<PAGE>
As filed with the Securities and Exchange Commission on April 10, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-3
REGISTRATION STATEMENT
Under the Securities Act of 1933
---------------
FOCAL COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
---------------
Delaware 4813 36-4167094
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification Number)
Incorporation or Classification Code
Organization) Number)
200 North LaSalle Street, Suite 1100, Chicago, Illinois 60601
(312) 895-8400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JOSEPH A. BEATTY
Executive Vice President and Chief Financial Officer
Focal Communications Corporation
200 North LaSalle Street, Suite 1100
Chicago, Illinois 60601
(312) 895-8400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Elizabeth C. Kitslaar, Esq. Leigh P. Ryan, Esq.
Jones, Day, Reavis & Pogue Paul, Hastings, Janofsky & Walker LLP
77 West Wacker Drive 399 Park Avenue
Suite 3500 31st Floor
Chicago, Illinois 60601-1692 New York, New York 10022-4697
(312) 782-3939 (212) 318-6000
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed maximum
Amount Proposed maximum aggregate
Title of each class to be offering price offering price Amount of
of securities to be registered registered (1) per unit (2) (2) registration fee
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<S> <C> <C> <C> <C>
Common Stock (par value $0.01 per
share).......................... 8,050,000 $46.50 $374,325,000 $98,822
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</TABLE>
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(1) Includes 1,050,000 shares that the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act using the average of the
high and low prices of the common stock on April 3, 2000.
---------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 10, 2000
PROSPECTUS
7,000,000 Shares
Focal Communications Corporation
Common Stock
$ per share
--------
Focal Communications Corporation is selling 4,000,000 of the shares to be
sold in the offering. The selling stockholders identified in this prospectus
are selling an additional 3,000,000 shares. Focal will not receive any of the
proceeds from the sale of shares being sold by the selling stockholders. The
underwriters named in this prospectus may purchase up to 1,050,000 additional
shares of common stock from the selling stockholders under certain
circumstances.
The common stock is quoted on the Nasdaq Stock Market's National Market under
the symbol "FCOM." The last reported sale price of the common stock on April
, 2000 was $ per share.
--------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------
<TABLE>
<CAPTION>
Per Share Total
---------- ----------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Focal (before expenses) $ $
Proceeds to the Selling Stockholders (before expenses) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
2000.
--------
Salomon Smith Barney Credit Suisse First Boston
Goldman, Sachs & Co.
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Thomas Weisel Partners LLC
, 2000
<PAGE>
[Outside gatefold will be a map of Focal's coverage area. Inside gatefold will
be visual depiction of Focal's network, including our new Focal Internet
eXchange points.]
<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 voice 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 7.
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PROSPECTUS SUMMARY
This summary highlights information that we believe is especially important
concerning our business and the offering. As a summary, it is necessarily
incomplete and does not contain all of the information that you should consider
before investing in our common stock. You should read the entire prospectus
carefully. Except as otherwise required by the context, references in this
prospectus to "Focal," "we," "us," or "our" refer to the combined businesses of
Focal Communications Corporation and all of its subsidiaries. For a description
of some of the industry terminology used in this prospectus, you should refer
to the "Glossary." Information contained on Focal's Internet site is not a part
of this prospectus.
You should also read and consider the information in the "Risk Factors"
section of this prospectus before making an investment in shares of our common
stock.
BUSINESS
Focal is a rapidly growing competitive provider of integrated communications
services. We provide data, voice and colocation 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 February
29, 2000, we had sold 270,000 access lines, of which 215,565 were installed and
in service. As of February 29, 2000, our customers had, on average, 279 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
<PAGE>
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 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, voice and
colocation 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 voice 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.
. 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.
3
<PAGE>
THE OFFERING
The following information assumes that the underwriters do not exercise the
option granted by the selling stockholders to purchase additional shares in the
offering. See "Underwriting."
