<PAGE>
As filed with the Securities and Exchange Commission on November 16, 1998
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_______________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report
November 16, 1998
FOCAL COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 333-49397 36-4167094
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification Number)
incorporation)
200 N. LaSalle Street
Suite 800
Chicago, IL 60601
(Address of principal executive offices) (Zip code)
(312)895-8400
(Registrant's telephone number, including area code)
<PAGE>
Item 5. Other Events.
- ----------------------
In August 1998, the Company completed the registration of its $270 million
stated principal amount at maturity, 12.125% senior discount notes due 2008 (the
"Notes"). In connection with this registration, the Company gave retroactive
effect to a change in accounting. This change in accounting was due to the fact
that the Company's Class B common shares vest over the term of employment of
certain executives, and as a result were determined to be compensatory in
nature. The financial statements included in Amendment No.4 to the Company's
Registration Statement on Form S-4 pursuant to which the Notes were offered
included disclosure of the Company's earnings per share even though such
disclosure was voluntary and not required under the rules and regulations of the
Securities and Exchange Commission. In preparing calculations for loss per share
and weighted average shares outstanding, the Company erroneously included all
Class B common shares which were issued in its calculations. These calculations
should have been prepared using only the number of Class B common shares that
were fully vested at such time. Accordingly, Exhibit 99.1 to this Form 8-K sets
forth revised loss per share and weighted average shares outstanding
calculations which have been computed in a manner that properly gives effect to
the Class B common shares.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
- ---------------------------------------------------------------------------
(a) Financial Statements of Business Acquired: N/A
-----------------------------------------
(b) Pro Forma Financial Statements: N/A
------------------------------
(c) Exhibits:
--------
Exhibit
Number Exhibit
------ -------
99.1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996, 1997
and June 30, 1998
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 Six
Months Ending June 30, 1997 and 1998
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 Six Months Ending June 30,
1998.
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 Six
Months Ending June 30, 1997 and 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, Focal
Communications Corporation has duly caused this Current Report on Form 8-K to be
signed on its behalf by the undersigned, hereunto duly authorized.
FOCAL COMMUNICATIONS CORPORATION
By /s/ Robert C. Taylor, Jr.
-------------------------
Robert C. Taylor, Jr.
President and Chief Executive Officer
Date: November 16, 1998
<PAGE>
EXHIBIT INDEX
-------------
Exhibit Sequential
Number Document Description Page Number
- ------ -------------------- -----------
99.1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS........................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996,
1997 and June 30, 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 Six Months
Ending June 30, 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 Six Months Ending June 30, 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
Six Months Ending June 30, 1997 and 1998........................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................... F-7
<PAGE>
EXHIBIT 99.1
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 (as revised, see Note 14), 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 (Except
with respect to the matter
discussed in Note 14, as to
which the date is November
13, 1998)
F-2
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
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 $140,077,423
Accounts receivable, trade (net of
allowance for doubtful accounts of
$469,000 and $1,298,000 at December
31, 1997 and June 30, 1998,
respectively)....................... -- 2,355,814 7,879,444
Related-party receivables............ 16,883 34,883 --
Other current assets................. -- 90,559 384,104
----------- ----------- ------------
Total current assets............... 3,807,004 4,737,808 148,340,971
----------- ----------- ------------
FIXED ASSETS, at cost:
Communications network............... -- 7,906,336 12,772,941
Construction in progress............. 37,285 1,938,236 14,686,578
Computer equipment................... 45,018 941,237 1,692,504
Leasehold improvements............... -- 652,173 2,486,749
Furniture and fixtures............... -- 355,759 530,504
Motor vehicles....................... -- -- 19,289
----------- ----------- ------------
82,303 11,793,741 32,188,565
Less--Accumulated depreciation and
amortization........................ 1,150 616,967 2,079,666
----------- ----------- ------------
Fixed assets, net.................. 81,153 11,176,774 30,108,899
Other non-current assets (net)....... -- -- 5,573,279
$ 3,888,157 $15,914,582 $184,023,149
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
------------------------------------
CURRENT LIABILITIES:
Accounts payable..................... $ 197,246 $ 1,502,479 $ 2,083,051
Accrued liabilities.................. 71,212 367,890 1,103,570
