<PAGE>
PROSPECTUS Filed Pursuant to Rule 424B(3)
Registration No. 333-34480
$275,000,000
Focal Communications Corporation
Offer to Exchange all Outstanding
11 7/8% Senior Notes due 2010, Series A for
11 7/8% Senior Notes due 2010, Series B
Interest Payable July 15 and January 15,
Commencing July 15, 2000
This Exchange Offer Will Expire at 5:00 p.m.,
New York City time, on June 30, 2000, unless extended.
----------------
Material Terms of the Exchange Offer
. We are offering to exchange all outstanding notes that are validly tendered
and not validly withdrawn for an equal principal amount of notes which are
registered under the Securities Act of 1933.
. The exchange offer is subject to conditions, including that the exchange
offer not violate any law or applicable interpretation of any law by the
Staff of the Securities and Exchange Commission.
. You may withdraw your tender of your outstanding notes at any time before
the expiration of the exchange offer.
. The exchange of notes will not be a taxable exchange for United States
federal income tax purposes.
. Focal will not receive any cash proceeds from the exchange offer.
. Affiliates of Focal may not participate in the exchange offer.
The Registered Notes
. The terms of the notes to be issued are substantially identical to the
outstanding notes that Focal issued on January 12, 2000, except that
transfer restrictions and registration rights provisions relating to the
outstanding notes will not apply to the registered notes.
. Interest on the notes accrues at the rate of 11 7/8% per year, payable in
cash every six months on July 15 and January 15, with the first payment on
July 15, 2000.
. The notes are senior, unsecured obligations of Focal and will rank equally
with all other unsecured and unsubordinated obligations of Focal.
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. 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 outstanding notes where such exchange
notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. Focal 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 available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
----------------
Investing in the notes to be issued in the exchange offer involves risks.
Please consider carefully the "Risk Factors" beginning on page 12 of this
prospectus.
This prospectus and the accompanying letter of transmittal are first being
mailed to holders of outstanding notes on or about June 5, 2000.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the notes to be distributed in the
exchange offer, nor have any of these organizations determined that this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
----------------
The date of this prospectus is June 1, 2000.
<PAGE>
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. We are not making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information contained in or incorporated by reference in this prospectus is
accurate as of any date other than the date on the front of this prospectus.
This prospectus incorporates important business and financial information
about Focal that is not included in or delivered with this prospectus. This
information is available without charge to you upon written or oral request to
the office of the Secretary, Focal Communications Corporation, 200 North
LaSalle Street, Suite 1100, Chicago, Illinois 60601. Our telephone number is
(312) 895-8400. To obtain timely delivery, you must request the information no
later than five business days before the date you require it.
We are not asking you for a proxy and you are requested not to send us a
proxy.
We have not taken nor will we take any action in any jurisdiction to permit
a public offering of the exchange notes offered by this prospectus or the
possession or distribution of this prospectus other than in the United States.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Information Regarding Forward-Looking Statements.......................... 1
Prospectus Summary........................................................ 2
Risk Factors.............................................................. 12
The Exchange Offer........................................................ 25
Use of Proceeds........................................................... 33
Capitalization............................................................ 34
Selected Consolidated Financial and Operating Data........................ 35
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 37
Business.................................................................. 45
Management................................................................ 67
Security Ownership of Certain Beneficial Owners and Management............ 71
Certain Transactions...................................................... 73
Description of the 1998 Notes............................................. 75
Description of the Exchange Notes......................................... 78
Material United States Federal Tax Considerations......................... 111
Plan of Distribution...................................................... 114
Legal Matters............................................................. 114
Experts................................................................... 114
Where You Can Find More Information....................................... 115
Glossary.................................................................. 117
</TABLE>
----------------
This prospectus contains summaries which we believe to be accurate with
respect to the key terms of some documents but for complete information
regarding the documents, you may obtain copies of the actual documents upon
request to us.
The market data included in this prospectus, including information relating
to our position in the industry, is based on independent industry publications,
other publicly available information or our management's good faith beliefs.
Although we believe that these independent sources are reliable, the accuracy
and completeness of this information is not guaranteed and has not been
independently verified.
This prospectus contains trademarks of Focal and its subsidiaries, and may
contain trademarks, trade names and service marks of other parties.
Unless we indicate otherwise, references to "Focal" or to "we," "us" or
"our" are to Focal Communications Corporation and all of its subsidiaries.
Information contained on Focal's Internet site is not a part of this
prospectus.
Unless otherwise indicated, the information in this prospectus gives effect
to a recapitalization pursuant to which our Class A common stock, Class B
common stock and Class C common stock were converted into a single class of
common stock and a 500-for-1 stock split. Both the recapitalization and the
stock split were completed on July 30, 1999.
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
We make statements in this prospectus that are not historical facts. These
"forward-looking statements" can be identified by the use of terminology such
as "believes," "expects," "may," "will," "should" or "anticipates" or
comparable terminology. These forward-looking statements include, among others,
statements concerning:
. Our business strategy and competitive advantages
. Our anticipation of potential revenues from designated markets or
customers
. Statements regarding the growth of the communications services industry
and our business
. The markets for our services and products
. Forecasts of when we will enter particular markets or begin offering
particular services
. Our anticipated capital expenditures and funding requirements
. Anticipated regulatory developments
These statements are only predictions. You should be aware that these
forward-looking statements are subject to risks and uncertainties, including
financial and regulatory developments and industry growth and trend
projections, that could cause actual events or results to differ materially
from those expressed or implied by the statements. The most important factors
that could prevent us from achieving our stated goals include, but are not
limited to, our failure to:
. Successfully expand our operations into new geographic markets on a
timely and cost-effective basis
. Successfully introduce and expand our data and telecom service offerings
on a timely and cost-effective basis
. Design and install our Internet services infrastructure
. Respond to competitors in our existing and planned markets
. Execute and renew interconnection agreements with incumbent carriers on
terms satisfactory to us
. Enter into and maintain agreements for transport facilities and
services, including Internet transit services
. Maintain acceptance of our services by new and existing customers
. Attract and retain talented employees
. Prevail in legal and regulatory proceedings regarding reciprocal
compensation for Internet-related calls
. Obtain and maintain any required governmental authorizations, franchises
and permits, all in a timely manner, at reasonable costs and on
satisfactory terms and conditions
. Respond effectively to regulatory, legislative and judicial
developments, including developments relating to reciprocal compensation
. Manage administrative, technical and operational issues presented by our
expansion plans
. Raise sufficient capital on acceptable terms and on a timely basis
. Successfully provision digital subscriber line, or DSL, services
For a discussion of some of these factors, see "Risk Factors" beginning on
page 12.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information that we believe is especially important
concerning our business and the exchange offering. As a summary, it is
necessarily incomplete and does not contain all the information that is
important to you. You should carefully read the entire prospectus and the other
documents to which this prospectus refers you, including the Letter of
Transmittal. For a description of some of the industry terminology used in this
prospectus, you should refer to the "Glossary." You should also read and
consider the information in the "Risk Factors" section of this prospectus.
BUSINESS
Focal is a rapidly growing competitive provider of integrated communications
services. We provide data and telecom services to large, communications-
intensive users in major cities. Our target customers include large
corporations, Internet service providers, or ISPs, and value-added resellers,
or VARs. We offer our customers an attractive alternative to incumbent local
exchange carriers, or ILECs. Because other competitive carriers generally have
chosen to compete in smaller cities or target smaller customers, we believe our
strategy is unique.
Currently, we offer service in 18 large metropolitan markets nationwide. We
plan to provide service in two additional markets in 2000 and expand into four
more markets in 2001. When we complete this expansion, we will provide service
in 24 markets, encompassing 56 metropolitan statistical areas. As of March 31,
2000, we had sold 291,443 access lines, of which 238,697 were installed and in
service. As of March 31, 2000, our customers had, on average, approximately 290
access lines in service.
In response to market demand for faster, more reliable solutions to Internet
connectivity, we have launched a new data services business. We have hired an
Internet industry veteran to lead a dedicated team of employees to build this
business. Our new suite of data services, which we expect to roll-out during
the third quarter of 2000, will include:
. Managed High-Speed Internet Access--We intend to provide our customers
with reliable, direct access to multiple Tier-1 Internet backbones with
private peering relationships that avoid highly-congested public access
points. We believe this service will alleviate many of the latency,
packet-loss and reliability problems associated with the Internet.
. Colocation Services--We intend to leverage our existing and planned
colocation facilities by leasing space to those customers that need to
reach a high concentration of Internet end-users.
. Private Peering Services--We intend to offer private peering services to
enable ISPs, content providers and application service providers to
exchange traffic at our peering points, thereby avoiding the congestion
at public interconnection points.
We will offer these data services by creating Focal Internet eXchanges, or
FIXs, in each of our existing and planned switching and colocation sites in 24
major U.S. markets. Our FIXs, based on a redundant switch and router platform,
will be Internet Protocol, or IP, enabled meeting points for both Internet
users and content and application service providers. We believe content and
application service providers will value our proximity to end-users, which
results from our substantial role as a provider of Internet dial-up facilities.
We currently provide dial-up access services to approximately 200 ISPs that
use the Focal network to bring traffic to the Internet. We believe that we have
been successful at achieving significant penetration in our key markets. For
example, we estimate that more than one-third of all dial-up Internet traffic
in the Chicago metropolitan area passes through a Focal switching center. End-
user dial-up traffic travels through our switching centers, all of which
contain colocation space in which many of our customers house their
2
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equipment. We believe that this colocation space is of unique value because of
its proximity to the end-user. By colocating at a Focal facility, our content
and application service provider customers will be at a point closest to the
edge of the Internet, resulting in improved connections and faster download
speeds. As of March 31, 2000, we had over 110,000 square feet of secure and
environmentally-conditioned colocation space available to our customers or
under development. As part of our new data services strategy, we plan to expand
our colocation space to approximately 500,000 square feet across 36 FIX centers
located in our 24 target markets.
We believe we will have a competitive advantage over other carriers and
Internet infrastructure companies due to our:
. Established relationships with some of the largest corporate, ISP and VAR
customers in the nation
. Network infrastructure, which has been designed with colocation space
adjacent to our switching centers
. Highly reliable network
. Reputation for quality service and customer care
. Ability to package switched local service and high-speed data and
Internet connections
In addition to these new data services, we continue to deploy digital
subscriber line, or DSL, services and a nationwide network based on
asynchronous transfer mode, or ATM, technology. We believe that by providing a
full portfolio of data services, we will better serve the needs of our
customers and appeal to a broader market.
We believe we were the first competitive communications provider to employ
the "smart-build" approach to network design. As such, we own and operate our
switches, initially lease, rather than own, transport capacity, and acquire
fiber transport capacity when and where the volume of customer traffic
warrants. Because of increased customer traffic volume in some of our markets,
we began acquiring our own fiber transport capacity in 1999. By combining
leased fiber with owned fiber capacity, we expect to better control these
assets and generate stronger operating results. We also expect to apply this
approach to the design of our Internet services infrastructure.
We believe that our management and operations team has been critical to our
initial success and will continue to differentiate us from our competitors. We
have built a skilled and experienced management team with extensive prior work
experience at major communications companies, such as MFS Communications,
PSINet, MCI WorldCom, AT&T, Sprint and Ameritech.
STRATEGY
Our objective is to become the provider of choice for data and telecom
services to large, communications-intensive customers in our target markets. We
are responding to the evolving demands of our customers and positioning
ourselves to provide the high-quality telecom and data services they require.
To achieve this objective we intend to:
. Leverage the strong relationships we have built with our communications-
intensive customer base to increase our share of their total
communications expenditures.
. Expand our suite of service offerings to include a wider array of data
services. Our new data service offerings will include managed, high-speed
Internet access, colocation and peering services.
. Utilize the smart-build approach to design and install a highly capital-
efficient communications network.
. Expand our geographic coverage to additional markets with high
concentrations of communications-intensive customers.
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. Supplement our direct sales efforts with indirect sales to maximize the
utilization of our network assets and systems infrastructure.
Our principal executive offices are located at 200 North LaSalle Street,
Suite 1100, Chicago, Illinois 60601. Our phone number is (312) 895-8400.
THE EXCHANGE OFFER
The Exchange Offer............... We are offering to exchange $1,000
principal amount of our 11 7/8% Senior
Notes due 2010, Series B, which have
been registered under the Securities Act
of 1933 and which we refer to in this
prospectus as the "exchange notes," for
each $1,000 principal amount of our
outstanding unregistered 11 7/8% Senior
Notes due 2010, Series A, which were
issued by us on January 12, 2000 in a
private offering and which we refer to
in this prospectus as the "outstanding
notes." We refer to the exchange notes
and the outstanding notes together as
the "2000 senior notes."
In order for your outstanding notes to
be exchanged, you must properly tender
them before the exchange offer expires.
All outstanding notes that are validly
tendered and not validly withdrawn will
be exchanged. We will issue the exchange
notes promptly after the exchange offer
expires.
You may tender your outstanding notes
for exchange in whole or in part in
integral multiples of $1,000 principal
amount.
Exchange and Registration We sold the outstanding notes on January
Agreement....................... 12, 2000 to Salomon Smith Barney Inc.,
Donaldson, Lufkin & Jenrette Securities
Corporation, Morgan Stanley & Co.
Incorporated, TD Securities (USA) Inc.
and Banc of America Securities LLC,
which we refer to collectively as the
"initial purchasers." Simultaneously
with that sale we signed an exchange and
registration agreement with the initial
purchasers which requires us to conduct
this exchange offer.
You have the right under the exchange
and registration agreement to exchange
your outstanding notes for exchange
notes with substantially identical
terms. This exchange offer is intended
to satisfy these rights. After the
exchange offer is complete, you will no
longer be entitled to any exchange or
registration rights with respect to your
outstanding notes.
For a description of the procedures for
tendering outstanding notes, see "The
Exchange Offer--Procedures for Tendering
Outstanding Notes."
Consequences of Failure to
Exchange Your Outstanding
Notes...........................
If you do not exchange your outstanding
notes for exchange notes in the exchange
offer, you will continue to be subject
to the restrictions on transfer provided
in the outstanding notes and the
indenture governing the 2000 senior
notes. In
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<PAGE>
general, the outstanding notes may not
be offered or sold, unless registered
under the Securities Act, except
pursuant to an exemption from, or in a
transaction not subject to, the
Securities Act and applicable state
securities laws. We do not plan to
register the outstanding notes under the
Securities Act.
Expiration Date.................. The exchange offer will expire at 5:00
p.m., New York City time, on June 30,
2000 unless extended by us, in which
case the term expiration date will mean
the latest date and time to which the
exchange offer is extended.
Conditions to the Exchange The exchange offer is subject to certain
Offer........................... conditions, including that the exchange
offer not violate any law or applicable
interpretation of any law by the Staff
of the Securities and Exchange
Commission. The exchange offer is not
conditioned upon any minimum principal
amount of outstanding notes being
tendered for exchange. See "The Exchange
Offer--Conditions to the Exchange
Offer."
We reserve the right, in our sole and
absolute discretion, subject to
applicable law, at any time and from
time to time:
. To delay the acceptance of the
outstanding notes
. To terminate the exchange offer if
specified conditions have not been
satisfied
. To extend the expiration date of the
exchange offer and retain all
tendered outstanding notes subject,
however, to the right of tendering
holders to withdraw their tender of
outstanding notes
. To waive any condition or otherwise
amend the terms of the exchange offer
in any respect
See "The Exchange Offer--Expiration
Date; Extensions; Amendments."
Procedures for Tendering If you wish to tender your outstanding
Outstanding Notes............... notes for exchange, you must:
. Complete and sign a Letter of
Transmittal according to the
instructions contained in the Letter
of Transmittal
. Forward the Letter of Transmittal by
mail or hand delivery, together with
any other required documents, to the
exchange agent, either with the
outstanding notes that you tender or
in compliance with the specified
procedures for guaranteed delivery of
your outstanding notes.
Some brokers, dealers, commercial banks,
trust companies and other nominees may
also effect tenders by book-entry
transfer.
5
<PAGE>
Please do not send your Letter of
Transmittal or certificates representing
your outstanding notes to us. You should
send those documents only to the
exchange agent. You should direct any
information requests or questions
regarding how to tender your outstanding
notes to the exchange agent.
Special Procedures for If your outstanding notes are registered
Beneficial Owners............... in the name of a broker, dealer,
commercial bank, trust company or other
nominee, we urge you to contact such
person promptly if you wish to tender
your outstanding notes pursuant to the
exchange offer.
Withdrawal Rights................ You may withdraw the tender of your
outstanding notes at any time before the
expiration date by delivering a written
notice of your withdrawal to the
exchange agent according to the
withdrawal procedures described under
the heading "The Exchange Offer--
Withdrawal Rights."
Resales of Exchange Notes........ We believe that you will be able to
offer for resale, resell or otherwise
transfer exchange notes issued in the
exchange offer without compliance with
the registration and prospectus delivery
provisions of the Securities Act,
provided that:
. You are acquiring the exchange notes
in the ordinary course of your
business
. You are not participating, and have
no arrangement or understanding with
any person to participate, in the
distribution of the exchange notes
. You are not an "affiliate" of Focal
within the meaning of Rule 405 under
the Securities Act
. You are not a broker-dealer that
acquired the outstanding notes
directly from us
Our belief is based on interpretations
by the Staff of the Securities and
Exchange Commission, as set forth in no-
action letters issued to third parties
unrelated to us. The Staff of the
Securities and Exchange Commission has
not considered the exchange offer in the
context of a no-action letter, and we
cannot assure you that the Staff of the
Securities and Exchange Commission would
make a similar determination with
respect to this exchange offer.
If our belief is not accurate and you
transfer an exchange note without
delivering a prospectus meeting the
requirements of the Securities Act or
without an exemption from those
requirements, you may incur liability
under the Securities Act. We do not and
will not assume or indemnify you against
liability of this type.
6
<PAGE>
Exchange Agent................... The exchange agent for the exchange
offer is The Bank of New York. 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.................. We will not receive any cash proceeds
from the issuance of the exchange notes
offered by this prospectus.
United States Federal Income Tax
Consequences....................
Your acceptance of the exchange offer
and the related exchange of your
outstanding notes for exchange notes
will not be a taxable exchange for
United States federal income tax
purposes. You should not recognize any
taxable gain or loss as a result of the
exchange. You will include in gross
income interest on the exchange notes in
the same manner and to the same extent
as you would on the outstanding notes.
Appraisal or Dissenters' You will have no appraisal or
Rights.......................... dissenters' rights in connection with
the exchange offer.
THE EXCHANGE NOTES
The exchange offer relates to the exchange of up to $275,000,000 principal
amount of exchange notes for up to an equal principal amount of outstanding
notes.
Exchange Notes................... $275,000,000 aggregate principal amount
of our 11 7/8% Senior Notes due 2010,
Series B.
The form and terms of the exchange notes
are substantially identical to the form
and terms of the outstanding notes,
except the exchange notes will be
registered under the Securities Act.
Therefore, the exchange notes will not
bear legends restricting their transfer
and will not be entitled to registration
under the Securities Act. The exchange
notes will evidence the same debt as the
outstanding notes, which they replace.
Both the outstanding notes and the
exchange notes are governed by the same
indenture, which we refer to as the
"January 2000 indenture."
Maturity......................... January 15, 2010
Interest Payment Dates........... July 15 and January 15, commencing July
15, 2000
Ranking.......................... The exchange notes will be general
senior unsecured obligations of Focal.
The exchange notes will rank equally
with all of our existing and future
unsecured and unsubordinated
indebtedness, including the outstanding
notes and our previously issued 1998
notes, and be senior to all of our
existing and future subordinated
indebtedness. The exchange notes will be
effectively subordinated to all of our
secured indebtedness to the extent of
the value of the assets securing that
indebtedness and structurally
subordinated to all indebtedness of our
subsidiaries.
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Each broker-dealer that receives
exchange notes for its own account in
exchange for outstanding notes which
were acquired by the broker-dealer as a
result of market-making or other trading
activities must acknowledge that it will
deliver a prospectus meeting the
requirements of the Securities Act in
connection with any resale of these
exchange notes. A broker-dealer may use
this prospectus for an offer to sell,
resale or other transfer of exchange
notes.
Optional Redemption.............. On or after January 15, 2005, we may
redeem the exchange notes, in whole or
in part, at the redemption prices set
forth in this prospectus, plus accrued
interest to the date of redemption. In
addition, prior to January 15, 2003, we
may use the net proceeds from specific
issuances of capital stock to redeem up
to 35% of the originally issued
principal amount of 2000 senior notes at
a redemption price of 111.875% of their
principal amount, plus accrued interest
so long as at least 65% of the aggregate
principal amount of 2000 senior notes is
outstanding following that redemption.
Change of Control................ Following a "Change of Control," as
defined under the section entitled
"Description of the Exchange Notes,"
each holder of 2000 senior notes will
have the right to require us to
repurchase all or any part of the
holder's 2000 senior notes at a purchase
price equal to 101% of their principal
amount plus accrued interest to but
excluding the repurchase date. We may
not have available sufficient funds or
the financial resources necessary to
satisfy our obligations to repurchase
the 2000 senior notes and other debt
that may become repayable upon a Change
of Control. If following a Change in
Control at least 95% of the aggregate
original principal amount of the 2000
senior notes has been redeemed or
repurchased, we may redeem the balance
of the 2000 senior notes at a purchase
price of 101% of their principal amount,
plus accrued interest.
Covenants........................ The January 2000 indenture under which
the exchange notes will be issued
contains covenants, including, among
others, covenants with respect to the
following matters:
. The incurrence of additional
indebtedness or the issuance of
preferred stock by us and our
subsidiaries
. The payment of dividends on, and
repurchase or redemption of, our
capital stock and our subsidiaries'
capital stock, the repurchase or
redemption of our subordinated
obligations, and the making of other
restricted payments
. Selling our assets or stock of our
subsidiaries
. Sale and leaseback transactions
. Transactions with our affiliates
. The incurrence of additional liens
8
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. Our ability to restrict the ability
of our subsidiaries to pay dividends
or make payments to us
. Our ability to engage in
consolidations, mergers and transfers
of substantially all of our assets
All of these limitations and
prohibitions are subject to a number of
important qualifications and exceptions.
Prospectus Delivery Requirement.. Each broker-dealer that receives
exchange notes for its own account in
exchange for outstanding notes, where
such outstanding 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."
9
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The information in the following table is based on historical financial
information included in our prior filings with the Securities and Exchange
Commission, including our annual report on Form 10-K for the fiscal year ended
December 31, 1999. The following summary financial information should be read
in connection with this historical financial information, including the notes
that accompany such financial information. This historical financial
information is considered a part of this document. See "Where You Can Find More
Information." Our audited historical financial statements as of December 31,
1999 and 1998, and for each of the three years ended December 31, 1999 were
audited by Arthur Andersen LLP, independent public accountants. The selected
financial data as of and for the three-month periods ended March 31, 1999 and
2000 have been derived from our unaudited consolidated financial statements
which, in the opinion of management, include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of our
financial condition and results of operations for these periods. The results of
operations for interim periods are not necessarily indicative of full year
results. You should not assume that the results of operations below are
indicative of the financial results we can achieve in the future.
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
---------------------------------- ----------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ---------- ----------
(Unaudited)
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Data services........... $ -- $ -- $ 96,856 $ 19,979 $ 32,190
Telecom services........ -- -- 30,005 6,025 13,139
---------- ---------- ---------- ---------- ----------
Total revenues........ 4,024 43,532 126,861 26,004 45,329
Expenses:
Customer service and
network operations... 2,155 15,284 70,910 10,369 33,255
Selling, general and
administrative....... 2,887 12,210 32,486 5,666 14,581
Depreciation and
amortization......... 616 6,671 23,763 4,027 10,376
Non-cash compensation
expense.............. 1,300 3,070 7,186 1,560 1,448
---------- ---------- ---------- ---------- ----------
Operating income (loss). (2,934) 6,297 (7,484) 4,382 (14,331)
Other income (expense),
net.................... 68 (9,606) (14,302) (4,098) (6,825)
(Provision) benefit for
income taxes........... -- (4,660) (600) -- 331
Accretion to redemption
value of Class A common
stock.................. (104) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)
applicable to common
stockholders........... $ (2,970) $ (7,969) $ (22,386) $ 284 $ (20,825)
========== ========== ========== ========== ==========
Basic net income (loss)
per share.............. $ (0.07) $ (0.18) $ (0.45) $ 0.01 $ (0.35)
========== ========== ========== ========== ==========
Diluted net income
(loss) per share....... $ (0.07) $ (0.18) $ (0.45) $ 0.01 $ (0.35)
========== ========== ========== ========== ==========
Basic weighted average
common stock
outstanding............ 42,186,500 43,763,000 50,066,315 43,961,000 60,150,761
========== ========== ========== ========== ==========
Diluted weighted average
common stock
outstanding............ 42,186,500 43,763,000 50,066,315 51,803,000 60,150,761
========== ========== ========== ========== ==========
Other Financial Data:
EBITDA.................. $ (1,018) $ 16,038 $ 23,465 $ 9,969 $ (2,507)
Capital expenditures.... 11,655 64,229 128,550 24,476 52,314
Ratio of earnings to
fixed charges.......... -- -- -- 1.05 --
Summary Cash Flow Data:
Net cash provided by
(used in) operating
activities............. $ (1,634) $ 22,507 $ 18,549 $ (1,305) $ 13,323
Net cash used in
investing activities... (11,655) (72,189) (130,590) (23,977) (51,449)
Net cash provided by
financing activities... 11,756 173,466 164,142 5,840 263,719
Operating Data:
Access lines in service. 7,394 52,011 181,103 70,572 238,697
Minutes of use
(millions)............. 282 3,568 13,362 2,033 6,421
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
As of As of
December 31, March 31,
1999 2000
------------ ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
short-term investments........ $188,142 $413,770
Current assets................. 219,932 454,212
Long-term debt, including
current portion............... 253,786 530,699
Total stockholders' equity..... 142,487 123,510
</TABLE>
You should keep the following matters in mind when you read the information
in the tables above:
. Non-cash compensation expense consists of:
--charges totaling $1.3 million for each of 1997 and 1998, $2.5
million for 1999, and $0.3 million and $0 for the three month
periods ended March 31, 1999 and 2000, respectively, which resulted
from the vesting over time of shares of common stock issued to some
of our executive officers in November 1996
--charges of $1.8 million and $0.3 million for 1998 and 1999, and
$0.1 million for the three months ended March 31, 1999 and 2000,
respectively, which resulted from the vesting and cancellation of
shares of common stock in connection with the September 30, 1998
amendment of vesting agreements with some of our executive officers
--charges of $4.4 million for 1999 and $1.2 million and $1.3 million
for the three months ended March 31, 1999 and 2000, respectively,
which resulted from our 1999 stock option grants to employees,
directors and an outside consultant, and common stock issued to a
director
. EBITDA represents earnings before interest, income taxes, depreciation
and amortization and other non-cash charges, including non-cash
compensation expense. EBITDA is not a measurement of financial
performance under generally accepted accounting principles. EBITDA is
not intended to represent cash flow from operations and should not be
considered as an alternative to net loss applicable to common
stockholders as an indicator of our operating performance or to cash
flows as a measure of liquidity. We believe that EBITDA is widely used
by analysts, investors and other interested parties in the
telecommunications industry. EBITDA is not necessarily comparable to
similarly titled measures for other companies.
. For the years ended December 31, 1997, 1998, and 1999 and for the three
months ended March 31, 2000, earnings were insufficient to cover
combined fixed charges by $2.9 million, $3.3 million, $21.8 million and
$21.2 million, respectively.
. We count access lines as of the end of the period indicated and on a
one-for-one basis using DS-0 equivalents.
. No additional proceeds will be received from the exchange offer.
11
<PAGE>
RISK FACTORS
In addition to the other information in this prospectus, you should consider
carefully the following risk factors in evaluating our company and our business
before tendering your outstanding notes for exchange notes. You should also
consider the additional information set forth in our Securities and Exchange
Commission reports on Forms 10-K and 10-Q and in the other documents
incorporated by reference in this prospectus.
Limited Operating History--We have a limited history of operations and you
therefore have limited information on which to base your investment decision.
We were incorporated in April 1996 and began providing service in our first
market, Chicago, in May 1997. Therefore, you have limited historical financial
and operating information with which to evaluate our performance. In addition,
the revenues and income potential of our new data services business is
unproven. You should consider and evaluate our prospects in light of the risks
and difficulties frequently encountered by companies in the rapidly-evolving
data services market.
Probable Future Losses--We expect negative operating cash flows and substantial
operating losses for the foreseeable future.
The development of our business requires significant capital and operational
expenditures to expand our networks, services and customer base. Many of these
expenditures must be completed before any revenue can be realized in a
particular market. These expenditures are expected to increase as we grow our
customer base in existing markets, expand into new markets and diversify our
service offerings.
Reciprocal compensation has historically represented a substantial portion
of our revenues. Reciprocal compensation payments are amounts we receive when
we complete local calls from another local exchange carrier's network. These
payments represented approximately 81%, 75%, 55% and 39% of our total revenues
for 1997, 1998, 1999 and for the three months ended March 31, 2000,
respectively. Since July 1, 1999, effective rates for reciprocal compensation
have decreased substantially. As a result, revenues from reciprocal
compensation, as a percentage of total revenues, have decreased substantially
and are expected to continue to decrease.
We expect negative operating cash flow and substantial operating losses
until these trends stabilize, our newer markets and service offerings are
established and mature, and we establish an adequate revenue base. Although we
had operating income in 1998 of $6.3 million, we had operating losses of $7.5
million in 1999 and $14.3 million for the three months ended March 31, 2000,
and we expect substantial operating losses for the foreseeable future. We may
continue to sustain negative operating cash flow and operating losses as a
result of low prices, including reduced rates attributable to reciprocal
compensation, and/or higher costs, including cash interest costs.
Significant Capital Requirements--Our future growth will require significant
capital.
Our business plan requires us to:
. Expand our existing networks and services
. Acquire and develop new networks and services in additional markets
. Deploy our own fiber capacity in a majority of our markets
. Design and install Focal Internet eXchanges in each of our switching and
colocation sites
. Fund our operating losses
These activities will require significant capital for the foreseeable
future. Capital expenditures for our current business plan are estimated to be
approximately $300 million in 2000 and $305 million in 2001. The
12
<PAGE>
2000 capital expenditures are expected to be made primarily for the build-out
of additional markets, the expansion of our existing markets, the roll-out of
new services, including managed high-speed Internet access, colocation and
peering services, and the purchase of local dark fiber transport capacity in a
majority of our markets. We currently plan to fund these requirements with the
net proceeds of the offering of the outstanding notes, together with our
existing cash balances, cash equivalents and short-term investments. In
addition, we are currently in negotiations for a $200 million senior secured
credit facility. If we choose to establish this facility, we expect that it
will fund our operations and capital expenditure requirements through the
fourth quarter of 2001. In addition, we may choose to obtain future debt or
equity financing to fund additional new products and services and for other
general corporate purposes.
Our expectations of our future capital requirements and cash flows from
operations are based on current estimates. Our actual capital expenditures and
cash flows could differ significantly from these estimates. If we require
additional capital to complete our planned expansion or if customer demand
significantly differs from our current expectations, our funding needs may
increase. In addition, we may be unable to produce sufficient cash flows from
ongoing operations to fund our business plan and future growth. This would
require us to alter our business plan, including delaying or abandoning our
expansion or spending plans, which could have a material adverse effect on our
business. In addition, we may elect to pursue other attractive business
opportunities that could require additional capital investments in our
networks. If any of these events were to happen, we could be required to borrow
more money, issue additional debt or equity securities or enter into joint
ventures.
Substantial Debt--We have a substantial amount of debt that could impact our
future prospects and we may not have sufficient cash flow to service our debt.
We currently have a substantial amount of debt in relation to our
stockholders' equity. At March 31, 2000, we had total debt outstanding of
$530.7 million, representing approximately 81% of our total capitalization, and
total stockholders' equity of $123.5 million. Non-cash interest on our 2000
senior notes and on our $270 million 12.125% Senior Discount Notes due 2008
issued in February 1998, which we refer to in this prospectus as the 1998
notes, will increase this debt by an additional $1.9 million by January 15,
2010 and $77.6 million by February 15, 2003, respectively. The January 2000
indenture and the indenture related to the 1998 notes, which we refer to as the
"February 1998 indenture," also permit us to incur additional debt, which we
plan
to do.
Our high level of debt could affect our future prospects adversely by:
. Impairing our ability to borrow additional money.
. Requiring us to use a substantial portion of our cash flows from
operations to pay interest or repay debt which will reduce the funds
available to us for our operations, capital expenditures and acquisition
opportunities. Of the $18.5 million and $13.3 million net cash flows
provided by our operations in 1999 and for the three months ended March
31, 2000, respectively, $25.3 million and $14.5 million, respectively,
were charged as interest expense on our debt. Of this amount, 82% and
88%, respectively, were used for interest on the 1998 notes and 2000
senior notes and 18% and 12% respectively, were used for interest on our
term loan facility, capital leases and other obligations. A portion of
this interest expense, totaling $3.6 million and $1.6 million,
respectively, relating to construction in progress was capitalized
during 1999 and for the three months ended March 31, 2000, respectively.
Cash generated from our operating activities may not be sufficient to
meet our debt service obligations for the foreseeable future.
. Placing us at a competitive disadvantage with companies that are less
restricted by their debt agreements. Our debt agreements limit our
ability to pursue our business strategy, borrow additional funds to grow
our business, acquire and dispose of assets, and make capital
expenditures.
. Making us more vulnerable in the event of a downturn in general economic
conditions.
13
<PAGE>
We cannot assure you that we will be able to meet our debt obligations. If
we are unable to generate sufficient cash to meet our obligations or if we fail
to satisfy the requirements of our debt agreements, we will be in default. A
default would permit the debtholders to require payment before the scheduled
due date of the debt, resulting in further financial strain on us and causing
additional defaults under our other indebtedness.
Our ability to meet our debt and other obligations and to reduce our total
debt depends on our future operating performance and on economic, financial,
competitive, regulatory and other factors. In addition, we may need to incur
additional indebtedness in the future. Many of these factors are beyond our
control. Although we believe that our existing current assets combined with
working capital from our operations, capital lease financings and proceeds of
future equity or debt financings will be adequate to meet our existing
financial obligations, we cannot assure you that our business will generate
sufficient cash flow or that future financings will be available to provide
sufficient proceeds to meet these obligations.
In order to repay our debt and fund our capital expenditures, we must
successfully implement our business strategy. If we are unable to do so, we may
have to reduce or delay our planned capital expenditures, sell assets, sell
additional equity or debt securities or refinance or restructure our debt. Any
delay in our planned capital expenditures could materially and adversely affect
our future revenue prospects. Any sale of assets to raise money to meet our
financial obligations could also occur on unfavorable terms.
Subordination--The exchange notes are effectively subordinated to all of our
secured indebtedness and the liabilities of our subsidiaries.
The exchange notes are general senior unsecured obligations, ranking equally
with all of our existing and future unsecured and unsubordinated indebtedness,
including the outstanding notes and the 1998 notes, and senior to all of our
existing and future subordinated indebtedness. The exchange notes are
effectively subordinated to all of our secured indebtedness to the extent of
the value of the assets securing such indebtedness, and structurally
subordinated to all indebtedness of our subsidiaries. At December 31, 1999 and
March 31, 2000, we had approximately $44.2 million and $42.1 million,
respectively, of secured indebtedness outstanding to which holders of exchange
notes would have been effectively subordinated in right of payment. In
addition, we are currently in negotiations for a $200 million senior secured
credit facility. If we choose to establish this facility, our secured
indebtedness will increase.