Common stock offered by Focal......... 4,000,000 shares
Common stock offered by selling 3,000,000 shares
stockholders..........................
Common stock outstanding after the 64,852,316 shares
offering..............................
Nasdaq Stock Market's National Market "FCOM"
symbol................................
Use of proceeds....................... We intend to use the net proceeds
from the offering to fund the costs
of capital expenditures and
operating losses, for working
capital and potential acquisitions
and for general corporate purposes.
We
will not receive any proceeds from
the sale of shares by the selling
stockholders.
Risk factors.......................... Investing in shares of our common
stock involves risks. See "Risk
Factors" for a discussion of
matters you should consider before
investing in shares of our common
stock.
The number of shares of common stock to be outstanding after the offering is
based on the number of shares of common stock outstanding as of February 29,
2000 and does not take into account shares reserved for issuance under our
equity incentive plans as of April 3, 2000, of which 7,787,257 shares are
reserved for issuance upon the exercise of outstanding options at a weighted
average exercise price of $11.27 per share.
4
<PAGE>
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. You should not
assume that the results of operations below are indicative of the financial
results we can achieve in the future.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
(Dollars in thousands, except share
data)
<S> <C> <C> <C>
Statement of Operations Data:
Revenues................................ $ 4,024 $ 43,532 $ 126,861
Expenses:
Customer service and network
operations........................... 2,155 15,284 70,910
Selling, general and administrative... 2,887 12,210 32,486
Depreciation and amortization......... 616 6,671 23,763
Non-cash compensation expense......... 1,300 3,070 7,186
----------- ----------- -----------
Operating income (loss)................. (2,934) 6,297 (7,484)
Other income (expense), net............. 68 (9,606) (14,302)
Provision for income taxes.............. -- (4,660) (600)
Accretion to redemption value of Class A
common stock........................... (104) -- --
----------- ----------- -----------
Net loss applicable to common
stockholders........................... $ (2,970) $ (7,969) $ (22,386)
=========== =========== ===========
Basic net loss per share................ $ (0.07) $ (0.18) $ (0.45)
=========== =========== ===========
Diluted net loss per share.............. $ (0.07) $ (0.18) $ (0.45)
=========== =========== ===========
Basic weighted average common stock
outstanding............................ 42,186,500 43,763,000 50,066,315
=========== =========== ===========
Diluted weighted average common stock
outstanding............................ 42,186,500 43,763,000 50,066,315
=========== =========== ===========
Other Financial Data:
EBITDA.................................. $ (1,018) $ 16,038 $ 23,465
Capital expenditures.................... 11,655 64,229 128,550
Summary Cash Flow Data:
Net cash provided by (used in) operating
activities............................. $ (1,634) $ 22,507 $ 18,549
Net cash used in investing activities... (11,655) (72,189) (130,590)
Net cash provided by financing
activities............................. 11,756 173,466 164,142
Operating Data:
Access lines in service................. 7,394 52,011 181,103
Minutes of use (millions)............... 282 3,568 13,362
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
1999
-------------------------
Pro Forma
Actual As Adjusted
----------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
short-term investments........ $ 188,142 $
Current assets................. 219,932
Long-term debt, including
current portion............... 253,786 526,806
Total stockholders' equity..... 142,487
</TABLE>
5
<PAGE>
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, and $2.5
million for 1999, 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,
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, 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.
. We count access lines as of the end of the period indicated and on a one-
for-one basis using DS-0 equivalents.
. The "Pro Forma As Adjusted" column in the balance sheet data table
reflects the sale of the shares of common stock offered by this
prospectus (assuming an offering price of $ per share) and the sale of
our 2000 notes, completed in January 2000, which resulted in our receipt
of net proceeds of $ million and $265.7 million, respectively, as if
these transactions had been consummated on December 31, 1999.