Current maturities of long-term
debt................................ -- 943,621 --
----------- ----------- ------------
Total current liabilities.......... 268,458 2,813,990 3,186,621
LONG-TERM DEBT, net of current
maturities............................ -- 2,593,265 156,624,309
----------- ----------- ------------
OTHER NONCURRENT LIABILITIES........... -- 179,481 358,963
----------- ----------- ------------
REDEEMABLE COMMON STOCK:
Class A, $.01 par value, 85,567
shares authorized and 79,461, 80,307
and 0 issued and outstanding at
December 31, 1996, 1997 and June 30,
1998................................ 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
June 30, 1998....................... -- -- 803
Common stock, Class B, $.01 par
value; 35,000 shares authorized,
20,000 shares issued at December
31, 1996, 1997 and June
30, 1998............................ 200 200 200
Common stock, Class C, $.01 par
value; 15,000 shares authorized,
14,711 shares issued at December
31, 1996, 1997 and June 30, 1998.... 147 147 147
Additional paid-in capital........... 5,200,000 5,096,435 31,298,850
Deferred compensation................ (5,091,667) (3,791,667) (3,141,667)
Accumulated deficit.................. (513,634) (3,380,487) (4,305,077)
----------- ----------- ------------
Total stockholders' equity
(deficit)......................... (404,954) (2,075,372) 23,853,256
----------- ----------- ------------
$ 3,888,157 $15,914,582 $184,023,149
=========== =========== ============
</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 SIX MONTHS
(COMMENCEMENT OF YEAR ENDING ENDING JUNE 30,
OPERATIONS) TO DECEMBER ------------------------
DECEMBER 31, 1996 31, 1997 1997 1998
------------------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES................ $ -- $ 4,023,690 $ 86,908 $13,180,491
EXPENSES:
Customer service and
network operations... -- 2,154,980 252,962 4,613,948
Selling, general and
administrative....... 421,777 2,887,372 994,597 3,271,785
Depreciation and
amortization......... 1,150 615,817 92,559 2,006,269
Non-cash compensation
expense.............. 108,333 1,300,000 650,000 650,000
--------- ----------- ----------- -----------
Total operating
expenses........... 531,260 6,958,169 1,990,118 10,542,002
--------- ----------- ----------- -----------
Operating income
(loss)............. (531,260) (2,934,479) (1,903,210) 2,638,489
--------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income....... 17,626 195,696 98,939 3,080,715
Interest expense...... -- (128,070) (3,697) (6,643,794)
--------- ----------- ----------- -----------
17,626 67,626 95,242 (3,563,079)
--------- ----------- ----------- -----------
NET LOSS................ $(513,634) $(2,866,853) $(1,807,968) $ (924,590)
--------- ----------- ----------- -----------
ACCRETION TO REDEMPTION
VALUE OF CLASS A COMMON
STOCK.................. -- (103,565) (51,780) --
--------- ----------- ----------- -----------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS.... $(513,634) $(2,970,418) $(1,859,748) $ (924,590)
========= =========== =========== ===========
BASIC AND DILUTED NET
LOSS PER SHARE OF
COMMON STOCK........... $ (30.22) $ (35.21) $ (22.23) $ (10.47)
========= =========== =========== ===========
BASIC AND DILUTED
WEIGHTED AVERAGE NUMBER
OF SHARES OF COMMON
STOCK OUTSTANDING...... 16,996 84,373 83,673 88,307
========= =========== =========== ===========
</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 SIX MONTHS ENDED
JUNE 30, 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 DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
------ ------ -------- ------- -------- ------- -------- ------- ----------- ------------ -----------
<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 -- -- -- -- --
Conversion of
common stock to
Class C
common......... (375) -- -- -- -- -- 14,711 147 -- -- --
Deferred
compensation... -- -- -- -- -- -- -- -- 5,200,000 (5,200,000) --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- -- -- 108,333 --
Net loss........ -- -- -- -- -- -- -- -- -- -- (513,634)
------ ---- -------- ------ -------- ------ -------- ------ ----------- ---------- -----------
BALANCE,
December 31, 1996.. -- -- -- -- 20,000 200 14,711 147 5,200,000 (5,091,667) (513,634)
Accretion of
redeemable
common stock... -- -- -- -- -- -- -- -- (103,565) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- -- -- 1,300,000 --
Net loss........ -- -- -- -- -- -- -- -- -- -- (2,866,853)
------ ---- -------- ------ -------- ------ -------- ------ ----------- ---------- -----------
BALANCE,
December 31, 1997.. -- -- -- -- 20,000 200 14,711 147 5,096,435 (3,791,667) (3,380,487)
------ ---- -------- ------ -------- ------ -------- ------ ----------- ---------- -----------
Adjustment to
reflect
amendment to
stock purchase
agreement....... -- -- 80,307 803 -- -- -- -- 12,402,415 -- --
Class A Common
Capital
Contributions... -- -- -- -- -- -- -- -- 13,800,000 -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- 650,000 --
Net Loss......... -- -- -- -- -- -- -- -- -- -- (924,591)
------ ---- -------- ------ -------- ------ -------- ------ ----------- ---------- -----------
BALANCE, June 30,
1998
(Unaudited)..... -- $-- 80,307 $ 803 20,000 $ 200 14,711 $ 147 $31,298,850 (3,141,667) $(4,305,078)
====== ==== ======== ====== ======== ====== ======== ====== =========== ========== ===========
<CAPTION>
TOTAL
------------
<S> <C>
May 31, 1996
(commencement of
operations)..... $--
Issuance of
common stock... --
