensee identified above ("Licensee") in
consideration of the grants and mutual covenants made in this License, agree as
follow:
1. DEFINITIONS:
1.1 "Software" means the Telco Friendly Software in executable format
identified in Exhibit 1 and any DPI modifications to that Software.
1.2 "Modifications" means DPI improvements, enhancements, additions, and
new versions of Telco Friendly Software.
1.3 "Software Package" means the Software, related documentation, and the
DPI DEMO LIB package, or any part thereof, as the context requires.
1.4 "Module" refers to any one of the Software programs listed on Exhibit
1.
1.5 "Access Line" means the facilities that provide access to local and
toll switched networks and are located between a customer and a serving central
office. An access line may include central-office equipment, a subscriber loop,
a drop line, inside wiring, and a jack. It may be a discrete entity, such as a
wire pair or a channel in a multiplex system.
2. DPI'S GRANTS WARRANTIES AND OBLIGATIONS:
2.1 License: Subject to the terms and conditions of this License, DPI
grants to Licensee
(a) a personal, non-exclusive and non-transferable license to use the
software Package for Licensee's own internal purposes as specified in
Exhibit 4 and no others;
(b) a non-exclusive license to make a reasonable number of copies of the
Software for back-up purposes only;
<PAGE>
(c) non-exclusive license to copy the documentation provided by DPI for
Licensee's internal purposes only.
2.2 DELIVERY: DPI shall deliver the Software Package according to the
schedule in Exhibit 2 or as otherwise agreed by both Parties. If DPI fails to
deliver the Software Package to Licensee after four (4) attempts to make
delivery, Licensee may request a refund and upon such request DPI shall
reimburse all amounts paid by Licensee to DPI under this License. This License
shall thereupon terminate without further obligation of the Parties except any
obligation arising out of a previous default.
2.3 USE OF SOFTWARE: Licensee recognizes and agrees that, with respect to
the use of the Software, it accepts full responsibility (1) for the selection of
the Software and (2) that the Software will meet its intended use.
2.4 WARRANTY OF PERFORMANCE: For ninety (90) days following initial
receipt of the Software, DPI warrants that the Software shall have the functions
and capabilities and shall perform as described in Exhibit 7, provided, however,
that any program errors in the Software shall not violate this Warranty of
Performance. This "Warranty of Performance" shall not apply to any Module that
has been modified by Licensee. The Warranty of Performance shall terminate
immediately upon the occurrence of any of the following:
(a) a material breach by Licensee of any term or condition of this
License;
(b) misuse, neglect or abuse of the Software, attempts to repair the
Software, or any other causes beyond the range of normal usage; or
(c) failure by Licensee to cooperate with and assist DPI in DPI's efforts
to repair, modify, or replace the defective Module.
Licensee acknowledges that Modifications to the Software may affect the way in
which the Software works and may affect Licensee's operating procedures. DPI
shall not be liable in the event that any Modification does not conform to the
Warranty of Performance, and DPI shall not be liable for any changes in
Licensee's operating procedures necessitated or caused by Modifications.
In the event Licensee believes a breach of the Warranty of Performance has
occurred, Licensee must promptly provide written notification to DPI
specifically describing the alleged breach. Upon receipt of such notice, DPI
shall, at its option and with reasonable dispatch: issue discrepancy or error
correction information or deliver corrected Software or Modules to Licensee. If
after four (4) attempts to correct a particular defect, DPI is unable to repair,
replace, or modify the Software or Module(s), Licensee may return the Software
or Modules for a refund of the License Fees associated with the return. This
refund remedy shall be available only if DPI's examination of the Software
discloses that the breach of the Warranty of Performance actually exists and was
not caused by conditions beyond DPI's control, or by
-2-
<PAGE>
Licensee's misuse, neglect, abuse, or attempts to repair, or any other cause
beyond the range of normal usage, or by accident, fire, or other hazard.
Licensee's remedies as set forth above are exclusive of any other remedy to
which Licensee may be entitled.
2.5 WARRANTY: DPI warrants that the Software does not infringe any United
States copyright or use any trade secret of any third party. DPI shall, at its
own expense, defend Licensee from any claim or action to the extent that such
claim is based upon infringement by the Software of such intellectual property
rights of a third party. DPI shall have the right to control the defense of all
such claims and actions. DPI shall have no obligation under this paragraph if
Licensee fails to notify DPI of the claim or action within ten (10) days after
receipt by Licensee of notice of the claim or action, or if Licensee fails to
notify DPI before offering to settle such claim or action. In the event that the
Software or any portion of the Software is judicially declared to be subject to
the intellectual property right of a third party, DPI shall, at its option: (1)
obtain permission or a right for Licensee to continue using the Software or the
portion of the Software affected; or (2) replace or modify the Software or
affected portion of the Software to render it non-infringing; or (3) remove the
Software or affected portion of the Software and refund to Licensee the License
Fee or the pro-rata portion of the License Fee paid to DPI.
2.6 LIMITATION OF WARRANTIES: DPI MAKES NO OTHER WARRANTY, EXPRESS OR
IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. DPI MAKES NO ASSURANCE OF SUCCESSFUL INSTALLATION OF THE SOFTWARE.
NEITHER DPI NOR ANY AFFILIATE OF DPI SHALL BE RESPONSIBLE TO LICENSEE, OR TO ANY
OF ITS AFFILIATES FOR LOST REVENUES, LOST PROFITS, LOST DATA OR OTHER SPECIAL,
INCIDENTAL, DIRECT, INDIRECT, OR CONSEQUENTIAL DAMAGES OR FOR LOSS OR DAMAGE OR
OTHER EXPENSE DIRECTLY OR INDIRECTLY ARISING FROM LICENSEE'S, OR ANY OTHER
PARTY'S USE OF OR INABILITY TO USE THE SOFTWARE OR FOR COMMERCIAL LOSS OF ANY
KIND; NOR SHALL ANY RECOVERY AGAINST DPI, WHETHER IN CONTRACT, TORT (INCLUDING
NEGLIGENCE), STRICT LIABILITY OR OTHERWISE, BE GREATER THAN THE AMOUNTS PAID BY
LICENSEE HEREUNDER.
2.7 REPLACEMENT COPIES: If the Software is unintentionally lost or
damaged after delivery but before the initial installation, DPI will promptly
deliver a replacement copy to Licensee. Licensee will be billed for and shall
pay the applicable media, preparation, shipping and handling fees for such a
replacement.
2.8 DATA CONVERSION: DPI assumes no responsibility for data conversion.
-3-
<PAGE>
3. LICENSEE'S OBLIGATIONS:
3.1 PAYMENTS TO DPI:
3.1.1 License Use Fees: Licensee shall pay License Use Fees to DPI
in the amounts and as provided in Exhibit 3. Such payments shall be in U.S.
dollars and paid at an address to be specified by DPI.
3.1.2 Payment For Service Required By Licensee Error: Licensee shall
pay DPI, at DPI's applicable service rates, including time and material fees,
for all maintenance services and warranty services required because of, in DPI's
determination, Licensee error or Licensee modification of the Software.
3.1.3 Taxes: Licensee shall be liable for any and all U.S. federal,
state, local, foreign or other governmental taxes, duties, or excises now or
hereafter applied to the production, storage, sale, transportation, import,
export, licensing or use of the Software or to the services provided hereunder,
including any sales tax, value added tax or similar tax. Any taxes imposed by
U.S. federal, or any other state, local, foreign or municipal government, or any
amount in lieu thereof, including interest and penalties thereon, paid or
payable at any time by DPI in connection with DPI's grant of license to
Licensee, exclusive of taxes based on DPI's net income, shall be borne by
Licensee. Licensee's payment obligation hereunder shall be made without
withholding on account of any taxes, levies, duties or other deduction
whatsoever. In the event that Licensee is required by applicable law to withhold
or deduct any sum from payments required hereby, licensee shall increase the
amount paid to DPI by such withholdings or deductions as may be necessary so
that DPI shall receive an amount which after the payment of such withholdings or
deductions shall be equal to the amount DPI would have received had such sum not
been withheld or deducted.
3.2 THE DESIGNATED HARDWARE TYPE:
Restricted Use of The Software: Licensee shall use the Software as
specified in Exhibit 5.
3.3 OBLIGATIONS TO PROTECT DPI'S PROPRIETARY RIGHTS:
3.3.1 Confidential Information: Licensee acknowledges that the
Software Package contains confidential information belonging to DPI and that
Licensee has no right to such confidential information except as expressly
provided in this License. Except as otherwise provided herein, Licensee shall
not copy, use, disclose, transmit, or commercially exploit, or allow anyone else
to copy, use, disclose, transmit, or commercially exploit any part of the
Software Package, including such confidential information, without prior express
written consent of an officer of DPI. Licensee shall keep all copies of the
Software Package including Modifications at its address identified in this
License, except for a backup copy which shall be located at the address shown
below. Licensee shall exercise all reasonable precautions to
-4-
<PAGE>
prevent access to, use of, or copying of the Software Package, including DPI's
confidential information.
Location of backup copy:
--------------------------------------
--------------------------------------
--------------------------------------
Licensee shall execute a non-disclosure agreement, as set forth in Exhibit 6,
with each employee who has access to the Software Package. Additionally, in the
event that any third party attempts to obtain access to the Software Package or
any of DPI's confidential information, Licensee shall immediately notify DPI, in
writing and either personally or by telephone, and Licensee shall cooperate with
DPI in any litigation against such third parties to prevent the recurrence of
such events.
3.3.2 Liens: Licensee shall not permit any lien or encumbrance of
any nature or description to attach to any part of the Software Package.
3.3.3 Retention of Rights: Licensee agrees that all patents,
copyrights, trademarks, and trade secrets in the Software Package shall be and
shall remain the sole and separate property of DPI. Licensee further agrees that
DPI is the owner of the Software Package and that Licensee's rights are limited
to those rights expressly provided in this License.