Focal Communications Corporation is a holding company that conducts
substantially all of our revenue producing operations through our operating
subsidiaries. Claims of holders of the exchange notes are effectively
subordinated to the indebtedness and other liabilities and commitments of our
subsidiaries, and claims by Focal as an equity holder in our non-wholly owned
subsidiaries and minority interests will be limited to the extent of our direct
or indirect investment in such entities. The ability of creditors, including
the holders of the exchange notes, to participate in the assets of any of our
subsidiaries upon any liquidation or bankruptcy of any such entity will be
subject to the prior claims of that entity's creditors, including trade
creditors, and any prior or equal claim of any other equity holder. In
addition, the ability of our creditors, including the holders of exchange
notes, to participate in distributions of assets of our subsidiaries will be
limited to the extent that the outstanding shares of any of our subsidiaries
are either pledged to secure other creditors or are not owned by Focal. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
Subsidiary Cash Flows--We depend upon the cash flows of our subsidiaries to
repay the exchange notes.
The exchange notes are obligations solely of Focal. Our ability to pay
interest on the exchange notes or to repay the exchange notes at maturity or
otherwise is dependent upon the cash flows of our operating subsidiaries and
the payment of funds by those subsidiaries to us in the form of repayment of
loans, dividends, management fees or otherwise. Our operating subsidiaries have
no obligation, contingent or other, to pay amounts pursuant to the exchange
notes or to make funds available therefor, whether in the form of loans,
dividends or other distributions. In addition, to the extent we make minority
investments and investments in joint ventures as a part of our strategy, we may
not have access to the cash flows of such entities. Accordingly,
14
<PAGE>
our ability to repay the exchange notes at maturity or otherwise may be
dependent upon our ability to refinance the exchange notes, which will in turn
depend, in large part, upon factors beyond our control. While at the present
time there are no material agreements in place which prohibit or restrict our
subsidiaries' right or ability to make such payments, future agreements may
contain covenants prohibiting them from distributing or advancing funds to
Focal under certain circumstances, including to fund interest payments in
respect of the exchange notes.
Financing a Change of Control Offer--We may not have the ability to raise the
funds necessary to finance the change in control offers required by the January
2000 indenture and the February 1998 indenture.
Upon the occurrence of specific kinds of change in control events, each
holder of 2000 senior notes and 1998 notes will have the right to require us to
repurchase all or a portion of the holder's notes. If this occurs, we may not
have sufficient funds to pay the repurchase price for all notes tendered by the
holders. In addition, our repurchase of notes as a result of these events may
be prohibited or limited by, or create a default under, the agreements related
to our borrowings, including senior indebtedness.
Restrictive Covenants--We are subject to restrictive covenants that limit our
flexibility.
Our equipment term loan facility and other debt instruments contain
customary covenants limiting our flexibility, including covenants limiting our
ability to incur additional debt, make liens, make investments, consolidate,
merge or acquire other businesses, sell assets, pay dividends and other
distributions, make capital expenditures and enter into transactions with
affiliates. These covenants may make it difficult for us to pursue our business
strategies. Failure to comply with the terms of the equipment term loan
facility would entitle the secured lenders to foreclose on the assets acquired
with the proceeds of these loans, principally telecommunications equipment and
related software licenses. The secured lenders would be repaid from the
proceeds of the liquidation of these assets before the assets would be
available for distribution to other creditors and, lastly, to the holders of
Focal's capital stock. Our ability to satisfy the financial and other
restrictive covenants may be affected by events beyond our control.
Network Expansion--Difficulties in expanding our networks could increase our
estimated costs and delay scheduled completion.
The expansion of our existing networks and the construction of networks in
new markets is a significant undertaking. This will require that we install and
operate additional facilities, switches and related equipment, design and
install Focal Internet eXchanges in each of our switch and colocation sites and
develop, introduce and market new products and services, including data
services. In addition, the deployment of additional data services, such as
high-speed LAN and Internet access and peering, will require modifications to
our network architecture. The development and expansion of some of our data
services offerings will also require us to obtain and install our equipment in
the ILECs' central office colocation space. Administrative, technical,
operational, regulatory and other problems that could arise may be more
difficult to address and solve due to the scope and complexity of our planned
expansion. We are also dependent on timely performance by third-party suppliers
and contractors, including suppliers of network equipment. Many of these
factors and problems are beyond our control. As a result, our network build-out
may not be completed as planned or for the costs and in the time frame that we
currently estimate. We may be materially adversely affected as a result of any
significant increase in the estimated cost of the network build-out or any
significant delay in its anticipated completion.
Management of Growth--An inability to effectively manage our planned rapid
growth could adversely affect our operations.
Our business plan contemplates rapid expansion for the foreseeable future.
This growth will increase our operating complexity and require that, among
other things, we:
. Accurately assess our markets
. Expand our employee base with highly-skilled personnel
15
<PAGE>
. Develop and institute adequate financial and management controls,
reporting systems and procedures
. Control expenses related to our business plan
. Integrate any acquired operations and joint ventures
. Obtain and maintain necessary regulatory approvals
. Lease additional real estate
Our inability to manage growth effectively would seriously hinder our plans
to deploy our new data services offerings. The difficulties associated with
deploying additional data services and installing and implementing equipment,
systems, procedures and controls for these services may place an additional
burden on our management and our internal resources. Our plans to rapidly
deploy these services could place a significant strain on our management's time
and resources. A failure to satisfy any of these requirements or manage our
growth effectively could have a material adverse effect on us.
New Data Services--Our data services business is new and may be unsuccessful.
We have only recently created our new data services business. We believe
that offering a broader portfolio of services is the best method for gaining
market share among our corporate, ISP and VAR customers and increasing customer
satisfaction. In order to implement our data services business plan, we will be
required to make operating and capital investments and must address operating
complexities associated with providing these new services. These operating
complexities are in addition to those we otherwise face in operating and
expanding our existing business and may include:
. Designing and installing an Internet services infrastructure and network
. Hiring, training and managing a dedicated team of employees to run this
business
. Obtaining Internet transit services from backbone providers
. Selecting new equipment and software and integrating these into our
existing networks
. Developing billing, back-office and information systems to accommodate
data services
In providing our new data services, we will also depend upon additional vendors
for assistance in the planning and deployment of our service offerings as well
as ongoing training and support. We may not be successful with respect to these
matters. If we are not successful with respect to these matters, there may be a
material adverse effect on our business and the price of our common stock.
We face significant competition in the market for data services. Our
competitors may mount a significant competitive response to new entrants in
their market, such as Focal. We expect to face intense competitive product and
pricing pressures in our markets.
In addition, we face the risk that the market for high performance data
services might fail to develop, or develop more slowly than expected, or that
our data service offerings may not achieve widespread market acceptance. This
market has only recently begun to develop, is evolving rapidly and likely will
be characterized by an increasing number of entrants. There is significant
uncertainty as to whether this market ultimately will prove to be viable or, if
it becomes viable, that it will grow. Furthermore, we may be unable to market
and sell our services successfully and cost-effectively to a sufficiently large
number of customers.
Network Failure--A failure in our network operations center, switch facilities
or computer systems could cause a significant disruption in the provision of
our services.
Although we have taken precautions against systems failure, interruptions
could result from natural disasters as well as power loss, telecommunications
failure and similar events. Our business depends on the efficient and
uninterrupted operation of our network operations center, our switch facilities
and our computer and communications hardware systems and infrastructure. We
currently have one network operations center, and we have 14 switching
facilities that serve our 18 markets. If we experience a problem at our network
operations center or switching facilities, we may be unable to provide services
to our customers, provide customer service and support, or monitor our network
infrastructure and switch facilities, any of which would seriously harm our
business.
16
<PAGE>
Network Vulnerability--Our network and software are vulnerable to security
breaches and similar threats that could result in our liability for damages and
harm our reputation.
Despite the implementation of network security measures, the core of our
network infrastructure is vulnerable to computer viruses, break-ins, network
attacks and similar disruptive problems. If any of these events occurred, we
could be liable for damages and our reputation could suffer, thereby deterring
potential customers from working with us. Security problems caused by third
parties could lead to interruptions and delays or to the cessation of service
to our customers. Furthermore, inappropriate use of the network by third
parties could also jeopardize the security of confidential information stored
in our computer systems and in those of our customers.
Although we intend to continue to implement industry-accepted security
measures, some of these industry-standard measures have been circumvented by
third parties, although not in our system. The measures we implement could be
circumvented. The costs and resources required to eliminate computer viruses
and alleviate other security problems could result in interruptions, delays or
cessation of service to our customers, which could hurt our business.
Internet-Related Reciprocal Compensation--Our entitlement to reciprocal
compensation for Internet traffic is subject to uncertainties that could
adversely affect us.
Several of the ILECs continue to challenge, through legal proceedings, the
CLECs' entitlement to reciprocal compensation payments under existing
interconnection agreements for calls made to ISPs on the grounds that these
calls should be considered interstate in nature, and that interstate calls are
not subject to reciprocal compensation. Several of these legal challenges seek
a refund of reciprocal compensation previously paid by the ILECs. Some ILECs
have refused to pay or have indicated they will escrow reciprocal compensation
for inbound ISP traffic.
In addition, other ILECs have claimed that reciprocal compensation should be
paid at rates lower than those previously used to calculate amounts owed to the
CLECs. On July 1, 1999, we began to exclude certain reciprocal compensation
revenues generated from our operations in states where recent regulatory
developments have impacted the potential level of collection of reciprocal
compensation. There is also a risk that courts and regulatory authorities that
previously ordered payment for certain reciprocal compensation, for which we
have established no reserves, will revisit this issue and revise their prior
decisions, including possibly permitting the ILECs to recoup our previously
recorded revenues from reciprocal compensation.
A number of states, including Illinois, have initiated, or announced their
intention to initiate, proceedings to determine whether it is appropriate to
establish separate reciprocal compensation rates for Internet-bound calls.
Legislation has been introduced in the U.S. Congress that would eliminate the
payment of reciprocal compensation for Internet bound calls. A judicial,
legislative or regulatory determination that we are not entitled to the
reciprocal compensation we have recognized, an order that we refund reciprocal
compensation paid to date or a decision that reciprocal compensation for
Internet-bound calls should be lower could have a material adverse effect on us
and our results of operations.
Information Support Systems--Any failure to develop and enhance effective
information support systems could have a material adverse effect on us.
Our business plan depends on our ability to develop and enhance
sophisticated information support systems. This is a complicated undertaking
requiring significant resources and expertise, and support from third-party
vendors. Since our business plan provides for growth in the volume and types of
services we offer, we need to develop and enhance these information support
systems on a schedule sufficient to meet our proposed service roll-out dates.
In addition, we will require these information support systems to expand and
adapt with our rapid growth. The failure to develop and timely enhance
effective information support systems could have a material adverse effect on
us and our ability to implement our growth strategy.
17
<PAGE>
Regulation--We are subject to significant regulation that could change in a
manner adverse to us.
Communications services are subject to significant regulation at the
federal, state and local levels. The following factors may have a material
adverse effect on us:
. Delays in receiving required regulatory approvals or onerous conditions
imposed on these approvals
. Difficulties completing interconnection agreements with ILECs
. The enactment of new and adverse legislation or regulatory requirements
or changes in the interpretation of existing legislation and/or changes
in regulatory requirements
Recent federal legislation governing the U.S. telecommunications industry
remains subject to judicial review and additional FCC rule-making. As a result,
we cannot predict the legislation's effect on our future operations or results.
Many regulatory and legislative actions regarding important items that impact
us are underway or are being contemplated by federal and state authorities.
Changes in current or future regulations adopted by federal, state or local
regulators, or other legislative or judicial initiatives relating to the
telecommunications industry, could have a material adverse effect on us.
Unlike some of our competitors, particularly the ILECs, we are not currently
subject to some of the burdensome regulations imposed by federal legislation.
Our ability to compete in the local exchange market will depend upon a
continued favorable, pro-competitive regulatory environment, and could be
adversely affected by new regulations or legislation affording greater
flexibility and regulatory relief to our competitors.
In August 1998, the FCC requested comments on new rules that would allow
ILECs to provide their own DSL services free from ILEC regulation through a
separate affiliate. The provision of DSL services by an affiliate of an ILEC
not subject to ILEC regulation could have a material adverse effect on us.
Congress has introduced bills that would grant Regional Bell Operating
Companies, or RBOCs, permission to provide data services in areas where they
are currently restricted from doing so. Although we cannot predict the outcome
of any proposed or pending legislation, the ability of RBOCs to provide data
services on a broader basis could have a material adverse effect on us. In
addition, the FCC recently acted to enable Internet service providers to buy
DSL services in bulk from ILECs, which could result in additional competition
for Internet service provider business.
We are currently required to publicly file with governmental authorities our
tariffs describing the prices we charge our customers and the terms and
conditions for some intrastate, interstate and international services.
Challenges to these tariffs by regulators or third parties could cause us to
incur substantial legal and administrative expenses. On April 28, 2000, the
FCC's orders requiring detariffing for interstate, domestic, interexchange
services were upheld on appeal. The FCC has since created a nine month plan for
implementing detariffing by January 31, 2001.
Federal and state regulatory agencies also have the right to impose
sanctions and forfeitures, mandate refunds or impose other penalties for
regulatory non-compliance and may require prior approval of transfers of
control and the issuance of debt and equity.
Some interexchange carriers, including AT&T and Sprint, have challenged the
switched access rates of Focal and other CLECs and have withheld some or all
payments for the switched access services that they continue to receive.
Although no formal complaints have been filed against us, AT&T and other
interexchange carriers have asserted that our charges for switched access
services are higher than those of the ILEC serving the same territory and are
therefore unjust and unreasonable. AT&T has refused to pay us any originating
access charges at our tariffed rate, and Sprint is paying us less than our
tariffed rates. We have joined other
CLECs in a lawsuit against AT&T and Sprint in Federal District Court seeking
collection of our access charges.
There is currently only a small body of laws and regulations applicable to
access to or commerce on the Internet. As the significance of the Internet
expands, federal, state and local governments may adopt rules and regulations
that affect the Internet. We cannot predict the nature of these regulations or
their impact on our business. The adoption of future laws or regulations or the
application of existing laws and regulation could slow the growth of the
Internet, decrease demand for our data services, impose taxes, otherwise
increase the cost of doing business on the Internet or otherwise adversely
affect us or our customers.
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<PAGE>
Reliance on Transport Facilities and Services of Third Parties--Our reliance on
leased transport facilities and services of third parties could materially and
adversely affect our business.
Our network design strategy contemplates us owning and operating our own
switches but initially leasing a substantial portion of our transport
facilities, or network lines, from third parties. During 1999, we used leased
facilities for 100% of our transport requirements. Although we have begun to
selectively acquire and activate our own fiber transport capacity in some of
our markets, we expect, for the foreseeable future, to continue to lease a
substantial portion of our transport capacity from other carriers, some of
which are competitors in our service territories.
We are also dependent on third-party suppliers for substantial amounts of
fiber, conduit, computers, software, switches, routers and related components
that we use to expand and upgrade our network. If any of these relationships is
terminated or a supplier fails to provide reliable services or equipment, and
we are unable to reach suitable alternative arrangements quickly or on
favorable terms, we may experience significant delays and additional costs. If
that happens, it could have a material adverse effect on us.
We currently lease a substantial portion of our transport facilities from
one carrier. Although we believe that adequate alternative sources of transport
facilities exist, if this carrier's facilities become unavailable, our business
could be disrupted. In addition, although we believe we have protection against
unexpected increases in the costs of our leased transport facilities, an
unexpected material increase in these costs could have a material adverse
effect on our results.
We have entered into multi-year agreements to lease fiber transport capacity
in several markets and expect to enter into additional agreements for Internet
transit services from Internet backbone providers. Our current agreements
require us to make minimum, fixed installment payments, whether or not we need
transport capacity or this capacity becomes otherwise available at lower
prices. When we negotiate these agreements, we estimate future supply and
demand for transmission capacity, as well as calling patterns and traffic
levels of our customers. We also set the price terms of these agreements on the
basis of the supply of, and the then prevailing prices for, transport capacity
which are expected to fluctuate over time. If we do not meet our minimum volume
commitments, we may be obligated to pay underutilization charges. If we
underestimate our need for transmission capacity, we may be required to obtain
capacity through other, possibly more expensive, means. If we overestimated our
need for transmission capacity or prevailing prices for transport capacity or
Internet transit services fall, it could have a material adverse effect on our
results of operations.
In order to offer our new data services, we will rely on multiple Tier-1
Internet backbone providers. To provide optimal routing to our customers
through our facilities, we must contract for Internet transit services from
several Internet backbone providers. We may be unable to establish
relationships with, or obtain necessary services from, backbone providers.
Furthermore, we may be unable to establish and maintain relationships with
other backbone providers that may emerge or that are significant in geographic
areas in which our facilities are or will be located. We cannot assure you that
these Internet backbone providers will provide service to us on a cost-
effective basis, if at all, or that these providers will provide us with the
necessary capacity to adequately meet customer demand or avoid service delays
or interruptions.
Relationship with ILECs--Our reliance on ILEC interconnection agreements and
changes to our agreements with the ILECs could have a material adverse effect
on us.
In addition to agreements with transport and Internet transit service
providers, we are dependent upon our agreements with the ILECs operating in our
existing and targeted markets. These agreements, called interconnection
agreements, specify how we connect our networks with the network of the ILEC in
each of our markets. Federal legislation regulating the telecommunications
industry has enhanced competition in the local service market by requiring the
ILECs to provide access to their networks through interconnection agreements
and to offer unbundled elements of their network and retail services at
prescribed rates to other telecommunications carriers. A failure to negotiate
required interconnection agreements or renew existing interconnection
agreements on favorable terms could have a material adverse effect on our
business.
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Our interconnection agreements also require the ILECs to provide sufficient
transmission capacity to keep blocked calls between our networks within
industry limits. Accordingly, we are partially dependent on the ILECs in our
efforts to provide our customers with superior service and avoid blocked calls.
The failure by the ILECs to comply with their obligations under our
interconnection agreements could result in customer dissatisfaction and the
loss of existing and potential customers. In addition, the rates charged to us
under the interconnection agreements may be too high to permit us to offer
usage rates that are low enough to attract a sufficient number of customers and
permit us to operate profitably.
The pace at which we are able to add new customers and services could be
adversely affected if the ILECs do not provide us with necessary network
elements, colocation space, intercompany network connections and the means to
share information about customer accounts, service orders and repairs on a
timely basis. Because the rules governing colocation remain subject to
additional FCC rulemaking, disputes concerning the types of equipment we may be
allowed to colocate could cause delays and added expense. In addition, our
ability to provide some high-speed data services will be dependent on our
obtaining space from the various ILECs for physical colocation of our equipment
in the ILECs' central offices and elsewhere. In many instances the ILECs do not
timely or fully comply with these requirements. Also, the rules governing which
elements the ILECs must provide and the cost methodology for providing these
elements are currently under FCC and judicial review.
Interconnection agreements are subject to review and approval by various
federal and state regulators. In addition, parties to the agreements may seek
to have the agreements modified based upon the outcome of regulatory or
judicial rulings occurring after the dates of the agreements. The outcome of
these rulings, or any modified agreements, could have a material adverse effect
on us. In addition, certain aspects of interconnection agreements, including
the price and economic terms of these agreements, have been subject to
litigation and regulatory action.
Competition--We compete in the communications services industry with
participants that have greater resources, more established networks and a
broader customer base than we do.
Portions of the communications services industry are highly competitive.
Many of our existing and potential competitors, including the ILECs and some
CLECs, have financial, personnel, marketing and other resources significantly
greater than ours. Many of these competitors have the added competitive
advantage of an established network and an existing customer base.
Our principal competitor in each of our markets is the ILEC. Although recent
federal legislation and rule-making have afforded us increased opportunities,
they also provide the ILECs with some advantages which could adversely affect
our business. In addition, current competitive advantages afforded to CLECs may
also be adversely affected by changes in existing regulation of
telecommunications services. These changes may include permitting ILECs to:
. Reduce their prices because of fewer regulatory restrictions
. Offer selective discount pricing to their customers
. Provide advanced data services through less-regulated separate
subsidiaries that may be used for voice traffic
. Eliminate the mandatory resale of advanced services
. Provide in-region long distance service
. Limit the network elements required to be provided on an unbundled basis
In addition, significant new competitors in the local exchange market could
arise as a result of:
. Consolidation and strategic alliances in the industry
. Foreign carriers being allowed to compete in the U.S. market
. Further technological advances
. Further deregulation and other regulatory initiatives
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Other competitors and potential market entrants include long distance
companies, cable television companies, value added resellers, electric
utilities, microwave carriers, wireless telephone system operators, data
service companies and operators of private networks.
In addition, the data services market, which we are entering, is extremely
competitive, and there are few barriers to entry. We expect intense competition
in the future, and we may not have the financial resources, technical
expertise, sales and marketing resources or support capabilities to compete
successfully in this market. Some of our existing competitors have greater
market presence, engineering and marketing capabilities, and financial,
technological and personnel resources than we do. As a result, our competitors
may have several advantages over us as we seek to develop a presence in this
new market.
Our competitors in the data services segment of the communications services
industry currently include RBOCs that offer Internet access, and global,
national and regional Internet service providers, some of which we expect will
provide us with connectivity services. We also believe that new competitors
will enter the data services market. These new competitors could include
computer hardware, software, media and other technology and telecommunications
companies. A number of communications companies and online service providers
have announced plans to offer or expand their network services. Further, the
ability of some of these potential competitors to bundle other services and
products with their network services could place us at a competitive
disadvantage.
Technological Changes--Our business could be adversely affected if we do not
keep pace with rapid technological changes.
The communications services industry is subject to rapid and significant
changes in technology. We cannot predict the effect of technological changes on
our business. The introduction of new products or technologies may reduce the
cost or increase the supply of services similar to those that we plan to
provide. As a result, our most significant competitors in the future may be new
entrants to the communications services industry. These new entrants may not be
burdened by an installed base of outdated equipment. Technological changes and
the resulting competition could have a material adverse effect on us.
The data services segment of our industry is also characterized by rapidly-
changing technology, industry standards, customer needs and competition, as
well as by frequent new product and service introductions. We may be unable to
successfully use or develop applicable technologies, adapt our network
infrastructure to changing customer requirements and industry standards,
introduce new services or enhance our existing services on a timely basis.
Our ability to compete successfully is dependent, in part, upon the
continued compatibility and interoperability of our services with products and
architectures offered by various other industry participants. If our services
do not continue to be compatible and interoperable with products and
architectures offered by other industry members, our ability to compete could
be impaired. Although we intend to support emerging standards in the market for
communications services, we cannot assure you that we will be able to conform
to new standards in a timely fashion, if at all, or maintain a competitive
position in the market.
Vulnerability to Communications Industry Developments--A slowing of
communications industry growth, including Internet use, could adversely affect
us.
We currently derive a majority of our revenues from selling switched data
services to large, communications-intensive users in major cities. Our business
plan and growth has been based in large part on increasing market demand for
sophisticated communications services. These services include dial-up Internet
access, managed high-speed Internet access, colocation services, private
peering services, DSL service and nationwide networking. Our customers use
these services predominately to download and transmit large amounts of
information over the public telephone network.
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The growth in data that is transmitted over the public network, or data
traffic, is driven by a number of factors, including the rapidly increasing
number of computer applications that can be managed, accessed or distributed
over the Internet, the growing number of personal computers linked to the
Internet, and improvements in equipment that manage data traffic over the
public networks. Revenues derived from providing data services may also
fluctuate because of other factors, including the continued growth of the
information technology, software and computer industries, and corporate cash
flows and spending patterns. There can be no assurance that current or future
economic or industry trends will not adversely affect our business.
Critical issues concerning the commercial use of the Internet remain
unresolved and may hinder or slow the growth of Internet use and the demand
for data services. Despite growing interest in varied commercial uses of the
Internet, many businesses have been deterred from purchasing sophisticated
data services for a number of reasons, including systemic problems that
continue to plague the exchange of data traffic over the public networks.
These problems include capacity restraints, transmission errors, service
problems and the inability of the public networks to transmit rapidly
increasing volumes of data over the Internet.
Uncertainties associated with the growth in the use of the public networks
to transmit data traffic may, if left unresolved, impede further development
of this market. The inability of the telecommunications industry to resolve
systemic network and infrastructure problems, or the failure of the market for
business-related Internet solutions to further develop, could have a material
adverse effect on us.
Quarterly Operating Results--Our quarterly operating results may vary
significantly.
We anticipate that our operating results could vary greatly from quarter to
quarter due to factors such as:
. The timing of significant expenses associated with the expansion and
development of our networks and services
. The variability of the level of revenues generated through sales of our
services
Any significant unanticipated shortfall of revenues or increase in expenses
could negatively impact our expected quarterly results of operations.
Furthermore, a failure on our part to estimate accurately the timing or
magnitude of particular anticipated revenues or expenses could also negatively
impact our quarterly results of operations. This type of variability could
have a material adverse effect on us.
Because our quarterly results of operations have fluctuated in the past and
will continue to fluctuate in the future, you should not rely on the results
of any past quarter or quarters as an indication of future performance in our
business operations or stock price.
Reliance on Key Personnel--We may be unable to hire and retain sufficient
qualified personnel; the loss of some of our key executive officers could
materially adversely affect us.
We believe that our future success will depend in large part on our ability
to attract and retain highly skilled, knowledgeable, sophisticated and
qualified managerial, professional and technical personnel. To implement our
business plan, including our offering of expanded data services, and manage
our planned growth successfully, we will need to add a substantial number of
additional employees. We have experienced significant competition in
attracting and retaining personnel who possess the skills that we are seeking.
As a result of this competition, we may experience a shortage of qualified
personnel.
Our business is managed by a relatively small number of senior management
and operating personnel. Losing some members of the senior management team or
key operating personnel could have a material adverse effect on us. We may be
unable to retain our senior management or other key employees, or retain other
skilled personnel in the future.
Limited Number of Stockholders--Three stockholders control us and their
interests may be different from the interests of holders of exchange notes.
Madison Dearborn Capital Partners, L.P., Frontenac VI, L.P. and Battery
Ventures III, L.P., our three principal institutional investors, control
approximately 60.4% of our total voting power (based on the number
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of shares outstanding as of March 31, 2000). As a result, these institutional
investors and our management have the ability to control our future operations
and strategy. Conflicts of interest between these institutional investors and
holders of the exchange notes may arise with respect to sales of shares of
common stock owned by these institutional investors or other matters. For
example, sales of shares by these institutional investors could result in a
"Change of Control" under the January 2000 indenture or the February 1998
indenture, which would require us to offer to repurchase the 2000 senior notes,
including the exchange notes, and the 1998 notes. In addition, if we encounter
financial difficulties or are unable to pay our debts as they mature, the
interests of our stockholders may conflict with those of the holders of the
exchange notes. These investors may have an interest in pursuing acquisitions,
divestitures, financings or other transactions that, in their judgment could
enhance their equity investment in Focal, even though transactions of this type
might involve increased risk to the holders of the exchange notes.
Potential Conflicts of Interest--Our institutional investors invest in other
telecommunications companies and conflicts of interest may arise from these
investments.
Madison Dearborn, Frontenac and Battery Ventures or their affiliates
currently have significant investments in communications services companies
other than Focal. These institutional investors may in the future invest in
other entities that compete with us. In addition, four of our directors, each
of whom is a principal of one of these institutional investors, serve as
directors of other public communications services companies. As a result, these
four directors may be subject to conflicts of interest during their tenure as
directors of Focal. Because of these potential conflicts, these four directors
may be required to periodically disclose financial or business opportunities to
us and to the other companies to which they owe fiduciary duties. Conflict of
interest issues are reviewed by the audit committee of our board of directors.
A majority of the members of the audit committee currently are independent
directors.
Franchises and Rights-of-Way--Our ability to develop networks will be adversely
affected if we cannot obtain necessary permits and rights-of-way.
We plan to selectively develop our own fiber transport facilities where it
makes economic sense to do so. To do this, we may need to obtain local rights
to utilize underground conduit and pole space, franchises, permits and other
rights-of-way from various public and private entities. The process of
obtaining these franchises, permits and rights-of-way is time consuming and
burdensome. The failure to enter into and maintain these arrangements for a
particular network on acceptable terms and on a timely basis may adversely
affect our ability to develop that network. In addition, the cancellation or
non-renewal of the rights, franchises or permits we do obtain could have a
material adverse affect on us.
Investment Company Act--We may be required to register as an investment
company, which would adversely affect us.
We have substantial cash balances and short-term investments. As a result,
we may be considered an "investment company" under the Investment Company Act
of 1940. The Investment Company Act requires companies that are engaged
primarily in the business of investing, reinvesting, owning, holding or trading
in securities, or that fail numerical tests regarding composition of assets and
sources of income and that are not primarily engaged in a business other than
investing, reinvesting, owning, holding or trading in securities, to register
as "investment companies." Various substantive restrictions are imposed on
these "investment companies" by the Investment Company Act.
Because we are primarily engaged in a business other than investing,
reinvesting, owning, holding or trading securities, we do not believe that we
are an investment company within the meaning of the Investment Company Act. If
we are required to register as an investment company under the Investment
Company Act, we would become subject to substantial regulation with respect to
our capital structure, management, operations, transactions with "affiliated
persons," as defined in the Investment Company Act, and other matters. To avoid
having to register as an investment company, we may have to hold a portion of
our liquid assets as cash or government securities instead of as investment
securities. Having to register as an investment company would have a material
adverse effect on us.
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Transfer Restrictions--If you participate in the exchange offer for the purpose
of participating in a distribution of the exchange notes or are an "affiliate"
of Focal, you may still be subject to various transfer restrictions.
If you exchange your outstanding notes in the exchange offer for the purpose
of participating in a distribution of the exchange notes, you may be deemed an
underwriter under the Securities Act. If so, you will be required to comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale of the exchange notes.
"Affiliates" of Focal may sell exchange notes only in compliance with the
provisions of Rule 144 under the Securities Act or another available exemption.
The broker-dealers described above must deliver a prospectus in connection with
any resale of exchange notes.
No Established Trading Market--There is no established trading market for the
exchange notes, which could make it more difficult for you to sell exchange
notes and could adversely affect their price.
The exchange notes constitute a new issue of securities for which no
established trading market exists. Consequently, it may be more difficult for
you to sell exchange notes. If the exchange notes are traded after their
initial issuance, they may trade at a discount, depending upon:
. Our financial condition
. Prevailing interest rates
. The market for similar securities
. Other factors beyond our control, including general economic conditions
We do not intend to apply for a listing or quotation of the exchange notes
on any securities exchange. The initial purchasers have informed us that they
intend to make a market in the exchange notes. However, the initial purchasers
have no obligation to do so, and may discontinue any market-making activities
at any time without notice. We cannot assure you of the development or
liquidity of any trading market for the exchange notes following the exchange
offer.
Diminished Liquidity--Holders of outstanding notes who fail to tender may
experience diminished liquidity after the exchange offer.
We have not registered nor do we intend to register the outstanding notes
under the Securities Act. Consequently, outstanding notes that remain
outstanding after consummation of the exchange offer will remain subject to
transfer restrictions under applicable securities laws. Unexchanged outstanding
notes will continue to bear a legend reflecting these restrictions on transfer.
Furthermore, we have not conditioned the exchange offer on receipt of any
minimum or maximum principal amount of outstanding notes. As outstanding notes
are tendered and accepted in the exchange offer, the principal amount of
remaining outstanding notes will decrease. This decrease will reduce the
liquidity of the trading market for the outstanding notes which will make it
more difficult for you to sell them. We cannot assure you of the liquidity, or
even the continuation, of the trading market for the outstanding notes
following the exchange offer.
Compliance With Exchange Offer Procedures--Holders of outstanding notes must
ensure compliance with exchange offer procedures.
You are responsible for complying with all exchange offer procedures. You
will receive exchange notes in exchange for your outstanding notes only if,
before the expiration date, you deliver all of the following to the exchange
agent:
. certificates for the outstanding notes or a book-entry confirmation of a
book-entry transfer of the outstanding notes into the exchange agent's
account at the Depository Trust Company, or DTC
. the Letter of Transmittal, properly completed and duly executed by you,
together with any required signature guarantees
. any other documents required by the Letter of Transmittal
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You should allow sufficient time to ensure that the exchange agent receives
all required documents before the exchange offer expires. Neither we nor the
exchange agent has any duty to inform you of defects or irregularities with
respect to the tender of your outstanding notes for exchange.
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
In connection with the sale of the outstanding notes, we entered into the
exchange and registration agreement with the initial purchasers in which we
agreed to file and to use our reasonable best efforts to cause to become
effective with the Securities and Exchange Commission a registration statement
with respect to the exchange of the outstanding notes for exchange notes with
terms identical in all material respects to the terms of the outstanding notes.
A copy of the exchange and registration agreement has been filed as an exhibit
to the registration statement of which this prospectus is a part. We are making
the exchange offer to satisfy our contractual obligations under the exchange
and registration agreement.
If you tender your outstanding notes in exchange for exchange notes, you
will represent to us that:
. Any exchange notes you receive are being acquired in the ordinary course
of your business
. You have no arrangement or understanding with any person to participate
in a distribution, within the meaning of the Securities Act, of exchange
notes
. You are not an "affiliate" of Focal within the meaning of Rule 405 under
the Securities Act or, if you are an affiliate, you will comply with the
registration and prospectus delivery requirements of the Securities Act
to the extent applicable
. You have full power and authority to tender, exchange, sell, assign and
transfer the tendered outstanding notes
. Focal will acquire good, marketable and unencumbered title to the
outstanding notes you tender, free and clear of all liens, restrictions,
charges and encumbrances
. The outstanding notes you tender for exchange are not subject to any
adverse claims or proxies
You also will warrant and agree that you will, upon request, execute and
deliver any additional documents deemed by us or the exchange agent to be
necessary or desirable to complete the exchange, sale, assignment, and transfer
of the outstanding notes you tender in the exchange offer. Each broker-dealer
that receives exchange notes for its own account in exchange for outstanding
notes in the exchange offer, where the outstanding notes were acquired by the
broker-dealer as a result of market-making or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
the exchange notes. See "Plan of Distribution."
The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of outstanding 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 that jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to the
exchange offer means any person in whose name the outstanding notes are
registered on our books 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 outstanding
notes, which, for purposes of the exchange offer, include beneficial interests
in the outstanding notes held by direct or indirect participants in DTC and
outstanding notes held in definitive form.
Terms of the Exchange Offer
We hereby offer, upon the terms and subject to the conditions set forth in
this prospectus and in the accompanying Letter of Transmittal, to exchange
$1,000 principal amount of exchange notes for each $1,000 principal amount of
outstanding notes properly tendered prior to the expiration date and not
properly withdrawn according to the procedures described below. Holders may
tender their outstanding notes in whole or in part in integral multiples of
$1,000 principal amount.