Conversion of
common stock to
Class B
common......... 200
Conversion of
common stock to
Class C
common......... 147
Deferred
Compensation... --
Amortization of
deferred
compensation... 108,333
Net loss........ (513,634)
------------
BALANCE,
December 31, 1996.. (404,954)
Accretion of
redeemable
common stock... (103,565)
Amortization of
deferred
compensation... 1,300,000
Net loss........ (2,866,853)
------------
BALANCE,
December 31, 1997.. (2,075,372)
------------
Adjustment to
reflect
amendment to
stock purchase
agreement....... 12,403,218
Class A Common
Capital
Contributions... 13,800,000
Amortization of
deferred
compensation.... 650,000
Net Loss......... (924,590)
------------
BALANCE, June 30,
1998
(Unaudited)..... $23,853,256
============
</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 SIX MONTHS ENDED
OPERATIONS), ENDED JUNE 30,
TO DECEMBER DECEMBER 31, -------------------------
31, 1996 1997 1997 1998
------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss.............. $ (513,634) $ (2,866,853) $(1,807,968) $ (924,590)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities--
Depreciation and
amortization....... 1,150 615,817 92,559 2,006,269
Deferred lease
costs.............. -- 179,481 -- 179,484
Deferred
Compensation
Expense............ 108,333 1,300,000 650,000 650,000
Amortization of
discount on senior
discount notes..... -- -- -- 6,596,702
Provision for losses
on accounts
receivable......... -- 469,000 11,051 829,000
Changes in operating
assets and
liabilities--
Accounts
receivable....... -- (2,824,814) (97,959) (6,352,630)
Related-party
receivables...... (16,883) (18,000) 16,883 34,883
Other assets...... -- (90,559) (96,985) (293,545)
Accounts payable
and accrued
liabilities...... 268,458 1,601,911 273,432 1,316,252
---------- ------------ ----------- ------------
Net cash
provided by
(used in)
operating
activities..... (152,576) (1,634,017) (958,987) 4,041,825
---------- ------------ ----------- ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Capital expenditures.. (82,303) (11,655,524) (3,695,993) (20,394,824)
---------- ------------ ----------- ------------
Net cash used in
investing
activities..... (82,303) (11,655,524) (3,695,993) (20,394,824)
CASH FLOW FROM FINANCING
ACTIVITIES:
Net proceeds from
issuance of long-term
debt................. -- 3,697,500 67,448 143,910,756
Payments on bank
credit facility and
capital leases....... -- (216,528) (7,061) (3,536,886)
Proceeds from Class A
common capital
contributions........ 4,025,000 8,275,000 4,275,000 13,800,000
---------- ------------ ----------- ------------
Net cash
provided by
financing
activities..... 4,025,000 11,755,972 4,335,387 154,173,870
---------- ------------ ----------- ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 3,790,121 (1,533,569) (319,593) 137,820,871
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 $ 3,470,528 $140,077,423
========== ============ =========== ============
</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 JUNE 30, 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 $3,380,487 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 June 30, 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.
Unaudited Interim Financial Information
The unaudited consolidated balance sheets as of June 30, 1997 and 1998, the
unaudited consolidated statements of stockholders' equity for the six months
ended June 30, 1997 and 1998 and the unaudited statements of operations and cash
flows for the six months ended June 30, 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 six months ended June 30,
1998 are not necessarily indicative of the results which may be expected for the
year ended December 31, 1998. All information included in these notes to
financial statements related to the six months ended June 30, 1997 and 1998 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 $4.4 million as of June 30, 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, 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 hearing took place in June and a ruling was
rendered on July 21, 1998 affirming the ICC order. The stay of the ICC order has
been continued for an additional 35 days to allow the parties to appeal.
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, for the year ended December 31, 1997, and for the
six months ended June 30, 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 June 30, 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 six months ended
June 30, 1998 as if compensation expense had been recorded for options granted
during 1997 and the six months ended June 30, 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 six months ended
June 30, 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 $(3,010,434) and $(35.68)
for the year ended December 31, 1997,
F-9
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and $(997,263) and $(11.29) for the six months ended June 30, 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.
As explained in Note 10, on November 27, 1996 the executives completed the
Exchange (as defined in Note 10) as part of the Agreement. Certain of the Class
B common shares issued in the exchange vest over the term of employment and, as
a result are compensatory in nature. Accordingly, compensation expense totalling
$5.2 million will be charged to income over the vesting period of the Class B
common shares. Compensation expense relating to the Exchange of $108,333 and
$1.3 million was recorded in 1996 and 1997 respectively.