3.3.4 Proprietary Notices: Licensee shall not remove any copyright
notices or any other notices or disclosures from any part of the Software
Package.
3.3.5 Non-Competition: Licensee shall not directly or indirectly
develop, sell, license, or lease to others, offer to sell, license, or lease to
others, any computer applications competitive with the Software which may
violate any copyright associated with the Software. Licensee shall not use any
part of the Software Package to develop computer applications competitive with
the Software.
3.3.6 DPI's Copyright in the Software Package: Licensee acknowledges
that DPI is the owner of the copyright in the Software the Software Package, and
any Modifications, improvements, and enhancements. Licensee will not under any
circumstances challenge in court or elsewhere DPI's ownership of such copyright,
the validity of any DPI copyright registration for the Software or the Software
Package, or the facts recited in any such registration. Licensee shall, at DPI's
option, return to DPI at DPI's expense, or destroy, all copies of the replaced
or defective portion of the Software Package. Licensee shall notify DPI that all
such copies have returned or destroyed.
-5-
<PAGE>
3.4 DUTY TO RETURN OR DESTROY COPIES: Upon receipt and installation of a
replacement, upgrade, or corrected copy of any part of the Software Package as
provided under Sections 2.2 and 2.5 of this License, Licensee shall, at DPI's
option, return to DPI at DPI's expense, or destroy, all copies of the replaced
or defective portion of the Software Package. Licensee shall notify DPI that all
such copies have been returned or destroyed.
3.5 AUDIT: During reasonable business hours, DPI will have the right
periodically to inspect Licensee's premises to assure itself that Licensee is
complying with the confidentiality provisions of this Agreement and to verify
that appropriate non-disclosure agreements have been executed. DPI will have the
right to periodically inspect Licensee's system, either on premises or remotely
through telecommunications link, to confirm Licensee's compliance with the
provisions of this Agreement.
3.6 GENERAL PROCEDURES: Licensee understands that generally accepted data
processing procedures dictate that Licensee always keeps back-up copies of data
files and of program files. Licensee further understands that generally accepted
data processing procedures dictate that the existing version of the Software
should be run concurrently with an upgraded version of the Software during at
least the first month of operation with the upgraded version.
4. EFFECTIVE DATE AND TERMINATION:
4.1 EFFECTIVE DATE: Licensee shall be effective when signed by both
Parties.
4.2 TERM: Subject to termination as set forth herein, or by a subsequent
written agreement of the parties, the term of this Licensee shall be perpetual.
4.3 TERMINATION: DPI may immediately terminate this License by giving
written notice to Licensee if Licensee violates any provisions of this License.
Licensee may terminate this Agreement for any reason on written notice to DPI
following expiration or fulfillment of Licensee's obligations.
4.4 RIGHT TO POSSESSION OF SOFTWARE: In the event of termination of this
License, DPI shall have the right to take and Licensee shall have the duty to
deliver the Software Package immediately to DPI and all copies wherever located,
without demand or notice so long as no breach of the peace occurs, and upon so
doing Licensee shall certify that it has so done and that it retains no copies
in its possession. DPI has the right to inspect Licensee's premises without
advance notice, but during business hours, to verify that Licensee has returned
the Software and all copies. This right to inspect continues for one year after
DPI terminates this License.
4.5 CONTINUING DUTIES: Licensee's obligations under Sections 3.3, 3.4,
and 5 shall survive the termination of this License.
-6-
<PAGE>
4.6 CONSEQUENCES OF TERMINATION: In addition to the provisions of Section
4.4, upon termination, Licensee shall cease all use of the Software Package, and
all amounts payable to DPI shall become due and payable on demand.
5. REMEDIES:
5.1 LIMITATIONS OF DPI'S LIABILITY: In connection with this License,
DPI's liability shall be limited to the total amount of payments received by DPI
from Licensee. With respect to any claim relating to the Software or this
License, the provisions of Section 2.6 shall be applicable, even if DPI has been
advised of the possibility of damages.
5.2 INJUNCTIVE RELIEF: In the event that Licensee breaches any term of
this License, DPI may obtain injunctive relief, an appropriate security bond,
and specific performance, in addition to any other relief available. Licensee
agrees to such injunction, security bond, and specific performance, and
acknowledges that other remedies are inadequate.
5.3 LITIGATION COSTS AND EXPENSES: In any action between the Parties
relating to this License, the court may award all or any part of the costs and
expenses relating to such action, including attorney's fees, as the court shall
deem just.
5.4 CUMULATIVE REMEDIES: Except as expressly provided herein, the
remedies available to either party under this License are cumulative and not
exclusive of any other remedies available.
6. GENERAL PROVISIONS:
6.1 ASSIGNMENT: This License shall be binding upon the parties'
respective successors and permitted assignees. Licensee may not assign this
License or any rights or obligations under this License without the prior
written consent of DPI, and any such attempted assignment shall be void.
6.2 EXCUSES FOR NON-PERFORMANCE: DPI shall be excused for any delay or
failure to fulfill its obligations under this License due to causes beyond its
control, such as natural disasters, acts of government, labor strikes of other
entities, acts of war, civil disturbances, or court order.
6.3 ENTIRE AGREEMENT: This License, together with its Exhibits, contains
the entire understanding of the Parties and supersedes all prior written or
verbal agreements or representations. No change or waiver of any provision of
this License shall be valid unless in writing and signed by the party against
whom such change or waiver is sought to be enforced. Any signature required by
DPI must be that of an officer of DPI. No employee, agent, or representative of
either party has authority to bind such party by any oral representation or
warranty.
-7-
<PAGE>
6.4 SURVIVING CLAUSES: If a court deems or declares invalid or
unenforceable any clause or provision of this License, all other terms and
provisions shall remain in full force and effect.
6.5 WAIVER: No delay or omission by DPI to exercise any right or power
under this License shall impair any such right or power or be construed as a
waiver.
6.6 CLAUSE HEADINGS: Clause headings are inserted for ease of reference
only and shall not be used in construing the meaning or effect of this
Agreement.
6.7 CONTROLLING LAW AND PLACE OF SUIT: This License shall be subject to
and shall be interpreted according to the laws of the State of Texas. The
Parties hereby subject themselves to the venue and jurisdiction of any
appropriate Court in Texas.
The Parties have caused this License to be executed by their duly authorized
representatives this 10th day of April, 1997.
DPI/TFS, Inc.
By: /s/ Mark Giles
------------------------------------
Print Name: Mark Giles
----------------------------
Title: General Manager
---------------------------------
Date: 4/10/97
----------------------------------
LICENSEE
By: /s/ Robert C. Taylor, Jr.
------------------------------------
Print Name: Robert C. Taylor, Jr.
----------------------------
Title: President
---------------------------------
Date: 4/9/97
----------------------------------
-8-
<PAGE>
SOFTWARE LICENSE
EXHIBIT 1
THE SOFTWARE
(Paragraph 1.1)
================================================================================
MODULES:
Commercial Billing
Service Orders
General Plant Information
Trouble Reporting
WATS Billing & Rating
General Ledger
Payroll/Labor Distribution
Accounts Payable
Inventory
Work Orders
Continuing Property Records
Toll Center Rating
Carrier Access Billing
Data Base System Control Records
Dynamic Menu System
-9-
<PAGE>
SOFTWARE LICENSE
EXHIBIT 2
DELIVERY SCHEDULE
(Paragraph 2.2)
================================================================================
Items to be supplied will be shipped or delivered within five (5) days of
execution of this Agreement.
-10-
<PAGE>
SOFTWARE LICENSE
EXHIBIT 3
PAYMENT AMOUNTS AND SCHEDULE
(Paragraphs 3.1.1, 3.1.2, and 3.1.3)
================================================================================
1. License Use Fees: * _________ . This License Use Fee has been calculated
based on * _________ Access Lines. This allows usage of the Software up to *____
Access Lines. Usage with more than *___ Access Lines will require the payment of
additional License Use Fees as shown below:
Access Line Levels Incremental License Use Fee
* Chart deleted
The Incremental License Use Fees are valid for a period of three (3) years from
execution of this Agreement. After such time they are subject to change without
notice.
Any usage beyond *___ Access Lines is subject to the then current License Use
Fees in effect at the time.
Licensee will submit to DPI, in writing, a certified and accurate count of its
total Access Lines as of the first day (January 1) of each year following the
execution date of this Agreement. Licensee shall submit such certified Access
Line count prior to January 31 of the same year. DPI shall invoice Licensee upon
receipt of the certified Access Line count for any additional License Use Fees
as applicable. Payment in respect of such additional License Use Fees shall be
made by Licensee within 30 (thirty) days of receipt of the invoice. Not
withstanding the foregoing, in the event Licensee's access line growth exceeds
*_______ prior to the January 1 date of any year, beginning with January 1,
1999, Licensee shall promptly notify DPI of the number of additional Access
Lines and shall make payment of any applicable additional License Use Fees to
DPI within thirty (30) days of such notification.
2. License Use Fee Payment Schedule
a. *______________________
b. *______________________
c. *______________________
- 11 -
<PAGE>
SOFTWARE LICENSE
EXHIBIT 4
BUSINESS FOR WHICH LICENSEE WILL USE THE SOFTWARE PACKAGE
(Paragraphs 2.1A)
================================================================================
Focal Communications Corporation, Holding Company
Focal Communications Corporation of Illinois,
wholly owned subsidiary
Focal Communications Corporation of Massachusetts,
wholly owned subsidiary
Focal Communications Corporation of New York,
wholly owned subsidiary
Focal Communications Corporation of California
wholly owned subsidiary
Licensee may not use the Software to perform service bureau or data processing
services for any third party without the express written consent of an officer
of DPI.