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The form and terms of the exchange notes are the same as the form and terms
of the outstanding notes except that:
. The exchange notes have been registered under the Securities Act and
therefore will not be subject to some restrictions on transfer
applicable to the outstanding notes
. Holders of the exchange notes will not be entitled to the rights of
holders of the outstanding notes under the exchange and registration
agreement
The exchange notes evidence the same indebtedness as the outstanding notes,
which they replace, and will be issued pursuant to, and entitled to the
benefits of, the January 2000 indenture.
The exchange offer is not conditioned upon any minimum principal amount of
outstanding notes being tendered for exchange. We reserve the right in our sole
discretion to purchase or make offers for any outstanding 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 outstanding 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, $275 million principal amount of outstanding notes is
outstanding.
Holders of outstanding notes do not have any appraisal or dissenters' rights
in connection with the exchange offer. Outstanding notes which are not tendered
for, or are tendered but not accepted in connection with, the exchange offer
will remain outstanding. For a description of the consequences of not tendering
outstanding notes for exchange, see "Risk Factors--Diminished Liquidity."
If any tendered outstanding notes are not accepted for exchange because of
an invalid tender, the occurrence of other events set forth in this prospectus
or otherwise, certificates for the unaccepted outstanding notes will be
returned, without expense, to the tendering holder of those notes promptly
after the expiration date.
Holders who tender outstanding 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 outstanding notes in connection with the exchange offer. We will
pay all charges and expenses, other than applicable taxes described below, in
connection with the exchange offer.
Our board of directors makes no recommendation to holders of outstanding
notes as to whether to tender or refrain from tendering all or any portion of
their outstanding notes in the exchange offer. In addition, no one has been
authorized to make any similar recommendation. Holders of outstanding notes
must make their own decision whether to tender in the exchange offer and, if
so, the aggregate amount of outstanding 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 June 30,
2000, unless we extend the exchange offer, in which case the term "expiration
date" will mean the latest date and time to which the exchange offer is
extended.
We expressly reserve the right in our sole and absolute discretion, subject
to applicable law, at any time and from time to time,
. To delay the acceptance of the outstanding notes for exchange
. To terminate the exchange offer, whether or not any outstanding notes
have been accepted for exchange, if we determine, in our 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
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. To extend the expiration date of the exchange offer and retain all
outstanding notes tendered in the exchange offer, subject, however, to
the right of holders of outstanding notes to withdraw their tendered
outstanding notes as described under "--Withdrawal Rights"
. 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 that we determine to constitute
a material change, or if we waive a material condition of the exchange offer,
we will promptly disclose the amendment by means of a prospectus supplement
that will be distributed to the registered holders of the outstanding notes,
and we will extend the exchange offer to the extent required by Rule 14e-1
under the Securities Exchange Act.
Any delay in acceptance, termination, extension or amendment will be
followed promptly by:
. Oral or written notice of the change to the exchange agent, with any
such oral notice to be promptly confirmed in writing
. A public announcement of the change, which 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 we may choose to make any public
announcement, and subject to applicable laws, we will 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, promptly
after the expiration date we will exchange, and will issue to the exchange
agent, exchange notes for outstanding notes validly tendered and not withdrawn
as described under "--Withdrawal Rights."
In all cases, delivery of exchange notes in exchange for outstanding notes
tendered and accepted for exchange in the exchange offer will be made only
after timely receipt by the exchange agent of:
. Outstanding notes or a book-entry confirmation of a book-entry transfer
of outstanding notes into the exchange agent's account at DTC
. The Letter of Transmittal, properly completed and duly executed, with
any required signature guarantees
. 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 outstanding
notes, book-entry confirmations with respect to outstanding 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 outstanding notes into the exchange agent's account at DTC.
Subject to the terms and conditions of the exchange offer, we will be deemed
to have accepted for exchange, and thereby exchanged, outstanding notes validly
tendered and not withdrawn as, if and when we give oral or written notice to
the exchange agent of our acceptance of those outstanding notes for exchange in
the exchange offer. Any oral notice will be promptly confirmed in writing. Our
acceptance for exchange of outstanding notes tendered through any of the
procedures described above will constitute a binding agreement between the
tendering holder and Focal upon the terms and subject to the conditions of the
exchange offer. The exchange agent will act as agent for Focal for the purpose
of receiving tenders of outstanding notes, Letters of Transmittal and related
documents, and as agent for tendering holders for the purpose of receiving
outstanding notes, Letters of Transmittal and related documents and
transmitting exchange notes to holders who validly
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tendered outstanding notes. The exchange will be made promptly after the
expiration date. If for any reason whatsoever the acceptance for exchange or
the exchange of any outstanding notes tendered in the exchange offer is
delayed, whether before or after our acceptance for exchange of outstanding
notes, or we extend the exchange offer or are unable to accept for exchange or
exchange outstanding notes tendered in the exchange offer, then, without
prejudice to our rights set forth in this prospectus, the exchange agent may,
nevertheless, on our behalf and subject to Rule 14e-1(c) under the Securities
Exchange Act, retain tendered outstanding notes and such outstanding notes may
not be withdrawn except to the extent tendering holders are entitled to
withdrawal rights as described under "--Withdrawal Rights."
Procedures for Tendering Outstanding Notes
Valid Tender. Except as set forth below, in order for outstanding notes to
be validly tendered in the exchange offer, either:
1. Before the expiration date,
. A properly completed and duly executed Letter of Transmittal 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," and
. Tendered outstanding notes must be received by the exchange
agent, or outstanding notes must be tendered according to the
procedures for book-entry transfer described below and a book-
entry confirmation must be received by the exchange agent, or
2. The guaranteed delivery procedures set forth below must be complied
with.
If less than all of the outstanding notes are tendered, a tendering holder
should fill in the amount of outstanding notes being tendered in the
appropriate box on the Letter of Transmittal. The entire amount of outstanding
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,
that person should so indicate when signing, and unless waived by us, evidence
satisfactory to us, in our sole discretion, of the person's authority to so act
must be submitted.
Any beneficial owner of outstanding 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 owner
wishes to participate in the exchange offer.
The method of delivery of outstanding 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, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure timely delivery and should obtain proper insurance.
No Letter of Transmittal or outstanding notes should be sent to Focal. Holders
may request their respective brokers, dealers, commercial banks, trust
companies or nominees to effect these transactions for them.
Book-Entry Transfer. The exchange agent will make a request to establish an
account with respect to the outstanding 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 outstanding notes by
causing DTC to transfer those outstanding notes into the exchange agent's
account at DTC according to DTC's procedures for transfers. However, although
delivery of outstanding notes may be effected through book-entry transfer into
the exchange agent's account at DTC, the
28
<PAGE>
Letter of Transmittal, 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" before 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. Tendering holders do not need to endorse their
certificates for outstanding notes and signature guarantees on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are unnecessary
unless:
1. A certificate for outstanding notes is registered in a name other
than that of the person surrendering the certificate, or
2. A registered holder completes the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" in the Letter of
Transmittal
In either of these cases, the certificates for outstanding 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 Securities Exchange Act as an
"eligible guarantor institution," including, as such terms are defined in that
rule:
. A bank
. A broker, dealer, municipal securities broker or dealer or government
securities broker or dealer
. A credit union
. A national securities exchange, registered securities association or
clearing agency
. A savings association
unless surrendered on behalf of such eligible institution. Please read
carefully Instruction 1 to the Letter of Transmittal.
Guaranteed Delivery. If a holder desires to tender outstanding notes in the
exchange offer and the certificates for the outstanding notes are not
immediately available or time will not permit all required documents to reach
the exchange agent before the expiration date, or the procedures for book-entry
transfer cannot be completed on a timely basis, the outstanding notes may
nevertheless be tendered, provided that all of the following guaranteed
delivery procedures are complied with:
. The tenders are made by or through an eligible institution
. Before the expiration date, the exchange agent receives from the
eligible institution a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form accompanying the Letter
of Transmittal, stating the name and address of the holder of
outstanding notes and the amount of outstanding notes tendered, stating
that the tender is being made by the notice 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 outstanding 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
. The certificates (or book-entry confirmation) representing all tendered
outstanding 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
29
<PAGE>
Determination of Validity. All questions as to the form of documents,
validity, eligibility, including time of receipt, and acceptance for exchange
of any tendered outstanding notes will be determined by us, in our sole
discretion, and that determination will be final and binding on all parties. We
reserve the absolute right, in our sole and absolute discretion, to reject any
and all tenders that we determine are not in proper form or the acceptance for
exchange of which may, in the view of our counsel, be unlawful. We also reserve
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 outstanding notes of any
particular holder whether or not we waive similar defects or irregularities in
the case of other holders.
Our interpretation of the terms and conditions of the exchange offer,
including the Letter of Transmittal and its instructions, will be final and
binding on all parties. No tender of outstanding 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 Focal, any affiliates of Focal, the
exchange agent or any other person will 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 Securities and Exchange
Commission, as set forth in no-action letters issued to third parties unrelated
to us, we believe that holders of outstanding notes, other than any holder that
is:
(1) A broker-dealer that acquired outstanding notes as a result of
market-making activities or other trading activities or
(2) A broker-dealer that acquired outstanding notes directly from us for
resale under Rule 144A or another available exemption under the Securities
Act,
who exchange their outstanding notes for exchange notes in the exchange offer
may offer for resale, resell and otherwise transfer the exchange notes without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that:
. The exchange notes are acquired in the ordinary course of the holders'
business
. The holders have no arrangement or understanding with any person to
participate in the distribution of the exchange notes
. The holders are not "affiliates" of Focal within the meaning of Rule 405
under the Securities Act
However, the Staff of the Securities and Exchange Commission has not
considered the exchange offer in the context of a no-action letter, and we
cannot assure you that it 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 outstanding notes in the exchange offer, where the
outstanding notes were acquired by the broker-dealer as a result of market-
making or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes.
Withdrawal Rights
Except as otherwise provided herein, tenders of outstanding notes may be
withdrawn at any time before the expiration date.
In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission of the notice of withdrawal must be timely received by
the exchange agent at its address set forth under "--Exchange Agent" before the
expiration date. Any notice of withdrawal must specify the name of the person
who tendered the outstanding notes to be withdrawn, the principal amount of
outstanding notes to be withdrawn and, if certificates for the outstanding
notes have been tendered, the name of the registered holder of the outstanding
notes as set forth on the outstanding notes, if different from that of the
person who tendered the outstanding notes.
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<PAGE>
If certificates for outstanding 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 outstanding notes to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by
an eligible institution, except in the case of outstanding notes tendered for
the account of an eligible institution.
If outstanding notes have been tendered by the procedures for book-entry
transfer set forth in "--Procedures for Tendering Outstanding Notes," the
notice of withdrawal must specify the name and number of the account at DTC to
be credited with the withdrawal of outstanding notes and must otherwise comply
with the procedures of DTC. Withdrawals of tenders of outstanding notes may not
be rescinded. Outstanding notes
properly withdrawn will not be deemed validly tendered for purposes of the
exchange offer, but may be retendered at any subsequent time before the
expiration date by following any of the procedures described above under "--
Procedures for Tendering Outstanding Notes."
All questions as to the validity, form and eligibility, including time of
receipt, of withdrawal notices will be determined by us, in our sole
discretion, which determination will be final and binding on all parties.
Neither Focal, any affiliates of Focal, the exchange agent or any other person
will 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 notification. Any outstanding notes which have been tendered but
which are withdrawn will be returned to the holder of those notes promptly
after withdrawal.
Interest on the Exchange Notes
Interest on the outstanding notes and the exchange notes will be payable
semi-annually in arrears on July 15 and January 15 of each year at a rate of 11
7/8% per annum, commencing July 15, 2000.
Conditions to the Exchange Offer
Notwithstanding any other provisions of the exchange offer or any extension
of the exchange offer, we will not be required to accept for exchange, or to
exchange, any outstanding notes for any exchange notes and will not be required
to issue exchange notes in exchange for any outstanding notes and, as described
below, may, at any time and from time to time, terminate or amend the exchange
offer, whether or not any outstanding notes have been accepted for exchange, or
may waive any conditions to or amend the exchange offer, if any of the
following conditions has occurred or exists or has not been satisfied before
the expiration date:
. There occurs a change in the current interpretation by the Staff of the
Securities and Exchange Commission which permits the exchange notes
issued in exchange for outstanding notes in the exchange offer to be
offered for resale, resold and otherwise transferred by their holders,
other than broker-dealers that acquired outstanding notes as a result of
market-making or other trading activities or broker-dealers that
acquired outstanding notes directly from Focal for resale under Rule
144A or another available exemption under the Securities Act, without
compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that the exchange notes are acquired in the
ordinary course of the holders' business, the holders have no
arrangement or understanding with any person to participate in the
distribution of the exchange notes and the holders are not "affiliates"
of Focal within the meaning of Rule 405 under the Securities Act
. Any action or proceeding has been instituted or threatened in any court
or by or before any governmental agency or body with respect to the
exchange offer which, in our judgment, would reasonably be expected to
impair our ability to proceed with the exchange offer
. Any law, statute, rule or regulation has been adopted or enacted which,
in our judgment, would reasonably be expected to impair our ability to
proceed with the exchange offer
. A stop order has been issued by the Securities and Exchange Commission
or any state securities authority suspending the effectiveness of the
registration statement, or proceedings have been initiated or, to our
knowledge, threatened for that purpose
31
<PAGE>
. Any governmental approval has not been obtained, which approval we, in
our sole discretion, deem necessary for the consummation of the exchange
offer as contemplated hereby
. Any change, or any development involving a prospective change, in our
business or financial affairs has occurred which, in our sole judgment,
might materially impair our ability to proceed with the exchange offer
If we determine in our sole and absolute discretion that any of the
foregoing events or conditions has occurred or exists or has not been satisfied
at any time prior to the expiration date, we may, subject to applicable law,
terminate the exchange offer, whether or not any outstanding notes have been
accepted for exchange, or may waive any such condition or otherwise amend the
terms of the exchange offer in any respect. If a waiver or amendment
constitutes a material change to the exchange offer, we will promptly disclose
the waiver or amendment by means of a prospectus supplement that will be
distributed to the registered holders of the outstanding notes, and we will
extend the exchange offer to the extent required by Rule 14e-1 under the
Securities Exchange Act.
Exchange Agent
We have appointed The Bank of New York 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 should be directed to the exchange
agent as follows:
By overnight courier or registered/certified mail:
The Bank of New York
101 Barclay Street
New York, New York 10286
Attention: Reorganization Department-7E
By hand:
The Bank of New York
101 Barclay Street
New York, New York 10286
Ground Level
Corporate Trust Services Window
Delivery to other than the above addresses will not constitute a valid
delivery.
Fees and Expenses
We will bear the expenses of soliciting tenders. 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 Focal.
We have 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. We have agreed to pay the
exchange agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses. We 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 outstanding notes, and in
handling or tendering for their customers.
Holders who tender their outstanding notes for exchange will not be
obligated to pay any transfer taxes in connection with the tender, 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 outstanding notes tendered,
or if a transfer tax is imposed for any reason other than the exchange of
outstanding 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 the tendering holder.
32
<PAGE>
USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the exchange
and registration agreement that we entered into in connection with our issuance
and sale of the outstanding notes. We will not receive any cash proceeds from
the issuance of the exchange notes offered by this prospectus. In consideration
for issuing the exchange notes as contemplated in this prospectus, we will
receive, in exchange, an equal number of outstanding notes in like principal
amount. The form and terms of the exchange notes are identical in all material
respects to the form and terms of the outstanding notes, except as otherwise
described in this prospectus under "The Exchange Offer--Terms of the Exchange
Offer." The outstanding notes surrendered in exchange for exchange notes will
be retired and canceled by us and cannot be reissued.
33
<PAGE>
CAPITALIZATION
The following table sets forth our total cash, cash equivalents and short-
term investments and capitalization as of March 31, 2000 on a historical basis.
You should read the information in this table in conjunction with our
Consolidated Financial Statements and the accompanying notes incorporated by
reference in this prospectus. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
and "Where You Can Find More Information." In the table below, dollars are
shown in thousands, except per share amounts.
<TABLE>
<CAPTION>
As of
March 31, 2000
--------------
(unaudited)
<S> <C>
Total cash, cash equivalents and short-term investments......... $413,770
========
Long-term debt, including current portion:
12.125% Senior Discount Notes due 2008, net of unamortized
discount of $77,614 at March 31, 2000........................ $192,386
11.875% Senior Notes due 2010, net of unamortized discount of
$1,938 at March 31, 2000..................................... 273,062
Secured equipment term loan................................... 42,100
Obligation under capital lease................................ 22,552
Other......................................................... 599
--------
Total long-term debt........................................ 530,699
--------
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized
and no shares issued and outstanding......................... --
Common stock, $.01 par value; 100,000,000 shares authorized
and 60,897,488 shares issued and outstanding at March 31,
2000......................................................... 609
Additional paid-in capital.................................... 178,328
Deferred compensation......................................... (866)
Accumulated deficit........................................... (54,561)
--------
Total stockholders' equity.................................. 123,510
--------
Total capitalization...................................... $654,209
========
</TABLE>
34
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The information in the following table is based on historical financial
information included in our prior filings with the Securities and Exchange
Commission, including our annual report on Form 10-K for the fiscal year ended
December 31, 1999. The following selected consolidated financial and operating
data should be read in connection with this historical financial information,
including the notes that accompany the financial information. This historical
financial information is considered a part of this document. See "Where You Can
Find More Information." Our audited historical financial statements as of
December 31, 1999 and 1998, and for each of the three years ended December 31,
1999 were audited by Arthur Andersen LLP, independent public accountants. The
selected financial data as of and for the three-month periods ended March 31,
1999 and 2000 have been derived from our unaudited consolidated financial
statements which, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of our financial condition and results of operations for these periods. The
results of operations for interim periods are not necessarily indicative of
full year results. You should not assume that the results of operations below
are indicative of the financial results we can achieve in the future. You
should also read the information in this table in conjunction with
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and the other financial data appearing
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period From
Commencement of Three Months Ended
Operations Years Ended December 31, March 31,
(May 31, 1996) to ---------------------------------- ----------------------
December 31, 1996 1997 1998 1999 1999 2000
----------------- ---------- ---------- ---------- ---------- ----------
(Unaudited)
(Dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Data services........... $ -- $ -- $ -- $ 96,856 $ 19,979 $ 32,190
Telecom services........ -- -- -- 30,005 6,025 13,139
--------- ---------- ---------- ---------- ---------- ----------
Total revenues......... -- 4,024 43,532 126,861 26,004 45,329
Expenses:
Customer service and
network operations.... -- 2,155 15,284 70,910 10,369 33,255
Selling, general and
administrative........ 422 2,887 12,210 32,486 5,666 14,581
Depreciation and
amortization.......... 1 616 6,671 23,763 4,027 10,376
Non-cash compensation
expense............... 108 1,300 3,070 7,186 1,560 1,448
--------- ---------- ---------- ---------- ---------- ----------
Operating income (loss). (531) (2,934) 6,297 (7,484) 4,382 (14,331)
Other income (expense),
net.................... 17 68 (9,606) (14,302) (4,098) (6,825)
(Provision) benefit for
income taxes........... -- -- (4,660) (600) -- 331
Accretion to redemption
value of Class A common
stock.................. -- (104) -- -- -- --
--------- ---------- ---------- ---------- ---------- ----------
Net income (loss)
applicable to common
stockholders........... $ (514) $ (2,970) $ (7,969) $ (22,386) $ 284 $ (20,825)
========= ========== ========== ========== ========== ==========
Basic net income (loss)
per share.............. $ (0.06) $ (0.07) $ (0.18) $ (0.45) $ 0.01 $ (0.35)
========= ========== ========== ========== ========== ==========
Diluted net income
(loss) per share....... $ (0.06) $ (0.07) $ (0.18) $ (0.45) $ 0.01 $ (0.35)
========= ========== ========== ========== ========== ==========
Basic weighted average
common stock
outstanding............ 8,498,000 42,186,500 43,763,000 50,066,315 43,961,000 60,150,761
========= ========== ========== ========== ========== ==========
Diluted weighted average
common stock
outstanding............ 8,498,000 42,186,500 43,763,000 50,066,315 51,803,000 60,150,761
========= ========== ========== ========== ========== ==========
Other Financial Data:
EBITDA.................. $ (422) $ (1,018) $ 16,038 $ 23,465 $ 9,969 $ (2,507)
Capital expenditures.... 82 11,655 64,229 128,550 24,476 52,314
Ratio of earnings to
fixed charges.......... -- -- -- -- 1.05 --
Summary Cash Flow Data:
Net cash provided by
(used in) operating
activities............. $ (153) $ (1,634) $ 22,507 $ 18,549 $ (1,305) $ 13,323
Net cash used in
investing activities... (82) (11,655) (72,189) (130,590) (23,977) (51,449)
Net cash provided by
financing activities... 4,025 11,756 173,466 164,142 5,840 263,719
Operating Data:
Access lines in service. -- 7,394 52,011 181,103 70,572 238,697
Minutes of use
(millions)............. -- 282 3,568 13,362 2,033 6,421
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
As of
As of December 31, March 31,
---------------------------------- ---------
1996 1997 1998 1999 2000
------ ------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-
term investments................. $3,790 $ 2,257 $134,001 $188,142 $413,770
Current assets.................... 3,807 4,738 144,637 219,932 454,212
Fixed assets, net................. 81 11,177 69,973 196,301 238,612
Total assets...................... 3,888 15,915 219,574 420,986 703,741
Long-term debt, including current
portion.......................... -- 3,537 185,296 253,786 530,699
Total stockholders' equity
(deficit)........................ (405) (2,075) 19,328 142,487 123,510
</TABLE>
You should not assume that the results of operations above are indicative of
the financial results we can achieve in the future. You should also keep the
following matters in mind when you read this information:
. Non-cash compensation expense consists of:
--charges totaling $0.1 million for 1996, $1.3 million for each of 1997
and 1998, $2.5 million for 1999 and $0.3 million and $0 for the three
month period ended March 31, 1999 and 2000, respectively, which
resulted from the vesting over time of shares of common stock issued
to some of our executive officers in November 1996
--charges of $1.8 million and $0.3 million for 1998 and 1999, and $0.1
million for the three months ended March 31, 1999 and 2000,
respectively, which resulted from the vesting and cancellation of
shares of common stock in connection with the September 30, 1998
amendment of vesting agreements with some of our executive officers
--charges of $4.4 million for 1999 and $1.2 million and $1.3 million
for the three months ended March 31, 1999 and 2000, respectively,
which resulted from our 1999 stock option grants to employees,
directors and an outside consultant, and common stock issued to a
director
. EBITDA represents earnings before interest, income taxes, depreciation
and amortization and other non-cash charges, including non-cash
compensation expense. 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 applicable to common
stockholders as an indicator of our operating performance or to cash
flows as a measure of liquidity. We believe that EBITDA is widely used
by analysts, investors and other interested parties in the
telecommunications industry. EBITDA is not necessarily comparable to
similarly titled measures for other companies.
. For the seven month period ended December 31, 1996 and for the years
ended December 31, 1997, 1998, 1999, and for the three months ended
March 31, 2000, earnings were insufficient to cover combined fixed
charges by $0.5 million, $2.9 million, $3.3 million, $21.8 million and
$21.2 million respectively.
. We count access lines as of the end of the period indicated and on a
one-for-one basis using DS-0 equivalents.
.No additional proceeds will be received from the exchange offer.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
General. Focal provides data and telecom services to large, communications-
intensive users in major cities. We began operations in 1996 and initiated
service first in May 1997. We currently serve a total of 18 markets, which
encompass a total of 47 metropolitan statistical areas, or MSAs, and plan to
serve 24 markets, or 56 MSAs, by the end of 2001. As of March 31, 2000, we sold
291,443 access lines, of which 238,697 were installed and in service. During
2000, we estimate that we will install at least 250,000 new access lines as our
existing markets continue to mature and as we launch services in additional new
markets. We also intend to launch our DSL and managed high-speed Internet
access, colocation and peering services during 2000.
We expect our continued expansion to result in continued negative operating
cash flows and operating losses for a period of time. We expect to again
produce positive operating cash flows during the second half of 2001 once these
trends stabilize and operating activities in our newer markets are established
and mature. If, however, these trends do not stabilize or our operating
activities are not established or do not mature as expected, we may continue to
sustain negative operating cash flows and net losses.
Revenues. Data services revenue includes revenues from circuit switched
lines sold to ISP customers, DSL, private line, colocation, and Internet
infrastructure services. Telecom services revenue includes circuit switched
lines sold to corporate and VAR customers. Our data and telecom services
revenue is comprised of monthly recurring charges, usage charges and initial,
non-recurring charges. Monthly recurring charges include the fees paid by our
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 ILEC and other CLECs as reciprocal compensation, and access
charges paid by the IXCs for long distance traffic that we originate and
terminate. Non-recurring revenues are typically derived from fees charged to
install new customer lines.
We earn reciprocal compensation revenue for calls made by customers of
another local exchange carrier to our customers. Conversely, we incur
reciprocal compensation expense to other local exchange carriers for calls by
our customers to their customers. Reciprocal compensation has historically been
a significant component of our total revenue due to the preponderance of
inbound applications utilized by our customers. Reciprocal compensation
represented approximately 81%, 75%, 55% and 73% and 39% of total revenues for
1997, 1998, 1999 and for the three months ended March 31, 1999 and 2000,
respectively. Reciprocal compensation represented approximately 35% of our
total revenues for the first quarter of 2000, if adjusted to exclude reciprocal
compensation revenues earned in prior periods.
We expect the proportion of revenues represented by reciprocal compensation
to modestly decrease in the future as a result of the expiration and subsequent
renegotiation of our existing interconnection agreements with the ILECs and the
impact of recent and future regulatory developments. While per minute of use
rates may decline further, we believe that any decline will be modest. We
expect to generate additional revenues from
37
<PAGE>
other services which will offset this anticipated decrease in reciprocal
compensation revenues. A reduction in or elimination of reciprocal compensation
revenues that are not offset by increases in other revenues generated by us
could have a material adverse effect on us and our results of operations.
Operating Expenses. Our operating expenses are categorized as customer
service and network operations, selling, general and administrative,
depreciation and amortization, and non-cash compensation 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 we make
for the use of fiber transport facilities connecting our customers to our
switches and for our connection to the ILECs' and other CLECs' networks. Our
strategy of initially leasing rather than building our own fiber transport
facilities has resulted in our cost of service being a significant component of
total costs. To date, we have been successful in negotiating lease agreements
that match the duration of our customer contracts, thereby allowing us to avoid
the risk of incurring expenses associated with transport facilities that are
not being used by revenue generating customers.
Historically, leasing rather than building our transport network has
resulted in capital expenditures which we believe are lower than those of CLECs
of similar size that own their fiber networks. Our capital expenditures have
been driven by customer service demands and projected near-term revenue streams
from our established markets. In addition, we believe that the percentage of
these "success-based" capital expenditures is higher than those of fiber-based
CLECs. In contrast, we incur operating expenses for leased facilities that are
proportionately higher than those incurred by fiber-based CLECs.
In the second quarter of 1999, we entered into a number of agreements to own
fiber transport capacity as well as lease transport facilities for combined
minimum commitments of $98.6 million through December 2004 and $42.6 million
from January 2005 through June 2019. These commitments will result in increased
operating expenses for future periods, which we believe should be more than
offset by future revenues associated with new services made possible, in part,
by these agreements. We activated our own Chicago transport network in February
2000 and expect to activate our remaining transport networks in other markets
by the end of 2000.
Other customer service and network operations expense consists of the costs
of operating our 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 expense ("SG&A") consists 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. We expect our SG&A to be lower as a
percentage of revenue than that of our competitors because we have relatively
high sales productivity associated with our strategy of serving communications-
intensive customers. These customers generally utilize a large number of
switched access lines relative to the average business customer, resulting in
more revenue per sale. Further, fewer sales representatives are required to
service the relatively smaller number of communications-intensive customers in
a given region.
We record monthly non-cash compensation expense related to shares issued to
some of our executive officers in November 1996, in connection with the
September 30, 1998 amendments to vesting agreements with some of our executive
officers, in connection with stock options granted to employees, an outside
consultant, and directors during 1999, and shares issued to a director during
the first quarter of 1999. We will continue to record non-cash compensation
expense in future periods relating to these events through the third quarter of
2003.
38
<PAGE>
Quarterly Results
The following table sets forth unaudited financial, operating and
statistical data for each of the specified quarters of 2000 and 1999. The
unaudited quarterly financial information has been prepared on the same basis
as our Consolidated Financial Statements and, in our opinion, contains all
normal recurring adjustments necessary to fairly state this information. The
operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
2000 1999
-------- ---------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Data Services Revenue ($
mil)....................... $ 32,190 $ 26,306 $ 26,339 $ 24,232 $19,979
Telecom Services Revenue ($
mil)....................... $ 13,139 $ 9,740 $ 8,145 $ 6,095 $ 6,025
Lines Sold to Date.......... 291,443 237,167 169,122 133,536 85,329
Lines Installed to Date..... 238,697 181,103 137,033 106,749 70,572
Estimated ISP Lines (% of
Installed Lines)........... 71% 72% 72% 72% 71%
Lines on Switch (%)......... 100% 100% 100% 100% 100%
ILEC Switches
Interconnected............. 1,447 1,209 948 771 443
ILEC Central Office
Colocations in Service or
Under Development.......... 223 221 201 58 23
Markets in Operation........ 18 16 14 13 12
Markets Under Development... 6 4 6 7 4
MSAs Served................. 47 40 38 34 31
MSAs Under Development...... 9 10 12 16 11
Circuit Switches
Operational................ 14 12 10 9 7
Circuit Switches Under
Development................ 7 7 7 6 6
ATM Switches Deployed....... 6 2 -- -- --
Fiber Miles Operational..... 864 -- -- -- --
Focal Customer Colocation
Space in Service
(Sq. Ft.).................. 73,840 70,105 53,478 41,081 29,282
Focal Customer Colocation
Space Under Development
(Sq. Ft.).................. 36,549 24,654 20,362 29,024 35,459
Capital Expenditures ($
mil)....................... $ 52 $ 34 $ 34 $ 57(1) $ 24
Employees................... 747 592 478 418 312
Sales Force (2)............. 124 116 105 93 65
</TABLE>
--------
(1) Includes approximately $21 million of assets acquired under a capital lease
during the second quarter of 1999.
(2) Quota bearing sales professionals. Does not include sales engineers or
customer support personnel.
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Data services revenue increased 61% from $20.0 million in the first quarter
of 1999 to $32.2 million during the first quarter of 2000. Telecom services
revenue increased 118% from the first quarter of 1999 to $13.1 million during
the first quarter of 2000. This increase in data and telecom services revenue
is primarily due to the generation of revenues from a number of new markets
that went into operation subsequent to the first quarter of 1999 and from an
increase in revenues from our more mature markets in the first quarter of 2000.
In addition, we installed 26,566 and 12,467 more data and telecom services
lines, respectively, during the first quarter of 2000 compared to the first
quarter of 1999. Customer service and network operations expenses totaled $33.3
million for the first quarter of 2000 compared to $10.4 million for the first
quarter of 1999. This $22.9 million increase resulted from our rapid expansion
into new markets and related costs for leased facilities, usage settlements,
customer care and operational personnel, equipment maintenance and other
operating expenses. Selling, general and administrative ("SG&A") expenses
increased by $8.9 million, from $5.7 million during the three months ended
March 31, 1999 to $14.6 million during the first quarter of 2000 as a result of
our rapid expansion. In addition, our overall customer service, network
operations, and SG&A expenses increased between comparable three month periods
due to a corresponding increase in our employee base of 435 employees.
Depreciation and amortization increased from $4.0 million to $10.4 million
in the comparative three-month periods. This increase of $6.4 million is a
result of our expansion into an additional six new markets, to a total of 18
markets in operation as of March 31, 2000.
39
<PAGE>
Interest income increased from $1.3 million in the first quarter of 1999, to
$5.8 million in the comparable period of 2000. This $4.5 million increase is
primarily due to our cash, cash equivalents, and short-term investments
increasing from $114.1 million at March 31, 1999 to $413.8 million at March 31,
2000 due to the receipt of approximately $137.0 million in net proceeds from
our initial public offering that was completed in August 1999 and the receipt
of $265.7 million in net proceeds from the offering of the outstanding notes
completed in January 2000. Interest expense increased from $5.4 million in the
first quarter of 1999 to $12.9 million in the first quarter of 2000. This $7.5
million increase is due to $7.2 million of interest expense charged relating to
the outstanding notes, an additional $0.7 million of amortization of discount
on the outstanding notes and our $270 million 1998 notes, $0.6 million of
interest expense on our secured equipment term loan that we entered into during
December 1998, and $0.6 million of interest expense relating to our capital
lease obligation for dark fiber transport capacity, which was partially offset
by interest capitalized during the first quarter of 2000 totaling $1.6 million.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Data services and telecom services revenues for 1999 were $96.9 million and
$30.0 million respectively. Total revenues for the year ended 1999 were $126.9
million compared to $43.5 million for the year ended 1998. This increase of
192% is primarily due to the generation of revenues from numerous markets
during 1999 compared to revenues from primarily two markets, Chicago and New
York, in the comparable period of 1998. We installed approximately 129,000
access lines during 1999, which exceeded the lines installed in the comparable
period of 1998 by approximately 187% or 84,000 lines. Customer service and
network operations expense was $70.9 million for 1999 and $15.3 million for
1998. This $55.6 million increase resulted primarily from our rapid expansion
into an additional six new markets during 1999 and the related increase in
operational costs associated with the growth of our existing markets. SG&A
expense increased by $20.3 million to $32.5 million for 1999 as a result of our
planned expansion. In addition, our overall customer service, network
operations, and SG&A expenses increased from 1998 to 1999 due to a
corresponding increase in our employee base by 359 employees, to 592 employees,
as of December 31, 1999.
Depreciation and amortization increased from $6.7 million to $23.8 million
in the comparative year to year periods. This increase of $17.1 million is a
result of our 1999 expansion into six new markets and due to our fixed asset
base increase for our existing markets. Our 1999 capital expenditures of
approximately $128.6 million (excluding $21.0 million of assets acquired under
capital lease) were $64.4 million greater than that of the comparable period of
1998. Non-cash compensation expense was $7.2 million for the year ended
December 31, 1999 compared to $3.1 million for comparable period in 1998. This
$4.1 million increase in non-cash compensation expense is the result of
September 30, 1998 amendments of vesting agreements with some of our executive
officers, stock options granted to employees, an outside consultant and
directors during 1999, and stock issued to a director during the first quarter
of 1999.
Interest income was $7.9 million and $6.5 million for the years ended 1999
and 1998, respectively. This increase of $1.4 million is primarily due to our
cash, cash equivalents, and short-term investments increasing from $134.0
million at the end of 1998 to $188.1 million at the end of 1999. This increase
is the result of our net proceeds of approximately $137 million raised in our
August 1999 initial public offering. Interest expense increased from $16.1
million during 1998 to $21.6 million for 1999. This net increase of $5.5
million is due to an additional $4.6 million of amortization of our 1998 notes,
$3.4 million of interest expense on our secured equipment term loan, and $1.1
million of non-cash interest expense relating to our capital lease obligation
for dark fiber transport capacity. This increase of $9.1 million was partially
offset by approximately $3.6 million of interest capitalized during 1999 in
connection with the construction of our major facilities and networks.
We incurred U.S. income tax expense of $0.6 million for the year ended 1999
compared to $4.7 million in the same period of 1998. This decrease of $4.1
million in our tax expense between years is primarily due to the $18.5 million
of additional pre-tax losses incurred during 1999 and the realization of a net
operating loss at the end of 1999. We are obligated to pay federal and state
income taxes due to the application of the alternative minimum tax.