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 for obligations of
similar duration. On June 30, 1998 there were no receivables 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. The Company is in compliance with these covenants
as of June 30, 1998.
Long-term debt at December 31, 1997 and June 30, 1998, consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
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 $113,375,691......... -- 156,624,309
Capital leases on equipment with interest at
14.66%, $2,327 due monthly through April,
2000......................................... 55,914 --
---------- ------------
3,536,886 156,624,309
Less--Current Maturities....................... 943,621 --
---------- ------------
$2,593,265 $156,624,309
========== ============
</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 six months ended June 30, 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 six months ended June 30, 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 six months ended June
30, 1998............................... 1,784 $335-$1,050 $788.54
----- ----------- -------
Outstanding at June 30, 1998.............. 3,006 $290-$1,050 $588.56
===== =========== =======
</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 5.62% 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 six months ended June
30, 1998 to be $280 per option as of June 30, 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
six months ended June 30, 1997 and 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 six months ended
June 30, 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), as discussed further in Note 14.
The 14,711 Class C common shares and the Company's 2,694 unvested stock
options granted during 1997 and the six months ended June 30, 1998, are
antidilutive and have been excluded from diluted loss per share calculation
for the year ended December 31, 1997 and the six months ended June 30, 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.
In the ordinary course of business, the Company is involved in various
regulatory matters (Note 2), proceedings and claims. In the opinion of the
Company's management, the outcome of such proceedings will not have a
materially adverse effect on the Company's financial position, results of
operations or cash flows.
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, $8,275,000, and
$13,800,000 for the period from May 31, 1996, to December 31, 1996, for the
year ended December 31, 1997, and for the six months ended June 30, 1998,
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 (Note 11). 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--(CONTINUED)
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 six months ended June 30, 1998,
was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE SIX
ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
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) (509,610)
Net loss applicable to
common stockholders..... -- -- (21,650) (491,984)
Basic and diluted net
loss per share.......... $ -- $ -- $ (5.41) $ (14.37)
========== =========== ========== ==========
1997--
Revenues................. $ -- $ 86,908 $1,226,076 $2,710,706
Loss from operations..... (757,521) (1,145,689) (786,384) (244,885)
Net loss applicable to
common stockholders..... (740,492) (1,119,257) (791,445) (319,224)
Basic and diluted net
loss per share.......... $ (8.87) $ (13.34) $ (9.39) $ (3.72)
========== =========== ========== ==========
1998--
Revenues................. $5,102,448 $ 8,078,043
Income from operations... 752,059 1,886,430
Net loss applicable to
common stockholders..... (341,191) (583,399)
Basic and diluted net
loss per share.......... $ (3.86) $ (6.61)
========== ===========
</TABLE>
F-16
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
<TABLE>
<CAPTION>
1996 1997
------------------ --------------------
PER PER
AMOUNT SHARE AMOUNT SHARE
--------- ------- ----------- -------
<S> <C> <C> <C> <C>
Net loss, as previously
reported..................... $(405,301) $(12.42) $(1,670,418) $(16.69)
Non-cash compensation expense. (108,333) (3.32) (1,300,000) (12.99)
--------- ------- ----------- -------
Net loss, as adjusted......... $(513,634) $(15.74) $(2,970,418) $(29.68)
========= ======= =========== =======
</TABLE>
14. REVISED LOSS PER SHARE
The Company voluntarily disclosed the Company's earnings per share in the
financial statements to Amendment No. 4 to the Company's Registration Statement
on Form S-4. In computing loss per share and weighted average shares
outstanding, the Company erroneously included all of the Class B common shares
which were issued in the calculations. In fact, only the Class B common shares
that were fully vested at such time should have been included in the
calculations.
The company has revised this voluntary disclosure to reflect the correct loss
per share and weighted average number of shares outstanding. The effect of
these revisions is presented below:
<TABLE>
<CAPTION>
For the period from
May 31, 1996 For the year
(Commencement of ending For the six For the six
Operations) to December 31, months ending months ending
December 31, 1996 1997 June 30, 1997 June 30, 1998
------------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Basic and Diluted net loss per share,
as previously reported $(15.74) $(29.68) $(18.62) $ (9.22)
Basic and Diluted net loss per share,
as revised $(30.22) $(35.21) $(22.23) $(10.47)
Basic and Diluted Weighted Average Number
of Shares of Common Stock Outstanding,
as previously reported 32,625 100,093 99,884 100,307
Basic and Diluted Weighted Average Number
of Shares of Common Stock Outstanding,
as revised 16,996 84,373 83,673 88,307
</TABLE>
F-17