- 12 -
<PAGE>
SOFTWARE LICENSE
EXHIBIT 5
THE DESIGNATED HARDWARE TYPE
(Paragraphs 3.2)
================================================================================
Hardware Type: IBM AS/400
- 13 -
<PAGE>
SOFTWARE LICENSE
EXHIBIT 6
NON-DISCLOSURE AGREEMENT
(Paragraphs 3.3)
================================================================================
__________________________ ("Employee") and _______________________ ("Employer")
and ("Employee") agree as follows:
1. Agreed Facts
1.1 Employer has the right to use certain software with related
documentation (the "DPI Software Package") from DPI/TFS, Inc. (hereinafter
referred to as "DPI"). The Software Package contains confidential information
and trade secrets belonging to DPI.
2. Covenants of Employee. In consideration of continued and future employment
with Employer, Employee agrees:
2.1 Employee shall not copy, duplicate, create, or recreate all or any
part of the DPI Software Package, other than as required for Employer's normal
operations.
2.2 Employee shall not assign, lease, sell, market, donate, or
commercially exploit all or any part of the Software Package.
3. Miscellaneous
3.1 This Agreement shall be binding upon Employee and shall survive
termination of Employee's employment for a period of two (2) years.
3.2 DPI is an intended beneficiary of this Agreement. Upon failure of
Employee to keep and perform the terms and conditions of this Agreement, DPI or
Employer may seek any and all remedies available at law or in equity, including
injunctive relief, together with costs and attorney fees.
---------------------------------- ---------------------------
Employer Date
---------------------------------- ---------------------------
Employer Date
-14-
<PAGE>
SOFTWARE LICENSE
EXHIBIT 7
SOFTWARE SPECIFICATIONS
(Paragraphs 2.4 and 2.5)
================================================================================
The attachment represents the minimum specifications of the systems.
Enhancements and upgrades are a continual process, therefore some specifications
may change prior to physical installation.
-15-
<PAGE>
WIDE AREA TELECOMMUNICATIONS SERVICE (WATS) RATING & BILLING
============================================================
Standard Features:
. On-Line Entry, Inquiry and Update
. User Friendly
. Menu and Screen Driven
. Operator Oriented Prompt Screens
. Comprehensive Reporting
. On-Going Updates Provided For FCC Approved Tariff Changes
. Uses Standard 8 1/2 x 11" and 14 7/8" x 11" Computer Paper
Application Features:
. Accommodates INWATS/OUTWATS/Two-Way WATS Billing
. Designed To Make Changes Easily When New Tariffs Are Approved
. Multiple Cycle Billing
. WATS Billing Data Can Be Printed For Edit And Review
-16-
<PAGE>
GENERAL LEDGER APPLICATION
================================================================================
The GENERAL LEDGER system is designed to operate as an independent operating
application or as an integrated module with other applications. This system will
process multiple companies, locations, and cost centers. It allows up to *
unique general ledger formats for each company for printing the various reports
such as Operating Statement, Balance Sheet and Cost Center reports. All journal
entries posted to the general ledger are stored in the Accounting History fee.
The Journal Report By Source Code, General Ledger Detail Report By Account and
General Ledger Summary Report By Account are generated using the information
contained in this file. The system is designed to handle companies by fiscal or
calendar year. All companies have a master control record in the Master Data
Base. The information contained in the master control record determines how a
company is to be processed.
All journal entries entered into the system have a control field for control
month and control year. These fields control where the journal entries will be
posted in the ledger files (General Ledger Balance Forward, Work Order Ledger).
The General Ledger and Work Order files have a starting balance field and
* control fields for annual processing. Multi/Year ledgers can be retained
in the ledger files. The system will convert to fiscal prior to posing the
ledger files. Detail journal entries are posted to the Accounting History file
and all entries charged to work orders are posted to the World Order History
file. The Accounting System is designed to group accounting entries by type of
entry and where the entry came from. In order to accomplish this, a source code
is provided to group entries from Payroll, Accounts Payable, Billing, A/R
Payments, Inventory and Manual Journal Entries.
Below is a list of valid source codes:
* Chart deleted
-17-
<PAGE>
Standard Features Include:
. G/L Accounts Inquiry/Update
. G/L Budget Maintenance (used for setting up budget amounts for profit
and loss statements)
. Profit & Loss Format Maintenance
. G/L Spread Master Maintenance
. G/L Year End Close
Reporting Includes:
. Journal Listing By Date Range Selection (from year/month to
year/month)
. G/L Chart of Accounts Listing
. Profit and Loss Formats Listing
. G/L Detail Report By Date Range Selection (month and year)
. G/L Summary Report by Date Range Selection (month and year)
. G/L Spread Edit
. Financial Reports by Profit & Loss Format Selection (balance sheet
operating statement, etc.)
Special Features:
* Chart deleted
-18-
<PAGE>
PAYROLL/LABOR DISTRIBUTION APPLICATION
================================================================================
Standard Features Include:
. Hourly and Salary Employee Processing
. Weekly, Biweekly, Semimonthly And Monthly Pay Frequencies
. Twenty-five (25) Voluntary Deductions (Insurance, Profit Sharing,
Credit Union, etc.) Per Employee, And Ninety-nine (99) Per Company,
In Addition To Tax Deductions
. Seven (7) Deduction Frequency Code Options (indicates how often
deduction will be taken: each pay period, first and third pay
periods only, etc.)
. Labor Costs Distribution To Detail Or Summary General Ledger
Account Level (user defined)
. Labor Costs Accumulation By Work Order Number
. Designation of Direct or Indirect Labor
. Employee Master File Entry/Inquiry/Update (Employee number, name,
address, employment date, marital status, rate, sick leave,
deductions, department number, vacation, YTD amounts, exempt
dependents, pay period, etc.)
. Master Control File Inquiry/Update (general ledger account numbers,
deduction codes, state information, married and single percentage
withholding tables, etc.)
. Time Card Information Entry/Update
. Calculate Trial Payroll (optional feature)
. Calculate Payroll (gross, taxes and voluntary deductions)
. Manual Check Entry/Validation
. Voided Check Entry
. Print Payroll Checks
. Print 941-A Forms
-19-
<PAGE>
. Print W-2 Forms
Reporting Includes:
. Employee Master File Listing (all employees)
. Updated Employees Only Listing (payroll changes)
. Time Card Edit
. Employee Year-To-Date Listing (reflects gross pay, deductions, FICA,
etc.)
. Trial Payroll Register (optional feature)
. Payroll Register
. Deductions Register
. Labor Distribution Register
. Labor Analysis Reports By:
. 941-A Quarterly Report
. Employee W-2 Yearly Report
. Employee Payroll Detail Listing by Date Range Selection (reflects
detail information for all payrolls processed during the date
range selected)
. Payroll Data Base control Records Listing (reflects all control records
maintained in the payroll database control files)
Special Features:
* Chart deleted
-20-
<PAGE>
ACCOUNTS PAYABLE APPLICATION
================================================================================
General:
This application provides the capability for entering into the system and
maintaining accounts payable information. The accounts payable system processes
all payable information on an open item basis. Transactions into the system
result from the processing of the direct payable transactions from the screen
input and mechanized computer entries. All information is maintained in detail
on a vendor/invoice basis. The system prints checks and allows hand check
processing with automatic journal entry process. The system produces detail
aging by customer and invoice and summary aging by customer reports. A cash
requirements report can be generated for each company and payment amounts are
listed by due date. The system has the ability to release by due date and has
on-line inquiry to the open item file. All control accounts are entered in the
accounts payable control maintenance and are stored in the system data base. All
offset accounts and ranges are user defined. Standard features include
applicable user file inquiry, update maintenance functions and comprehensive
reporting.
Standard Features Include:
. Independent Reporting For Each Company
. Open Item Master File
. On-Line Display And Update Via Screen
. Complete Detail Aging Analysis By Open Item
. Cash Requirements Reporting
. Computer Checks And Manual Check Processing With Full Journal Entry
Reporting To General Ledger
. Interfaces To Other System Applications
. Complete History Of All Invoiced Amounts, Debit Or Credit Adjustments
And Payments
. General Ledger Entry/Update (Accounts payable vouchers and journal
entries)
. Vendor Inquiry By Company And Vendor Number Selection
. Release Accounts Payable Hand Checks From Open Item Payables File By
Voucher Or Document Number
-21-
<PAGE>
. Process Accounts Payable Hand Checks And Generate Appropriate Journal
Entries
. Release Accounts Payable Checks By Company And Due Date Selection
. Print Accounts Payable Checks By Company Selection And Generate
Appropriate Journal Entries
. Accounts Payable Control Maintenance Inquiry/Update
Reporting Includes:
. Invoice Edit (Accounting Input Edit)
. Accounts Payable Detail and Aging Reports
. Cash Requirements Report (By due date)
. Accounts Payable Check Pre-Register
. Hand Checks Processed Report
. Vendor Listing
Special Features:
* Chart deleted
-22-
<PAGE>
INVENTORY APPLICATION
================================================================================
General:
This application provides the capabilities for entering into the system and
maintaining inventory and purchase order information. All inventory items are
maintained by company number, inventory item number and bin number in the
inventory master file. This file contains entries for company and inventory item
number, last date item was updated, inventory class, unit of measure, quantities
on hand and on order, MTD and YTD quantities for receipts, issues and
adjustments, current average cost, beginning of year on hand quantity, current
inventory value, primary and secondary vendor numbers, reorder point, staging
quantity breakdowns and reorder quantity. This information is accessible through
the inventory item inquiry or maintenance screen programs.
New purchase orders and inventory issues, receipts and adjustments are entered
via the transaction entry screen programs. After the transactions to be
processed have been entered, edit reports are generated for verification and
correction purposes prior to posting the transaction entry information to the
applicable inventory and purchase order files. During the posting cycle, each
inventory item having a receipt, issue or adjustment transaction is updated and
the open purchase order item quantities are reduced based on the quantity
received for each purchase order item. The application allows for automated
posting to the General Ledger for all inventory transactions during a month.