6
<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 you invest in our common stock. 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 36% of our total revenues
for 1997, 1998, 1999 and December of 1999, 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 an operating loss of $7.5
million in 1999, 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. We currently plan
to fund these requirements with the net proceeds of this offering, together
with the net proceeds from the sale of our $275 million 11.875% Senior Notes
due 2010 issued in January 2000, which we refer to in this prospectus as the
2000 notes, our existing cash balances, cash equivalents and short-term
investments.
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
7
<PAGE>
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 February 29, 2000, we had total debt outstanding of
$530.1 million, representing approximately 80% of our total capitalization, and
total stockholders' equity of $128.7 million. Non-cash interest on our 2000
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 $2.0 million by January 15, 2010 and $79.5
million by February 15, 2003, respectively. The indentures related to the 2000
notes and the 1998 notes 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 net cash flows provided by our
operations in 1999, $25.3 million was charged as interest expense on our
debt. Of this amount, 82% was used for interest on the 1998 notes and 18%
was used for interest on our term loan facility, capital leases and other
obligations. A portion of this interest expense, totaling $3.6 million,
relating to construction in progress was capitalized during 1999. 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.
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, including this offering, 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.
8
<PAGE>
Focal Communications Corporation is a holding company that receives all its
revenues from its subsidiaries. Its ability to obtain payments from its
subsidiaries may be restricted by the profitability and cash flows of its
subsidiaries and laws regulating the payment of dividends by a subsidiary to
its parent company. If its subsidiaries are unable to pay dividends, the
holding company may be unable to service its debt. In this situation, creditors
of its subsidiaries and future holders of preferred stock, if any, of its
subsidiaries, would have prior claims on the assets of the subsidiaries over
the claims of the holding company and its stockholders.
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
. 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
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. 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 our growth 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
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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 could seriously harm our business.
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 have initiated proceedings to determine whether it is
appropriate to establish separate reciprocal compensation rates for Internet-
bound calls. A judicial 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.
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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.
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 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.
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.
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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.
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 of operations.
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.
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Relationship with ILECs--Our reliance on ILEC interconnection agreements and
changes to these 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.
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
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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
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
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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.
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, which could negatively impact our stock price.
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
If our results of operations from quarter to quarter fail to meet the
expectations of public market analysts and investors, our stock price could
suffer. 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.
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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 and 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 public stockholders.
Madison Dearborn Capital Partners, L.P., Frontenac VI, L.P. and Battery
Ventures III, L.P., our three principal institutional investors, will control
approximately 52.7% of our total voting power after the offering, based on the
number of shares outstanding as of February 29, 2000 and assuming that the
underwriters' over-allotment option is not exercised. As a result, these
institutional investors and our management will have the ability to control our
future operations and strategy. Conflicts of interest between these
institutional investors and our public stockholders 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 our notes indentures, which would require
us to offer to repurchase our notes. In addition, the interests of our
institutional investors and other existing stockholders regarding any proposed
merger or sale of Focal may differ from the interests of our new public
stockholders, especially if the consideration to be paid for the common stock
is less than the price paid by public stockholders.
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 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,
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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.
Dividends--We do not intend to pay dividends and our indentures restrict our
ability to do so.
We have never declared or paid any cash dividends on our common stock. For
the foreseeable future, we intend to retain any earnings to finance the
development and expansion of our business, and we do not anticipate paying any
cash dividends on our common stock. Payment of any future dividends on our
common stock will depend upon our earnings and capital requirements, the terms
of our debt facilities and other factors our board of directors considers
appropriate. Our ability to declare and pay dividends on our common stock is
also currently restricted by covenants in our notes indentures.
Liquidity and Volatility--There is limited trading in our common stock; our
stock price has been and may continue to be volatile.
After completion of this offering, approximately 19.9 million shares of
common stock will be available for trading on Nasdaq by stockholders other than
our three principal institutional investors and our four founding stockholders
(assuming that the underwriters' over-allotment option is not exercised). While
this offering will improve liquidity, any significant position in our common
stock may be less liquid than investments in many other publicly traded
companies. We cannot assure you that an active trading market will develop or
be sustained after the offering is completed.