40
<PAGE>
We had a net loss of $22.4 million for 1999 compared to a net loss of $8.0
million in 1998. This $14.4 million of additional losses in 1999 is a direct
result of an increase in costs related to our planned expansion to 16 markets
at the end of 1999, an additional $5.5 million of net interest expense, and an
additional $4.1 million in non-cash compensation expense.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Total revenues for 1998 were $43.5 million compared to $4.0 million for
1997. The significant increase is due to the rapid growth in our Chicago and
New York markets during 1998 and the fact that service was first initiated in
Chicago in May 1997. Customer service and network operations expense was $15.3
million in 1998 compared to $2.2 million during 1997. The increase resulted
from our rapid expansion and the related costs of leased facilities, usage
settlements, customer care and operations personnel, equipment maintenance and
other operating expenses. Selling, general and administrative expense also
increased from $2.9 million for 1997 to $12.2 million for 1998 due to our
expansion. Similarly, depreciation and amortization increased from $0.6 million
in 1997 to $6.7 million in 1998 as a result of a significant increase in the
level of fixed assets put into service. Non-cash compensation expense
associated with the vesting over time of shares of common stock issued to some
of our executive officers in November 1996, and the vesting and cancellation of
shares of common stock in connection with the September 30, 1998 amendments to
vesting agreements with some of our executive officers, was $3.1 million for
1998 compared to $1.3 million for 1997. The increase of $1.8 million is due to
the September 30, 1998 amendment to these vesting agreements.
Interest income increased from $0.2 million in 1997 to $6.5 million for 1998
due primarily to the investment of the proceeds received in February 1998 from
the sale of the 1998 notes. Interest expense for 1998 was $16.1 million
compared to $0.1 million for 1997. The increase is primarily due to the
amortization of the discount on the 1998 notes.
Year Ended December 31, 1997 Compared to Seven-Month Period Ended December 31,
1996
We had total revenues of $4.0 million in 1997. We had no revenues in 1996.
The increase was due to the recording of our first revenue during May 1997.
Prior to May 1997, we incurred start-up and operating expenses in advance of
revenue as we prepared to launch our network services in the Chicago market.
Customer service and network operations expense increased from zero in 1996 to
$2.2 million in 1997. There were no customer service or network activities
during 1996. Such activities began as we initiated construction of our first
network in January 1997 and as we began to provide service in May 1997.
Selling, general and administrative expense increased from $0.4 million in 1996
to $2.9 million in 1997, largely due to a rapid increase in sales and
administrative personnel in 1997. Depreciation and amortization increased from
near zero in 1996 to $0.6 million in 1997 due to the increase in assets put
into service during 1997. Non-cash compensation expense associated with certain
shares issued to some of our executive officers in November 1996 increased from
$0.1 million in 1996 to $1.3 million in 1997 based on a full year's impact of
this expense during 1997 as compared to one month of non-cash compensation
expense during 1996.
Interest income increased from $0.02 million in 1996 to $0.2 million in 1997
as a result of significantly greater cash balances we maintained after
receiving additional equity contributions during 1997. Interest expense was
$0.1 million in 1997 due to debt financing incurred by one of our subsidiaries.
We did not have any interest expense during 1996.
Liquidity and Capital Resources
We intend to continue to increase our coverage of major U.S. cities by
expanding our services to another two markets during 2000 and four additional
markets in 2001. Our business plan will require that we expand our existing
networks and services, deploy our own fiber capacity in a majority of our
markets, construct our Focal Internet eXchanges and expanded colocation
centers, and fund our initial operating losses. We will require significant
capital to fund the purchase and installation of voice and data switches,
routers, equipment,
41
<PAGE>
infrastructure and fiber facilities and/or long-term rights to use fiber
transport capacity. The implementation of this plan requires significant
capital expenditures, a substantial portion of which will be incurred before
significant related revenues from our new markets are expected to be realized.
These expenditures, together with associated early operating expenses, may
result in our having substantial negative operating cash flow and substantial
net operating losses for the foreseeable future, including 2000 and 2001.
Although we believe that our cost estimates and the scope and timing of our
build-out are reasonable, we cannot assure you that actual costs or the timing
of the expenditures, or that the scope and timing of our build-out, will be
consistent with current estimates.
Our capital expenditures were approximately $52.3 million for the first
three months of 2000, primarily reflecting capital spending for the build-out
of our additional markets and the roll-out of new services. Our capital
expenditures were approximately $128.5 million (excluding $21.0 million of
assets acquired under capital lease) in 1999 compared to $64.2 million in 1998,
primarily reflecting capital spending for the build-out of our markets. We
estimate that our capital expenditures in connection with our current business
plan will be approximately $300 million for 2000 and approximately $305 million
for 2001. The 2000 capital expenditures are expected to be made primarily for
the build-out of additional markets, the expansion of our existing markets, the
roll-out of new services, including managed high-speed Internet access,
colocation and peering services, and the purchase of local dark fiber transport
capacity in a majority of our markets.
Our expectations of our future capital requirements and cash flows from
operations are based on current estimates. If our plans or assumptions change
or prove to be inaccurate, we may be required to seek additional sources of
capital or seek additional capital sooner than currently anticipated.
Net cash provided by operating activities for the first three months of 2000
was $13.3 million, an increase of $14.6 million from the same period in 1999.
This increase is primarily the result of a $6.4 million increase in
depreciation and amortization, a $31.0 million increase in accounts payable and
accrued liabilities, and an additional $0.7 million of amortization of discount
on the outstanding notes and 1998 notes, which was offset by additional net
losses of $21.1 million and the increase in our March 31, 2000 accounts
receivable relative to the March 31, 1999 balance by approximately $1.6
million. Net cash provided by operating activities for 1999 was $18.5 million,
a decrease of $4.0 million from the same period in 1998. This decrease is
primarily the result of a $17.1 million increase in depreciation and
amortization, a $4.1 million increase in non-cash compensation expense, and an
additional $4.6 million of amortization of the 1998 notes, which was offset by
additional net losses of $14.4 million and the increase in our 1999 accounts
receivable exceeded 1998 by approximately $16.4 million. Net cash used in
operating activities was $1.6 million for 1997 and net cash provided by
operations was $22.5 million in 1998, an increase of $24.1 million from 1997.
This increase was primarily due to an increase in non-cash reconciling items
for depreciation and amortization, non-cash compensation expense, amortization
of discount on the 1998 notes and an increase in accounts payable and accrued
liabilities.
Net cash used in investing activities was $51.4 million for the first three
months of 2000 compared to $24.0 million in the first three months of 1999.
This increase of $27.4 million is primarily the result of our expansion into
six new markets, which resulted in capital expenditures that exceeded the first
three months of 1999 by $27.8 million. Net cash used in investing activities
was $130.6 million for 1999 compared to $72.2 million in 1998. This increase of
$58.4 million is primarily the result of our 1999 expansion into 6 new markets
and the continued expansion of our existing markets. Our capital expenditures
of $128.5 million in 1999 exceeded 1998 by $64.3 million. Short-term
investments primarily consist of debt securities, which typically mature
between three months and one year. Net cash used in investing activities was
$72.2 million for 1998 and $11.7 million for 1997. The increase of $60.5
million from 1997 represents a $52.6 million increase in capital expenditures
due to our 1998 expansion into new markets and the purchase of short-term
investments of $8.0 million. Short-term investments primarily consist of debt
securities, which typically mature between three months and one year.
42
<PAGE>
Net cash provided by financing activities for the first three months of 2000
was $263.7 million, an increase of $257.9 million from the first three months
of 1999. This increase is primarily due to the $265.7 million in net proceeds
received from the issuance of the outstanding notes. Net cash provided by
financing activities for 1999 was $164.1 million, a decrease of $9.3 million
from 1998. This decrease is primarily the net result of our debt and equity
proceeds between comparable periods. Net cash provided by financing activities
consisted of $173.5 million in 1998 and $11.8 million in 1997. The increase of
$161.7 million from 1997 to 1998 was mainly the result of net proceeds from the
1998 notes offering of $143.9 million after $6.1 million in issuance costs and
$19.2 million in borrowings under a secured equipment term loan facility (the
"Credit Agreement") during 1998.
On February 18, 1998, we received $150 million in gross proceeds from the
sale of our 1998 notes. The 1998 notes will accrete to an aggregate stated
principal amount of $270 million by February 15, 2003. As of March 31, 2000,
the principal amount of the 1998 notes had accreted to approximately $192.4
million. As of December 31, 1999, the principal amount of the 1998 notes had
accreted to approximately $186.8 million. No interest is payable on the 1998
notes prior to August 15, 2003. Thereafter, cash interest will be payable
semiannually on August 15 and February 15 of each year. On August 2, 1999, we
raised net proceeds of approximately $137 million in our initial public
offering in which we sold 11,442,500 shares of our common stock at a price of
$13 per share, which includes the underwriter's exercise of their over-
allotment option to purchase 1,492,500 common shares at $13 per share. On
January 12, 2000, we received approximately $265.7 million in net proceeds from
the offering of the outstanding notes. The 2000 senior notes interest payment
dates are July 15 and January 15, commencing July 15, 2000.
We have historically incurred net losses and have an accumulated deficit of
$54.6 million as of March 31, 2000 and an accumulated deficit of $33.7 million
and $11.3 million as of December 31, 1999 and 1998, respectively. The aggregate
net proceeds totaling approximately $602.7 million that we received from the
offering of our 1998 notes, the August 1999 equity offering, the outstanding
notes and certain other financings, have funded a large portion of our
operating losses and capital expenditures through March 31, 2000. We expect
that our existing cash and investment balances of $413.8 million as of March
31, 2000 and future cash flows that are expected to be provided from ongoing
operations will be sufficient to fund our operations and capital expenditure
requirements through the second quarter of 2001.
We are currently in negotiations for a $200 million senior secured credit
facility. If we choose to establish this facility, we expect that it will fund
our operations and capital expenditure requirements through the fourth quarter
of 2001. In addition, we may choose to obtain future debt or equity financing
to fund additional new products, services and other general corporate purposes.
The discussions under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contain forward-looking statements. Our
future performance is subject to a number of risks and uncertainties that could
cause actual results to differ substantially from our projections. See
"Information Regarding Forward-looking Statements" on page 1 of this
prospectus.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to minimal market risks. We manage sensitivity of our results
of operations to these risks by maintaining a conservative investment
portfolio, which primarily consists of debt securities, typically maturing
within one year, and entering into long-term debt obligations with appropriate
pricing and terms. We do not hold or issue derivative, derivative commodity or
other financial instruments for trading purposes. Financial instruments held
for other than trading purposes do not impose a material market risk on us.
We are exposed to interest rate risk, as additional debt financing is
periodically needed due to the large operating losses and capital expenditures
associated with establishing and expanding our network coverage. The interest
rate that we will be able to obtain on debt financing will depend on market
conditions at that time, and may differ from the rates we have secured on our
current debt.
43
<PAGE>
While all of our long-term debt bears fixed interest rates, the fair market
value of our fixed rate long-term debt is sensitive to changes in interest
rates. We have no cash flow or earnings exposure due to market interest rate
changes for our fixed long-term debt obligations. The table below provides
additional information about our 1998 notes. For additional information about
our long-term debt obligations, see our Consolidated Financial Statements and
accompanying notes incorporated by reference in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 2000
----------------------------------
Average
Expected Fixed Interest
Maturity Debt Rate
---------------- -------- --------
<S> <C> <C>
2000 $ -- --
2001 -- --
2002 -- --
2003 -- --
2004 -- --
Thereafter 545,000 12%
-------- ---
$545,000 12%
======== ===
Fair Market
Value $447,750
========
</TABLE>
44
<PAGE>
BUSINESS
Introduction
We are a rapidly growing competitive provider of integrated communications
services. We provide data and telecom services to large, communications-
intensive users in major cities. Our target customers include large
corporations, ISPs and VARs. We began operations in 1996, initiated service
first in May 1997 and currently offer service in the following 18 markets:
Chicago New York Philadelphia
San Francisco Los Angeles Seattle
Orange County, California Boston Oakland
Washington, DC Dallas Northern Virginia
Detroit Fort Worth Northern New Jersey
San Jose Atlanta Houston
As part of our previously announced expansion, we plan to provide service in
Minneapolis and Cleveland by September 30, 2000. Due to the success we have
experienced in our existing markets, we have decided to expand our geographic
footprint to include four additional markets by September 30, 2001. When we
complete this expansion, we will provide service in 24 markets, encompassing a
total of 56 metropolitan statistical areas. As of March 31, 2000, we had sold
291,443 access lines, of which 238,697 were installed and in service. This
compares to 237,167 lines sold and 181,103 lines installed and in service as of
December 31, 1999 and 85,329 lines sold and 70,572 lines installed and in
service as of March 31, 1999.
In response to market demand for faster, more reliable solutions to Internet
connectivity, we have launched a new data services business. We have hired an
Internet industry veteran to lead a dedicated team of employees to build this
business. Our new suite of services, which we expect to roll-out during the
third quarter of 2000, will include:
. Managed High-Speed Internet Access--We intend to provide our customers
with reliable, direct access to multiple Tier-1 Internet backbones with
private peering relationships that avoid highly-congested public access
points . We believe this service will alleviate many of the latency,
packet-loss and reliability problems associated with the Internet.
. Colocation Services--We intend to leverage our existing and planned
colocation facilities by leasing space to those customers that need to
reach our high concentration of end-users.
. Private Peering Services--We intend to offer private peering services to
enable ISPs, content providers and application service providers to
exchange traffic at our peering points, thereby avoiding the congestion
at public interconnection points.
We will offer these data services by creating FIXs in each of our existing
and planned switching and colocation sites in 24 major U.S. markets. Our FIXs,
based on a redundant switch and router platform, will be IP-enabled meeting
points for both Internet users and content and application service providers.
We believe content and application service providers will value our proximity
to end-users, which results from our substantial role as a provider of Internet
dial-up facilities.
We currently provide dial-up access services to approximately 200 ISPs that
use the Focal network to bring traffic to the Internet. We believe that we have
been successful at achieving significant penetration in our key markets. For
example, we estimate that more than one-third of all dial-up Internet traffic
in the Chicago metropolitan area passes through a Focal switching center. End-
user dial-up traffic travels through our switching centers, all of which
contain colocation space in which many of our customers house their equipment.
We believe that this colocation space is of unique value because of its
proximity to the end-user. By colocating at a Focal facility, our content and
application service provider customers will be at a point closest to the edge
of the Internet, resulting in improved connections and faster download speeds.
As of March 31, 2000, we had over 110,000 square feet of secure and
environmentally-conditioned colocation space available to our customers or
under development. As part of our new data services strategy, we plan to expand
our colocation space to approximately 500,000 square feet across 36 FIX centers
located in our 24 target markets.
45
<PAGE>
We believe we will have a competitive advantage over other carriers and
Internet infrastructure companies due to our:
. Established relationships with some of the largest corporate, ISP and
VAR customers in the nation
. Network infrastructure, which has been designed with colocation space
adjacent to our switching centers
. Highly reliable network
. Reputation for quality service and customer care
. Ability to package switched local service and high-speed data and
Internet connections
In addition to these new data services, we continue to deploy DSL services
and a nationwide network based on ATM technology. We believe that by providing
a full portfolio of data services, we will better serve the needs of our
customers and appeal to a broader market.
To support our long distance service offerings, we have leased
approximately 23,000 DS-3 miles of transport capacity connecting each of our
existing and planned markets. Using these facilities, we are developing our
nationwide ATM network to carry data and voice traffic. This will allow us to
provide virtual private network services for both data and voice. We are
currently able to price long distance voice calls that remain on the Focal
network as if they were local calls using our FocaLINC service.
We believe we were the first competitive communications provider to employ
the "smart-build" approach to network design. As such, we own and operate our
switches, initially lease, rather than own, transport capacity and acquire
fiber transport capacity when and where the volume of customer traffic
warrants. During 1999, we leased facilities for 100% of our transport
requirements. However, we signed agreements with Level 3 Communications and
Metromedia Fiber Network Services to acquire a combined minimum of 10,800
fiber miles of our own local fiber transport capacity in many of our markets.
We activated our own Chicago transport network in February 2000 and expect to
activate our remaining transport networks in other markets by the end of 2000.
By combining leased with owned fiber capacity, we expect to better control
these assets and generate stronger operating results.
We also expect to apply our "smart-build" approach to the design of our
Internet services infrastructure. We plan to initially buy Internet transit
services from a minimum of three Internet backbone providers in each of our
planned markets. This strategy is consistent with the approach we have taken
with transport capacity.
A majority of our revenue is currently derived from the provision of
switched data services for our targeted customers. Due to customer demand, in
each of our markets we are deploying digital subscriber line, or DSL,
nationwide networking using asynchronous transfer mode, or ATM, technology,
and a new set of data services, which includes managed high-speed Internet
access, content and application hosting and peering services. We believe that
by providing these data services, we will appeal to a broader customer base.
Market Potential
We believe communications-intensive users in large metropolitan markets are
inadequately supplied with highly reliable data and telecom services. We also
believe that these types of users will increasingly demand diversity in
communications providers. As a result, we have chosen to initially do business
only in large metropolitan markets with a high concentration of
communications-intensive customers. We select our target geographical markets
using several criteria:
. Sufficient market size
. Favorable regulatory environment
. The existence of multiple fiber transport and Internet backbone
providers with extensive networks
. The existence of, or ability to obtain, attractive interconnection
agreements with the ILEC
46
<PAGE>
We currently offer circuit-switched data and voice services and plan to
offer packet-switched data services and high-speed Internet services. We
believe the market potential in our target markets for these services is large
and rapidly growing. By the end of 2000, we estimate:
. the addressable market for circuit-switched data and voice services will
be $64 billion
. the addressable market for private line and packet-switched data
services will be $11 billion
. the addressable market for high-speed Internet services, including
access and colocation will be $12 billion.
Consequently, we estimate our total market potential within our target markets
to be approximately $87 billion by the end of 2000.
Market for Circuit-Switched Data and Voice Services
The market potential is large and growing for circuit-switched data and
voice services. According to data published by the FCC, these communications
services in the U.S. generated 1998 revenues of approximately $165 billion, net
of access charges. A market study done by our management estimates that
switched services from the business and residential segments in the
metropolitan markets we intend to serve by the end of 2000 will generate
revenue of approximately $64 billion in 2000.
Market for Private Line and Packet-Switched Data Services
According to Frost & Sullivan, the total U.S. market for private line and
packet-switched data services will grow at an annual rate of approximately 15%
from about $22 billion in 1998 to approximately $44 billion by 2003. The DSL
portion of this market in the U.S. is anticipated to grow at an annual rate of
approximately 39% over the same period. Much of the growth is expected to
result from increased demand for streaming media, e-mail, web hosting services,
e-commerce, collaborative workflow and real-time video services and
applications. We estimate that the addressable market for private line and
packet-switched data services in the metropolitan markets we intend to serve by
the end of 2000 will be approximately $11 billion.
Market for High-Speed Internet Services
With the advent of high-speed access, the Internet has become a tool for
mission-critical business applications and consumer services. Pioneer
Consulting predicts that the demand for Internet bandwidth will increase from
0.33 terabits per second in 1999 to 11.9 terabits per second in 2003, creating
a market that in 2003 will be $122 billion in revenues, based on our estimates.
The market for colocation and peering is also expected to grow along with
Internet bandwidth. We approximate that our addressable market for high-speed
Internet services, including access, colocation and peering, will be
approximately $12 billion in the year 2000 for the metropolitan markets we
intend to serve by the end of 2000.
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The table below summarizes estimates from our market study regarding our
current and planned markets. You should be aware that, with the exception of
the "Operational Markets," the launch period shown in the second column is our
current estimate of when we will begin providing services in our planned
markets. These estimates are subject to change based upon numerous factors,
including timely performance by third party suppliers and receipt of required
regulatory approvals. You should also be aware that we may choose not to deploy
networks in the markets named below. The markets targeted for launch in 2001
are preliminary and each may be replaced by other markets.
<TABLE>
<CAPTION>
Estimated Number of
Business and Switched
Launch Period Access Lines (1)
------------------- ---------------------
(in thousands)
<S> <C> <C>
Operational Markets:
Chicago, IL........................... May 1997 6,014
New York, NY.......................... January 1998 8,567
Philadelphia, PA...................... September 1998 3,117
San Francisco, CA..................... September 1998 1,699
San Jose, CA.......................... September 1998 1,414
Oakland, CA........................... September 1998 1,932
Washington, DC........................ December 1998 3,412(2)
Northern Virginia..................... December 1998 -- (2)
Los Angeles, CA....................... December 1998 6,937
Orange County, CA..................... December 1998 3,975
Northern New Jersey................... January 1999 5,108
Boston, MA............................ January 1999 4,082
Detroit, MI........................... June 1999 3,711
Seattle, WA........................... September 1999 2,424
Dallas, TX............................ December 1999 2,122
Fort Worth, TX........................ December 1999 963
Atlanta, GA........................... March 2000 2,587
Houston, TX........................... March 2000 2,788
Planned Markets:
Cleveland, OH......................... Third Quarter 2000 1,921
Minneapolis, MN....................... Third Quarter 2000 1,781
Baltimore, MD (3)..................... First Quarter 2001 1,840
Miami, FL (3)......................... Second Quarter 2001 2,098
San Diego, CA (3)..................... Second Quarter 2001 1,906
St. Louis, MO (3)..................... Third Quarter 2001 1,747
------
Total: 72,145
======
</TABLE>
--------
(1) Access line data has been estimated as of December 31, 2000.
(2) Data for Northern Virginia are included in the data for Washington, DC
(3) Represents markets currently under evaluation for 2001. We cannot assure
you that we will actually deploy networks in these markets. We may choose
to substitute other markets.
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Strategy
Our objective is to become the provider of choice for data and telecom
services to large, communications-intensive customers in our target markets. We
are responding to the evolving demands of our existing customers and
positioning ourselves to provide the high-quality telecom and data services
that they require. To achieve this objective we intend to:
. Leverage Strong Customer Relationships--Our customer base includes a
substantial number of large corporations, ISPs and VARs, some of which
are:
<TABLE>
<S> <C> <C> <C>
IBM Sony Citigroup United Airlines
E*Trade Merrill Lynch MindSpring Genuity
CompuServe Nortel Networks Sears Motorola
OnSite Access Seren Innovations UniDial Communications Sprint
</TABLE>
We have built strong relationships with these customers. Focal has a
reputation for reliable, sophisticated service and superior customer
care and support. We operate a robust network in order to meet the
demanding requirements of our communications-intensive customers. We
also have a sophisticated sales force that works closely with our
customers to make sure that their needs are met. We believe that the
strength of our existing customer relationships gives us a competitive
advantage over other communications services providers who may try to
target our customer base. Consequently, we believe we can leverage the
relationships we have built with our customers and increase our share
of their total communications expenditures by selling them additional
services.
. Expand Service Offerings--We intend to expand our suite of service
offerings in response to our customers' demand for sophisticated new
services. Our new data services business will offer valuable Internet
infrastructure services, including managed, high-speed Internet access,
"edge-of-the network" colocation and local Internet peering points. Our
Internet access service will offer customers dedicated Internet backbone
connectivity that is faster and more reliable than service they can
purchase on their own. Due to our proximity to the Internet's end-users,
our colocation centers will provide ISPs, content providers and
application service providers with a central, convenient colocation
facility located close to the "edge" of the network. Finally, as more
ISPs, content providers and application service providers colocate with
us, we plan to offer local peering services that enable these parties to
directly connect with each other at our facilities, thereby avoiding the
congestion at public interconnection points. We believe this strategy
will allow us to significantly grow our revenues and increase our
profitability as we drive additional demand for our existing services,
increase the penetration rate of our new services and leverage our
existing network, sales and management infrastructure.
. Design a Capital-Efficient Network--By utilizing the "smart-build"
approach to network design we believe we have optimized our return on
invested capital. We do this by initially leasing, rather than owning,
fiber capacity, concentrating our capital expenditures on switching
facilities and information systems and acquiring fiber transport
capacity as the volume and demands of our customer traffic warrants.
Because of increased customer traffic volume in some of our markets, we
began acquiring our own fiber transport capacity within our local
markets in 1999. By continuing to use the "smart-build" approach to
network and service deployment, we expect to reduce the time and money
required to launch new markets and services, minimize the financial risk
associated with underutilized networks and generate revenue and cash
flow more quickly. We intend to use this same strategy as we launch our
new suite of Internet services.
. Expand Geographic Coverage--We believe the market potential for Focal's
services in markets with high concentrations of communications-intensive
users is large and growing. We currently offer services in 18 large
metropolitan markets across the United States and intend to aggressively
deploy additional facilities in other key markets. As part of our
deployment plan, we expect to have a total of
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20 markets operational by the end of 2000, and to expand into four
additional markets in 2001. We believe the total addressable market for
all of our services will amount to $87 billion in revenue in 2000.
. Maximize Network Utilization--We supplement our direct sales efforts
with indirect sales to maximize the utilization of our network assets
and systems infrastructure. To achieve this goal we actively utilize our
VAR distribution channel, which accounted for approximately 12% of our
installed line base as of March 31, 2000. We provide services to VARs,
such as managers of multi-dwelling units and companies that market
bundled communications services to small- and medium-sized businesses.
This enables us to increase the number of access lines served by our
networks, driving network utilization. We also intend to pursue ways to
maximize utilization rates for our Internet backbone. For example, we
plan to sell unused upstream capacity to ISPs, content providers and
application service providers as a way to maximize the utilization and
efficiency of our network.
Networks
We have installed Nortel DMS-500 SuperNode digital central office switches
in each of our existing markets, and currently plan to deploy similar switches
in our additional markets. As we add customers in a market, it has generally
been cost-effective for us to use leased fiber transport capacity to connect
our customers to our network. We have initially leased local network trunking
facilities from the ILECs in each of our markets in order to connect our
switches to major ILEC central offices serving our central business district
and outlying areas of business concentrations. We have chosen to design our
networks using this "smart-build" approach, which involves purchasing and
maintaining our own switches while leasing our fiber transport facilities on
an as-needed basis. This provides us with added negotiating leverage in
obtaining favorable terms from transport providers and allows us to offer our
customers both redundancy and diversity. In addition, we have designed our
networks to maximize call completion and significantly reduce the likelihood
of blocked calls, which helps us satisfy the needs of our high-volume
customers. This "smart-build" approach is possible because there are multiple
vendors of local fiber transport facilities in each of our large metropolitan
markets, both current and planned. Our switch-based, leased transport network
architecture has allowed us to:
. Reduce the time and money required to launch a new market
. Minimize financial risk associated with under-utilized networks
. Generate revenue and cash flow more quickly
We have the flexibility to add or subtract leased local transport capacity
on an incremental basis with the addition or loss of customers. We believe
that the quantity of existing and planned fiber transport facilities available
from numerous carriers will be sufficient to satisfy our need for local leased
transport facilities and permit us to obtain these facilities at competitive
prices for the foreseeable future. The fiber transport providers in our
current and planned markets compete with each other for our business in order
to maximize the return on their fixed-asset networks, which enables us to
obtain competitive pricing. In addition, because each of our fiber transport
capacity providers is a common carrier, they are required to make their
transport services available to us on terms no less favorable than those
provided to similar customers.
Although during 1999 we leased 100% of our transport facilities, we believe
that it is now economically attractive for us to own a portion of our local
transport capacity because of increased volumes of customer traffic between
our switches and specific ILEC central offices in some of our markets. We are
a party to agreements with Level 3 Communications and Metromedia Fiber Network
Services for the acquisition of local fiber transport capacity covering a
combined minimum of 10,800 fiber miles.
Our agreement with Level 3 Communications provides us with an indefeasible
right of use, or IRU, for a specified number of fibers being constructed or
acquired by Level 3. The IRU in each covered market has a 20-year term and
covers a total of approximately 8,300 fiber miles. Under this agreement, we
are required to pay fees totaling approximately $18 million, payable in
installments based upon the achievement of construction
50
<PAGE>
and installation milestones. We activated our own Chicago transport network in
February 2000 and expect to activate our remaining transport networks in other
markets by the end of 2000. The Level 3 agreement also requires us to pay
nominal quarterly operations and maintenance fees based upon the number of
fiber route miles covered. Our 20-year agreement with Metromedia Fiber Network
Services provides for the long-term lease of a minimum of 2,500 fiber miles of
fiber optic capacity for approximately $53 million over the 20-year term. This
agreement also gives us the option to lease additional fiber in Metromedia
Fiber Network Services' markets for lease payments that decrease according to a
sliding scale based on volume.
We have also employed a "smart-build" approach in developing our inter-
city strategy. Initially, we resold long distance transmission service by
buying minutes on a wholesale basis. Going forward, we have decided to lease
fiber optic transport capacity connecting our switches between each of our
existing and planned markets. We will therefore transport our calls from market
to market over our own network and terminate the calls either directly at our
customer's location or at the ILEC switch. For international calls, we have
negotiated agreements with various international carriers for termination of
our international calls throughout the world.
To implement our inter-city network, we have signed agreements with a
number of carriers under which we have leased approximately 23,000 DS-3 miles
of transport capacity connecting each of our existing and planned markets. This
inter-city, DS-3 backbone network will initially be based on time division
multiplexing technology. During 2000, we plan to convert the inter-city
backbone to ATM technology. We believe the use of ATM switches will provide
greater flexibility in creating and managing both data and voice services over
the same physical network. We are currently able to price inter-city calls that
remain on our network as if they were local calls--a service we call FocaLINC.
We are a party to a private line service agreement with MCI WorldCom
providing for the lease of fiber transport capacity that will be used to
connect our existing and planned markets. Under this agreement, we have agreed
to pay total charges of at least $70 million for private line services,
including existing private lines used within our markets to provide local
service. The charges are payable as minimum annual volume commitments of $10
million in the year ended May 3, 2000, $13.2 million in the year ended May 3,
2001 and $15.6 million in each of the years ended May 3, 2002, 2003 and 2004.
If we terminate the agreement prior to the end of the term, we are required,
with limited exceptions, to pay the difference between the commitment for the
relevant year and our actual charge, as well as 50% of the commitment for each
remaining year during the term.
In order to support high-speed access to corporate LANs, we began in 1999 to
deploy DSL technology in our key markets. We are obtaining colocation space
from the ILECs and installing DSL access multiplexers, or DSLAMs, in colocation
cages in ILEC central offices located in densely populated regions. Once
installed, the DSLAMs terminate into an ATM switch, which transports high-speed
data from end users to Focal's corporate customers. These customers then manage
the flow of this traffic onto their corporate LANs.
To launch our new data services, which we expect will include managed high-
speed Internet access, colocation and peering services, we plan to:
. Build a new Internet platform, called a Focal Internet eXchange, or FIX,
in each of our switch and colocation sites. Each FIX will consist of a
state-of-the art, fully-redundant, powerful Internet routing and
switching infrastructure that will enable us to provide high quality
Internet access services to our customers. The local facilities will be
monitored by a centralized data network operations center, staffed 24
hours a day, seven days a week, and supported by trained technical
resources in the field.
. Purchase transit services from a minimum of three Tier-1 backbone
providers in each of our planned markets. The transit services will
terminate in routers in our FIXs, giving our customers direct access to
multiple Internet backbones and allowing them to bypass congested, public
interconnection points.
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<PAGE>
Products and Services
Data Services
Existing Services. Focal Virtual Office is designed to allow a corporate
customer's employees to dial-in to the corporate customer's local area network
using a telephone number in the employee's local calling area. This allows the
employee to access the local area network for the price of a local call and
enables our corporate customer to avoid the higher cost of maintaining region-
wide 800 service for local area network access. In addition, our Virtual Office
customers are able to use the Focal Finder(TM) service, an interactive tool
placed on the customer's web site that automatically provides a telecommuting
employee with the local calling number to be used for server access.
Focal Multi-Exchange Service, a variant of the Focal Virtual Office service
marketed to ISPs, allows an ISP's customers to cost-effectively access the
ISP's remote access servers. The combination of the multi-exchange service
capacity and our high level of customer care has resulted in strong demand for
our Multi-Exchange Service from ISPs.
We are currently deploying DSL access services to provide high-speed,
dedicated access to corporate LANs and the Internet. This service is being
marketed to each of our targeted customer segments-- large corporations, ISPs
and VARs. DSL service is or will be available in a variety of speeds ranging
from 144 kilobits per second to up to seven megabits per second. We believe DSL
access service is a natural extension of the switched data services that we
have provided since inception.
On July 2, 1999, Focal entered into a five-year joint marketing and service
agreement with Splitrock Services, Inc., subsequently acquired by McLeodUSA
Incorporated, a provider of advanced data communications services to ISPs,
telecommunications carriers and other businesses. Under this agreement, McLeod
has agreed to purchase a minimum of 10,000 DSL lines as may be needed by McLeod
to provide service to McLeod's wholesale customers or retail end-users in
Focal's markets, subject to service availability on a timely basis. Focal also
has been granted a right of first refusal to provide DSL service to McLeod
within Focal's service territory to the extent McLeod is not providing DSL
services over its own network. In turn, McLeod has been granted a right of
first refusal to offer specified data communications and network services if
Focal itself does not offer these services within the relevant geographic
market. The parties have also agreed to cooperate in selected network planning
functions.
With the purchase of our own fiber capacity, we believe we can offer both
intra-city and inter-city private line data services at attractive prices.
Consequently, we plan to more aggressively market private lines for data
applications to new and existing customers.
We offer our customers the ability to colocate equipment in our switching
centers. Equipment colocation benefits the customer by allowing it to
inexpensively house its data equipment without having to maintain secure,
environmentally controlled space. We also offer them equipment maintenance
services. These services are particularly well-suited to our ISP customers, who
frequently operate remote access servers and routers in conjunction with our
switched services. As of March 31, 2000 we had over 110,000 square feet of
customer colocation space available or under development.
New Services. As overall Internet usage has grown, it has placed tremendous
demands on public networks and peering points. As traffic moves from one
Internet backbone to another, it passes through a variety of interconnection
points. Users frequently complain about delays, lost packets and other
deterioration in service at these congested exchange points. At the same time,
access speeds available to consumers and businesses continue to increase. New
technology and faster modems are accelerating the speed at which users can
access the Internet.
With these greater access speeds and as more and more companies begin to
distribute content and applications over the Internet, demand for larger-sized
files and more complex applications has increased. As a
52
<PAGE>
result, reliable Internet network performance has become essential to
businesses and consumers. Erratic performance and lengthy delays, once an
acceptable norm, have become unacceptable. For most, this means that fast,
reliable and stable delivery of content and applications will become the new
standard.
Our new data services respond to this increased demand for high-speed
Internet access and improved Internet content and services delivery. We
recently created a new data services business to provide our customers with
faster, reliable solutions to Internet connectivity. These services include
managed high-speed Internet access, colocation and peering services. By
building on our reputation as a premier provider of local dial-up access
services to ISPs, we intend to expand the value proposition to our customers
while satisfying their demand for additional Internet services.