Current inventory dollar values are reduced accurately using calculations that
generate the true average cost of each inventory item being issued. Standard
features include applicable user file maintenance functions and the
comprehensive reporting.
Standard Features Include:
. Inventory Item Inquiry By Company Number, Item Number and Bin
. Label Selection
. Inventory Transactions Entry/Inquiry/Update
. Transaction Types:
- 1) Receipts
- 2) Transfers
- 3) Adjustments
- 4) Purchase Orders
-23-
<PAGE>
Reporting Includes:
. Active Inventory Item Number Listing (reflects all inventory items
maintained in the inventory master file; includes company number, item
number, class and description, unit of measure, item status, and
totals for active items and inactive items)
. Inventory Transactions Entry Edits For: Receipts, Transfers,
Adjustments and Purchase Orders
. Inventory Stock Status Report
. Inventory On Order Report
. Transaction Activity Report
. Inventory Activity To-Date
Special Features:
* Chart deleted
-24-
<PAGE>
WORK ORDERS APPLICATION
================================================================================
The WORK ORDERS application provides the capability for entering into the system
and maintaining work order information by company number and work order number.
The work order master file accommodates entries for the work order number,
company number, project description, project completion date, estimated
completion date, budget and project status. Project cost to date information is
generated and maintained via journal entries created through the Accounts
Payable, Payroll Inventory and General Ledger applications. User assigned
account number entries are allowed for defining valid work order ledger account
numbers and the associated account number description. The information
maintained in the work order master and account number files is used for
validation purposes when the associated project costs are being allocated to the
work order or the completed work order costs are being spread to the Continuing
Property Records. Only valid work orders that reflect a project completion date
can be spread to the Continuing Property Records and completed work orders may
be purged from the work order master file by accounting year and month
selection. Standard features include applicable user file maintenance functions
and reporting includes Work Order Detail and Summary reports and a Work Order
Master File listing.
Standard Features Include:
. Work Order Master File Entry/Inquiry/Update
. Purge Completed Work Orders By Date Range Selection
. Valid General Ledger Work Order Accounts Inquiry/Update
(accommodates as many work order accounts and account
descriptions as the general ledger chart of accounts - up to
9,999,999)
Reporting Includes:
. Work Order Detail Ledger Report (reflects detail transactions by work
order)
. Work Order Summary Ledger Report (reflects work order activity costs
by general ledger account for twelve (12) month period)
. Work Order Master Listing (reflects all current work orders, including
work order number, project description, project completion date and
project cost-to-date amounts)
Special Features:
* Chart deleted
-25-
<PAGE>
CONTINUING PROPERTY RECORDS APPLICATION
================================================================================
General:
This application provides the capability for entering into the system and
maintaining continuing property records information. The application
accommodates 1) continuing property items entry 2) spreading of completed work
order costs to continuing property items and 3) retirement of specific
continuing property items. Standard features include applicable user file
inquiry, update maintenance functions, comprehensive audit trail and analysis
reporting.
Standard Features Include:
. Continuing Property Item Entry/Inquiry/Update
. Continuing Property Item Retirement Quantity Entry
. Spread Work Order Costs to Continuing Property Records
. Continuing Property Records Spread Amounts Update (updates CPR item
masters with appropriate work order spread amounts)
. Continuing Property Records Item Retirement Update (updates CPR item
masters with appropriate retirement quantities)
. Continuing Property Records Month End Reset (clears MTD received and
retired quantity amounts)
. Continuing Property Records Year End Reset (clears MTD and YTD
received and retired quantity amounts and updates beginning year
totals)
Reporting Includes:
. Work Order Spread Amounts Edit (reflects work order amounts to be
spread to each CPR item)
. Work Order Spread Amounts Posted Report (reflects work order amounts
posted to each CPR item)
. Retired Continuing Property Record Items Posted Report (reflects
retirement quantities posted to each CPR item)
. Continuing Property Records Analysis Report (reflects property
analysis by exchange and plant type)
-26-
<PAGE>
. Active Continuing Property Records Item Number Listing (reflects
active CPR item numbers by exchange)
. Continuing Property Records Factored Quantity Analysis Report For All
Exchanges (reflects totals by plant type and general ledger account
number. Detail information includes: plant type, CPR item number, item
description, last update, in place quantity and cost, unit of measure,
factor of measure, factor of measure, factored quantity and property
value. The item factor of measure allows the user to convert one type
of measurement to another type of measurement, i.e., wire or cable
footage to miles. This converted information can be used for both
internal or external reporting purposes)
Special Features:
* Chart deleted
-27-
<PAGE>
COMMERCIAL BILLING APPLICATION
================================================================================
. On-Line Access To Current & Comprehensive Subscriber Billing
Information
. Subscriber Information Accessed By Name Or Telephone Number Selection:
. Primary Subscriber . Adjustments
. Miscellaneous . Payments
. Service and Equipment . Treatment
. Directory . Toll
. Group Billing . Plant
. Accounts Receivable . Trouble
. Calling Card . Service Order
. Deposits and interest . Prior Billing
. Equal Access information
. Scroll Screen Functions Facilitate Information Retrieval
. Accounts Receivables Payments
. Accounts Receivables Adjustments
. Group Billing
. Toll Processing
. Unlocated Toll
. Service & Equipment
. Service & Equipment Proration
. Service & Equipment Rate Changes
. Detail Or Summary DA Call Billing
-28-
<PAGE>
. Cycle Billing (Accommodates Up To 99 Billing Cycles)
. Subscriber Reassignment
. Subscriber Treatment
. Deposits & Interest
. Calling Cards
. Subscriber Write Off
. Subscriber Billing Statements
. Reminder Notices
. Bank Drafts
. Subscriber Credit Rating Promotion/Demotion
. Accounts Receivable Reporting, Control And Auditing
. Directory Assistance Reporting
. High Toll Usage Reporting
. Advance or Arrears Billing Methods
. Subscriber Billing Information Updated From NYNEX DPI Service Order
Application
. Variable Billing Statement Form Print Formats Available
. User Defined Billing Statement Handling Codes
. Allows Up To 99 Billing Statement Copies Per Subscriber
. Billing Statements Printed By Cycle With Handling Code. Phone Number
Order Option
. On-Line Balance Forward Accounts Receivable and Credit Rating
Information Inquiry For Each Billing Period Per Main Number Billed
. Unlimited Number of Billing Periods Can Be Maintained
-29-
<PAGE>
. Subscriber Physical Address Can Be Defined By: State, City, Subdivision,
Street Name, Street Number, Street Direction a nd Street Subtitle,
Building, Building Sub-number
. Free Format Directory Listings
. User Defined Directory Codes
. Multiple "List With" Entries
. Allows Prefix Designation To The Subscriber Service and Equipment Item
Level For Special Rates (i.e., Vacation, Convention, etc.)
. Automatic Booking Of Refunds To Subscriber's Bill
. Industry Standard EMR 210 Toll Record Format Used Throughout Billing
Process
. Up To 12 Months of Detail Toll information Can Be Accessed For Inquiry,
Investigation Or Reporting Purposes
. Toll Dollar Limit Amounts Can Be Designated For Credit Or Security
Deposit Purposes
. Up To 999 Deposit, Interest and Refund Amounts Per Subscriber
. User Defined and Controlled Data Base Control Records
. On-Line Entry, Inquiry and Update Menu and Screen Driven
. Operator Oriented Prompt and Instruction Screens
. Comprehensive Reporting With Variable Selections
. Comprehensive User Oriented Documentation
-30-
<PAGE>
SERVICE ORDER
================================================================================
. On-Line Multi-User One Step Process Service Order Entry
. On-Line Access To Current And Comprehensive Service Order and Subscriber
Billing Information
. Automatic Service Order Number Assignment
. Automatic Screen Mode For Entry Of New Orders
. Optional Planning Schedule Interfacing and Usage Reporting
. Service Order Entry Information Validated Against Data Base
. Automatic Retrieval of Existing Subscriber Information During Service
Order Entry
. Scroll Screen Functions Facilitate Information Retrieval:
. Service Order By Number
. Service Order By Name
. Service Order By Telephone No. Number (Open Only)
. Service Order By Number (Open Only)
. Physical Address By Location
. Physical Address By Street
. Subscriber Deposits
. Line Card By Location
. Line Card By Street
. Line Card By Special Circuit
. Line Card By Telephone Number
. Line Card By Distribution Cable Card
. Line Card By Name
. Service & Equipment By Item Code
. Calling Card By Sequence Number
. Comprehensive Service Order Information:
. Physical Address . Service and Equipment
. Billing . Calling Card
. Additional Subscriber . Free Form Memo w/Unlimited Pages
. Advance Payment And Deposit . Basic Order
. Directory . Line Card
-31-
<PAGE>
. User Defined Service Order Types
. Customer Contact Memo Printing With Multiple Copies Option
. Mass Order Processing Capability (No. Change, Disconnect, Switch Cut,
etc.)