Our stock price has been and may continue to be volatile. The market price
of our shares may be significantly affected by factors including:
. An actual or anticipated fluctuation in our operating results
. New products or services or new contracts by us or our competitors
. Legislative and regulatory developments
. Conditions and trends in the communications services industry, general
market conditions and other factors beyond our control
In addition, the stock market has periodically experienced significant price
and volume fluctuations that have particularly affected the market prices of
common stock of communications services companies, including both
telecommunications and Internet companies. These changes have often been
unrelated to the operating performance of particular companies. These broad
market fluctuations may also adversely affect the market price of our shares.
Future Stock Sales--Sales of large amounts of our common stock or the
perception that sales could occur may depress our stock price.
After this offering, our three principal institutional investors, our
executive officers and our directors will collectively own 66.2% of the
outstanding shares of our common stock (based on the number of shares
outstanding as of February 29, 2000 and assuming that the underwriters' over-
allotment option is not exercised). A substantial portion of these shares and
shares of our common stock held by some of our other stockholders are subject
to a registration rights agreement that grants holders of these shares the
right to have their shares registered either on demand or together with shares
we intend to sell. In addition, as of April 3, 2000, there were 7,787,257
shares of our common stock reserved for issuance upon exercise of outstanding
options granted under our equity incentive plans and an additional 90,994
shares of our common stock reserved for issuance under our equity incentive
plans. Each of the selling stockholders will, with specified exceptions, be
prohibited from selling or, with respect to shares subject to the registration
rights agreement, requesting registration of shares of our common stock for 90
days after the date of this prospectus.
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The market price of our common stock could drop as a result of sales of a
large number of our shares in the public market after the offering. The
perception that sales may occur could also have the same result.
Anti-takeover Provisions--Provisions of our charter, applicable law and our
notes indentures may delay or prevent a change in control.
Our certificate of incorporation and bylaws, the Delaware corporations
statute and our notes indentures may make it difficult or even prevent a third
party from acquiring us without the approval of our incumbent board of
directors. These provisions, among other things:
. Divide our board of directors into three classes, with members of each
class to be elected in staggered three-year terms
. Limit the right of stockholders to remove directors
. Prohibit stockholder action by written consent in place of a meeting
. Limit the right of stockholders to call special meetings of stockholders
. Regulate how stockholders may present proposals or nominate directors for
election at annual meetings of stockholders
. Authorize our board of directors to issue preferred stock in one or more
series without any action on the part of stockholders
These provisions could limit the price that investors might be willing to
pay in the future for shares of our common stock, may discourage third party
bidders from bidding for us and could significantly impede the ability of the
holders of our common stock to change our management.
Our business is subject to regulation by the FCC and state regulatory
commissions or similar state regulatory agencies in the states in which we
operate. The FCC and some states have statutes or regulations that would
require an investor who acquires a specified percentage of our securities or
the securities of one of our subsidiaries to obtain approval to own such
securities from the FCC or the state commission.
Dilution--You will experience immediate and substantial dilution in your
investment.
The public offering price is substantially higher than the net tangible book
value per share of our common stock. As a result, you will experience immediate
and substantial dilution in net tangible book value when you buy shares of our
common stock in the offering. This means that you are paying a higher price per
share than the amount of our total assets, minus our total liabilities, divided
by the number of outstanding shares. To the extent that outstanding options to
purchase our common stock are exercised or we issue additional shares of our
common stock at prices lower than the then-current net tangible book value,
there will be further dilution to the holders of our common stock.
Investment Company Act--We may be required to register as an investment
company, which would adversely affect us.
We now have and after the offering will continue to 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.
19
<PAGE>
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.