Our managed high-speed Internet access services will be targeted to our
corporate and ISP customer segments. We expect that these services will provide
high-quality access optimally routed over multiple Tier-1 Internet backbone
networks. We will buy Internet transit services from a minimum of three Tier-1
backbone providers, terminating those connections on our routers in our
switching centers. We believe that our aggregation of different providers and
control over these routers will allow us to provide a higher quality of service
than our customers could otherwise afford. The service would allow direct
access to the leading global backbones with private peering connections to
reach most of the Internet's top destinations, with availability of other
backbones in case of a network failure or outage. We expect that this solution
will reduce most of the problems, namely packet loss and latency, that slow
Internet services today, and will provide faster download speeds and increased
reliability.
We also intend to sell upstream bandwidth in bulk to colocation customers
who need to send large amounts of data to the Internet. Since most of our
current customers will typically send small files to and receive large files
back from the Internet, the remaining "upstream" bandwidth is often unused and
can be packaged for customers needing a one-way service. While this is a
targeted, niche market, it nonetheless offers us the opportunity to sell, at a
small incremental cost, bandwidth that would otherwise be unused.
Our colocation services will be targeted to customers who need to reach a
high concentration of end-users. Following the installation of a FIX, we will
be able to offer an enhanced colocation environment to our customers. By
colocating in a Focal facility, our colocation customers will have the ability
to improve the performance of content and application delivery by situating as
close to the edge of the network as possible and reach customers of multiple
ISPs from one location. Potential customers for this service include content
replication and distribution services, streaming media hosting services,
application service providers, unified messaging providers and companies
providing downloads of software and other large files.
We believe that our private peering points will facilitate a more reliable
exchange of traffic than is currently available. The current peering option for
most of our ISP customers is to exchange traffic at the public exchange points.
These public exchange points are major bottlenecks in the transfer of data as
congestion causes lost packets and delays. By managing a private peering
environment for the exclusive use of our customers, we will be able to
facilitate smoother exchanges of Internet traffic.
While we expect that each of our Internet services will stand on its own,
the services are highly complementary. We believe that we will attract
colocation customers because we offer convenient access to end-users of
multiple ISPs. We believe we will attract ISP and corporate customers not only
because of our more reliable connectivity services, but also because of the
ready access to content and applications that our customers may host in our
facilities.
Telecom Services
Inbound Services. Our basic, inbound service allows for the completion of
calls to a new phone number we supply to our customer. Alternatively, local
number portability, or LNP, allows us to provide inbound services using a
customer's existing phone number. While LNP is occasionally unavailable and
cumbersome to implement, it permits us to serve customers without altering
their existing phone numbers. Consequently, we expect LNP to become
increasingly useful to us in taking existing business from our primary
competitors, the ILECs.
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Direct inward dial service allows inbound calls to reach a particular
station on a customer's phone system without operator intervention. We market
direct inward dial service to our corporate customers as both a primary and
backup service. As a primary service, the customer uses Focal numbers where a
new line and number are needed, as when a customer hires a new employee. As a
backup service, we can implement an alternative numbering plan for the customer
in case the customer's primary service from the ILEC or another CLEC is
interrupted.
Outbound Services. Our basic outbound services allow local and toll calls to
be completed within a metropolitan region and long distance calls to be
completed worldwide. This direct outward dial service is utilized by end users
in several ways. As a primary service, a customer uses Focal as a replacement
for the ILEC in placing calls to destinations within the region. In our least
cost routing application, a customer can utilize our service in conjunction
with its existing ILEC service to route calls using whichever carrier is least
expensive for that particular type of call or time of day.
Other outbound applications include outbound 800 calling and long distance
overflow service. In order to encourage customers to use our service, we offer
customers an incentive for letting us provide their outbound 800 calls. In the
case of long distance overflow service, we act 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 network.
Our FocaLINC service is designed to price inter-city calls that remain on
our network as if they were local calls. This product provides a cost-effective
way for our customers in one market to make calls to their offices in other
Focal markets.
All of the services described above are commonly provisioned over a high-
speed digital communications circuit called a T-1 facility and interface
directly with our customers' private branch exchange or other customer-owned
equipment. Direct interfacing averts our need to provide multiplexing
equipment, which combines a number of communications paths onto one path, at
the customer's location. This is possible due to the high call volume generated
by the large communications-intensive customers we target. Our ability to
directly interface with existing customer equipment further minimizes our
capital investment and maximizes our overall return on capital. We also believe
our installation of DSL equipment utilizing HDSL2 technology will allow us to
more cost-effectively provision T-1 facilities needed for voice customers. In
addition DSL technology will allow us to reach more customers in areas not
currently served by fiber.
Advanced Services
CDR Express provides our VAR customers with automated delivery of daily call
detail records, or CDRs, via the Internet. This system enables these customers
to accurately bill their customers in a secure environment. CDR Express, as
well as some other Focal products, are located in Your Domain--a section of our
web site specifically dedicated to each customer. Your Domain enables our
customers to access their most recent invoices, call detail records and the
customer order entry forms. Your Domain is protected by a customer's user name
and password. Your Domain can also inform customers of new product offerings
being developed by us. Our Form View product, located in Your Domain, allows
our customers to download order forms and other important documents through the
Internet at their convenience.
Focal FLOW is an outbound service marketed to VARs that need to be able to
switch outbound traffic among multiple long distance or international carriers.
We partition our central office switch so VARs can utilize the core switching
capability of our equipment at reasonable per minute or per port cost.
Sales and Marketing
Our primary objective is to satisfy the need for highly reliable
communications services for communications-intensive users in the large
metropolitan markets in which we operate by providing diverse, reliable and
sophisticated services. We believe that we have a competitive advantage in
satisfying this need since we are focused on delivering a specific set of
innovative services to our target customers.
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Diversity. Focal provides diversity to communications-intensive users by
delivering highly reliable, local communications services as an alternative to
the ILEC. This type of diversity already exists in other areas of
communications services, such as long distance. Communications-intensive
customers clearly embrace the benefits of diversity, particularly because
redundancy minimizes the effects of facilities failures and maximizes
competitive pricing. As a result, most of our target customers typically have
multiple long distance providers, multiple equipment vendors and multiple local
private-line providers. Because of our focused strategy, we believe that we are
uniquely positioned to become the provider of choice for data and voice
communications services for large, communications-intensive corporate users,
VARs and ISPs. Our focused strategy is based on our ability to deliver the
superior level of diverse, reliable and sophisticated services that our
customers require.
Reliability. We provide reliable service to communications-intensive users,
who are highly sensitive to the potential effects of facilities failures, by
designing our networks around the same theme of diversity that we advocate for
our customers. Although local services are perceived as simple, basic services,
the delivery of highly reliable, local services requires sophisticated systems.
We have engineered our switching and transport networks to meet the demanding
traffic and reliability requirements of our target customers. Our network
strategy is based on developing and operating a robust, reliable, high-
throughput local network relative to the ILECs and other CLECs. Because we are
a relatively new entrant to the markets we serve, we must meet or exceed the
performance quality of the existing local networks in order to attract
communications-intensive users to our networks. Unlike smaller users that tend
to pre-qualify vendors based on price, we believe that communications-intensive
users choose vendors based on the performance of their networks, and
specifically, their reliability. As a result, the design and operation of our
network are key success factors in our business development process.
We conducted extensive research to identify the best hardware for the high-
volume users that we serve. As a result of this research, we selected Nortel
DMS-500 SuperNode central office switches, which we have engineered to reduce
significantly the likelihood of blocked calls and to maximize call completion.
As such, our customers are unlikely to find themselves unable to complete or
receive calls due to limitations inherent in our switches. We typically connect
to a large number of switches in the ILEC's network. As of March 31, 2000, we
had connected to a total of 1,447 ILEC switches. We believe this is a
competitive advantage because it increases call completion even if a portion of
the ILEC's trunking network becomes blocked. We optimize the configuration of
our network by implementing overflow routing between the ILEC's network and
ours, where available. Because the customer base of the ILECs and other CLECs
is not typically as communications-intensive as ours, we specifically
engineered our network to accommodate traffic volumes per customer far in
excess of that which the ILECs or other CLECs typically experience. We believe
that our design is unique among ILECs and CLECs and is attractive to our target
customer base of communications-intensive users. In addition, we enhance our
reliability by delivering service from our switches to customers over multiple
fiber transport systems.
We have also implemented safeguards in our network design to maximize
reliability. The DMS-500 SuperNode switch allows us to distribute customer
traffic across multiple bays of equipment, thus minimizing the effects of any
customer outage. In addition, these switches were engineered by Nortel Networks
with fully redundant processors and memory in the event of a temporary failure.
Similarly, we design our FIXs to achieve high levels of reliability by
connecting each FIX to at least three Internet backbone providers and by
building two levels of redundancy into our switching and routing infrastructure
at each FIX. Our disaster prevention strategy includes service from multiple
power sources where available, on-site battery backup and diesel generator
power at each switching facility to protect against failures of our electrical
service.
Sophistication. Our target customers are knowledgeable, sophisticated buyers
of communications services that demand a high level of professionalism
throughout a vendor's organization. We believe that the technical
sophistication of our management and operations team has been a critical factor
in our initial success and will continue to differentiate us from our
competitors. Execution of our strategy of penetrating communications-intensive
accounts requires a well-experienced team of sales professionals. As a result,
attracting and retaining
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experienced sales professionals is important to our overall success. Our sales
professionals' compensation is structured to retain these valuable employees
through the grant of stock options and cash compensation incentives based on
our revenue and operating cash flow objectives.
We divide our direct sales force into four groups:
. The data services group
. The corporate services group
. The telecom services group
. The Internet services group
The data services group is responsible for selling to information services
providers, DSL providers and other data carriers, including ISPs. We are able
to offer several innovative services to ISPs, such as environmentally
conditioned colocation space, virtually non-blocking switching and transport
facilities and firm installation times. Servicing ISPs also maximizes our
network utilization by bringing traffic onto our network during periods, such
as evenings or weekends, when the network would otherwise be under-utilized.
The corporate services group is responsible for selling to large corporate
users. Our sales strategy for these corporate customers is to complement the
customer's service from the ILEC. Our initial sale to a corporate customer
typically involves installing incremental lines for specialized inbound
services, such as Virtual Office, or replacing only a limited number of
outbound lines. After we build the service relationship, we anticipate
increasing our overall penetration of the customer's local service. Over a
period of time, we hope to dominate a corporate customer's local switched
traffic. We emphasize the diversity, reliability and sophistication of our
services in order to earn our place as the local provider of choice for our
corporate customers.
The telecom services group markets directly to VARs and other carriers by
positioning us as a highly-reliable, responsive and cost-effective source of
wholesale local communications services. We believe a wide array of
communications service providers, including long distance companies, will seek
to provide bundled communications services in the large metropolitan markets we
target. We are well-positioned to be the provider of choice for re-bundled
local service. Because we do not intend to directly distribute our services to
residential or small- and medium-sized business customers, we believe that VARs
and other carriers looking to purchase the local service portion of their
bundled service offerings are more likely to purchase service from us rather
than from other ILECs or CLECs that compete with them.
The Internet services group will market our managed high-speed Internet
access, colocation and peering services to large corporate users, information
services providers, VARs, DSL providers and other data carriers, including
ISPs. This group will work as an overlay sales team to the data services group,
the telecom services group and the corporate services group, leveraging our
existing relationships. While our initial customer relationships have been
built by our data services, telecom services and corporate services groups, the
Internet services group will bring depth and expertise in understanding
customer demands related to the Internet and will provide robust solutions to
customer issues.
Information Systems
Superior customer service is critical to achieving our goal of capturing
market share. We are continually enhancing our service approach, which utilizes
a trained team of customer sales and service representatives to coordinate
customer installation, billing and service. Comprehensive support systems are
also a critical component of our service delivery. We have installed systems
designed to address all aspects of our business, including service order,
network provisioning, end-user and carrier billing, and trouble reporting. The
efficiency of our operating processes contributes to our ability to rapidly
initiate service to new accounts. Our installation desk follows a customer's
order, ensuring the installation date is met. Additionally, our customer sales
representatives respond to all other customer service inquiries, including
billing questions and repair calls.
We are enhancing our systems and procedures for operations support, order
provisioning and other back office systems in order to facilitate and
streamline the processing of large order volumes and customer service.
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These systems are required to enter, schedule, provision and track a customer's
order from the point of sale to the installation and testing of service. The
existing systems currently employed by most ILECs, CLECs and long distance
carriers generally require multiple entries of customer information to
accomplish order management, provisioning, switch administration and billing.
This process is not only labor intensive, but it creates numerous opportunities
for errors in provisioning service and billing, delays in installing orders,
service interruptions, poor customer service, increased customer turnover and
significant added expenses due to duplicated efforts and decreased customer
satisfaction.
We are currently using order management software to develop processes that
allow us not only to enter customer orders onsite, via computer and/or over the
Internet, but also to monitor the status of an order as it progresses through
the service initiation process. This software supports the process by which we
convert a customer to our network from the local exchange network of an ILEC or
other carrier, including circuit design and work flow management.
Electronic Bonding with ILECs. In an effort to make the initiation of
service for a customer more efficient, we and Ameritech Illinois have
implemented electronic bonding between our operations support systems.
Electronic bonding is expected to improve productivity by decreasing the period
between the time of sale and the time a customer's line is installed. We
activated electronic bonding with Ameritech in the fourth quarter of 1999.
Electronic bonding allows us to access data from the ILEC, submit service
requests electronically, and more quickly attend to errors in the local service
request form because an order is bounced back if the ILEC determines that there
is a mistake. As a result, we expect to be able to eventually substantially
reduce the time required to switch service to us. Electronic bonding should
also enable us to improve our ability to provide better customer care since we
will more readily be able to pinpoint problems with a customer's order.
Electronic Bonding with Customers. We are also working toward the electronic
bonding of that portion of the billing process in which we gather customer
specific information, including their current service options, and the process
of identifying and resolving customer service problems.
We believe automation of internal processes contributes to the overall
success of a service provider and that billing is a critical element of any
telephone company's operation. We deliver billing information in a number of
media besides paper, including electronic files and Internet inquiry. Our
Invoice Domain service allows customers to securely access and view their
monthly invoices over the Internet. In addition, this service allows customers
to download call detail records. Similarly, our VAR customers can download call
records on a daily basis through our secure web site. This allows them to
efficiently process invoices for their end-user customers.
Significant Relationships
We have no customers that accounted for more than 10% of our revenues during
the three years ended December 31, 1999 and for the three months ended March
31, 2000.
Our relationships with Ameritech and Bell Atlantic are mandatory, co-carrier
relationships and are not that of a customer and supplier. Nevertheless,
Ameritech and Bell Atlantic are shown here due to their contribution to our
revenues for the three years ended December 31, 1999 and the three months ended
March 31, 2000. Ameritech and Bell Atlantic accounted for approximately 25% and
21% of our consolidated revenues for the three months ended March 31, 2000,
respectively, and 43% and 20% of our consolidated revenues in 1999,
respectively, and 59% and 16% of our consolidated revenues in 1998,
respectively. Ameritech accounted for approximately 81% of our consolidated
revenues in 1997. The revenues from these carriers for the three years ended
December 31, 1999 and the three months ended March 31, 2000 are the result of
interconnection agreements we have entered into with them relating to the
transport and termination of communications traffic. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"--Regulation" for further discussion regarding reciprocal compensation.
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Competition
Portions of our industry are highly competitive. We face a variety of
existing and potential competitors, including:
. The ILECs in our current and target markets
. Other voice and data CLECs
. Long distance carriers
. Potential market entrants, including cable television companies, VARs,
electric utilities, microwave carriers, wireless telephone system
operators and private networks built by large end-users
. Foreign carriers
. Internet infrastructure companies
Our primary competitor in each of our existing and planned markets is the
ILEC. Examples include BellSouth, Bell Atlantic, U S WEST, SBC (including its
subsidiaries Ameritech Illinois and Pacific Bell) and GTE. These ILECs are
generally required to file their prices with the state regulatory agencies in
their service areas. Any price changes must be reflected in these filings. The
ILECs have also generally been given the flexibility to respond to competition
with lower pricing. In most cases, proposals for lower pricing must also be
filed with the state utility commissions and the pricing must be made available
to similarly situated customers. We believe this provides a disincentive for
the ILECs to significantly vary or discount prices even in competitive
situations. However, as a CLEC, similar obligations apply to us. See "--
Regulation--State Regulation."
The ILECs offer a wider variety of services in a broader geographic area
than ours and have much greater resources than we do. This may encourage an
ILEC to subsidize the pricing for services with which we compete with the
profits of other services in which the ILEC remains the dominant provider. We
believe competition has limited the number of services dominated by ILECs. In
addition, state regulators have exercised their enforcement powers in a way
that makes it unlikely the ILECs would be able to successfully pursue this type
of protective pricing strategy for an extended period.
In addition to competition from ILECs, we also face competition from a
growing number of other CLECs. Although CLECs overall have only captured
approximately 5% of total revenue of the U.S. local telecommunications market,
we nevertheless compete to some extent with other CLECs in our customer
segments. There are typically several other CLECs competing in each
metropolitan market we serve or plan to enter. Examples of data and voice CLECs
in our markets include Allegiance Telecom, Covad Communications Group, MCI
WorldCom, NEXTLINK Communications, NorthPoint Communications Group, Rhythms
NetConnections and Teleport Communications Group, now a part of AT&T. In some
instances, these CLECs have resources greater than ours and offer a wider range
of services. Many of the CLECs in our markets target small- and medium-sized
business customers, which differs from our target customer base of large,
communications-intensive users.
The data services market is also extremely competitive. Our principal
competitors in this market include Internet connectivity providers such as
UUNET Technologies and Verio, private peering companies, such as InterNAP
Network Services and Equinix, RBOCs that offer Internet access, global,
national and local ISPs and companies that offer colocation services, such as
Exodus Communications and AboveNet Communications. We also believe that new
competitors will enter the data services market. See "Risk Factors--
Competition."
Some of the ILECs recently requested, among other things, that the FCC relax
regulation of their provision of advanced data networks, which may also be used
for voice traffic. While the FCC has denied those requests, it has initiated a
rule-making that is intended to establish the procedures and safeguards
necessary before these ILECs could, through separate subsidiary companies,
provide these services on a largely
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deregulated basis. If adopted, these rules may provide additional opportunities
for competition from these ILECs. SBC and Ameritech received authority from the
FCC to create such a subsidiary in the FCC's approval of their merger. Bell
Atlantic New York also received similar authority with the recent grant of its
application to provide long-distance service in New York. The FCC recently
released an order addressing, among other things, colocation rights of carriers
offering advanced data services, but deferred action on the separate subsidiary
issue. Bills have been introduced in Congress that would grant RBOCs permission
to provide data services in areas where they are currently restricted from
doing so. Although we cannot predict the outcome of any proposed or pending
legislation, the ability of RBOCs to provide data services on a broader basis
could have a material adverse effect on us. In addition, the FCC recently acted
to enable ISPs to buy DSL services in bulk from ILECs, which could result in
additional competition for ISPs business.
In addition to ILECs and other CLECs, we are increasingly competing with
long distance carriers. A number of long distance carriers have introduced
local telecommunications services to compete with us and the ILECs. These
services include toll calling and other local calling services, which are often
packaged with the carrier's long distance service. While we do not believe the
packaging aspect of the service is particularly attractive to the
communications-intensive customers we target, large long distance carriers
enjoy certain competitive advantages due to their vast financial resources and
brand name recognition. In addition, we believe there is a risk the long
distance carriers may subsidize the pricing of their local services with
profits from long distance services. We anticipate that the entry of some of
the ILECs into the long distance market will reduce the risk of this type of
activity by reducing the profitability of the long distance carrier's long
distance minutes. Further, to the extent the long distance carrier purchases
our service on a wholesale basis and rebundles it at a subsidized rate, we may
benefit as the subsidized, wholesale service could result in higher market
penetration than we would otherwise have achieved. In addition, we have
displaced long distance carriers where the customer was dissatisfied with the
quality of the long distance carrier's local service. We expect our reputation
for exceptional service quality and customer care will continue to result in us
displacing the long distance carrier as the primary alternative to the ILEC in
competitive situations. In addition, we expect that some of our recent and
proposed service offerings, which enable long distance calls to be priced like
local calls, will increase our competitiveness.
We compete principally on the basis of the quality, sophistication and
reliability of our service. See "--Sales and Marketing." We believe that the
principal competitive factors in our markets are speed and reliability of
service, quality of facilities, level of customer care and technical support,
and the timing and market acceptance of new services and enhancements to
existing services.
Regulation
The following summary of regulatory developments and legislation is not
complete. It does not describe all present and proposed federal, state and
local regulation and legislation affecting the telecommunications industry.
Existing federal and state regulations are currently subject to judicial
proceedings, legislative hearings and administrative proposals that could
change, in varying degrees, the manner in which our industry operates. We
cannot predict the outcome of these proceedings or their impact on the
telecommunications industry or us.
Overview. Our services are subject to varying degrees of federal, state and
local regulation. The FCC exercises jurisdiction over all the facilities of,
and services offered by, telecommunications common carriers like us to the
extent we use our facilities 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
provide, originate or terminate intrastate communications. The decisions of
these regulatory bodies are often subject to judicial review, which makes it
difficult for us to predict outcomes in this area.
Federal Regulation. We must comply with the requirements of common carriage
under the Communications Act of 1934. Comprehensive amendments to the
Communications Act of 1934 were made by the Telecommunications Act of 1996,
referred to as the Telecom Act, which substantially altered both federal
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and state regulation of the telecommunications industry. The purpose of this
legislation was to deregulate the telecommunications industry to a significant
degree, thereby fostering increased competition among carriers. Because
implementation of the Telecom Act is subject to numerous federal and state
policy rule-making and judicial review, we cannot predict with certainty what
its ultimate effect on us will be.
Under the Telecom Act, any entity may enter a telecommunications market,
subject to reasonable state safety, quality and consumer protection
regulations. The Telecom Act makes local markets accessible by requiring the
ILEC to permit interconnection to its network and establishing ILEC obligations
with respect to:
. Colocation of equipment. This allows companies like us to install and
maintain our own network equipment, including DSLAMs and fiber optic
equipment, in ILEC central offices.
. Interconnection. This requires the ILECs to permit their competitors to
interconnect with ILEC facilities at any technically feasible point in
the ILECs' networks.
. Reciprocal compensation. This requires the ILECs and CLECs to compensate
each other for telecommunications traffic that originates on the network
of one carrier and is sent to the network of the other.
. Resale of service offerings. This requires the ILEC to establish
wholesale rates for services it provides to end-users at retail rates to
promote resale by CLECs.
. Access to unbundled network elements. This requires the ILECs to
unbundle and provide access to some components of their local service
network to other local service providers. Unbundled network elements are
portions of an ILEC's network, such as copper lines or "loops," that
CLECs can lease in order to create their own facilities networks.
. Number portability. This requires the ILECs and CLECs to allow a
customer to retain an existing phone number within the same local area
even if the customer changes telecommunications services providers. All
telecommunications carriers will be required to contribute to the shared
industry costs of number portability, with the first payments made in
the fourth quarter of 1999.
. Dialing parity. This requires the ILECs and CLECs to establish dialing
parity so that customers do not perceive a quality difference between
networks when dialing.
. Access to rights-of-way. This requires the ILECs and CLECs to establish
non-discriminatory access to telephone poles, ducts, conduits and
rights-of-way.
ILECs are required to negotiate in good faith with other carriers that
request any or all of the arrangements discussed above. If a requesting carrier
is unable to reach agreement with the ILEC within a prescribed time, either
carrier may request arbitration by the applicable state commission. If an
agreement still cannot be reached, carriers are forced to abide by the
obligations established by the FCC and the applicable state commission.
We have entered into a number of interconnection agreements with the ILECs
in our markets and will enter into additional agreements as our build-out
progresses. We have existing interconnection agreements in each of our existing
markets and in several of our planned markets. Nine of the interconnection
agreements covering our existing markets, including the agreement covering
Chicago, expired in 1999. Eight of the interconnection agreements covering our
existing markets, including the agreement covering New York, expire in 2000.
The expiration of these agreements will require that we negotiate new
interconnection terms with the ILECs. Pending conclusion of these negotiations,
several existing interconnection agreements should continue to govern the
payment of reciprocal compensation and other interconnection terms while other
renegotiated agreements will be given retroactive effect from the expiration
date of the superceded agreement following the conclusion of negotiations and
arbitrations. Failing to reach agreement on renegotiations, we have filed for
arbitration in states in Bell Atlantic and Ameritech territory. In Illinois,
the Illinois Commerce Commission recently ruled on our arbitration petition.
See "Risk Factors--Internet-Related Reciprocal Compensation" and "--
Relationship with ILECs."
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The FCC is charged with establishing guidelines to implement the Telecom
Act. In August 1996, the FCC released a decision, known as the Interconnection
Decision, that established rules for the interconnection requirements outlined
above and provided guidelines for interconnection agreements by state
commissions. The U.S. Court of Appeals for the Eighth Circuit vacated portions
of the Interconnection Decision. On January 25, 1999, the U.S. Supreme Court
reversed the Eighth Circuit and upheld the FCC's authority to issue regulations
governing pricing of unbundled network elements provided by the ILECs in
interconnection agreements, including regulations governing reciprocal
compensation, which are discussed in more detail below. In addition, the
Supreme Court affirmed an FCC rule that allows requesting carriers to "pick and
choose" the most attractive portions of existing interconnection agreements
with other carriers. The Supreme Court did not, however, address other
challenges raised about the FCC's rules at the Eighth Circuit because those
challenges were not decided by the Eighth Circuit. These challenges will have
to be addressed by the Eighth Circuit in light of the Supreme Court's decision.
In addition, the Supreme Court disagreed with the standard applied by the FCC
for determining whether an ILEC should be required to provide a competitor with
particular unbundled network elements.
The FCC adopted a new standard in November 1999 for analyzing unbundled
network elements as required by the Supreme Court's order. Applying this
standard to the existing network elements, the FCC concluded that ILECs would
no longer be required to provide directory assistance and operator services as
network elements, though they will continue to be available pursuant to tariff
at different prices. The FCC also removed unbundled switching as an element in
urban areas where the incumbents are also providing certain other combinations
of elements in a non-discriminatory fashion. However the FCC declined, except
in limited circumstances, to require ILECs to unbundle certain facilities used
to provide high speed Internet access and other data services.
The Supreme Court's decision and the FCC's order on remand do not remove all
uncertainty concerning the pricing terms and conditions of interconnection
agreements. The Eighth Circuit could set aside the FCC's rules concerning the
pricing of unbundled network elements, and the incumbents may challenge the
FCC's order on remand from the Supreme Court for not removing additional
network element obligations. Furthermore, the complexity of the revised rules
creates uncertainty as to how they might be enforced by the states. The
resulting uncertainty makes it difficult to predict whether we will be able to
continue to rely on our existing interconnection agreements or have the ability
to negotiate acceptable interconnection agreements in the future.
In addition to requiring the ILECs to open their networks to competitors and
reducing the level of regulation applicable to CLECs, the Telecom Act also
reduces the level of regulation that applies to the ILECs, thereby increasing
their ability to respond quickly in a competitive market. For example, the FCC
has applied "streamlined" tariff regulation of the ILECs, which shortens the
requisite waiting period before which tariff changes may take effect. These
developments enable the ILECs to change rates more quickly in response to
competitive pressures. The FCC has also adopted heightened price flexibility
for the ILECs, subject to specified caps. If exercised by the ILECs, this
flexibility may decrease our ability to effectively compete with the ILECs in
our markets.
The Telecom Act also gives the FCC authority to determine not to regulate
carriers if it believes regulation would not serve the public interest. The FCC
is charged with reviewing its regulations for continued relevance on a regular
basis. As a result of this mandate, a number of regulations that apply to CLECs
have been and may in the future continue to be eliminated. We cannot, however,
guarantee that any regulations that are now or will in the future be applicable
to us will be eliminated.
In March 1999, the FCC issued an order requiring ILECs to provide unbundled
loops and colocation on more favorable terms than had previously been
available. The order permits colocation of equipment that could be used to more
efficiently provide advanced data services such as high-speed DSL service, and
requires less expensive "cageless" colocation. In the March order, the FCC
deferred action on its previous proposal to permit ILECs to offer advanced data
services through separate affiliates, free from some of the obligations of
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the Telecom Act. In an August order, the FCC determined that advanced services
are telecommunication services subject to regulation under Sections 251 and 252
of the Telecom Act. In the same order the FCC issued a notice of proposed rule
making on terms for the provision of such services on a separate subsidiary
basis.
In an FCC decision on voluntary remand, the FCC affirmed and clarified its
position that advanced data services are subject to the interconnection, resale
and bundling requirements of the Telecom Act. Permitting ILECs to provision
data services through separate affiliates with fewer regulatory requirements
could have a material adverse impact on our ability to compete in the data
services sector. The FCC imposed conditions on the merger of SBC with Ameritech
in October that permit the provisioning of advanced data services via separate
subsidiaries pursuant to various requirements, some of which expire in the near
term. The FCC is currently considering a request from SBC for a waiver of a
portion of its merger requirements. If granted, this waiver would permit SBC to
provide certain DSL technologies in portions of its networks without complying
with the non-discrimination requirements of its merger conditions. We cannot
predict whether these requirements are enforceable, nor whether they will deter
anticompetitive behavior if they are enforceable. Bell Atlantic's application
for long distance service in New York has been approved subject to similar
separate subsidiary provisions. These areas of regulation are subject to change
through additional proceedings at the FCC or judicial challenge.
On March 17, 2000, the District of Columbia Circuit Court vacated those
portions of the FCC's expanded colocation rules that permitted CLECs to
colocate equipment that contained functions in addition to those necessary for
interconnection or access to unbundled network elements. The Court, while
upholding the FCC's authority to require cageless colocation, also rejected the
FCC's effort to leave the choice of space within the central office to the
CLEC. The Court also vacated the FCC's regulations that permit CLECs to install
their own cross-connects between different colocation arrangements in ILEC
central offices. The Court vacated the FCC's rules in part and remanded to the
FCC the issue of what equipment is necessary for interconnection or access to
unbundled elements.
On December 9, 1999, the FCC released its line sharing order that requires
ILECs to offer line sharing as an unbundled network element by June 6, 2000.
Line sharing permits CLECs to use a customer's existing line to provide DSL
services while the ILEC continues to use the same line to provide voice
service. Prices for line sharing will be set by the states.
Reciprocal Compensation. We expect that reciprocal compensation payments
will make up a significant portion of our initial revenues in each of our
markets. Reciprocal compensation is the compensation paid by one carrier to
complete particular calls on another local exchange carrier's network. Because
a significant portion of our customers typically receive more calls than they
make, we expect to receive more reciprocal compensation than we pay for calls
that originate on our networks. As a result of the current regulatory
environment and several trends in our business, which are discussed below, we
expect our revenues from reciprocal compensation to decline.
Some ILECs have refused to pay reciprocal compensation charges that they
estimate are the result of inbound ISP traffic because they believe that this
type of traffic is outside the scope of existing interconnection agreements.
For example, Ameritech disputed a portion of the reciprocal compensation
charges billed to it by us, which it believed were related to Internet charges.
In March of 1998, the Illinois Commerce Commission ruled in favor of Focal and
other CLECs regarding this dispute. In October 1998, Ameritech complied with
the ruling and we received payment for past reciprocal compensation charges
that represent substantially all of the disputed amounts. Reciprocal
compensation payments from Ameritech comprised approximately 81% of our
revenues for the year ended December 31, 1997 and payments from Ameritech and
Bell Atlantic comprised approximately 60% and 75% of our revenues for the years
ended December 31, 1999 and 1998, respectively. On June 18, 1999, the Seventh
Circuit affirmed the Illinois Commerce Commission's order requiring the payment
of reciprocal compensation for ISP-bound traffic. On August 19, 1999, the
Seventh Circuit modified its prior order by providing that Ameritech is free to
raise in state courts any state claims concerning reciprocal
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compensation, and by deferring any ruling on the petitions for rehearing
pending the Court's resolution in other cases of procedural issues concerning
the participation of state commissioners. Ameritech had previously filed such a
state complaint which at its request has been held in abeyance pending the
outcome of the federal case.
On May 8, 2000, the Illinois Commerce Commission resolved our arbitration
for a new agreement with Ameritech and determined that we are entitled to
reciprocal compensation for ISP-bound calls. The Commission at the same time
directed its staff to initiate a generic proceeding to further address
reciprocal compensation. The Commission also noted that it might make the
reciprocal compensation results in the Focal arbitration subject to a true up.
Some states in which our current and planned markets are located have
ordered the ILECs to pay reciprocal compensation for Internet-related calls
based on existing interconnection agreements or state arbitrations. The
majority of states that have addressed the question have ruled that
compensation is owed for this traffic. However, these states and other states
that have not considered the issue to date may yet determine that no
compensation is owed. A finding that reciprocal compensation is not payable for
ISP traffic in Illinois, New York, California or Pennsylvania would have a
material adverse effect on us.
In addition, on February 26, 1999, the FCC issued a declaratory ruling and
Notice of Proposed Rulemaking concerning inbound ISP traffic. The FCC concluded
in its ruling that ISP traffic is jurisdictionally mixed and largely interstate
in nature, and thus within the FCC's jurisdiction. The FCC has requested
comment as to what reciprocal compensation rules should govern this traffic
upon expiration of existing interconnection agreements. The FCC also determined
that no federal rule existed that governed reciprocal compensation for ISP
traffic at the time existing interconnection agreements were negotiated and
concluded that it should permit states to determine whether reciprocal
compensation should be paid for calls to ISPs under existing interconnection
agreements.
In light of the FCC's order, state commissions, which previously addressed
this issue and required reciprocal compensation to be paid for ISP traffic, may
reconsider and may modify their prior rulings. Several ILECs, including
Ameritech, are seeking to overturn prior orders that they claim are
inconsistent with the FCC's February 26, 1999 order. Relief sought could
include repayment of reciprocal compensation amounts previously paid by the
ILECs. Of the 29 state commissions that have considered the issue since the
FCC's February 26, 1999 order, 24 of these states have upheld the requirement
to pay reciprocal compensation for ISP-bound traffic. Only Massachusetts, New
Jersey, South Carolina, Colorado and Louisiana are not requiring reciprocal
compensation for this traffic, at least pending negotiations and a further FCC
decision. Missouri and Ohio are not requiring current payment, but are
requiring a true-up based on the FCC's future decision. Colorado recently
ordered bill and keep as compensation for switch calls. In addition, of the ten
Federal District Courts and state courts and the three U.S. Courts of Appeals
that have reviewed this issue on the merits to date, all have upheld state
decisions requiring that reciprocal compensation be paid for ISP-bound traffic.
On March 24, 2000, the U.S. Court of Appeals for the District of Columbia
Circuit vacated the FCC's Declaratory Ruling that Internet-bound calls are not
local calls for which reciprocal compensation is owed. The Court remanded the
proceeding to the FCC for a further review of the nature of these calls for
purposes of reciprocal compensation. We cannot predict the impact of the
Court's ruling on pending or future proceedings at this time.
The New York Public Service Commission (the "NYPSC") determined that in
certain circumstances, Bell Atlantic can pay a lower reciprocal compensation
rate for calls terminated by a CLEC in excess of a ratio of three terminating
calls to each originating call. The NYPSC also provided an opportunity to a
CLEC having a ratio in excess of three-to-one, such as Focal, to demonstrate
that its network is such that the higher rate should be applied. Unless Focal
can demonstrate a basis for entitlement to the higher rate, it will receive the
lower tariffed rate as of January 2000. Bell Atlantic filed a tariff seeking to
reduce the lower rate by thirty percent from its current level of $0.0034/MOU.