. Comprehensive Audit & Balancing Features
. Service Results Tracking
. Multi-Level Service Order Scheduling And Rescheduling
. Service Order Processing By Actual Completion Date or Effective Date
. Service Order Printing Controlled By User Designation
. User Defined Variable Print Routing Of Service Order Forms
. Automatic Removal Of Old Subscriber Information On Number Change,
Transfer, And Disconnect Orders
. User Defined And Controlled Data Base Control Records
. On-Line Entry, Inquiry and Update
. Menu and Screen Driven
. Operator Oriented Prompt and Instruction Screens
. Comprehensive Reporting With Variable Selection Options:
. Service Order Information . Subscriber Information
. Service Order Activity . Before & After Service Order Post
. Advance Payments and Deposits . Station Gain and Loss
. Planning Schedule Usage . Number Changes
. Service Order Log . Comprehensive User-Oriented
Documentation
-32-
<PAGE>
GENERAL PLANT/LINE ASSIGNMENT
================================================================================
. On-Line Inquiry To Current Line Card Information Including:
. Physical Address
. Dedicated Cable and Pair . Service Order Activity
. Distribution Drop . Trouble Activity
. Map Number . User-Defined Data Fields
. Terminal Location . Service and Equipment
. Cable Network . Carrier Information
. Telephone Number . Central Office Information
. Service Type . Special Circuit Information
. Name . Detached Extension Information
. Connect/Disconnect Date
. Service Area Master Broken Down By:
. State (Or Region) . Street Subdescription
. City . Map Number
. Subdivision . Dedicated Cable and Pair
. Street . Terminal Location #1
. Street Direction . Terminal Location #9
. Street Subtitle . Building Number
. Street Number . Building Subnumber
. Line Card Access By:
. Telephone Number . Distribution Cable
. Name . Address
. Special Circuit . Street
. Line Card Scroll By:
. Telephone Number . Distribution Cable
. Name . Address
. Special Circuit . Street
. Standard Listings and Reporting Including:
. Line Card Print Out
. Line Card Listing
. Cable Usage Reports
-33-
<PAGE>
Standard Features Include:
. Cable Network Assignment To Selected Address
. Cable Usage For All Or Specific Cable Routes (Available Pairs And
Percentage Usage)
. Interface Into Billing, Service Order, And Trouble Applications
. Reports And Listings For Line Cards
. Validation Of Information Against User Defined Data Base
. Automatic Central Office Assignment, Direct Interface of Central
Office Data Base To Commercial Representatives. Total Assignment To
Premise May Be Accomplished From Commercial Office.
Currently Under Development:
. Automatic Polling of Central Office Diagnostics By Trouble Clerks.
Results of Test Will Be Attached Automatically To Trouble Ticket.
-34-
<PAGE>
TROUBLE REPORTING APPLICATION
================================================================================
General
This application provides the capability for entering into the system and
maintaining subscriber telephone trouble information. The application
accommodates 1) subscriber trouble entry 2) REA or user defined and controlled
data base 4) purging of cleared trouble calls from the system by date selection
and 5) printing of trouble codes and descriptions.
. Trouble Information Includes:
. General Information . Completion Information
. Line Card Information . Physical Address Information
. Service and Equipment Information . Subscriber Miscellaneous
Information (User-Defined)
. Memo Information
. Scheduling Information . Testing Information
. Dispatch Information
Standard Features Include:
. Subsequent and Common Cause Tickets
. Automatic Completion Of Common Cause Tickets
. Automatic Crediting of S/E Charges (User Option)
. Entry of Service Charges
. Unlimited Trouble History Capability
. Unlimited Memo Screen Information
. Trouble Ticket Printout Up To Twenty Locations
. Buried Drop Wire Requirements Reporting
. REA User Defined Reporting
. Validation Against Disconnect For Nonpayment Information
. User Defined Trouble Scheduling/Dispatch Tracking
-35-
<PAGE>
. Purge Trouble File By Date Range Selection (All Cleared Trouble
Records Having A Trouble Report Date That Is Equal To Or Less Than The
Date Entered Will Be Purged From The System)
. Assign To Trouble Ticket Information By:
. Ticket Number . Telephone Number
. Address . Circuit Number
. Appointment Date And Time . Billing Name
. Line Card Number . Cable Pair
. User Defined Data Base Information Includes:
. Trouble Ticket Types . Cause Codes
. Report Codes . Fault Codes
. Action Taken Codes . Memo Information
. Plant Class Codes . Completion Status Codes
. Plant Usage Codes . Source Codes
. Plant Item Codes . Trouble Service Results Code
. Manufacturer Codes . Test Result Codes
. Weather Codes . Appointment Codes
. User Controlled Information Includes:
. Validation And Closeout Requirements . REA Reporting
. Entry Screen Access . Trouble Ticket Printing
Reporting Includes:
. Trouble Analysis Report By Variable Option Selection
. Detail Trouble By Telephone Number- (Reflects trouble location,
report number and code, action taken, line number, reported data
and time, cleared date and time, employee number, hours elapsed,
plant class and item, manufacturer code, fault code, cause code,
weather code, reassigned telephone number designation and total
number of troubles reported. Elapsed time is calculated from the
time the trouble was reported to the time the trouble was
cleared.)
. Summary Trouble By Exchange- (Reflects number of months
processed, plant class code and description, plant item and
description, number of troubles, trouble rate, plant units, index
base sheath miles, etc., totals for number of troubles cleared,
trouble reports, other reports and associated number of
-36-
<PAGE>
troubles, trouble rate, plant units and index base, and the
exchange trouble percentage of all trouble.)
. Summary Trouble For All Exchanges By Plant Class - Reflects
number of troubles, trouble rate, plant units and index base
total stations for total troubles cleared, total other reports,
total trouble reports, plant class and the plant class trouble
percentage of all trouble.)
Variable Options:
- Weather - To Date Reported
- Manufacturer - Plant Item
- Exchange - From Date Reported
- Report Number - Report Code
- Fault Code - Incomplete Only
- Repair Person I.D. - Plant Class
- Cause Code
. Trouble Code And Descriptions Listing (Reflects all active trouble
codes and descriptions)
Special Features:
* Chart deleted
-37-
<PAGE>
TOLL CENTER RATING AND REPORTING
Standard Features:
. Rated Toll Data and Applicable Non-rated Converted Message Types
Interfaces To The NYNEX DPI Commercial Billing Application
. Can Be Used Stand Alone With Other Billing Application Software
. User Selection Options Provided For Rating "One Rate Period Messages"
and Rate Period Specific Billing (RPSB)
. On-Line Entry, Inquiry and Update
. Menu and Screen Driven
. Operator Oriented Prompt and Instruction Screens
. Comprehensive Reporting With Variable Selections
. Comprehensive User Oriented Documentation
. Standard 14 7/8" X 11" Computer Paper. No Special Forms Required.
Application Features:
* This information has been deleted. A total of 3 pages have been omitted
from this "Application Features" section.
Reporting:
. Terminating Point Master (TPM) File Listings Selection Options:
. Beginning and Ending Place Abbreviations
. Beginning and Ending Area Codes
. Beginning and Ending Exchange Numbers
. Combination of Above
. ATTIX Master File Listings Selection Options:
. Beginning Ending Area Codes
. Beginning and Ending Exchange Numbers
. Combination of above
-38-
<PAGE>
. Other Carrier Master File Listings Selection Options:
. Beginning and Ending Area Codes
. Beginning and Ending Exchange Numbers
. Combination of Above
. Rate Table Master File Listings Selection Options:
. Carrier Code . Rating Period Code
. Lata Indicator . Non-overseas and Overseas Points
. Place Code . Combination of Above
. Type Code (PP,SS,DD,CC)
. Rate Period Master File Listings Selection Options:
. Year To List . Call Type (PP,SS,DD,CC)
. Carrier Code . Non-Overseas and Overseas
. Lata Indicator . Combination of Above
. Place Abbreviation
. Exchange Master File Listings Selection Options:
. Individual Exchange
. All Exchanges
. Dial-It Master file Listings Selection Options:
. Individual Area Code
. All Area Codes
. Company Master File Listings Selection
. State Tax Master File Listing
. Collect Surcharge Master File Listing
. Group Location Master File Listing Selection Options:
. Individual Group Location
. All Group Locations
. Independent To Independent Points Master File Listing
-39-
<PAGE>
. List All Toll Center Rating Data Base Master files
. Conversion Summary (Edit Reports)
. EAX No. 1, No. 2 and No. 5 Tape
. SATT Tape
. TOPS Tape
. Mark Sense
. Hand Tickets Edit Report
. Connect Hour Peg Count Summary Report
. Unratable Toll Listing (Invalid Tickets). Multiple Copies Option
Provided in Toll Rating Process.
. Credit Toll Listing. Multiple Copies Option Provided in Toll Rating
Process.
. Message Toll and WATS Data/B-I Settlement Reports Selection Options:
. Beginning Month and Day of Report
. Ending Month and Day of Report
. Year of Report
. Number of Copies
. Print Intra/Inter Lata Separately (Yes/No)
. Tape Invoice Summary Report
User Requirements:
The user is responsible for accommodating the transfer of tape data to and from
the AS/400 computer via tape drive or direct communication processing.
Ticketing Record Format Conversion Requirements:
Record format conversion programs are required for ticketing record formats not
presently accommodated by this application.
-40-
<PAGE>
CARRIER ACCESS BILLING SYSTEM (CABS)
Standard Features:
. Stand Alone Application
. On-Line Entry, Inquiry and Update
. User Friendly
. Menu and Screen Driven
. Operator Oriented Prompt Screens
. Comprehensive Reporting
. On-going Updates Provided For FCC Approved Tariff Changes
. Uses Standard 8 1/2 x 11" and 14 7/8" x 11" Computer Paper
Application Features:
* This information has been deleted. (Two pages have been
omitted from this "Application Features" section)
Reporting:
. Message and Minute Count Audit Report
. Measured Feature Group Usage Report
. Non-measured Feature Group Service Report
. Special Access Lines (S.A.L.) Recurring and Nonrecurring
. Installation Charges Report
. Billing and Collection Charges Report
. Accounts Receivable Transaction Report
. Management Analysis Reports consist of:
. NECA Report (Current Month and Year-To-Date)
. USOC Count Report
-41-
<PAGE>
Listings: (All Generated By Company, Carrier Combinations)
. Company Information Listing
. Carrier Information Listing
. CLLI Code Listing
. Switched and Special Route Listing
. Wire Center Listing
. Wire Center Message Factor Listing
. FCC Account Listing
. Charge Code Listing
. Wire Center Trunk Group Routing Listing
. Feature Group Rate Listing
. Universal Service Order Code (USOC) Listing (Utilizing Daily and Monthly
Rates, Recurring and Nonrecurring Charges)
. Special Transport USOC Listing
. Access Connection USOC Listing
. Special Access Line USOC Listing
. Features and Functions USOC Listing
. Channel Mileage USOC Listing
. Point of Termination USOC Listing
. Channel Termination USOC Listing
. Billing and Collections USOC Listing
. Installation USOC Listing
. Rate Period Listing
-42-
<PAGE>
. Carrier Network Listing
-43-
<PAGE>
DATA BASE SYSTEM CONTROL RECORDS
================================================================================
General
The System Software is a highly integrated system with application programs
sharing common information to reduce redundant information being setup for each
application. All control records are user defined and controlled, and only have
to be entered one time.
Once setup, all associated applications have immediate access to the data
entered. This common integration not only helps reduce the required hardware
disk storage, but also provides more accurate editing and cross checking of the
application information entries through the built-in entry validation processes.
The system control record information must be entered first, as all other
applications utilize this information. The control records for each application
must be setup prior to processing of that application. Listings for each
control record type can be generated for initial setup validation, maintenance
and on-going reference purposes.
The following is a list of the current system control records used.
SYSTEM CONTROL MAINTENANCE
- --------------------------------------------------------------------------------
1. Company Information
2. Location Information
3. Department Information
4. Data Base Sequence Counters Maintenance
5. State Tax Codes
6. Batch Jobs Control Information
7. City Code
8. County Code
9. School Code
10. Tax District
11. Batch Jobs Control Information
12. Intercompany Transfer J/E Data Base
BILLING CONTROL MAINTENANCE
- --------------------------------------------------------------------------------
1. Exchange Code
2. Service Code
3. Billing Method
4. Toll Limit
5. Handling Code
6. Credit Rating
-44-
<PAGE>
7. Deposit Code
8. Interest Method
9. Billing Cycle
10. EMR Toll Record ID
11. Directory Code
12. Charge Codes
13. Service & Equipment Item
14. Service & Equipment Category
15. Service & Equipment Class Code
16. Directory Assistance Charges
17. Other Tax
18. EMR Message Type
19. EMR Rate Class
20. EMR Rate Period
21. Equal Access Transaction Codes
22. Equal Access Status Indicator
23. Matrix Category Codes
24. Payment Type Codes
25. Private Line Type Codes
26. "BRMIS" Item Codes
27. "BRMIS" Charge Codes
28. Billing Journal Entries
29. Corner Default Payment
30. Caller I.D. Codes
31. Toll Concession
32. Optional Calling Plan
33. OCP Schedule Definition
34. OCP Rerate Period
35. OCP Rerate Table
36. Tax Exempt Location
37. Reverse Billing
PAYROLL CONTROL MAINTENANCE
- ---------------------------
1. Payroll Rate
2. Hour Type
3. Paid Period Information
4. Hour Groups
5. Check Information
6. State Information
7. FICA Tax Limits
8. Federal Tax Table
9. The Card Hour Types
10. Deduction Information
-45-
<PAGE>
11. Class Description
12. Grade Description
13. Step Description
14. Job Description
15. Education
16. Check Distribution
17. Last Raise Reason
18. Termination Reason
19. Labor Function Code
20. State Tax Tables
21. Deduction Registers Control
22. Sick Information
23. State FIPS 5-1 Code
-46-
<PAGE>
WORK ORDER CONTROL MAINTENANCE
- --------------------------------------------------------------------------------
1. Project Status
SERVICE ORDER CONTROL MAINTENANCE
- --------------------------------------------------------------------------------
1. Last S/O Number
2. Routing Control Master
3. Contact Memo Routing
4. Service Order Type Codes
5. ISR Type Codes
6. Service Order Type Codes
7. Reason Not Complete Codes
8. Planning Schedule Codes
9. Employee Code
10. Memo Default
11. Service Order Entry Default
12. Service Order Stage Code Description
CONTINUING PROPERTY RECORD MAINTENANCE
- --------------------------------------------------------------------------------
1. Item Number
2. Plant Type
3. Plan/Item Combinations
GENERAL PLANT MAINTENANCE
- --------------------------------------------------------------------------------
1. State
2. City
3. Subdivision
4. Street Name
5. Street Direction
6. Street Subtitle
7. Taxing District
8. County Codes
9. School Codes
10. Cable Type Codes
11. Cable Record Codes
12. Distribution Cable Pair Counts
13. Line Card Miscellaneous Description Information
14. Cross Connect Box Location
15. Features and Functions
-47-
<PAGE>
INVENTORY MAINTENANCE
- --------------------------------------------------------------------------------
1. Staging and Disbursement Codes
2. Offset G/L Account
TROUBLE MAINTENANCE
- --------------------------------------------------------------------------------
1. Trouble Control Master
2. Printing Control Master
3. Ticket Type
4. Source Code
5. Report Code
6. Schedule Code
7. Appointment Code
8. Plant Class
9. Plant Item
10. Plant Category
11. Fault Code
12. Cause Code
13. Action Taken Code
14. Weather Code
15. Plant Usage Code
16. Manufacturer Code
17. Employee Code
18. Completion Status Code
19. Test Result Code
20. Service Result Code
21. Memo Form
22. Plant Class/Item
23. Plant Unit of Measure
24. Trouble Ticket Surge Description
-48-
<PAGE>
Future Release Addendum
-----------------------
This document is an addendum to the Software License agreement, number LA97-10
between DPI/TFS, Inc. ("DPI") and Focal Communication Corporation ("FOCAL").
Both parties have discussed plans for the two releases that will transition
Telco Friendly Software to the Integrated Customer Management System. The
functional specifications for these releases are attached hereto as Exhibits 1
and 2.
The schedule below reflect wireline object code software only.
Release Availability
Release 1 2nd quarter 1997
Release 2 4th quarter 1997
These figures are based on the number of access lines provided for in the
current License Agreement between DPI and FOCAL. Provided that delivery is made
as shown above, FOCAL will be obligated to pay the charges shown.
Both parties agree and understand that development plans are subject to change
and that it is possible that the releases described in this Addendum may not be
delivered. If a specific release, described above, is not delivered by the
delivery date shown above or does not contain all of the functions described in
the applicable attached Exhibit, FOCAL's sole remedy is that it may choose not
to accept the Release as and when it is available and be entitled to a refund of
Software License Fees paid to date upon if the Telco Friendly Software is
returned as described in the Software License. Other than the specific remedies
set forth in this paragraph, neither party shall have any obligation to the
other for any failure to deliver the future Releases and functions described
above.
Licenses to the releases will be provided under the terms and conditions of the
existing Software License agreement unless modified or additional terms are
provided no less than thirty (30) days prior to delivery of the release.
Agreed: Agreed:
DPI/TFS, Inc. Focal Communication Corporation
By: /s/ Mark Giles By: /s/ Robert C. Taylor, Jr.
-------------------------- ------------------------------------------
Name Mark Giles Name: Robert C. Taylor, Jr.
------------------------- ----------------------------------------
Title: General Manager Title: President
----------------------- ---------------------------------------
Date: 4/10/97 Date: 4/9/97
----------------------- ---------------------------------------
-49-
<PAGE>
Exhibit 1
Release 1
---------
Full details of each enhancement will be provided in external specification
documents once the final details are approved and have passed all quality
verifications and inspections.
1. E911 Interface
- -------------------
. Supports National Emergency Number Association (NENA) Version 2 file
format
Master Street Address Guide (MSAG)
Automatic Location Identification (ALI)
. Various input and output options
Electronic via CA/400
Magnetic Tape
Paper
2. Installment and Lease Support
- ----------------------------------
. Supports automatic calculation of installment and lease payments
Recurring charges over time
Calculates interest on installments and lease payments
. Tracks current versus past due balances
. Supports late payment charges (through Accounts Receivable by Service)
. Allows early payoff or balloon payments
3. Billing for Internet Services
- ----------------------------------
. Converts data, provided from a Service Provider, into a toll record
billable format
. Processes and bills regular and overtime usage to customer accounts
. Provides error reports and capability of correcting errors or returning
to service provider
. Provides capability of billing multiple sessions as a single line item
4. Graphical User Interface
- -----------------------------
. "Point and click" environment
. Provides a pictorial representation of screen data including graphs and
charts
. Pull down menus, tool bars and message bars
. Integrates PC functions with TFS applications
-50-
<PAGE>
5. Directory Management System
- --------------------------------
. Provides a single place for the storage and retrieval of directory
related information
. Customer data is defaulted no re-entry required.
. Allows out-of-alphabetical order placement of listings
. Allows the look-up of directory information by a wide variation of
selections
. Allows maintenance of multiple directories and multiple sections within
a directory
. Generates publisher directory tapes, electronic files and reports
6. Flexible Taxation
- ----------------------
. Supports multiple jurisdictions
. Supports taxes paid by customer or company
. Provides tax on tax capabilities
. Supports foreign state tax on in-collect messages
. Provides a flat tax per call
. Message taxation rules by carrier, record ID and jurisdiction
. Supports limits (tax only amounts over or under a fixed amount)
. Provides overrides
. Provides unlimited taxes per geographic location and billing element
-51-
<PAGE>
Exhibit 2
---------
Release 2
---------
Full details of each enhancement will be provided in external specification
documents once the final details are approved and have passed all quality
verifications and inspections.