We intend to vigorously challenge all aspects of the Bell Atlantic effort to
reduce the rates as described above. Bell Atlantic has also informed us that it
intends to unilaterally escrow these payments in two smaller markets, New
Jersey and Delaware.
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Upon expiration of our existing interconnection agreements, we must
negotiate new rates for reciprocal compensation with each carrier. Pending
conclusion of these negotiations, the existing interconnection agreements are
expected to continue to govern the payment of reciprocal compensation. We
expect rates for reciprocal compensation will be lower under new
interconnection agreements than under our existing agreements. A reduction in
rates payable for reciprocal compensation could have a material adverse effect
on us, as could any requirement to refund reciprocal compensation paid to date.
Legislation has recently been introduced in Congress that if inacted would
eliminate reciprocal compensation for calls to ISPs or the Internet in future
agreements. The legislation would also eliminate a CLEC's ability to opt into
an agreement providing for reciprocal compensation and would prohibit
reciprocal compensation during any extension of the original term of an
interconnection agreement.
Interstate Access Charges. In addition to charging other carriers reciprocal
compensation for terminating local traffic, Focal also collects access charges
from carriers for originating and terminating interexchange traffic. Some
interexchange carriers, including AT&T and Sprint, have challenged our switched
access rates as well as those of other CLECs, and have withheld some payments
for the switched access services that they continue to receive. Although no
formal complaints have been filed against us, AT&T and Sprint have asserted
claims against other CLECs that our charges for switched access services are
higher than those of the ILEC serving the same territory, and are therefore
unjust and unreasonable. These interexchange carriers have refused to pay us
any originating access charges in excess of the corresponding incumbent rate.
Because our access charges are appreciably less than some CLECs, and are lower
than the access charge rates charged by smaller incumbents having traffic
volumes similar to ours, we do not expect the FCC to require any appreciable
reduction in our tariffed rates. We have joined other CLECs in a lawsuit
against AT&T and Sprint in Federal District Court seeking collection of our
access charges.
Internet Regulation. There is currently only a small body of laws and
regulations applicable to access to or commerce on the Internet. As the
significance of the Internet expands, federal, state and local governments may
adopt rules and regulations that affect the Internet. We cannot predict the
nature of these regulations or their impact on our business. The FCC has
previously indicated that it would consider whether certain forms of phone-to-
phone IP telephony should be regulated as telecommunications services for
universal service purposes. No decision has been made.
Tariff and Filing Requirements. Non-dominant carriers, including Focal, 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 forebear from regulating any telecommunications services
provider if specified statutory analyses are satisfied. The FCC's order,
however, has been stayed by a federal court. Accordingly, non-dominant
interstate carriers, including Focal, currently must continue to file
interstate tariffs with the FCC until final determination of the issue. Any
challenges to these tariffs by regulators or third parties could cause us to
incur substantial legal and administrative expenses. On April 28, 2000, the
FCC's orders requiring detariffing for interstate, domestic, interexchange
services were upheld on appeal. The FCC has since created a nine month plan for
implementing detariffing by January 31, 2001.
In addition, periodic reports concerning carriers' interstate circuits and
deployment of network facilities also are required to be filed with the FCC.
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 may also impose 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.
The FCC also requires that certified carriers like Focal notify the FCC of
foreign carrier affiliations and secure a determination that such affiliations,
if in excess of a specified amount, are in the public interest.
State Regulation. Most states regulate entry into the markets for local
exchange and other intrastate services, and states' regulation of CLECs vary in
their regulatory intensity. The majority of states require that
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companies seeking to provide local exchange and other intrastate services to
apply for and obtain the requisite authorization from a state regulatory body,
such as a state 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 March 31, 2000, we had obtained local exchange
certification or were otherwise authorized to provide local exchange service
in:
California Illinois Minnesota Pennsylvania
Delaware Indiana Missouri Texas
District of Columbia Maryland New Jersey Virginia
Florida Massachusetts New York Washington
Georgia Michigan Ohio
To the extent that an area within a state in which we provide service is served
by a small or rural exchange carrier not currently subject to competition, we
may not currently have authority to provide service in those areas at this
time.
As a CLEC, we are and will continue to be subject to the regulatory
directives of each state in which we are and will be certified. Most states
require that CLECs charge just and reasonable rates and not discriminate among
similarly situated customers. Some other state requirements include:
. The filing of periodic reports
. The payment of various regulatory fees and surcharges
. 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 and for issuances by
certified carriers of equity securities, notes or indebtedness, although the
terms of this offering do not require any prior approval. States generally
retain the right to sanction a carrier or to revoke certifications if a carrier
violates relevant laws and/or regulations. Delays in receiving required
regulatory approvals could also have a material adverse effect on us. We cannot
assure you that regulators or third parties will not raise material issues with
regard to our compliance or non-compliance with applicable laws or regulations.
In most states, certificated carriers like us 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. We may, however, be required to file tariff addenda
of the contract terms.
Under the Telecom Act, implementation of our 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 we operate or intend to operate have
taken regulatory and legislative action to open local communications markets to
various degrees of local exchange competition.
Local Regulation. We are also subject to numerous local regulations, such as
building code requirements, franchise and local public rights of way. These
regulations may vary greatly from state to state and from city to city.
Employees
As of March 31, 2000, we employed 747 full-time employees, none of whom were
covered by a collective bargaining agreement. We believe that our future
success will depend on our continued ability to attract and retain highly
skilled and qualified employees. We believe that our relations with our
employees are good.
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Properties
We are headquartered in Chicago, Illinois and lease office space in a number
of locations, primarily for network equipment installations and sales and
administrative offices. Our material leased switching and network properties
are located in:
Chicago, Illinois New York, New York Los Angeles, California
Philadelphia, Pennsylvania Washington, DC Cambridge, Massachusetts
Norristown, Pennsylvania Seattle, Washington Atlanta, Georgia
Southfield, Michigan Dallas, Texas Cleveland, Ohio
Houston, Texas San Francisco, California
Minneapolis, Minnesota
Jersey City, New Jersey San Jose, California
and cover approximately 452,000 square feet of leased space as of March 31,
2000. These leases expire in years ranging from 2004 to 2013 and have varying
renewal options. We also own approximately 13 acres of real property in
Arlington Heights, Illinois. This property, which includes a 52,000 square foot
building, houses our second Chicago switching center, national data center and
national network operations center.
Legal and Administrative Proceedings
With the exception of the matters discussed below, we are not aware of any
litigation against us. In the ordinary course of our business, we are involved
in a number of regulatory proceedings before various state commissions and the
FCC.
On September 16, 1997, we filed a complaint and request for temporary
injunction against Ameritech Illinois with the Illinois Commerce Commission.
The complaint claimed breach of the terms of the interconnection agreement
between us and Ameritech Illinois because Ameritech Illinois refused to pay
reciprocal compensation for our transport and termination of calls to our end-
users that Ameritech Illinois believed were ISPs. In the interests of obtaining
a more timely judgment, we withdrew our complaint without prejudice on October
17, 1997 and filed to intervene in a consolidated suit that included similar
complaints against Ameritech Illinois by several other CLECs. On March 11,
1998, the Illinois Commerce Commission issued an order that required Ameritech
Illinois to pay reciprocal compensation for calls made to ISPs. On March 15,
1998, Ameritech Illinois filed a motion with the Illinois Commerce Commission
to stay the order pending an appeal, which was denied on March 23, 1998. On
March 27, 1998, Ameritech Illinois filed suit in the United States District
Court for the Northern District of Illinois seeking reversal of the Illinois
Commerce Commission order. Ameritech Illinois also sought a stay of this order
from the District Court, which was granted while the case was decided. On July
21, 1998, the District Court upheld the Illinois Commerce Commission's order,
finding that calls to ISPs are local calls and therefore subject to the
reciprocal compensation rules contained in the Telecom Act. The District Court
stayed the decision to permit any party to appeal. Ameritech Illinois then
appealed the decision to the U.S. Court of Appeals for the Seventh Circuit on
August 25, 1998, and was denied a stay while the appeal is pending. In October
1998, Ameritech Illinois complied with the order and we received payment for
past reciprocal compensation charges that represent substantially all of the
disputed amounts. On June 18, 1999, the Seventh Circuit affirmed the Illinois
Commerce Commission's order requiring the payment of reciprocal compensation
for ISP-bound traffic. On August 19, 1999, the Seventh Circuit modified its
prior order to permit Ameritech to raise in state courts any state claims
concerning reciprocal compensation, and deferred any ruling on the petitions
for rehearing pending the Court's resolution in other cases of procedural
issues concerning the participation of state commissioners. Ameritech had
previously filed such a complaint which at its request had been held in
abeyance pending the outcome of the federal case. See "--Regulation" for a
description of federal rule-making and other developments affecting reciprocal
compensation.
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MANAGEMENT
Executive Officers, Selected Key Employees and Directors
The table below contains information about the ages and positions of Focal's
executive officers, selected key employees, and directors, as of April 30,
2000.
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Robert C. Taylor, Jr.... 40 Director, President and Chief Executive Officer
John R. Barnicle........ 35 Director, Executive Vice President and Chief Operating Officer
Joseph A. Beatty........ 36 Director, Executive Vice President and Chief Financial Officer
Michael L. Mael......... 43 Executive Vice President and President, Focal Data Communications
Renee M. Martin......... 45 Senior Vice President, General Counsel and Secretary
Robert M. Junkroski..... 36 Vice President and Treasurer
Gregory J. Swanson...... 33 Controller
Richard J. Metzger...... 51 Vice President of Regulatory Affairs and Public Policy
James E. Crawford, III.. 54 Director
John A. Edwardson....... 50 Director
Paul J. Finnegan........ 47 Director
Richard D. Frisbie...... 50 Director
James N. Perry, Jr...... 39 Director
Paul G. Yovovich........ 46 Director
</TABLE>
Robert C. Taylor, Jr. Mr. Robert Taylor is Chief Executive Officer and
President for Focal Communications Corporation. He was appointed to this
position in August 1996. Mr. Taylor is also the company's co-founder and a
director. Mr. Taylor is the Chairman of the Association for Local
Telecommunications Services, the nation's leading organization representing
facilities-based competitive local exchange carriers. In addition, Mr. Taylor
sits on the board of directors for IPLAN Networks, a CLEC based in Argentina.
Mr. Taylor has held positions with MFS Communications, most recently since 1994
as Vice President of Global Accounts, where he worked with the company's 50
largest customers and executed market development activities in Mexico and
Canada. Prior to joining MFS in 1994, Mr. Taylor was one of the original senior
executives at McLeodUSA Incorporated. Mr. Taylor has also held management
positions with MCI, Bellcore and Ameritech. 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 and Chief
Operating Officer and a director since June 1996. Mr. Barnicle is a co-founder
of Focal 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, a subsidiary of MFS Communications. From 1994 to
1996, Mr. Barnicle was a Vice President of Duff & Phelps Credit Rating Company
and before that held various marketing, operations and engineering positions
with MFS Telecom (1992-1994) and Centel Corporation, a local exchange carrier
(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 and Chief
Financial Officer since November 1996 and was also Treasurer from November 1996
through January 1999 and Secretary from November 1996 through April 1998. He
was also a director from May 1996 to November 1996 and became a director again
in April 2000. Mr. Beatty is a co-founder of Focal 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
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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. In
addition, Mr. Beatty holds a Bachelor of Science degree in Electrical
Engineering.
Michael L. Mael. Mr. Mael has been Executive Vice President and President,
Focal Data Communications, since January 2000. Mr. Mael is responsible for
developing and managing Focal's data services business. From 1997 until January
2000, he was Vice President, Applications and Web Services, at PSINet, where he
developed and managed the company's global Web hosting business. From 1992
until 1997, Mr. Mael held various management positions at MCI Communications in
finance, marketing and business development, and was a member of the team that
created MCI's Internet initiative. From 1986 until 1992, he worked as a
management consultant, both for Strategic Planning Associates and
independently. Mr. Mael received his M.B.A. from Stanford University, and holds
a Bachelor of Arts degree.
Renee M. Martin. Ms. Martin has been Senior Vice President, General Counsel
and Secretary since March 1998. Ms. Martin is responsible for our legal,
regulatory, real estate and human resources functions. 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, and managed outside legal counsel. From 1982
to 1984, Ms. Martin was an attorney at the law firm of 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 Vice President and Treasurer
since January 1999 and was Controller from January 1997 to January 1999. He is
responsible for all our accounting, revenue assurance, audit, cash and risk
management and customer credit functions. From 1995 to 1997, Mr. Junkroski was
Controller for Brambles Equipment Services, Inc., an equipment leasing company,
where he was responsible for establishing and maintaining the divisional
accounting, financial reporting and budgeting functions. From 1987 to 1995, Mr.
Junkroski was Controller for Focus Leasing Corporation, an equipment leasing
company, 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.
Gregory J. Swanson. Mr. Swanson has been Controller since January 1999 and
is our principal accounting officer. He is responsible for all internal and
external accounting and reporting functions. From June 1998 to December 1998,
Mr. Swanson was Director of External Reporting for Allegiance Corporation, a
health care manufacturing and distribution company. Before that he spent
approximately nine years at Arthur Andersen LLP, a public accounting firm,
where he was responsible for audit and business advisory services to technology
and manufacturing companies. Mr. Swanson is a Certified Public Accountant and
holds a Bachelor of Science degree in Accounting.
Richard J. Metzger. Mr. Metzger has been Vice President of Regulatory
Affairs and Public Policy since September 1998. He is responsible for our
regulatory and public policy activities. From 1994 to 1998, he served as
General Counsel of the Association for Local Telecommunications Services. From
1984 to 1993, he held various legal positions with Ameritech including serving
as Vice President and General Counsel of Wisconsin Bell and Michigan Bell. From
1976 to 1984, he was an attorney at the law firm of Sidley & Austin. Mr.
Metzger received his J.D. from the University of Chicago and holds a Bachelor
of Arts degree in Philosophy of Science.
James E. Crawford, III. Mr. Crawford has served as a director of Focal since
November 1996. Since August 1992, he has been a general partner of Frontenac
Company, a venture capital firm. From February 1984 to August 1992, Mr.
Crawford was a general partner of William Blair Venture Management Co., a
venture capital fund. He was also a general partner of William Blair & Company,
an investment bank and brokerage firm affiliated with William Blair Venture
Management Co., from January 1987 to August 1992. Mr. Crawford serves as a
director of Optika, Inc., Input Software, Inc., Allegiance Telecom and several
private companies.
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John A. Edwardson. Mr. Edwardson has served as a director of Focal since
February 1999. He has been Chairman of Burns International Services Corp., a
security services company, since June 1999 and President and Chief Executive
Officer of Burns International since March 1999. From 1994 to 1998, Mr.
Edwardson was President of UAL Corporation, the holding company for United
Airlines and also served as UAL's Chief Operating Officer from April 1995
through September 1998. He previously was Executive Vice President and Chief
Financial Officer of Ameritech and held executive positions with Northwest
Airlines. Mr. Edwardson also serves as a director of Burns International and
Household International, Inc.
Paul J. Finnegan. Mr. Finnegan has served as a director of Focal since
November 1996. Since January 1993, Mr. Finnegan has been Managing Director of
Madison Dearborn Partners, Inc., the general partner of Madison Dearborn.
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 and the Board of Directors or Managers, as
applicable, of CompleTel, LLC and Allegiance Telecom.
Richard D. Frisbie. Mr. Frisbie has served as a director of Focal since
November 1996. Mr. Frisbie is a founder and has been Managing Partner of
Battery Ventures since 1983. He is responsible for management of the Battery
Funds and focuses principally on communications opportunities. Mr. Frisbie
serves as a director of Allegiance Telecom.
James N. Perry, Jr. Mr. Perry has been a director of Focal since November
1996. From January 1993 to January 1999, he served as Vice President of Madison
Dearborn Partners, Inc., and since January of 1999 has served as Managing
Director 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 or manager, as applicable, of Clearnet
Communications, Inc., Omnipoint Corporation, CompleTel, LLC, CompleTel Holdings
and Allegiance Telecom.
Paul G. Yovovich. Mr. Yovovich has served as a director of Focal since March
1997. He is a private investor and a principal of Lake Capital Management. Mr.
Yovovich served as President of Advance Ross Corporation, an international
transaction services and manufacturing company, 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.
Mr. Yovovich also serves as a director of 3Com Corporation, Customer Services,
Inc., Lante Corporation, Van Kampen Open End Funds, Comarco, Inc. and American
Media Operations, Inc.
1997 Plan
Our 1997 Non-Qualified Stock Option Plan (the "1997 Plan") gave our board of
directors broad discretion to grant non-qualified stock options to directors,
officers and other key employees. Following our initial public offering of
common stock in August 1999, no further grants of stock options have been or
will be made under the 1997 Plan. The total number of shares of common stock
that may be issued or transferred under the 1997 Plan may not exceed 6,324,625
shares of common stock. The maximum share number can be adjusted if we
undertake a stock split, stock dividend or other similar transactions. The
board of directors determines who will receive options and what the terms of
the options will be.
The option agreements between us and each existing optionee provide that,
upon the occurrence of a Change in Control (as defined in the 1997 Plan), the
portion of the option that would have vested in the 12 month period following
the Change in Control (if the optionee remained employed by us during that
period) will automatically become vested as of the date of the Change in
Control. In addition, if we terminate the optionee's employment, actually or
constructively, in connection with or in anticipation of a Change in Control,
or within two years after a Change in Control, all of the optionee's remaining
options will automatically become vested and exercisable as of the date of
termination.
As of April 30, 2000, there were options covering 5,686,648 shares of
Focal's common stock outstanding under the 1997 Plan with a weighted average
exercise price of $2.99 per share.
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1998 Plan
We also have the 1998 Equity Performance Incentive Plan (the "1998 Plan")
that permits the board of directors to grant a variety of awards to officers
and other key employees. The board of directors can grant:
. Incentive and non-qualified stock options
. SARs, which are rights to receive an amount equal to a specified portion
of the increase in market value of a common stock over a specified
exercise price between the date of grant and the date of exercise
. Restricted shares, which involve the immediate transfer of shares of
common stock for the performance of services. Restricted shares must be
subject to a "substantial risk of forfeiture" within the meaning of
Section 83 of the Internal Revenue Code
. Deferred shares, which involve an agreement to deliver shares of common
stock in the future in consideration for the performance of services
. Performance shares, each of which is a bookkeeping unit equivalent to
one share of common stock
. Performance units, each of which is a bookkeeping unit equivalent to
$1.00
The total number of shares of common stock that may be issued or transferred
under the 1998 Plan may not exceed 2,050,000. On April 27, 2000, our board of
directors voted to increase this number to 12,050,000, subject to the approval
of our stockholders at our 2000 annual meeting. The maximum share number is
subject to adjustment in the event of a stock split, stock dividend or other
similar transactions.
The board of directors has broad discretion in granting and establishing the
terms of awards under the 1998 Plan subject to the limitations contained in the
1998 Plan.
As of April 30, 2000, there were options covering 1,990,218 shares of
Focal's common stock outstanding under the 1998 Plan with a weighted average
exercise price of $34.92 per share. Focal may not grant awards under the 1998
Plan after August 21, 2008.
Director Plan
We also have a 1998 Equity Plan for Non-Employee Directors that permits
directors ("Non-Employee Directors") who are not employees, representatives or
affiliates of any of Madison Dearborn, Frontenac or Battery Ventures
(collectively, the "Institutional Investors") to elect to receive all or a
portion of their compensation as directors in the form of shares of common
stock. The Director Plan also permits us to issue options to Non-Employee
Directors to purchase shares of common stock.
The number of shares of common stock that may be issued or transferred under
the Director Plan, plus the number of shares of common stock covered by
outstanding awards, may not exceed 150,000 shares in the aggregate. The maximum
number of shares may be adjusted if Focal undertakes a stock split, stock
dividend or other similar transactions.
As of April 30, 2000, there were options covering 2,698 shares of our common
stock outstanding under the Director Plan with a weighted average exercise
price of $44.50 per share.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The table below sets forth information regarding beneficial ownership of our
common stock as of March 31, 2000 for:
. Our Chief Executive Officer and each of our four other most highly
compensated executive officers whose combined salary and bonus for 1999
exceeded $100,000 for services rendered in all capacities for our last
three fiscal years (the "Named Executive Officers")
. Each of our directors
. All of our executive officers and directors as a group
. Each other person who we know beneficially owns 5% or more of our common
stock
Except as set forth below, there are no other persons who to our knowledge
as of March 31, 2000 beneficially owned 5% or more of our common stock. The
percentages specified below are based on 60,897,488 shares of common stock
outstanding as of March 31, 2000. Unless otherwise noted, the address of each
Named Executive Officer and director of Focal is 200 North LaSalle Street,
Suite 1100, Chicago, Illinois 60601.
<TABLE>
<CAPTION>
Number of Shares Percent
Name Beneficially Owned (1) Beneficially Owned
---- ---------------------- ------------------
<S> <C> <C>
Named Executive Officers
Robert C. Taylor, Jr. (2)............ 2,865,385 4.7%
John R. Barnicle (3)................. 2,794,585 4.6%
Joseph A. Beatty (4)................. 2,865,385 4.7%
Renee M. Martin (5).................. 35,687 *
Directors
James N. Perry, Jr. (6).............. 21,606,425 35.5%
Paul J. Finnegan (7)................. 21,606,425 35.5%
James E. Crawford III (8)............ 10,084,010 16.6%
Richard D. Frisbie (9)............... 5,041,365 8.3%
Paul G. Yovovich (10)................ 289,850 *
John A. Edwardson (11)............... 202,134 *
All Executive Officers and Directors
as a Group (13 persons) (12)........ 45,989,013 75.2%
Other Owners
Madison Dearborn Capital Partners,
L.P. (13)........................... 21,606,425 35.5%
Frontenac VI, L.P. (14).............. 10,082,980 16.6%
Battery Ventures III, L.P. (15)...... 5,041,365 8.3%
Brian F. Addy (16)................... 2,690,385 4.4%
</TABLE>
--------
* Less than 1% of the issued and outstanding shares of our common stock.
(1) In accordance with the rules of the Securities and Exchange Commission,
each beneficial owner's holding has been calculated assuming full exercise
of outstanding warrants and options exercisable by the holder within 60
days after March 31, 2000, but no exercise of outstanding warrants and
options held by any other person. 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 applicable community property laws.
(2) Includes 175,000 shares of common stock subject to vesting provisions
contained in the executive's Restricted Stock Agreement. Also includes
1,035,385 shares of common stock held by Mistral Partners, L.P., a family
limited partnership. Mr. Taylor exercises sole voting and investment power
over shares held by this partnership.
(3) Includes 175,000 shares of common stock subject to vesting provisions
contained in the executive's Restricted Stock Agreement. Also includes
350,000 shares of common stock held by JRB Partners, L.P., a family
limited partnership. Mr. Barnicle exercises sole voting and investment
power over shares held by this partnership.
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(4) Includes 175,000 shares of common stock subject to vesting provisions
contained in the executive's Restricted Stock Agreement. Also includes
835,000 shares of common stock held by Coventry Court Partners, L.P., a
family limited partnership. Mr. Beatty exercises sole voting and
investment power over shares held by this partnership.
(5) Consists of shares of common stock subject to options which are
exercisable within 60 days of March 31, 2000.
(6) Mr. Perry, a director, owns no shares in his own name. Consists of shares
of common stock owned by Madison Dearborn. See footnote 13 below. Mr.
Perry's address is c/o Madison Dearborn Partners, Inc., Three First
National Plaza, Suite 3800, Chicago, IL 60602.
(7) Mr. Finnegan, a director, owns no shares in his own name. Consists of
shares of common stock owned by Madison Dearborn. See footnote 13 below.
Mr. Finnegan's address is c/o Madison Dearborn Partners, Inc., Three First
National Plaza, Suite 3800, Chicago, IL 60602.
(8) Mr. Crawford, a director, owns no shares in his own name. Consists of
shares of common stock owned by Frontenac and 1,030 shares of common stock
owned by Mr. Crawford's son. See footnote 14 below. Mr. Crawford's address
is c/o Frontenac Company, 135 S. LaSalle Street, Suite 3800, Chicago, IL
60603.
(9) Mr. Frisbie, a director, owns no shares in his own name. Consists of
shares of common stock owned by Battery. See footnote 15 below. Mr.
Frisbie's address is c/o Battery Ventures, 20 William Street, Wellesley,
MA 02481.
(10) Includes 151,716 shares of common stock and an additional 138,134 shares
of common stock subject to options which are exercisable within 60 days of
March 31, 2000.
(11) Includes 150,000 shares of common stock and an additional 52,134 shares of
common stock subject to options which are exercisable within 60 days of
March 31, 2000.
(12) Includes 45,741,871 shares of common stock and an additional 247,142
shares of common stock subject to options which are exercisable within 60
days of March 31, 2000.
(13) Consists of shares of common stock owned by Madison Dearborn. Messrs.
Perry and Finnegan, directors of Focal, are principals of Madison Dearborn
Partners, Inc., the ultimate general partner of Madison Dearborn. Because
of these positions, Messrs. Perry and Finnegan share voting and investment
power with respect to the shares owned by Madison Dearborn. The address of
Madison Dearborn is Three First National Plaza, Suite 3800, Chicago, IL
60602. See "Risk Factors--Potential Conflicts of Interest."
(14) Consists of shares of common stock owned by Frontenac. Mr. Crawford, a
director, is a general partner of Frontenac Company, the general partner
of Frontenac. Because of this position, Mr. Crawford shares voting and
investment power with respect to the shares owned by Frontenac. The
address of Frontenac is 135 S. LaSalle Street, Suite 3800, Chicago, IL
60603. See "Risk Factors--Potential Conflicts of Interest."
(15) Consists of shares of common stock owned by Battery Ventures. Mr. Frisbie,
a director, is a managing general partner of Battery Ventures. Because of
this position, Mr. Frisbie shares voting and investment power with respect
to the shares owned by Battery Ventures. The address of Battery Ventures
is 20 William Street, Wellesley, MA 02481. See "Risk Factors--Potential
Conflicts of Interest."
(16) Mr. Addy is a "Named Executive Officer." He resigned from Focal, effective
January 7, 2000. Includes 1,115,385 shares of common stock held by Ad-
Venture Capital Partners, L.P., a family limited partnership. Mr. Addy
exercises sole voting and investment power over shares held by this
partnership.
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CERTAIN TRANSACTIONS
The Stock Purchase Agreement and Stockholders' Agreement
We have entered into a Stock Purchase Agreement with some of our
stockholders, dated as of November 27, 1996 and amended after that date.
Pursuant to the Stock Purchase Agreement and additional related agreements, our
existing stockholders were granted registration rights described below.
The Stock Purchase Agreement also requires us to:
. Deliver financial information to the Institutional Investors and certain
of their transferees in a private sale of shares of common stock
. Provide access by the Institutional Investors, and certain of their
transferees in a private sale of shares of common stock, to our physical
properties, books and records
. Comply with the periodic reporting requirements under the Exchange Act
to enable holders of "restricted shares" of common stock to sell those
shares of common stock pursuant to Rule 144 under the Securities Act of
1933 or a short-form registration statement under the Securities Act of
1933.
Registration Rights
Focal has granted registration rights to some holders of its common stock.
These holders of common stock have the benefit of the following demand
registration:
. Subject to minimum dollar amounts, Madison Dearborn may demand two
registrations on Form S-1
. Frontenac and Battery may each demand one registration on Form S-1
. The holders of 8% of all shares of common stock subject to the
registration agreement may demand an unlimited number of registrations
on Form S-2 or Form S-3
In addition, stockholders that have been granted registration rights have
unlimited "piggyback" registration rights under which they have the right to
request that we register their shares of common stock whenever we register any
of our securities under the Securities Act of 1933 and the registration form to
be used may be used for the registration of their shares of common stock. These
piggyback registration rights will not, however, be available:
. If the piggyback registration is in connection with an underwritten
registration and the managing underwriter concludes that including
shares of common stock owned by holders of "piggyback" registration
rights would have an adverse impact on the marketing of the securities
to be sold in the underwritten offering
. For registrations undertaken because of a demand registration
Employment Agreement with Mr. Mael
We entered into an employment agreement with Michael Mael, an Executive Vice
President of Focal, on January 8, 2000. Mr. Mael's agreement provides that he
will receive a minimum base salary of $225,000 (or any greater amount approved
by a majority of the board of directors) and bonuses determined by the board in
their sole discretion. Except as provided herein, Mr. Mael's employment
agreement contains substantially the same employment terms as our employment
agreements with our other executive officers. In addition to the employment
agreement, on January 31, 2000 we granted to Mr. Mael 150,000 shares of
restricted stock under our 1998 Equity Performance and Incentive Plan, which
shares are subject to forfeiture until they vest under the agreement. One-third
of the shares vest under the agreement on each of the first three anniversaries
of January 31, 2000 provided that Mr. Mael remains in our employ. If Mr. Mael
is terminated by us other than for cause, leaves for good reason or dies or
becomes disabled, all of the shares immediately become non-forfeitable and
fully vested.
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Stock Purchases by Our Directors
In May 1997, Mr. Yovovich purchased 115,385 shares of common stock for a
purchase price of $75,000. In October 1998, he purchased an additional 33,334
shares of common stock for himself and members of his family for a purchase
price of $100,000. In March 1999, Mr. Edwardson purchased 150,000 shares of
common stock for a purchase price of $472,500.
Some of Our Directors are also Directors of our Competitors
Some of our directors, who serve as representatives of the Institutional
Investors, also serve on the boards of directors of companies with which we may
compete or enter into agreements. Specifically, Mr. Crawford, Mr. Finnegan, Mr.
Frisbie and Mr. Perry are directors of Allegiance Telecom, a Dallas-based CLEC.
Allegiance Telecom is one of our competitors. See "Risk Factors--Potential
Conflicts of Interest."
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DESCRIPTION OF THE 1998 NOTES
On February 18, 1998, we issued $270 million stated principal amount at
maturity of our 12.125% Senior Discount Notes due 2008, or 1998 notes, which
resulted in gross proceeds of $150,027,606. The following description is a
summary of the material provisions of the 1998 notes and the indenture dated
February 18, 1998, which governs the 1998 notes, and which we refer to as the
February 1998 indenture.
The 1998 notes have the following characteristics:
. They mature on February 15, 2008 and are limited to an aggregate stated
principal amount at maturity of $270,000,000.
. They were issued at an issue price of $555.6578 per $1,000 stated
principal amount at maturity (the "Issue Price"), which represents
55.56578% of the stated principal amount at maturity.
. They generated gross proceeds to Focal of $150,027,606.
. The indebtedness of Focal evidenced by the 1998 notes ranks senior in
right of payment to all indebtedness of Focal which is expressly
subordinated in right of payment to the 1998 notes and pari passu in
right of payment with all other existing and future unsubordinated and
unsecured indebtedness to Focal including the 2000 senior notes. The
1998 notes are effectively subordinated in right of payment to all
existing and future liabilities, including trade payables, of any of
Focal's subsidiaries. In addition, holders of secured indebtedness of
Focal will be entitled to a prior claim on those assets of Focal
securing their indebtedness to the extent of the proceeds of those
assets.
. They bear interest on the Issue Price at a rate of 12.125% per annum
computed on a semiannual note equivalent basis from the issue date of
the 1998 notes.
. In the period prior to February 15, 2003, interest at a rate of 12.125%
per annum will accrue on the Issue Price of the 1998 notes but will not
be payable in cash ("Deferred Interest").
. From and after February 15, 2003, interest at a rate of 12.125% per
annum ("Current Interest") on the stated principal amount at maturity of
the 1998 notes will be payable in cash semiannually on August 15 and
February 15 of each year, beginning on August 15, 2003.
. The stated principal amount at maturity is $1,000 per 1998 note and
represents the Issue Price, plus Deferred Interest accrued but unpaid up
to February 15, 2003. Focal will pay interest on overdue principal and
premium, if any, of the 1998 notes and, to the extent lawful, interest
on overdue installments of interest on the 1998 notes at a rate per
annum equal to the interest rate payable on the 1998 notes.
We may elect to redeem all or part of the 1998 notes at any time or from
time to time, on or after February 15, 2003 at the redemption prices set forth
below, which are expressed as percentages of stated principal amount at
maturity, plus accrued and unpaid Current Interest, if any, on the stated
principal amount at maturity so redeemed to the redemption date if redeemed
during the 12-month period commencing February 15 of the years set forth below:
<TABLE>
<CAPTION>
Redemption
Year 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,
we may redeem in the aggregate up to 35% of the original aggregate stated
principal amount at maturity of the 1998 notes with the proceeds from one or
more registered underwritten primary public offerings of common stock.
Redemption will be at a price (expressed as a percentage of the accreted value
of the 1998 notes on the redemption date) of 112.125% so long as at least 65%
of the original aggregate stated principal amount at maturity of the 1998 notes
remains outstanding after each redemption. Any such redemption may only be
effected once and must be effected within 90 days after such public offering
upon not less than 30 nor more than 60 days' notice.
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If a Change of Control (as defined below) occurs, each holder of a 1998 note
will have the right to require us to repurchase all or any part of the holder's
1998 notes at a purchase price equal to 101% of the accreted value thereof,
plus accrued and unpaid Current Interest, if any, up to but excluding the
Change of Control payment date. If after giving effect to the Change of Control
repurchase offer, at least 95% of the original aggregate stated principal
amount at maturity of the 1998 notes has been redeemed or repurchased, we have
the right to redeem the balance of the 1998 notes at a purchase price equal to
101% of the accreted value thereof, plus accrued and unpaid Current Interest,
if any, up to but excluding the determined redemption date.
A "Change of Control" will occur under the February 1998 indenture if:
. the sale, conveyance, transfer or lease of all or substantially all of
the assets of Focal to any "person" or "group" (as such term is used in
Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act, including
any group acting for the purpose of acquiring, holding, voting or
disposing of securities within the meaning of Rule 13d-5(b)(i) under the
Securities Exchange Act), other than Madison Dearborn, Frontenac,
Battery Ventures or any of their affiliates, or subsidiaries of Focal,
occurs;
. any "person" or "group" (as the term is used in Sections 13(d)(3) and
14(d)(2) of the Securities Exchange Act, including any group acting for
the purpose of acquiring, holding, voting or disposing of securities
within the meaning of Rule 13d-5(b)(i) under the Securities Exchange
Act), other than Madison Dearborn, Frontenac, Battery or any of their
affiliates, becomes the "beneficial owner" (as defined in Rule 13d-3
under the Securities Exchange Act) of more than 50% of the total voting
power of all classes of the capital stock the holders of which are
entitled to vote for the election of directors ("voting stock") of Focal
(including any warrants, options or rights to acquire such voting
stock), calculated on a fully diluted basis;
. during any period of two consecutive years, individuals who at the
beginning of such period constituted the board of directors (together
with any directors whose election or appointment by the board or whose
nomination for election by the stockholders of Focal 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) cease for any reason
to constitute a majority of the board then in office; or
. the merger, amalgamation or consolidation of Focal with or into another
person or the merger of another person with or into Focal shall have
occurred, and the securities of Focal that are outstanding immediately
prior to such transaction and which represent 100% of the aggregate
voting power of the voting stock of Focal 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.
We are also required to offer to repurchase the 1998 notes if all or some of
the net proceeds of an asset sale are not used to purchase telecommunications
equipment or repay other senior indebtedness.