1. Flexible Pricing Plans (OCP's)
- -----------------------------------
. Combines non-recurring, recurring and usage charges
. Provides flexible Alters to select eligible charges
. Provide cross product discounting capabilities
. Allows utilization of loyalty plans
2. ICMS Plant Records
- -----------------------
. Retains logical plant record information
Devices and terminals with ports
Bandwidth-defined transport elements
. Supports fiber optic and data services
3. ICMS Service Orders
- ------------------------
. Provides an expanded service order number
. Provides a "Fast Path" function for new connections
. Allows simple customer changes to be input interactively
Name/Address changes
Billing-only S&E additions/changes
4. Provisioning Performance and Jeopardy Monitoring
- -----------------------------------------------------
. Measures service order activity and stage performance
. Provides proactive commitment management
. Allows real-time monitoring of work flow
. User defined parameters for performance monitoring
5. Disputes Management
- ------------------------
. Captures and tracks customer disputes, complaints and inquiries
. Supports adjustments to customer accounts
. Parameter driven allowing enforcement of business rules.
. Work flow support
-52-
<PAGE>
6. Faults Management
- ----------------------
. Fault entry on multiple customer services
. Automatic creation of common cause faults through Network Fault entry
. Group scheduling of faults
. Link/Unlink capabilities
7. Near Real-Time Rating
- --------------------------
. Message processing using logical manager/server controls
. Processes small batches of switch records
. On-line access to rated records in unbilled detail
8. Customer Correspondence
- ----------------------------
. Generate customer correspondence documents importing customer data
into custom forms
9. Migration Aids
- -------------------
. Utilities available for conversion processes
10. Customer and Account Model
- -------------------------------
. Manage customers at entity level
. Discounts applied at service, account or customer level
. Summary billing available for multi-account customers
11. *Multi-Service Billing Enabled Capabilities
- ------------------------------------------------
. Wireline (Telephony)
* . Wireless
* . Cable Television
* . Combined billing
. One-stop customer service
*Note: Release 3 multi-service billing enabled capabilities are available as
separate purchases. The base price of the ICMS product supports wireline
services only.
12. Customer at-a-time Billing
- -------------------------------
. 24 Hour on-line day
. Self recovering
. Multi-thread for performance
-53-
<PAGE>
13. Custom Statement Formats
- -----------------------------
. System generates statement details file
. Processed by:
- Out source print/stuff/mail
- IBM AFP Printers
- Custom Statement Formatter (CSF, an option, add-on product)
- Other print solutions
14. Credit Card Payments
- -------------------------
. Supports electronic credit card payments
15. Third-party Billing
- ------------------------
. Support for resale of services on combined bill
. Segregates accounts receivable for treatment and write off
16. Number Portability
- -----------------------
. Support for both Incumbent and Competitive LECs
. Industry standard interfaces
17. Interconnection Support
- ----------------------------
. Support for incumbent and Competitive LECs
. Track network element ownership and usage
. Ordering and order fulfillment
. Invoicing and invoice reconciliation
18. Century Date Support
- -------------------------
. Year 2000 support throughout system functions
Release contents subject to change.
-54-
<PAGE>
EXHIBIT 10.21
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
This Executive Employment Agreement is made as of this 15th day of July,
1998, by and between Focal Communications Corporation of California, a Delaware
corporation (and with its affiliates, including its parent corporation, Focal
Communications Corporation, collectively referred to as the "Company") and
Andrew K. Robitshek, whose address is 22 Second Street, Apartment 301,
Sausalito, CA 94965 (the "Executive").
WHEREAS, the Company and the Executive wish to enter into an agreement for
employment which shall provide certain terms of employment. The parties
acknowledge that all terms of employment may not be contained in this Agreement,
but that as to other conflicting terms of employment, which may be initiated
from time to time by the Company, the terms contained herein, or as amended from
time to time by the parties hereto, shall control.
NOW THEREFORE, in accordance with the premise above, the parties agree as
follows:
1. Terms of Executive's Employment.
-------------------------------
(a) Employment. The Company hereby employs Executive, and Executive
----------
hereby accepts employment and agrees to perform his duties and responsibilities
hereunder, in accordance with the terms and conditions hereinafter set forth.
The Company shall have the right to terminate the Executive's employment for any
reason, at any time, with or without Cause (defined below). Executive shall
have the right to terminate his employment for any reason, at any time, upon
giving the Company written notice two weeks prior to such termination.
(b) Duties and Responsibilities.
---------------------------
(i) Initially, the Executive shall serve as Vice President and
General Manager, Focal Communications Corporation of California, and so
long as Executive is employed by the Company (including affiliates), the
Executive shall serve in such position as may be determined by the Board of
Directors of Focal Communications Corporation ("Board") and shall perform
all duties and accept all responsibilities incident to such position or as
may be assigned to him by the Board, and shall at all times comply with the
policies and procedures adopted by the Company for its employees.
(ii) The Company and Executive acknowledge that the Executive has
entered into a prior agreement with the Company regarding employment
issues, including non-competition matters and that this agreement shall
amend and supercede such prior agreement. The Executive represents and
covenants to the Company that he is not subject or a party to any
employment agreement, non-competition agreement, nondisclosure agreement or
any similar agreement, covenant or restriction that would prohibit the
Executive from executing this Agreement and performing his duties and
responsibilities assigned by the Company.
<PAGE>
(c) Extent of Service. So long as Executive is employed by the
-----------------
Company or any of its Subsidiaries, the Executive agrees to use his best efforts
to carry out his duties and responsibilities under paragraph 1(b) hereof and to
devote his full professional time and attention thereto.
(d) Base Compensation. For all the services rendered by the Executive
-----------------
hereunder, the Company shall, commencing on the agreed upon start date of this
Agreement and continuing so long as Executive is employed by the Company or any
of its Subsidiaries, pay the Executive an annual salary at the rate of $130,000
per year, plus any additional amounts, if any, as may be approved by a majority
of the Board, less withholding required by law or agreed to by the Executive,
and payable in installments at such times as is customary with the Company but
in any event no less frequently than monthly. The Company agrees that the
Executive's salary will be reviewed annually by the Board to determine if any
adjustment is appropriate. For purposes of paragraph l(f) and Section 3 herein,
Executive's annual salary shall not be less than $130,000. So long as Executive
is employed by the Company or any of its Subsidiaries, the Executive shall also
be entitled to participate in such vacation pay and any other fringe benefit
plans as may from time to time be adopted by a majority of the Board.
(e) Incentive Compensation. In addition to the compensation set forth
----------------------
in paragraph l(d) above, so long as the Executive is employed by the Company the
Executive shall be entitled to participate in a discretionary annual bonus plan
providing for the payment to Executive of an annual bonus, in an amount to be
determined by a majority of the Board or another officer of the Company as the
Board determines. The annual bonus is discretionary in nature and is determined
in the exclusive discretion of the Board or other officer so designated by the
Board. The Company may adopt from time to time a bonus program, in which the
Executive shall participate, the terms of which require the Company to achieve
certain performance goals which are set in advance each year in the sole
discretion of the Board.
In addition to the discretionary bonus plan described above, Executive
will be entitled to participate in the current Stock Option Plan adopted by the
Board.
(f) Severance Pay. If at any time after the date hereof Executive
-------------
ceases to be employed by the Company and its Subsidiaries ("Termination") for
death or disability or by the Company for any reason other than Cause, Executive
(or, in the case of death, Executive's estate) shall, until the end of the
Severance Pay Period (as defined below), be entitled to receive a salary at the
same rate of pay as, and on the same schedule and terms as was customary for,
the salary Executive received under paragraph l(d) above immediately prior to
the Termination, as well as (except in the case of Executive's death) comparable
medical benefits to those provided by the Company to Executive immediately prior
to the Termination (such salary and benefits collectively, the "Severance Pay");
provided that if at any time during the Severance Pay Period Executive obtains
other employment, Executive's Severance Pay shall during the period of such
employment be reduced (but not below zero) by the amount of salary and benefits
Executive receives as compensation for such employment. The payment of such
Severance Pay shall in no way be construed as a continuation of Executive's
employment after the Termination. The "Severance Pay
-------------
2
<PAGE>
Period" shall be equal to the 12-month period commencing on the date of
- ------
Termination. If Executive resigns or is terminated by the Company for Cause, the
Company shall not be obligated to pay any Severance Pay.
(g) Nondisclosure and Nonuse of Confidential Information.
----------------------------------------------------
(i) Nondisclosure Obligation. Executive shall not disclose or
------------------------
use at any time, either during his employment with the Company or thereafter,
any Confidential Information (as defined below) of which Executive is or becomes
aware, whether or not such information is developed by him, except to the extent
that such disclosure or use is directly related to and required by Executive's
performance of duties assigned to Executive by the Company. Executive shall take
all appropriate steps to safeguard Confidential Information and to protect it
against disclosure, misuse, espionage, loss and theft.
(ii) Confidential Information. As used in this Agreement, the
------------------------
term "Confidential Information" means information that is not generally known to
------------------------
the public and that is used, developed or obtained by the Company in connection
with its business, including but not limited to (i) products or services, (ii)
fees, costs and pricing structures, (iii) designs, (iv) analysis, (v) drawings,
photographs and reports, (vi) computer software, including operating systems,
applications and program listings, (vii) flow charts, manuals and documentation,
(viii) data bases, (ix) accounting and business methods, (x) inventions,
devices, new developments, methods and processes, whether patentable or
unpatentable and whether or not reduced to practice, (xi) customers and clients
and customer or client lists, (xii) copyrightable works, (xiv) all technology
and trade secrets, (xv) business plans and financial models, and (xvi) all
similar and related information in whatever form. Confidential Information shall
not include any information that has been published in a form generally
available to the public prior to the date Executive proposes to disclose or use
such information. Information shall not be deemed to have been published merely
because individual portions of the information have been separately published,
but only if all material features constituting such information have been
published in combination.