The February 1998 indenture contains restrictive covenants which, among
other things, restrict our ability to:
. Incur additional indebtedness and, in the case of our subsidiaries,
issue preferred stock
. Pay dividends
. Prepay subordinated indebtedness
. Repurchase capital stock
. Enter into sale and leaseback transactions
. Make investments
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. Engage in transactions with affiliates
. Create liens on our assets
. Cause encumbrances or restrictions to exist on the ability of our
subsidiaries to pay dividends
. Sell assets
. Engage in mergers and consolidations
The February 1998 indenture contains events of default that are
substantially similar to those relating to the exchange notes offered hereby.
See "Description of the Exchange Notes." An event of default will occur under
the February 1998 indenture if, among other things:
. any principal payment in excess of $1,000,000 with respect to
indebtedness of Focal is not paid when due within any applicable grace
period;
. our indebtedness is accelerated by its holders and the principal amount
of the accelerated indebtedness exceeds $5,000,000; or
. a court enters a final judgment against us 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.
Focal consummated an exchange offer of the 1998 notes in August 1998.
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<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
General
The outstanding notes were, and the exchange notes will be, issued under an
indenture dated as of January 12, 2000 between Focal and Harris Trust and
Savings Bank, as trustee, which we refer to as the January 2000 indenture. The
Bank of New York has succeeded Harris Trust and Savings Bank as trustee under
the 2000 indenture. For purposes of this description of the exchange notes,
references to "Focal," "we," "our" or "us" refers to Focal Communications
Corporation and does not include its subsidiaries except for purposes of
financial data determined on a consolidated basis. Except as otherwise
indicated, the following description relates to both the outstanding notes and
the exchange notes, which we collectively refer to as the 2000 senior notes.
The terms of the exchange notes are identical in all material respects to
the outstanding notes, except that:
. the exchange notes have been registered under the Securities Act and
therefore will not be subject to the restrictions on transfer applicable
to the outstanding notes and
. holders of the exchange notes will not be entitled to rights of holders
of outstanding notes under the exchange and registration agreement.
The terms of the exchange notes include those stated in the January 2000
indenture and those made a part of the January 2000 indenture by reference to
the Trust Indenture Act of 1939 as in effect on the date of the January 2000
indenture. The exchange notes are subject to all of those terms, and holders
of the exchange notes should refer to the January 2000 indenture and the Trust
Indenture Act for a complete statement of the applicable terms. A copy of the
January 2000 indenture is available from Focal on request. The statements and
definitions of terms under this caption relating to the 2000 senior notes and
the January 2000 indenture are summaries and do not purport to be complete.
These summaries use terms defined in the January 2000 indenture and are
qualified in their entirety by express reference to the January 2000
indenture. Some of the terms used in this description are defined below under
"--Definitions."
Principal, Maturity and Interest
The 2000 senior notes issued under the January 2000 indenture are limited
to $275,000,000 aggregate principal amount of which all $275,000,000 was
issued in the offer and sale of the outstanding notes. For each outstanding
note accepted for exchange, the holders will receive an exchange note having a
principal amount equal to that of the tendered outstanding note. The exchange
notes will mature on January 15, 2010. We will not be required to make any
mandatory sinking fund payments in respect of the exchange notes. Interest on
the exchange notes will accrue at a rate of 11 7/8% per annum and be payable
in cash semi-annually in arrears on each July 15 and January 15, commencing
July 15, 2000 to registered holders of exchange notes, on July 1 or January 1,
as the case may be, immediately preceding the interest payment date. Interest
on the exchange notes will accrue from the most recent interest payment date
to which interest has been paid or duly provided for or, if no interest has
been paid or duly provided for, from the date of issuance. Cash interest will
be computed on the basis of a 360-day year of twelve 30-day months. If we
default on any payment of principal and/or premium (whether upon redemption or
otherwise), cash interest will accrue on the amount in default at the rate of
interest borne by the exchange notes. Interest on overdue principal and
premium and, to the extent permitted by law, on overdue installments of
interest will accrue at the rate of interest borne by the exchange notes.
The exchange notes will be issued without coupons and in fully registered
form only, in minimum denominations of $1,000 principal amount and integral
multiples thereof.
The interest rate on the exchange notes will be subject to increase in some
circumstances if several conditions are not satisfied, all as further
described under "--Exchange Offer; Registration Rights." All references herein
to interest shall include such additional interest, if appropriate.
Ranking
The exchange notes will be senior unsecured obligations of Focal ranking
pari passu in right of payment with all existing and future senior
Indebtedness of Focal, including the outstanding notes and the 1998 notes,
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<PAGE>
and will rank senior in right of payment to all existing and future
subordinated Indebtedness of Focal, if any. Holders of secured Indebtedness of
Focal, however, will have claims that are prior to the claims of the holders
with respect to the assets securing the other Indebtedness except to the extent
the exchange notes are equally and ratably secured by the same assets. The
January 2000 indenture permits Focal to incur secured Indebtedness. As of
December 31, 1999, we had approximately $44.2 million of secured Indebtedness
outstanding to which holders of the exchange notes would have been effectively
subordinated in right of payment. In addition, as of December 31, 1999, we had
approximately $253.8 million of indebtedness. See "Risk Factors--
Subordination."
Our operations are conducted through our subsidiaries and, therefore, we are
dependent upon cash flow from these entities to meet our obligations. Our
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 our subsidiaries (including trade payables). See "Risk
Factors--Subordination." Except to the extent that loans made by us to our
subsidiaries are recognized as Indebtedness, any rights of Focal and its
creditors, including the holders, to participate in the assets of any of our
subsidiaries upon any liquidation or reorganization of any subsidiary will be
subject to the prior claims of the subsidiary's creditors (including trade
creditors).
Book-Entry System
The outstanding notes were issued in the form of two Global Notes (as
defined in the January 2000 indenture) held in book-entry form, one
representing the outstanding notes issued under Rule 144A and the other
representing the outstanding notes issued under Regulation S. The exchange
notes will initially be issued in the form of one or more Global Notes 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 January 2000 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, the 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 the 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 the Global Note. Ownership of beneficial interests in
the 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 some purchasers of securities take physical delivery
of the securities in definitive form. These limits and 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 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 January 2000 indenture. Neither
Focal, the trustee, nor any agent of Focal will have any responsibility or
liability for:
. any aspect of DTC's reports relating to or payment made on account of
beneficial ownership interests in a Global Note representing any
exchange notes or for maintaining, supervising or reviewing any of DTC's
records relating to such beneficial ownership interests or
. any other matter relating to the actions and practices of DTC or any of
its participants.
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We have 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 the Global Note, as
shown on the records of DTC. We expect 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 its 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 January 2000 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 the Global Note for any purposes under the January 2000 indenture.
Accordingly, each person owning a beneficial interest in a Global Note must
rely on the procedures of DTC and, if the person is not a participant, on the
procedures of the participant through which the person owns its interest, to
exercise any rights of a holder under the January 2000 indenture. We
understand that, under existing industry practices, in the event that we
request 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 January 2000 indenture, DTC would authorize the
participants holding the relevant beneficial interest to give or take the
action, and the participants would authorize beneficial owners owning through
the participants to give or take the action or would otherwise act upon the
instructions of beneficial owners owning through them.
DTC has advised us 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 us 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 Securities
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 we believe to be reliable, but we take no
responsibility for the accuracy of the information.
Certificated Notes
The exchange notes represented by a Global Note are exchangeable for
certificated exchange notes only if:
. DTC notifies us that it is unwilling or unable to continue as a
depository for such Global Note or if at any time DTC ceases to be a
clearing agency registered under the Securities Exchange Act, and a
successor depository is not appointed by us within 90 days;
. we execute and deliver to the trustee a notice that such Global Note
will be so transferable, registrable and exchangeable, and such transfer
is registrable; or
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. there has occurred and be continuing an Event of Default with respect to
the exchange 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:
. certificated exchange notes will be issued only in fully registered form
in denominations of $1,000 or integral multiples thereof;
. 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 our office or agency
maintained for such purposes; and
. no service charge will be made for any issuance of the certificated
exchange notes, although we may require payment of a sum sufficient to
cover any tax or governmental charge imposed in connection with the
issuance.
Optional Redemption
The exchange notes will be redeemable, at our option, in whole or in part,
at any time or from time to time, on or after January 15, 2005 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 set forth below (expressed as percentages of principal
amount), plus accrued and unpaid interest, if any, to the redemption date, if
redeemed during the 12-month period commencing January 15 of each of the years
set forth below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2005.......................... 105.938%
2006.......................... 103.958%
2007.......................... 101.979%
2008 and thereafter........... 100.000%
</TABLE>
In addition, at any time and from time to time prior to January 15, 2003, we
may redeem in the aggregate up to 35% of the initially outstanding aggregate
principal amount of the 2000 senior notes with the proceeds from one or more
underwritten primary public offerings of our common stock pursuant to an
effective registration statement under the Securities Act following which there
is a Public Market at a redemption price of 111.875% of the principal amount of
the 2000 senior notes, plus Additional Interest, if any, so long as at least
65% of the original aggregate principal amount of the 2000 senior notes remains
outstanding after each such redemption. Any such redemption may only be
effected once and must be effected within 90 days after such public offering
upon not less than 30 nor more than 60 days' notice.
If less than all of the 2000 senior notes are to be redeemed, the trustee
shall select, in such manner as it shall deem fair and appropriate, the
particular 2000 senior notes to be redeemed or any portion thereof in principal
amounts 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," we are not required to make redemption
payments or sinking fund payments with respect to the 2000 senior notes.
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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 us to repurchase all or any part (equal to $1,000 principal amount
or an integral multiple thereof) of such holder's 2000 senior 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 principal amount
thereof plus accrued and unpaid 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 2000 senior 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 2000 senior notes or portions thereof not tendered or accepted
for payment will continue to accrue interest,
(iv) that unless we default in the payment of the Change of Control
Purchase Price, all 2000 senior 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 2000 senior notes or portions thereof
purchased pursuant to a Change of Control Offer will be required to
surrender their 2000 senior 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
principal amount of 2000 senior notes delivered for purchase, and a
statement that such holder is withdrawing such holder's election to have
such 2000 senior notes or portions thereof purchased,
(vii) holders whose 2000 senior notes are being purchased only in part
will be issued new 2000 senior notes equal in principal amount to the
unpurchased portion of the 2000 senior note or 2000 senior notes
surrendered, which unpurchased portion must be equal to $1,000 in principal
amount or an integral multiple thereof, and
(viii) if after giving effect to such Change of Control Offer, at least
95% of the original aggregate principal amount of the 2000 senior notes has
been redeemed or repurchased, we shall have the right to redeem the balance
of the 2000 senior notes at the Change of Control Redemption Purchase
Price.
On the Change of Control Payment Date, we will:
(i) accept for payment 2000 senior 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 2000 senior notes or portions thereof so tendered and
(iii) deliver, or cause to be delivered, to the trustee the 2000 senior
notes so accepted together with an Officers' Certificate listing the 2000
senior notes or portions thereof tendered to us and accepted for payment.
The Paying Agent will promptly mail to each holder of 2000 senior notes so
accepted, payment in an amount equal to the Change of Control Purchase Price
for such 2000 senior notes, and we will execute and the trustee will promptly
authenticate and mail to each holder a new 2000 senior note equal in principal
amount to any unpurchased portion of the 2000 senior notes surrendered, if any.
Each such new 2000 senior note will be in a principal amount of $1,000 or an
integral multiple thereof.
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If after giving effect to a Change of Control Offer at least 95% of the
original aggregate principal amount of the 2000 senior notes has been
repurchased, we will have the right to redeem the balance of the 2000 senior
notes at a redemption price (the "Change of Control Redemption Purchase Price")
equal to 101% of the principal amount thereof plus accrued and unpaid 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 will state that:
(i) a Change of Control Offer has been consummated and after giving
effect thereto at least 95% of the original aggregate principal amount of
the 2000 senior notes has been redeemed or repurchased,
(ii) we are exercising our right to redeem the balance of the
outstanding 2000 senior notes,
(iii) the redemption date (the "Change of Control Redemption Date") with
respect to such 2000 senior notes which will be no earlier than 30 days nor
later than 60 days from the date such notice is mailed,
(iv) unless we default in the payment of the Change of Control
Redemption Purchase Price with respect to such 2000 senior notes, all such
2000 senior notes will cease to accrue interest from and after such Change
of Control Redemption Date and
(v) holders are required to surrender their 2000 senior 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, we will:
(i) accept for payment 2000 senior 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 2000 senior notes so tendered, and
(iii) deliver, or cause to be delivered, to the trustee the 2000 senior
notes so accepted together with an Officers' Certificate listing the 2000
senior notes tendered to the Paying Agent and accepted for payment.
The Paying Agent will promptly mail to each holder of 2000 senior notes so
accepted, payment in an amount equal to the applicable Change of Control
Redemption Purchase Price for such 2000 senior notes.
The existence of the holders' right to require, subject to certain
conditions, us to repurchase 2000 senior notes upon a Change of Control may
deter a third party from acquiring us in a transaction that constitutes a
Change of Control. Future indebtedness of Focal may contain provisions which
prohibit the purchase by Focal of any 2000 senior notes prior to the date
specified in such 2000 senior notes as the fixed date on which the principal of
such 2000 senior notes is due and payable, require obligations thereunder to be
repurchased upon a Change of Control or limit or prohibit our ability to comply
with our obligations under the January 2000 indenture in the event of a Change
of Control. Further, our failure 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 Focal. Moreover, due to the financial
effect of such repurchase on Focal, the exercise by the holders of their right
to require us to repurchase the 2000 senior 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, we cannot assure you that we will have
sufficient funds to pay the Change of Control Purchase Price for all 2000
senior notes tendered by holders seeking to accept the Change of Control Offer.
If a Change of Control Offer occurs at a time when we do not have sufficient
available funds to pay the Change of Control Purchase Price for all 2000 senior
notes tendered pursuant to such offer or at a time when we are prohibited from
purchasing the 2000 senior notes (and we are 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 January 2000
indenture.
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One of the events that constitutes a Change of Control under the January
2000 indenture is a sale, conveyance, transfer or lease of all or substantially
all of the property of Focal. The January 2000 indenture is 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 we were to
engage in a transaction in which we disposed of less than all of our assets, a
question of interpretation could arise as to whether such disposition was of
"substantially all" of our assets and whether we were required to make a Change
of Control Offer.
To the extent such laws and regulations are applicable, we will comply with
the requirements of Section 14(e) under the Securities Exchange Act and any
other securities laws and regulations in connection with the repurchase of 2000
senior notes pursuant to a Change of Control Offer or a Change of Control
Redemption.
Except as described in this prospectus with respect to a Change of Control,
the January 2000 indenture does not contain any other provisions that permit
holders to require that we repurchase or redeem 2000 senior notes in the event
of a takeover, recapitalization or similar restructuring.
Asset Sale
We will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, consummate an Asset Sale unless:
(i) Focal 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 received by Focal 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 Focal or such Restricted Subsidiary
(other than Indebtedness that is subordinated by its terms to the 2000
senior notes) and the release of Focal 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) Focal 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, Focal 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
Focal (other than Indebtedness to a Restricted Subsidiary unless the
proceeds thereof are used by such Restricted Subsidiary in a manner
contemplated by clauses (i) through (iii) of this sentence) or other
Indebtedness of Focal (other than Indebtedness to a Restricted
Subsidiary unless the proceeds thereof are used by such Restricted
Subsidiary in a manner contemplated by clauses (i) through (iii) of
this sentence) that is senior to the 2000 senior 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, Focal or another Restricted Subsidiary unless
the proceeds thereof are used by Focal or such Restricted Subsidiary in
a manner contemplated by clauses (i) through (iii) of this sentence),
or
(b) to the extent none of Focal 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
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any such revolving credit facility; provided, however, that neither
Focal 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 2000 senior notes and that matures prior to January 15,
2010.
Any Net Cash Proceeds from any Asset Sale that are not used within 360 days as
described in clauses (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, Focal shall, within 30 days of such date, make an
offer to purchase (an "Asset Sale Offer"), on a pro rata basis from all
holders:
(i) the 2000 senior notes at a purchase price (the "Offer Purchase
Price") in cash equal to 100% of the principal amount thereof, plus accrued
and unpaid interest thereon, if any, to but excluding the purchase date, in
accordance with the procedures set forth in the January 2000 indenture and
(ii) to the extent required by the terms thereof, any other Indebtedness
of Focal that is pari passu with the 2000 senior notes.
The pro rata amount of such Excess Proceeds to be used to purchase 2000
senior notes shall be in an amount equal to the aggregate amount of such Excess
Proceeds multiplied by the quotient obtained by dividing the principal amount
of the outstanding 2000 senior notes by the sum of such principal amount and
the principal amount (or accreted value, as the case may be) of such other
Indebtedness. To the extent that the aggregate Offer Purchase Price of all 2000
senior notes tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds relating thereto (such shortfall constituting a "Deficiency"), Focal
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 principal amounts of the outstanding 2000 senior notes tendered
pursuant to an Asset Sale Offer is in excess of the Excess Proceeds to be used
to purchase such 2000 senior notes, such Excess Proceeds shall be applied to
purchase such 2000 senior notes on a pro rata basis in principal amounts 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 2000 senior 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, we will comply with
the requirements of Section 14(e) under the Securities Exchange Act and any
securities laws and regulations, in connection with the repurchase of 2000
senior notes pursuant to an Asset Sale Offer.
Certain Covenants
Set forth below are certain covenants that are contained in the January 2000
indenture:
Limitation on Consolidated Indebtedness
We will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, Incur any Indebtedness after the Issue Date. However, we 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 Focal 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
Focal 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 periods.
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Notwithstanding the foregoing limitation, Focal and its Restricted
Subsidiaries may Incur each and all of the following:
(i) Senior Indebtedness in an aggregate principal amount outstanding at
any one time not to exceed $250,000,000, 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
Focal or a Restricted Subsidiary after the Issue Date;
(iii) Indebtedness owed by Focal to any Significant Restricted
Subsidiary or Indebtedness owed by a Restricted Subsidiary to Focal or to a
Significant Restricted Subsidiary; provided that upon either:
(a) the transfer or other disposition by a Significant Restricted
Subsidiary or Focal of any Indebtedness so permitted to a Person other
than Focal 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 Focal 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 2000 senior notes,
(b) Indebtedness outstanding at the date of the January 2000
indenture,
(c) Indebtedness Incurred pursuant to clause (ii) above, 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 Focal as necessary to accomplish such refinancing by
means of a tender offer or privately negotiated repurchase, plus the
expenses of Focal and its Restricted Subsidiaries incurred in
connection with such refinancing; provided that Indebtedness the
proceeds of which are used to refinance the 2000 senior notes or
Indebtedness which is pari passu with the 2000 senior notes or
Indebtedness which is subordinate in right of payment to the 2000
senior notes shall only be permitted under this clause (iv) if:
(y) in the case of any refinancing of the 2000 senior notes or
Indebtedness which is pari passu with the 2000 senior notes, the
refinancing Indebtedness is made pari passu to the 2000 senior 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
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thereto or by way of any mandatory redemption, defeasance,
retirement or repurchase thereof by Focal (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 Focal) 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 Focal) 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 Focal 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 2000 senior notes and the
January 2000 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 Focal such that, after giving effect to the
incurrence thereof, the total aggregate principal amount of Indebtedness
incurred under this clause (viii) plus any refinancings thereof otherwise
incurred in compliance with the January 2000 indenture would not exceed
200% of Total Net Incremental Equity;
(ix) Acquired Indebtedness;
(x) Indebtedness of Focal to the extent the net proceeds thereof are
promptly:
(a) used to repurchase 2000 senior notes tendered as a result of a
Change of Control Offer or
(b) deposited to defease the 2000 senior notes as provided under the
covenant described below under "--Satisfaction and Discharge of the
January 2000 Indenture, Defeasance";
(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
$25,000,000 aggregate principal amount at any one time outstanding; and
(xii) Indebtedness of Focal and any Restricted Subsidiary outstanding on
the Issue Date including, without limitation, the 1998 notes.
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.
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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, Focal, in its sole discretion, will classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses. Focal may, however, allocate portions of
such Indebtedness between or among such clauses.
Limitation on Restricted Payments
Focal 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, Focal 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 Focal 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 Focal'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 Focal or any
Restricted Subsidiary from any Person (including 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 Focal 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 Focal,
(y) from the issuance (other than to a Subsidiary of Focal) of
Capital Stock (other than Disqualified Stock) of Focal and warrants,
rights or options on Capital Stock (other than Disqualified Stock)
of Focal, or
(z) from the conversion of Indebtedness of Focal into Capital
Stock (other than Disqualified Stock and other than by a Subsidiary
of Focal) of Focal after the date of the January 2000 indenture,
less, in the case of this clause (c), an amount equal to the amount of
such Net Cash Proceeds that 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.
The foregoing limitations shall not prevent Focal from:
(i) paying a dividend on its Capital Stock at any time within 60 days
after the declaration thereof if, on the declaration date, Focal could have
paid such dividend in compliance with the preceding paragraph,
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(ii) retiring (a) any Capital Stock of Focal or (b) any Indebtedness of
Focal that is subordinate in right of payment to the 2000 senior notes, in
exchange for, or out of the proceeds of the substantially concurrent sale
of Qualified Stock of Focal,
(iii) retiring any Indebtedness of Focal subordinated in right of
payment to the 2000 senior notes in exchange for, or out of the proceeds
of, the substantially concurrent Incurrence of Indebtedness of Focal (other
than Indebtedness to a Subsidiary of Focal), if such new Indebtedness (a)
is subordinated in right of payment to the 2000 senior notes at least to
the same extent as the Indebtedness being refinanced, (b) has an Average
Life longer than the 2000 senior 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
Focal held by any directors, officers or employees of Focal or any
Restricted Subsidiary upon the termination of such Person's tenure as a
director or employee, as the case may be, so long as the aggregate price
paid for all such retired Capital Stock or options does not exceed
$5,000,000 in the aggregate,
(v) retiring any Capital Stock of Focal 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 Focal 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 Focal and its Restricted
Subsidiaries on the date of such Investments if the aggregate amount of
Investments made pursuant to this clause (vi) does not exceed the sum of
(a) $20,000,000 plus (b) an amount equal to (x) Total Net Incremental
Equity, minus (y) any amount of Total Net Incremental Equity to the extent
it has been used to Incur Indebtedness pursuant to clause (viii) under the
covenant described above under "--Limitation on Consolidated Indebtedness",
(vii) the declaration or payment of dividends on the Common Stock of
Focal (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 Focal 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
January 2000 indenture applicable to mergers, consolidations and transfers
of all or substantially all of the property and assets of Focal, and
(ix) making Investments not otherwise permitted in an aggregate amount
not to exceed $10,000,000 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), Focal 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 Focal's latest available financial statements.
Limitation on Liens
Focal 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 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 2000 senior notes equally and ratably with
such Indebtedness, provided that no Indebtedness of Focal which is subordinate
in right of payment to the 2000 senior notes may be so secured.
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The foregoing restrictions shall not apply to:
(i) Liens existing on the date of the January 2000 indenture and
securing Indebtedness outstanding on the date of the January 2000
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 Focal or any Significant Restricted Subsidiary,
(iv) Liens on Property of Focal 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 January 2000 indenture, if (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, if (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 Focal'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 2000 senior notes, and
(ix) Permitted Liens.
Limitation on Sale and Leaseback Transactions
Focal 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 Focal or a Restricted Subsidiary on the one
hand and a Restricted Subsidiary or Focal on the other hand), unless:
(i) Focal 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 Focal 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) Focal or such Restricted Subsidiary would be permitted to create a
Lien on such Property without securing the 2000 senior 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."
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Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries
Focal 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 Focal or
any Restricted Subsidiary,
(ii) to make loans or advances to Focal or any Restricted Subsidiary, or
(iii) to transfer any of its Property to Focal 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 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 Focal 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 Focal or any Restricted Subsidiary not
otherwise prohibited by the January 2000 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 Focal or any
Restricted Subsidiary in any manner material to Focal 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 Focal or a Restricted Subsidiary otherwise
permitted under the January 2000 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 a 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) above 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 Focal 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 Focal
or any of its Restricted Subsidiaries that secure Indebtedness of Focal or any
of its Restricted Subsidiaries otherwise permitted under "--Limitation on
Consolidated Indebtedness."
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Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
Focal 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 Focal 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 Focal 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
Focal 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 of related Affiliate
Transactions is on terms that are no less favorable to Focal or such
Restricted Subsidiary than those that could have been obtained in a
comparable arm's-length transaction by Focal 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 Focal
or the relevant Restricted Subsidiary to apply for comparative purposes, is
otherwise on terms that, taken as a whole, Focal has determined to be fair
to Focal or the relevant Restricted Subsidiary), and
(ii) Focal 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 Focal 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 Focal 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 Focal 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
Focal and its Subsidiaries and qualified to perform such task.
Notwithstanding the foregoing, the following shall not be deemed Affiliate
Transactions:
(1) any employment, noncompetition, confidentiality or similar agreement
entered into by Focal or any of its Restricted Subsidiaries in the ordinary
course of business,
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(2) any agreement or arrangement with respect to the compensation of a
director or officer of Focal 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 Focal or the Restricted Subsidiaries,
(5) issuances of Capital Stock of Focal 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 Focal's
business.
Restricted and Unrestricted Subsidiaries
(i) Focal may designate a Subsidiary (including a newly formed or newly
acquired Subsidiary) of Focal 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 Focal
or a Restricted Subsidiary (other than Indebtedness to Focal 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 Focal shall be classified as a
Restricted Subsidiary thereof.
(ii) Focal may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary if: (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 January 2000 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) must be made by the Board of Directors pursuant to
a Board Resolution and will be effective as of the date specified in such
Board Resolution.
Reports
Focal will file with the trustee within 15 days after it files them with
the Securities and Exchange Commission copies of the annual reports on Form
10-K and the information, documents, and other reports that Focal is required
to file with the Securities and Exchange Commission pursuant to Section 13 or
15(d) of the Securities Exchange Act as well as quarterly reports ("SEC
Reports"). If Focal ceases to be required to file SEC Reports pursuant to
either of these sections of the Securities Exchange Act, Focal will
nevertheless continue to file such reports with the Securities and Exchange
Commission (unless the Securities and Exchange Commission will not accept such
a filing) and the trustee. Focal will furnish copies of the SEC Reports to the
holders of 2000 senior notes at the time Focal is required to file the same
with the trustee.
Amalgamation, Consolidation, Merger, Conveyance, Lease or Transfer
Focal 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 Focal in which Focal is the
surviving corporation), or sell, convey, assign, transfer, lease or otherwise
dispose of all or substantially all of the Property and assets of Focal and
its Restricted Subsidiaries taken as a whole to any other Person, unless:
(i) either (a) Focal is the surviving corporation or (b) the corporation
(if other than Focal) formed by such amalgamation or consolidation or into
which Focal is merged, or the Person which acquires, by sale,
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assignment, conveyance, transfer, lease or disposition, all or
substantially all of the Property and assets of Focal and the Restricted
Subsidiaries taken as a whole (such corporation or Person, the "Surviving
Entity"), is 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 expressly assumes, by a
supplemental indenture, the due and punctual payment of the principal of
(and premium, if any) and interest on all the 2000 senior notes and the
performance of Focal's covenants and obligations under the January 2000
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 has occurred and
is 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), Focal (or the Surviving
Entity, if Focal is not the surviving corporation):
(A) has a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of Focal 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";
Notwithstanding the foregoing, 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 Focal if all Liens and Indebtedness of Focal 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 Focal and its Restricted Subsidiaries
outstanding immediately prior to the transaction, will be deemed to have
been Incurred for all purposes of the January 2000 indenture) or (y) a
consolidation, merger or sale of all or substantially all of the assets of
Focal 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) Focal'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 Focal immediately prior to such transaction;
(iv) if, as a result of any such transaction, Property of Focal would
become subject to a Lien prohibited by the provisions of the January 2000
indenture described under "--Limitation on Liens" above, Focal or the
Surviving Entity to Focal has secured the 2000 senior notes as required
thereby; and
(v) Focal 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 January 2000
indenture:
(i) default in the payment of interest (including Additional Interest,
if any) on any 2000 senior 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 2000 senior 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 2000 senior note as required under
the January 2000 indenture;
(iii) default in the performance, or breach, of any covenant or warranty
of Focal in the January 2000 indenture (other than a covenant or warranty
addressed in clauses (i) or (ii) above) and continuance of
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such Default or breach for a period of 60 days after written notice thereof
has been given to Focal by the trustee or to Focal and the trustee by
holders of at least 25% of the aggregate principal amount of the
outstanding 2000 senior notes;
(iv) (a) any principal payment in excess of $10,000,000 with respect to
Indebtedness of Focal or any Restricted Subsidiary is not paid when due
within the applicable grace period, if any, or (b) Indebtedness of Focal or
any Restricted Subsidiary is accelerated by the holders thereof and the
principal amount of such accelerated Indebtedness exceeds $10,000,000;
(v) the entry by a court of competent jurisdiction of one or more final
judgments against Focal 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 Focal 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 principal amount
of the outstanding 2000 senior notes may declare the principal amount of, and
any accrued and unpaid interest on, all 2000 senior notes then outstanding to
be immediately due and payable by a notice in writing to Focal (and to the
trustee if given by holders), and upon any such declaration, such principal
amount and any accrued and unpaid interest thereon will become and be
immediately due and payable. If any Event of Default specified in clause (vi)
above occurs, the principal amount of, and any accrued and unpaid interest on,
the 2000 senior 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.
Focal 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 January 2000 indenture. In addition, Focal is required
within 30 days after becoming aware of any Default or Event of Default, to
deliver to the trustee a statement describing such Default or Event of Default,
its status and what action Focal 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
Focal and the trustee may, at any time and from time to time, without notice
to or consent of any holder of 2000 senior notes, enter into one or more
indentures supplemental to the January 2000 indenture
(i) to evidence the succession of another Person to Focal in accordance
with the terms of the January 2000 indenture and the assumption by such
successor of the covenants of Focal in the January 2000 indenture and the
2000 senior notes,
(ii) to add to the covenants of Focal, for the benefit of the holders,
or to surrender any right or power conferred upon Focal by the January 2000
indenture,
(iii) to add any additional Events of Default,
(iv) to evidence and provide for the acceptance of appointment under the
January 2000 indenture of a successor trustee,
(v) to secure the 2000 senior notes,
(vi) to cure any ambiguity in the January 2000 indenture, to correct or
supplement any provision in the January 2000 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 January
2000 indenture if such actions do not adversely affect the interests of the
holders in any material respect, or
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(vii) to comply with the requirements of the Securities and Exchange
Commission or any other regulatory authority in order to effect or maintain
the qualification of the January 2000 indenture under the Trust Indenture
Act.
With the consent of the holders of not less than a majority in aggregate
principal amount of the outstanding 2000 senior notes, Focal and the trustee
may enter into one or more indentures supplemental to the January 2000
indenture for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of the January 2000 indenture or modifying
in any manner the rights of the holders. However, no such supplemental
indenture may, without the consent of the holder of each outstanding 2000
senior note:
(i) change the date specified in any 2000 senior note as the fixed date
on which the principal of such 2000 senior note is due and payable, or
change the due date of any installment of interest on any 2000 senior 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 2000 senior note or any premium or interest
thereon is payable,
(ii) subordinate in right of payment, or otherwise subordinate, the 2000
senior notes to any other Indebtedness,
(iii) impair the right to institute suit for the enforcement of any
payment with respect to the 2000 senior notes,
(iv) make any change that would result in Focal being required to make
any deduction or withholding from any payment made under or with respect to
the 2000 senior notes, or
(v) modify any provision of this paragraph (except to increase any
percentage set forth herein).
The holders of not less than a majority in aggregate principal amount of the
outstanding 2000 senior notes may, on behalf of the holders of all the 2000
senior notes, waive any past Default under the January 2000 indenture and its
consequences, except a Default (i) in the payment of any amount on any 2000
senior 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 2000 senior note affected.
Satisfaction and Discharge of the January 2000 Indenture; Defeasance
Focal may terminate its obligations under the January 2000 indenture when:
(i) either (a) all outstanding 2000 senior notes have been delivered to
the trustee for cancellation or (b) all such 2000 senior 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 Focal, and Focal 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 2000 senior 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) Focal has paid or caused to be paid all sums payable by Focal under
the January 2000 indenture, and
(iii) Focal has delivered an Officers' Certificate and an Opinion of
Counsel relating to compliance with the conditions set forth in the January
2000 indenture.
Focal, at its election, shall:
(i) be deemed to have paid and discharged its debt on the 2000 senior
notes and the January 2000 indenture shall cease to be of further effect as
to all outstanding 2000 senior notes (except as to (a) rights of
registration of transfer, substitution and exchange of 2000 senior notes
and Focal's right of optional
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redemption, (b) rights of holders to receive payments of principal of,
premium, if any, and interest on the 2000 senior 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 January 2000 indenture
and (d) certain other specified provisions in the January 2000 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 Focal with the trustee, in trust for the benefit of
the holders, at any time prior to the Maturity of the 2000 senior 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 2000 senior
notes, money in an amount, or (c) a combination thereof, sufficient to pay
and discharge the principal of, and interest on, the 2000 senior notes then
outstanding on the dates on which any such payments are due in accordance
with the terms of the January 2000 indenture and of the 2000 senior notes.
Such defeasance or covenant defeasance shall be deemed to occur only if certain
conditions are satisfied, including, among other things, delivery by Focal 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) Focal's deposit will not result in the trust created thereby or the
trustee being subject to regulation under the Investment Company Act.
The Trustee
The Bank of New York has succeeded Harris Trust and Savings Bank as the
trustee under the January 2000 indenture and its current address is 101 Barclay
Street, New York, New York 10286.
The holders of not less than a majority in aggregate principal amount of the
outstanding 2000 senior 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 January 2000 indenture. The January 2000 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 January 2000 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 January 2000 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 Focal, as such, shall have any liability for any covenant,
agreement or other obligations of Focal under the 2000 senior notes or the
January 2000 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 Focal. By accepting a 2000 senior 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 2000
senior notes. Nonetheless, such waiver may not be effective to waive
liabilities under the federal securities laws and it has been the view of the
Securities and Exchange Commission that such a waiver is against public policy.
Governing Law
The January 2000 indenture and the 2000 senior notes are and 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.
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Transfer and Exchange
The outstanding notes are subject to certain restrictions on transfer. A
holder may transfer or exchange 2000 senior notes in accordance with the
January 2000 indenture. Focal, the Registrar and the trustee may require a
holder, among other things, to furnish appropriate endorsements and transfer
documents and Focal may require a holder to pay any taxes and fees required by
law or permitted by the January 2000 indenture.
Exchange Offer; Registration Rights
We entered into an exchange and registration agreement with the initial
purchasers pursuant to which we agreed, for the benefit of the holders of the
outstanding notes, to file the registration statement (of which this prospectus
constitutes a part) with the Securities and Exchange Commission registering the
exchange of the outstanding notes for exchange notes having terms substantially
identical in all material respects to the outstanding 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 exchange and registration
agreement). Upon the effectiveness of the registration statement, we will offer
the exchange notes in exchange for surrender of the outstanding notes. We will
keep the registered exchange offer open for not less than 20 business days (or
longer if required by applicable law) after the date notice of the registered
exchange offer is mailed to the holders of the outstanding notes.
For each outstanding note surrendered to Focal pursuant to the registered
exchange offer, the holder of such outstanding note will receive an exchange
note having a principal amount equal to that of the surrendered outstanding
note. Under existing interpretations of the Securities and Exchange Commission,
the exchange notes will be freely transferable by holders other than our
affiliates after the registered 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 Focal, as
those terms are interpreted by the Securities and Exchange Commission. However,
broker-dealers ("Participating Broker-Dealers") receiving exchange notes in the
registered exchange offer will have a prospectus delivery requirement with
respect to resales of the exchange notes. The Securities and Exchange
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 outstanding
notes) with this prospectus. Under the exchange and registration agreement, we
are 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 the exchange notes.
A holder of outstanding notes (other than certain specified holders) who
wishes to exchange outstanding 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 registered 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 Focal, 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.
We have filed the registration statement and will commence the exchange
offer pursuant to the exchange and registration agreement. In the event that
. applicable interpretations of the Staff of the Securities and Exchange
Commission do not permit us to effect such a registered exchange offer,
. for any other reason the registration statement is not declared
effective within 210 days after the date of original issuance of the
outstanding notes,
. the registered exchange offer is not consummated (the term "consummated"
as used in this context shall mean that Focal has offered the exchange
notes in exchange for surrender of the outstanding notes, kept such
offer open for the period of time required above and fulfilled all of
its other obligations under such offer) within 240 days after the date
of original issuance of the outstanding notes,
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. the initial purchasers so request with respect to outstanding notes held
by such initial purchasers and thus not eligible to be exchanged for
exchange notes in the registered exchange offer, or
. any holder of outstanding notes (other than an initial purchaser or any
affiliate of Focal) does not receive freely tradeable exchange notes in
the registered exchange offer (it being understood that, for purposes of
this clause, (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 for outstanding 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 outstanding notes acquired as a result of market making
activities or other trading activities shall not result in the exchange
notes being not "freely tradeable"),
we will, at our cost,
. as promptly as practicable, file a shelf registration statement covering
resales of the outstanding notes or the exchange notes, as the case may
be,
. use our reasonable best efforts to cause the shelf registration
statement to be declared effective under the Securities Act and
. 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
outstanding notes or exchange notes, as applicable, covered by the shelf
registration statement have been sold.
We 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 outstanding notes or the exchange notes, as the
case may be. A holder selling such outstanding 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 exchange and registration agreement which are applicable to
such holder (including certain indemnification obligations).
If:
. the exchange offer registration statement has not been declared
effective prior to the 210th day following the date of original issuance
of the outstanding notes;
. either the exchange offer has not been consummated or the shelf
registration statement has not been declared effective on or prior to
the 240th day following the date of original issuance of the outstanding
notes; or
. after the shelf registration statement has been declared effective, the
shelf registration statement thereafter ceases to be effective or usable
(subject to certain exceptions) in connection with resales of
outstanding notes or exchange notes in accordance with and during the
periods specified in the exchange and registration agreement without
being succeeded promptly by an additional registration statement filed
and declared effective (each such event referred to above a
"Registration Default"),
interest ("Additional Interest") will accrue on the outstanding notes and the
exchange notes (in addition to the stated interest on the outstanding 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 January 15 and July 15 of each year, beginning on
the January 15 or July 15 immediately following a Registration Default, at a
rate of 0.50% per annum during the 90-day period immediately following the
occurrence of a Registration Default and shall increase by 0.25% per annum at
the end of each subsequent 90-day period. In no event shall such rate exceed
1.50% per annum in the aggregate regardless of the number of Registration
Defaults.
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The summary in this prospectus of certain provisions of the exchange and
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
exchange and registration agreement, a copy of which has been filed as an
exhibit to the registration statement of which this prospectus is a part.
Definitions
Set forth below is a summary of certain of the defined terms used in the
January 2000 indenture. Reference is made to the January 2000 indenture for the
full definition of all such terms, as well as any capitalized terms used herein
for which no definition is provided.
"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 Focal and of each other Subsidiary of Focal; provided further that
neither Focal 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 Focal 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 Focal or any other
Restricted Subsidiary) in a transaction in which such Restricted Subsidiary
ceases to be a Restricted Subsidiary of Focal, but excluding a disposition by a
Restricted Subsidiary to Focal or a Significant Restricted Subsidiary or by
Focal to a Significant Restricted Subsidiary) of (i) shares of Capital Stock or
other ownership interests of a Subsidiary of Focal (other than pursuant to an
amalgamation, merger or consolidation of a Restricted Subsidiary into Focal or
any Restricted Subsidiary), (ii) substantially all of the assets of Focal 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
Focal 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
January 2000 indenture applicable to amalgamations, consolidations, mergers,
and transfers of all or substantially all of the assets of Focal; 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
Focal or a Restricted Subsidiary, (b) contemporaneous exchanges by Focal or any
Restricted Subsidiary of Telecommunications Assets for other Telecommunications
Assets in the ordinary course of business; provided that the applicable
Telecommunications Assets received by Focal or such Restricted Subsidiary have
at least substantially equal Fair Market Value to Focal 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
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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 Focal 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 Focal 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 Focal to any "Person" or "group" (as such term is used in
Sections 13(d)(3) and 14(d)(2) of the Securities 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 Securities
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 Securities 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 Securities Exchange Act), other than
any Permitted Holder, becomes the "beneficial owner" (as defined in Rule
13d-3 under the Securities Exchange Act) of more than 50% of the total
voting power of all classes of the Voting Stock of Focal (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
election or appointment by the board of directors or whose nomination for
election by the stockholders of Focal 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 Focal's shareholders) cease for any
reason to constitute a majority of the board of directors then in office,
or
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(iv) the merger, amalgamation or consolidation of Focal with or into
another Person or the merger of another Person with or into Focal shall
have occurred, and the securities of Focal that are outstanding immediately
prior to such transaction and which represent 100% of the aggregate voting
power of the Voting Stock of Focal 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 Focal, its Common Stock, $.01 par
value.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of Focal 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 Focal and its
Restricted Subsidiaries for such period, (ii) Consolidated Income Tax Expense
of Focal and its Restricted Subsidiaries for such period, (iii) the
consolidated depreciation and amortization expense of Focal and its Restricted
Subsidiaries for such period, (iv) any non-cash expense related to the issuance
to employees of Focal or any Restricted Subsidiary of options to purchase
Capital Stock of Focal 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 Focal'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 Focal) that is subject to a restriction
which prevents the payment of dividends or the making of distributions to Focal
or another Restricted Subsidiary to the extent of such restriction and (b) (1)
if, during or after such period, Focal 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 Focal 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, Focal 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
Focal 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 Focal 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
Focal 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 Focal'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 Focal and its Restricted Subsidiaries, whether or not
declared or paid, (vi) interest on Indebtedness guaranteed by Focal 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 Focal means, for any period, the aggregate net
income (or net loss) of Focal 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
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extraordinary or non-recurring, (ii) any net income (or net loss) of any Person
other than Focal and its Restricted Subsidiaries, except to the extent of the
amount of dividends or other distributions actually paid to Focal or its
Restricted Subsidiaries by such other Person during such period, (iii) the net
income (or net loss) of any Person acquired by Focal 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 Focal 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 Focal 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 Focal, (vii) with regard to a non-wholly owned Restricted
Subsidiary, any aggregate net income (or net loss) in excess of Focal'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 Focal 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 Focal 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 date specified in the 2000 senior notes as the fixed date on which
the principal of such 2000 senior notes are due and payable.
"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 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 Focal) organized and in existence
under the laws of the United States of America with a rating at the time as of
which
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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, (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., (vi)
other debt obligations maturing in 365 days or less issued by a corporation
(other than an Affiliate of Focal) organized under the laws of the United
States or any state thereof and rated at least "A-" by S&P or "A3" by Moody's,
and (vii) with respect to any Foreign Subsidiary, investments by such Foreign
Subsidiary that are comparable to those described in clauses (iv) and (v) above
but with respect to such Foreign Subsidiary's country of organization or
country in which it conducts its business operations.
"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.
"Foreign Subsidiary" means any Restricted Subsidiary of Focal which (i) is
not organized under the laws of the United States, any state thereof or the
District of Columbia, and (ii) conducts substantially all of its business
operations outside the United States of America.
"GAAP" means generally accepted accounting principles in the United States,
consistently applied, which were in effect on the date of the January 2000
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 Focal (whether by merger,
amalgamation, consolidation, acquisition or otherwise) shall be deemed to have
been Incurred by Focal at the time at which such Person becomes a Subsidiary of
Focal.
"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
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Subsidiaries, the maximum fixed redemption or repurchase price of Preferred
Stock of such Person's Restricted Subsidiaries, at 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 January 2000 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 outstanding notes were first
authenticated and delivered under the January 2000 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 2000 senior note, the date on
which the principal of such 2000 senior note becomes due and payable as
provided therein or in the January 2000 indenture, whether on the date
specified in such 2000 senior note as the fixed date on which the principal of
such 2000 senior note is due and payable, on the Change of Control Payment Date
or purchase date established pursuant to the terms of the January 2000
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 Focal or any of the Restricted Subsidiaries, cash or readily
marketable cash equivalents received net of (a) all reasonable out-of-pocket
expenses of Focal 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
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(but excluding any finder's fee or broker's fee payable to any Affiliate of
Focal) 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 Focal or its Restricted Subsidiaries, (b) all payments
made or required to be made by Focal or its Restricted Subsidiaries on any
Indebtedness which is secured by 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 Focal) in Restricted Subsidiaries as a result of
such transaction and (d) appropriate amounts to be provided by Focal or any
Restricted Subsidiary, as the case may be, as a reasonable reserve against any
liabilities associated with such assets and retained by Focal 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 Focal 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 January 2000 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 Focal or any Subsidiary of
Focal 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 Focal and delivered to the trustee,
which shall comply with the January 2000 indenture.
"Permitted Holders" means Madison Dearborn Capital Partnership, L.P.,
Frontenac VI L.P., and Battery Ventures III, L.P., and Affiliates (other than
Focal 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
January 2000 indenture, (iii) Investments pursuant to agreements or obligations
of Focal 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 Focal'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 Focal's
and its Restricted Subsidiaries' Property or other assets when taken as a
whole, or materially impair the use thereof in
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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 Focal, (iv) Liens incurred or pledges and 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 Focal or its
Restricted Subsidiaries, (viii) Liens arising out of judgments or awards
against Focal or any Restricted Subsidiary with respect to which Focal or such
Restricted Subsidiary is prosecuting an appeal or proceeding for review and
Focal 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 Focal and its Restricted Subsidiaries, (xi) Liens encumbering
Property or other assets under construction arising from progress or partial
payments by a customer of Focal 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 Focal 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 Focal 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 January 2000 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.
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 Focal 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 Focal or to Focal's stockholders (in their
capacity as such), or declared or paid to any Person other than Focal 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 Focal or such Restricted Subsidiary and other than pro rata
dividends or other distributions made by a Restricted Subsidiary that is not a
Significant Restricted
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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 Focal or any of its Restricted Subsidiaries (other than
to Focal or any Restricted Subsidiary) to purchase, redeem, acquire or retire
any Capital Stock of Focal or (iii) a payment made by Focal or any of its
Restricted Subsidiaries (other than a payment made solely in Qualified Stock of
Focal) 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 Focal which is
subordinate (whether pursuant to its terms or by operation of law) in right of
payment to the 2000 senior notes and which was scheduled to mature on or after
the maturity of the 2000 senior 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 Focal in a
Restricted Subsidiary engaged in a Telecommunications Business or (c) an
Investment by a Restricted Subsidiary in Focal or in a Restricted Subsidiary
engaged in a Telecommunications Business.
"Restricted Subsidiary" means any Subsidiary of Focal 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 Focal which is not,
expressly by its terms, subordinate or junior in right of payment to the 2000
senior notes.
"Significant Restricted Subsidiary" means any Restricted Subsidiary of which
Focal 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 Focal 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 2000 senior 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 2000 senior
notes exists, (ii) in the event that any other Default exists, upon notice by
holders of 25% or more of the aggregate principal amount of the outstanding
2000 senior notes to the trustee, the trustee shall have the right to give
notice to Focal 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 Focal (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 date specified in
the 2000 senior notes as the fixed date on which the principal of such 2000
senior notes is due and payable or (y) permit redemption or other retirement
(including pursuant to an offer to purchase made by Focal) of such other
Indebtedness at the option of the holder thereof prior to the final date
specified in the 2000 senior notes as the fixed date on which the principal of
such 2000 senior notes is due and payable, 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 Focal) which is conditioned upon a change of
control of Focal 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 Focal's repurchase of the 2000
senior notes required to be repurchased by Focal 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 Focal's manner of
business on the Issue Date), and shall, in any event, include all businesses in
which Focal 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.
"Total Net Incremental Equity" means, at any time of determination, the sum
of, without duplication, (i) the aggregate Net Cash Proceeds received by Focal
from capital contributions in respect of existing Capital Stock (other than
Disqualified Stock) or the issuance or sale of Capital Stock (other than
Disqualified Stock or Qualified Stock to the extent the proceeds of such
Qualified Stock are used to retire any Capital Stock or Indebtedness of Focal
pursuant to clause (ii) of the second paragraph of the "Limitation on
Restricted Payments" covenant but including Capital Stock issued upon the
conversion of convertible Indebtedness or from the exercise of options,
warrants or rights to purchase Capital Stock (other than Disqualified Stock))
subsequent to the Issue Date, other than to a Subsidiary of Focal, plus (ii)
the Fair Market Value (determined at the time of issuance) of any Capital Stock
(other than Disqualified Stock) of Focal issued as consideration for the
acquisition of Capital Stock or assets of any Person engaged in the
Telecommunications Business, plus (iii) the aggregate Net Cash Proceeds
received by Focal or any Restricted Subsidiary from the sale, disposition,
maturity or repayment (in whole or in part) of any Investment that is made
after the Issue Date and that constituted a Restricted Payment declared or made
on and after the Issue Date to the extent made in reliance on clause (iii)(c)
of the first paragraph or clause (vi)(b) of the second paragraph of the
covenant described above under "--Limitation on Restricted Payments," but only
such Net Cash Proceeds up to an amount equal to the lesser of (a) the return of
capital with respect to the applicable portion of such Investment and (b) the
cost of the applicable portion of such Investment, in either case, less the
cost of the disposition of such Investment, plus (iv) the net reduction in
Investments in any Person made pursuant to clause (vi)(b) of the second
paragraph of the covenant described under "--Limitation on Restricted Payments"
resulting from such Person becoming a Restricted Subsidiary (valued as provided
in the definition of "Investment"), less (v) the aggregate amount of all
Restricted Payments made after the Issue Date (x) to the extent made in
reliance on clause (iii)(c) of the first paragraph or (y) to the extent made in
reliance on clause (vi)(b) of the second paragraph of the covenant described
above under "--Limitation on Restricted Payments."
"Unrestricted Subsidiary" means any Subsidiary of Focal that Focal has
classified as an "Unrestricted Subsidiary" and that has not been reclassified
as a Restricted Subsidiary, pursuant to the terms of the January 2000
indenture. See "--Restricted and Unrestricted Subsidiaries" for a description
of the conditions in which Focal may designate a Subsidiary of Focal an
"Unrestricted Subsidiary."
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"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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MATERIAL UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a summary of the material United States federal tax
consequences of the exchange of outstanding notes for exchange notes, and, in
the case of non-U.S. holders, of the ownership and disposition of the exchange
notes. This summary is based on the Internal Revenue Code of 1986, as amended,
existing and proposed Treasury regulations promulgated thereunder, and
administrative and judicial interpretations thereof, all in effect as of the
date of this prospectus and all of which are subject to change, possibly with
retroactive effect. The summary assumes that you hold the outstanding notes,
and will hold the exchange notes, as capital assets within the meaning of
Section 1221 of the Internal Revenue Code. It does not address any state, local
or foreign tax consequences of the exchange of outstanding notes for exchange
notes. It also does not discuss all of the tax consequences that may be
relevant to you in light of your particular circumstances or if you are a
certain type of holder, including:
. a bank,
. an insurance company,
. a tax-exempt organization,
. a dealer in securities or foreign currencies,
. a holder of an exchange note as part of a hedging transaction,
"straddle," conversion transaction or other integrated transaction for
United States federal income tax purposes,
. a holder whose functional currency is not the United States dollar, or
. a holder who or that did not purchase the outstanding notes for cash at
their original issue date at their original offering price.
You should consult with your own tax advisor about the application of the
United States federal income and estate tax laws to your particular situation
as well as any consequences of the exchange of outstanding notes for exchange
notes and the ownership and disposition of exchange notes under the tax laws of
any state, local or foreign jurisdiction.
United States Federal Income Tax Consequences of the Exchange
Your acceptance of the exchange offer and the related exchange of your
outstanding notes for exchange notes will not be a taxable event for United
States federal income tax purposes. Your exchange notes will be treated as a
continuation of the outstanding notes. You will have the same tax basis and
holding period in the exchange notes as you had in the outstanding notes
immediately before the exchange.
United States Federal Tax Consequences to Non-U.S. Holders
If you are a non-U.S. holder, the following discussion describes the
material United States federal income and estate tax consequences of the
ownership and disposition of exchange notes that may be applicable to you. You
are a non-U.S. holder if you are a beneficial owner of an exchange note who or
that, for United States federal income tax purposes, is
. an individual other than a citizen or resident alien of the United
States,
. a corporation or partnership that is not created or organized in or
under the laws of the United States or any of its political subdivisions
(and, in the case of a partnership, is not treated as a United States
person under Treasury regulations),
. an estate other than an estate the income of which is subject to United
States federal income taxation regardless of its source, or
. a trust if no court within the United States is able to exercise primary
supervision over the trust's administration or one or more United States
persons do not have the authority to control all of the trust's
substantial decisions.
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Ownership
Subject to the discussion below concerning backup withholding, you will not
be subject to withholding of United States federal income tax on payments of
principal, interest and premium, if any, on the exchange notes, provided that,
in the case of interest, you satisfy the following conditions:
. you do not own actually or constructively, 10% or more of the total
combined voting power of all classes of Focal stock entitled to vote,
. you are not a controlled foreign corporation that is related, directly,
indirectly or constructively, to Focal through stock ownership, and
. you satisfy the certification requirements (described generally below)
set forth in Section 871(h) or Section 881(c) of the Internal Revenue
Code and the regulations thereunder.
If you cannot meet these conditions, you generally will be subject to U.S.
withholding tax at the rate of 30% on interest payments, unless you are
eligible for a reduced withholding tax rate under an applicable U.S. income tax
treaty.
You will fulfill the certification requirement referred to above if you
certify on Internal Revenue Service Form W-8BEN (or successor form), under
penalties of perjury, that you are not a United States person and provide your
name and address, and file the Form W-8BEN with Focal or its paying agent. If
an exchange note is held on your behalf by a securities clearing organization,
bank or other financial institution holding customers' securities in the
ordinary course of its trade or business, the certification requirement will be
fulfilled if the financial institution files with Focal or its paying agent a
statement, signed under penalties of perjury, that it has received the Form W-
8BEN from you (or from another intermediary financial institution acting on
your behalf) and furnishes Focal or its paying agent with a copy thereof. Under
current law, if you are a foreign partnership, you may furnish the Form W-8BEN
to Focal or its paying agent or to a financial institution holding an exchange
note on your behalf. However, for interest received after December 31, 2000, if
you are a foreign partnership, unless you have entered into a withholding
agreement with the Internal Revenue Service, you will be required, in addition
to providing an intermediary Form W-8BEN, to attach an appropriate
certification by each partner. A look-through rule will apply in the case of
tiered partnerships. Foreign partnerships and their partners should consult
their own tax advisors regarding possible additional certification and
reporting requirements.
If you are engaged in the conduct of a trade or business in the United
States, and if interest on an exchange note is effectively connected with the
conduct of that trade or business, you will be subject to regular United States
federal income tax on that interest on a net income basis in the same manner as
if you were a United States person. You will be exempt from the withholding tax
discussed above if you provide to Focal or its paying agent a properly executed
Internal Revenue Service Form W-8ECI (or successor form). In addition, if you
are a foreign corporation, you may be subject to a branch profits tax at the
rate of 30% (or such lesser rate as may be specified by an applicable U.S.
income tax treaty) on your effectively connected earnings and profits for the
taxable year, subject to certain adjustments. For purposes of the branch
profits tax, interest on an exchange note will be included in your effectively
connected earnings and profits if the interest is effectively connected with
the conduct of a trade or business in the United States.
Sale, Exchange, Redemption or Other Disposition
Subject to the discussion below concerning backup withholding, you will not
be subject to United States federal income tax, or to any withholding thereof,
on any gain realized on the sale, exchange, redemption, or other disposition of
an exchange note, unless:
. you are an individual who is present in the United States for 183 days
or more in the taxable year of the disposition and certain other
conditions are met, or
. the gain is effectively connected with the conduct by you of a trade or
business in the United States.
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If you are engaged in the conduct of a trade or business in the United
States, and if any gain realized on the sale, exchange, redemption, or other
disposition of an exchange note is effectively connected with the conduct of
that trade or business, you will be subject to regular United States federal
income tax on the gain on a net income basis in the same manner as if you were
a United States person. In addition, if you are a foreign corporation, you may
be subject to a branch profits tax at the rate of 30% (or such lesser rate as
may be specified by an applicable U.S. income tax treaty) on your effectively
connected earnings and profits for the taxable year, subject to certain
adjustments. For purposes of the branch profits tax, any gain recognized on the
sale, exchange, redemption or other disposition of an exchange note will be
included in your effectively connected earnings and profits if the gain is
effectively connected with the conduct of a trade or business in the United
States.
Estate Tax
If you are an individual non-U.S. holder and if you hold an exchange note at
the time of your death, the note will not be includible in your gross estate
for purposes of the United States federal estate tax, provided that, at the
time of your death:
. you do not own, actually or constructively, 10% or more of the total
combined voting power of all classes of Focal stock entitled to vote,
and
. payments of interest with respect to the exchange note, if received at
that time, would not have been effectively connected with the conduct of
your trade or business in the United States.
Backup Withholding and Information Reporting
Under current United States federal income tax law, you will not be subject
to backup withholding tax at the rate of 31% or to information reporting on
payments of interest if the certifications required by Section 871(h) or
Section 881(c) of the Internal Revenue Code and described generally above are
received, provided that neither Focal nor its paying agent has actual knowledge
that you are a United States person.
Under current Treasury Regulations, payments of the proceeds of the sale,
exchange, redemption or other disposition of an exchange note made to or
through a foreign office of a broker generally will not be subject to backup
withholding or information reporting. However, if a broker is a United States
person, a controlled foreign corporation for United States federal income tax
purposes, a foreign person 50% or more of whose gross income is effectively
connected with the conduct of a United States trade or business for a specified
three-year period or, in the case of payments made after December 31, 2000, a
foreign partnership with certain connections to the United States, then
information reporting will be required unless the broker has in its records
documentary evidence that you, as payee, are not a United States person or that
otherwise establishes an exemption. Backup withholding may apply to any payment
that a broker is required to report if the broker has actual knowledge that
you, as payee, are a United States person. Payments to or through the United
States office of a broker will be subject to backup withholding and information
reporting unless you certify, under penalties of perjury, that you are not a
United States person or otherwise establish an exemption.
Any amounts withheld from a payment under the backup withholding rules will
be allowed as a credit against your United States federal income tax liability
and may entitle you to a refund, provided that the required information is
furnished to the Internal Revenue Service. You should consult your own tax
advisor regarding the application of the information reporting and backup
withholding requirements to your particular situation, the availability of an
exemption therefrom, and the procedure for obtaining an exemption, if
available.
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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 outstanding
notes where such outstanding notes were acquired as a result of market-making
activities or other trading activities. Focal 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.
Focal 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, Focal 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. Focal has agreed to pay all expenses incident to the exchange
offer (including the expenses of one counsel for the holders of the 2000 senior
notes) other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the 2000 senior notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The legality of the exchange notes offered by this prospectus will be passed
upon for Focal by Jones, Day, Reavis & Pogue, Chicago, Illinois. Swidler Berlin
Shereff Friedman, LLP in Washington, D.C. will pass upon specific regulatory
legal matters for Focal. Certain legal matters relating to the offering of the
outstanding notes were passed upon for the initial purchasers by Paul,
Hastings, Janofsky & Walker LLP (a limited liability partnership including
professional corporations), New York, New York.
EXPERTS
The consolidated financial statements and schedules incorporated by
reference in this registration statement, to the extent and for the periods
indicated in their reports, have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their reports with respect
thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in giving said reports.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement of which this prospectus forms a
part. This registration statement, including the attached exhibits and
schedules, contain additional relevant information about the exchange notes.
The rules and regulations of the Securities and Exchange Commission allow us to
omit some of the information included in the registration statement from this
prospectus.
In addition, we have filed reports, proxy statements and other information
with the Securities and Exchange Commission under the Securities Exchange Act.
You may read and copy any of this information at the following locations of the
Securities and Exchange Commission:
Public Reference Room New York Regional Office Chicago Regional
7 World Trade Center Office
Citicorp Center
450 Fifth Street, N.W. Suite 1300 500 West Madison
Room 1024 New York, New York 10048 Street
Washington, D.C. 20549 Suite 1400
Chicago, Illinois
60661-2511
You may obtain information on the operation of the Securities and Exchange
Commission's Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Securities Exchange Act file number for our
reports is 333-49397.
The Securities and Exchange Commission also maintains an Internet Web site
that contains reports, proxy statements and other information regarding
issuers, like Focal, that file electronically with the Securities and Exchange
Commission. The address of that site is http://www.sec.gov.
The Securities and Exchange Commission allows us to "incorporate by
reference" information into this prospectus. This means we can disclose
important information to you by referring you to another document filed
separately with the Securities and Exchange Commission. The information
incorporated by reference is considered to be a part of this prospectus, except
for any such information that is superseded by information included directly in
this document.
This prospectus incorporates by reference the documents listed below that we
have previously filed or will file with the Securities and Exchange Commission.
They contain important information about us and our financial condition.
. Our annual report on Form 10-K for our fiscal year ended December 31,
1999. This report contains our audited and consolidated financial
statements for us and our subsidiaries as of December 31, 1998 and 1999
and the years ended December 31, 1997, 1998 and 1999;
. Our quarterly report on Form 10-Q for our fiscal quarter ended March 31,
2000;
. Our definitive proxy statement for our 2000 annual meeting of
stockholders;
. The description of our common stock contained in our Registration
Statement on Form 8-A;
. All documents filed with the Securities and Exchange Commission by us
under Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act
after the date of this prospectus and before the offering is terminated,
are considered to be a part of this prospectus, effective the date such
documents are filed.
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
You can obtain any of the documents listed above from the Securities and
Exchange Commission, through the Securities and Exchange Commission's Internet
Web site at the address described above, or directly from us, by requesting
them in writing or by telephone at the following address:
Focal Communications Corporation
200 North LaSalle Street, Suite 1100
Chicago, Illinois 60601
Attn: Secretary
Telephone: (312) 895-8400
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We will provide a copy of any of these documents without charge, excluding
any exhibits unless the exhibit is specifically listed as an exhibit to the
registration statement of which this prospectus forms a part. If you request
any documents from us, we will mail them to you by first class mail, or another
equally prompt means, within two business days after we receive your request.
You should make your request by , 2000 in order to ensure timely
delivery of these documents before the exchange offer expires.
The January 2000 indenture, which governs the outstanding notes and which
will govern the exchange notes, requires us to furnish the trustee with annual
reports containing consolidated financial statements audited by our independent
public accountants and with quarterly reports containing unaudited condensed
consolidated financial statements for each of the first three quarters of each
fiscal year.
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GLOSSARY
Access charges--The charges paid by an IXC to a local exchange carrier for
the origination or termination of the IXC's customer's long distance calls.
Access line--A telephone line that connects a customer to the telephone
company's central office switching equipment.
Application service provider--A firm that offers a contractual service for
deploying, hosting and managing software from a central facility.
ATM (Asynchronous Transfer Mode)--High bandwidth, low-delay, connection-
oriented, packet-like switching and multiplexing technique requiring 53-byte,
fixed-sized cells.
Backbone--An element of the network infrastructure that provides high-
speed, high-capacity connections among the network's physical points of
presence, i.e., connection points and service centers. The backbone is used to
transport end user traffic across the metropolitan area and across the United
States.
Bandwidth--Refers to the maximum amount of data that can be transferred
through a computer's backbone or communication channel in a given time. It is
usually measured in Hertz, cycles per second, for analog communications and
bits per second for digital communications.
Broadband--A classification of the information capacity or bandwidth of a
communications channel that allows large quantities of data to be transmitted
or received simultaneously.
Carrier--A telephone service provider.
Central office--A carrier's facility where subscriber lines are joined to a
switching office.
Circuit--An electronic, radio or optical connection over which
communications may occur.
CLEC (competitive local exchange carrier)--A category of telephone service
provider 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, Internet access, 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 ILEC and other CLECs. Such certifications are granted on
a state-by-state basis.
Colocation--A location where a carrier's or customer's equipment
interconnects with the network of a carrier inside the carrier's facility.
Colocation involves the placement of equipment, owned by customers or in some
cases competitors, in a common facility operated by a communication provider
or neutral party to provide more expedient interconnection between devices,
increase reliability and reduce cost of operations and service. A colocation
facility is a secure data center that houses networking and computer
equipment.
Content provider--A firm that delivers content, such as print, video or
audio, over the Internet.
Communications Act of 1934--Federal legislation that established rules for
broadcast and nonbroadcast communications, both wireless and wired telephony.
Copper line or loop--A pair of traditional copper telephone lines using
electric current to carry signals.
Data communications--Digital transmissions through wired or wireless
networks, usually linking computers.
Digital--Describes a method of storing, processing and transmitting
information through the use of distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital transmission and switching
technologies employ a sequence of these pulses to convey information, as
opposed to the continuously variable
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analog signal. The precise digital numbers minimize distortion, such as
graininess or "snow," in the case of video transmission, or static or other
background distortion in the case of audio transmission.
DMS-500--A digital central office switch manufactured by Nortel Networks,
that provides both local
exchange switching (also known as a "class 5" switch) and long distance
switching (also known as a "class 4" switch) in a single device.
DSL (Digital Subscriber Line)--A transmission technology enabling high-
speed access in the local copper loop, often for the last mile between the
network service provider--i.e., an incumbent carrier, competitive carrier and
end user.
DSLAM (Digital Subscriber Line Access Multiplexer)--A multiplexer which
houses individual circuit cards used to provide DSL service.
DS-0, DS-1, DS-3--Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit rate of up to 64
kilobits per second. DS-1 service has a bit rate of 1.544 megabits per second
and DS-3 service has a bit rate of 45 megabits per second. DS-0 is also
equivalent to one standard telephone line.
FCC (Federal Communications Commission)--The United States government
federal regulatory agency with the authority to regulate all interstate and
international communications media (i.e., radio, television, wire, etc.)
originating or terminating in the United States.
Fiber transport--A physical facility carrying optical signals over fiber
cable.
ILEC (incumbent local exchange carrier)--A company historically providing
local telephone service. Often refers to one of the RBOCs or GTE.
Interconnection--The physical and logical connection of two operators'
networks, thereby allowing users and customers of one system to connect or
communicate with users and customers of the other, or to access services
provided from the other system.
Interconnection agreement--A contract between an ILEC and a CLEC for the
interconnection of the ILEC's and CLEC'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.
IP (Internet Protocol)--The suite of data communications protocols, or
rules, upon which the Internet is based. IP enables a packet of information to
travel through multiple networks to get to its ultimate destination.
ISP (Internet Service Provider)--A company that provides its customers with
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.
LAN or local area network--An intraoffice communication system usually used
to provide data transmission in addition to voice transmission. A network
allowing the interconnection and intercommunication of a group of computers,
primarily for the sharing of resources and exchange of information (e.g., e-
mail).
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.
LNP (Local number portability)--A technique that allows local exchange
service customers of an ILEC to keep their existing telephone number, while
moving their service to a CLEC.
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Minutes of use--A measure of time during which a telecommunications circuit
is maintained.
Modem--An abbreviation of Modulator-Demodulator. An electronic signal-
conversion device used to convert digital signals from a computer to analog
form for transmission over the telephone network. At the transmitting end, a
modem working as a modulator converts the computer's digital signals into
analog signals that can be transmitted over a telephone line. At the receiving
end, another modem working as a demodulator converts analog signals back into
digital signals and sends them to the receiving computer.
MSA (metropolitan statistical area)--A contiguous, geographic area, which
has a population of at least 50,000, defined by the United States government as
having a substantial economic community of interest.
Multiplexing--An electronic or optical process that combines several lower
speed transmission signals into one higher speed signal.
Network--An integrated system composed of switching equipment and
transmission facilities designed to provide for the direction, transport and
recording of telecommunications traffic.
Network access point/metropolitan access exchange (NAP/MAE)--A junction
point for major Internet service providers to interconnect with each other and
exchange traffic across their networks. Network access points are also known as
Internet exchanges (IXs). Connection at one or more network access points
implies being connected to the greater Internet.
Packets--Discrete and logical groupings of information.
Peering--An arrangement whereby two autonomous networks exchange traffic,
generally using the IP protocol. When a backbone provider receives data traffic
that is not destined for one of its own customers, it must route it to another
backbone provider--either at a public network access point or a private peering
point--to complete the transmission on the Internet.
Private peering--Partly due to congestion at public network access points,
many ISPs formed private agreements with each other to interconnect with each
other directly via dedicated circuits.
Reciprocal Compensation--The compensation paid by one carrier to send
traffic to another carrier's network.
RBOC (Regional Bell Operating Company)--The four remaining local telephone
companies (formerly part of AT&T) established as a result of the AT&T
divestiture decree. These include BellSouth, Bell Atlantic, U S WEST and SBC.
Router--A device that accepts the Internet Protocol from a local area
network or another wide area network device and routes Internet Protocol
packets across a network backbone. Some routers also provide protocol
conversion services to transfer Internet Protocol packets over frame relay,
Asynchronous Transfer Mode, and other backbone network services.
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 Networks is an example of a switch.
Switched services--Transmission of switched calls through the local switched
network.
T-1--A digital communications circuit operating at a speed of 1.5 Mbps, also
known as a DS-1 (digital signaling level one) and equivalent to 24 DS-0s.
Time Division Multiplexing--An electronic process that combines multiple
communications channels onto a single, higher-speed channel by interleaving
portions of each in a consistent manner over time.
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Transit--A form of traffic exchange between two networks where one network
will use the other network to transmit IP packets to their final destination.
In a transit relationship, should the final destination not exist on the
transit provider's network, the transit provider will use its own transit or
peering relationships to deliver the data to other networks.
Trunk or trunking--A circuit between two switches.
VARs (value-added resellers)--Organizations that purchase telecommunications
services on a wholesale basis, generally combine it with other products and
services, and sell the resulting package of services to an end user.
WAN (wide area network)--A remote computer communications system that is
networked to allow file sharing among geographically distributed work groups,
usually over a long distance. WANs typically use links provided by local
telephone companies.
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$275,000,000
Focal Communications Corporation
Offer to Exchange Its 11 7/8% Senior Notes due 2010,
Series B, for any and all of Its Outstanding 11 7/8%
Senior Notes due 2010, Series A
[FOCAL LOGO]
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PROSPECTUS
June 1, 2000
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