(h) Cause. Cause means a finding by 2/3 of the Board members then
-----
serving, after Executive has been given the opportunity for a formal hearing, of
(A) Executive's theft or embezzlement, or attempted theft or embezzlement, of
money or property of the Company, Executive's perpetration or attempted
perpetration of fraud, or Executive's participation in a fraud or attempted
fraud, on the Company, or Executive's unauthorized appropriation of, or attempt
to misappropriate, any tangible or intangible assets or property of the Company,
(B) any act or acts of disloyalty, misconduct or moral turpitude by Executive
injurious to the interest, property, operations, business or reputation of the
Company or Executive's conviction of a crime the commission of which results in
injury to the Company or (C) Executive's repeated refusal or failure (other than
by reason of disability) to carry out reasonable instructions by his superiors
or the Board.
3
<PAGE>
2. The Company's Ownership of Intellectual Property.
------------------------------------------------
(a) Acknowledgment of Company Ownership. In the event that Executive
-----------------------------------
as part of his activities on behalf of the Company generates, authors or
contributes to any invention, design, new development, device, product, method
or process (whether or not patentable or reduced to practice or constituting
Confidential Information), any copyrightable work (whether or not constituting
Confidential Information) or any other form of Confidential Information relating
directly or indirectly to the Company's business as now or hereinafter conducted
(collectively, "Intellectual Property"), Executive acknowledges that such
---------------------
Intellectual Property is the exclusive property of the Company and hereby
assigns all right, title and interest in and to such Intellectual Property to
the Company. Any copyrightable work prepared in whole or in part by Executive
will be deemed "a work made for hire" under Section 201(b) of the 1976 Copyright
Act, and the Company shall own all of the rights comprised by the copyright
therein. Executive shall promptly and fully disclose all Intellectual Property
to the Company and shall cooperate with the Company to protect the Company's
interests in and rights to such Intellectual property (including, without
limitation, providing reasonable assistance in securing patent protection and
copyright registrations and executing all documents as reasonably requested by
the Company, whether such requests occur prior to or after Termination of
Executive's employment with the Company).
(b) Executive Invention. Executive understands that paragraph 2 of
-------------------
this Agreement regarding the Company's ownership of Intellectual Property does
not apply to any invention for which no equipment, supplies, facilities or trade
secret information of the Company were used and which was developed entirely on
Executive's own time, unless (i) the invention relates to the business of the
Company or to the Company's actual or demonstrably anticipated research or
development or (ii) the invention results from any work performed by Executive
for the Company.
(c) Delivery of Materials upon Termination of Employment. As
----------------------------------------------------
requested by the Company from time to time and upon the Termination of
Executive's employment with the Company for any reason, Executive shall promptly
deliver to the Company all copies and embodiments, in whatever form, of all
Confidential Information and Intellectual Property in Executive's possession or
within his control (including, but not limited to, written records, notes,
photographs, manuals, notebooks, documentation, program listings, flow charts,
magnetic media, disks, diskettes, tapes and all other materials containing any
Confidential Information or Intellectual Property) irrespective of the location
or form of such material and, if requested by the Company shall provide the
Company with written confirmation that all such materials have been delivered to
the Company.
3. Noncompetition and Nonsolicitation.
----------------------------------
(a) Noncompetition. Executive acknowledges and agrees with the
--------------
Company that Executive's services to the Company are unique in nature and that
the Company would be irreparably damaged if Executive were to provide similar
services to any person or entity competing with the Company or engaged in a
similar business. For and in consideration of the terms contained
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herein Executive covenants and agrees with the Company that during the
Noncompetition Period (as defined below), Executive shall not, directly or
indirectly, either for himself or for any other individual, corporation,
partnership, joint venture or other entity, participate in any business
division, group or franchise (or if there are no divisions, any business) where
such division, group or franchise (or business, if applicable) engages or
proposes to engage in any business conducted by the Company or proposed to be
conducted pursuant to a Board resolution or Subsequent Business Plan (including,
but not limited to, the sale or distribution of local switched dial tone
telecommunication services) in any metropolitan statistical area ("MSA") in
which the Company conducts such business or proposes to conduct such business
pursuant to a Board resolution or Subsequent Business Plan. For purposes of this
Agreement, the term "participate in" shall include, without limitation, having
any direct or indirect interest in any corporation, partnership, joint venture
or other entity, whether as a sole proprietor, owner, stockholder, partner,
joint venturer, creditor or otherwise, or rendering any direct or indirect
service or assistance to any individual, corporation, partnership, joint venture
and other business entity (whether as a director, officer, manager, supervisor,
employee, agent, consultant or otherwise), other than ownership of up to 2% of
the outstanding stock of any class which is publicly traded.
(b) Nonsolicitation. During the Noncompetition Period, Executive
---------------
shall not (i) induce or attempt to induce any employee of the Company to leave
the employ of the Company, or in any way interfere with the relationship between
the Company and any employee thereof, (ii) hire directly or through another
entity any person who was an employee of the Company at any time during the
Noncompetition Period, or (iii) induce or attempt to induce any customer,
supplier, licensee or other business relation of the Company to cease doing
business with the Company, or in any way interfere with the relationship between
any such customer, supplier, licensee or business relation and the Company
(including, without limitation, making any negative statements or communications
concerning the Company).
(c) Noncompetition Period. The "Noncompetition Period" shall commence
--------------------- ---------------------
on the date hereof and continue (i) if Executive is terminated by the Company
with or without Cause, until such date as shall be specified by the Company in
writing within the 14 days after Termination, provided that such date shall not
--------
be later than the first anniversary of the Termination, or (ii) otherwise, until
such date as shall be specified by the Company in writing within the 30 days
after Termination, provided that such date shall not be later than the 12-month
--------
anniversary of the Termination. After the end of the Severance Pay Period (or if
there is no Severance Pay, the date upon which the Company elects the duration
of the Noncompetition Period), the Company shall until the end of the
Noncompetition Period pay Executive his Noncompete Compensation (unless
Executive breaches his obligations under this paragraph 3, it being understood
that in such case Executive shall continue to be bound by such obligations as if
the Company were continuing to pay Noncompete Compensation). If there is no
Severance Pay, the Company shall during the period from Termination until such
time as the Company elects the duration of the Noncompetition Period (the
"Interim Period"), pay Executive his Interim Compensation (unless Executive
- ---------------
breaches his obligations under this paragraph 3, it being understood that in
such case Executive shall continue to be bound by such obligations as if the
Company were continuing to pay Interim Compensation). "Noncompete Compensation"
-----------------------
shall consist of 50% of the salary that Executive received under
5
<PAGE>
paragraph l(d) above as compensation from the Company and its Subsidiaries
immediately prior to termination (Executive's "Previous Salary") together with
---------------
the continuation of the medical benefits that the Company provided to Executive
immediately prior to Termination (Executive's "Previous Benefits"); provided
----------------- --------
that if at any time during the Noncompetition Period Executive obtains other
employment (i) with comparable medical benefits to Executive's Previous
Benefits, Executive's Noncompete Compensation shall during the period of such
employment not include the continued provision of medical benefits, and (ii)
with a salary exceeding 50% of Executive's Previous Salary, Executive's
Noncompete Compensation shall during the period of such employment be reduced
(but not below zero) by the amount of such excess. "Interim Compensation" shall
--------------------
consist of 100% of Executive's Previous Salary and Previous Benefits, provided
--------
that if at any time during the Interim Period Executive obtains other
employment, Executive's Interim Compensation shall during the period of such
employment be reduced (but not less than zero) by the amount of salary and
benefits received as compensation for such other employment.
4. Notices. Any notice provided for in this Agreement must be in writing
-------
and must be either personally delivered, mailed by first class mail (postage
prepaid and return receipt requested) or sent by reputable overnight courier
service (charges prepaid) to the recipient at the address below indicated:
To the Company: Focal Communications Corporation
200 N. LaSalle Street, Suite 800
Chicago, Illinois 60601
Attention: President
To Executive: Andrew K Robitshek
22 Second Street, Apt. 301
Sausalito, CA 94965
or to such other address or to the attention of such other person as the
recipient party shall have specified by prior written notice to the sending
party. Any notice under this Agreement shall be deemed to have been given when
personally delivered, one business day after being sent by reputable overnight
courier service, or three business days after being deposited in the U.S. mail.
5. General Provisions.
------------------
(a) Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
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(b) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
(c) Counterparts. This Agreement may be executed in separate
------------
counterparts, none of which need contain the signature of more than one party
hereto but each of which shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(d) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall bind the parties hereto and their respective successors and
assigns and shall inure to the benefit of and be enforceable by the parties
hereto and their respective successors and assigns.
(e) Choice of Law. All questions concerning the construction,
-------------
validity, enforcement and interpretation of this Agreement and the exhibits
hereto shall be governed by the laws of the State of California.
(f) Remedies. Each of the parties to this Agreement (including the
--------
Investors shall be entitled to enforce its rights under this Agreement
specifically, to recover damages and cost (including reasonable attorney's fees)
caused by any breach of any provision of this Agreement and to exercise all
other rights existing in its favor. The parties hereto agree and acknowledge
that, money damages would not be an adequate remedy for any breach of the
provisions of this Agreement and that any party may in its sole discretion apply
to any court of law or equity of competent jurisdiction (without posting any
bond or deposit) for specific performance and/or other injunctive relief in
order to enforce or prevent any violations of the provisions of this Agreement.
(g) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company and
Executive.
(h) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or legal holiday
in the State of Illinois, the time period shall be automatically extended to the
business day immediately following such Saturday, Sunday or holiday.
* * * * *
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
FOCAL COMMUNICATIONS CORPORATION
OF CALIFORNIA
By /s/ John R. Barnicle
-----------------------------
Its: E.V.P. - C.O.O.
---------------------------
EXECUTIVE:
/s/ Andrew K. Robitshek
-------------------------------
Andrew K. Robitshek
8
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Exhibit 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our
report (and to all references to our firm) included in or made a part of
Registration Statement File No. 333-49397.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 31, 1998