USE OF PROCEEDS
After deducting estimated underwriter discounts and offering expenses, we
expect to receive net proceeds from the offering of approximately $ . This
estimate is based on an assumed offering price of $ per share. We intend
to use the net proceeds, together with amounts available from our existing cash
balances and future cash flow from ongoing operations, to fund the costs of
capital expenditures and operating losses, for working capital and potential
acquisitions, and for general corporate purposes. We will have broad discretion
in determining the uses and exact amounts for each use of the net proceeds.
Pending these uses, we will invest the net proceeds in short-term money market
and other market-rate, investment-grade instruments. See "Risk Factors--
Investment Company Act" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
We will not receive any of the proceeds from the sale of common stock by the
selling stockholders.
20
<PAGE>
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
Our common stock is traded on the Nasdaq Stock Market's National Market. Our
ticker symbol is "FCOM." We completed the initial public offering of our common
stock in August 1999. Prior to July 28, 1999, no established public trading
market for our common stock existed.
The following table sets forth the intraday high and low bid information per
share for our common stock as reported on the Nasdaq Stock Market's National
Market for the periods indicated:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Year ended December 31, 1999:
Third quarter (from July 28, 1999)....................... $29.75 $15.50
Fourth quarter .......................................... $26.88 $18.50
Year ended December 31, 2000:
First quarter............................................ $85.00 $23.38
Second quarter (through April , 2000).................. $ $
</TABLE>
There were approximately 128 owners of record of our common stock as of
February 29, 2000. This number excludes stockholders whose stock is held in
nominee or street name by brokers and we believe that we have a significantly
larger number of beneficial holders of common stock. A recently reported sale
price of our common stock on the Nasdaq Stock Market's National Market is set
forth on the front cover of this prospectus.
Dividends
We do not anticipate paying any cash dividends in the foreseeable future.
Any future determination to pay dividends will be at the discretion of our
board of directors and will be dependent upon then existing conditions,
including our financial condition, results of operations, contractual
restrictions, capital requirements, business prospects and other factors our
board of directors deems relevant. In addition, our current financing
arrangements effectively prohibit us from paying cash dividends for the
foreseeable future.
21
<PAGE>
CAPITALIZATION
The following table sets forth our total cash, cash equivalents and short-
term investments and capitalization as of December 31, 1999:
. on an actual basis
. on a pro forma basis to reflect the net proceeds received from the
sale of our 2000 notes in January 2000 as if the sale had occurred on
December 31, 1999 and
. on a pro forma, as adjusted basis to reflect the net proceeds
received from the sale of our 2000 notes in January 2000 and the sale
of shares of common stock by Focal in this offering, assuming an
offering price of $ per share, as if these transactions had
occurred on December 31, 1999.
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 "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Where You Can Find More Information."
<TABLE>
<CAPTION>
As of December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(Dollars in thousands,
except share amounts)
<S> <C> <C> <C>
Total cash, cash equivalents and short-term
investments................................... $188,142 $453,886 $
======== ======== ========
Long-term debt, including current portion:
12.125% Senior discount notes due 2008, net
of unamortized discount of $83,184 at
December 31, 1999........................... $186,816 $186,816 $186,816
11.875% Senior notes due 2010, net of
unamortized discount of $1,980 at December
31, 1999.................................... -- 273,020 273,020
Secured equipment term loan.................. 44,214 44,214 44,214
Obligation under capital lease............... 21,994 21,994 21,994
Other........................................ 762 762 762
-------- -------- --------
Total long-term debt....................... 253,786 526,806 526,806
-------- -------- --------
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 60,748,981, 60,748,981
and 64,748,981 shares issued and outstanding
actual, pro forma and pro forma as adjusted,
respectively................................ 607 607 647
Additional paid-in capital................... 177,535 177,535
Deferred compensation........................ (1,919) (1,919) (1,919)
Accumulated deficit.......................... (33,736) (33,736) (33,736)
-------- -------- --------
Total stockholders' equity................. 142,487 142,487
-------- -------- --------
Total capitalization..................... $396,273 $669,293 $
======== ======== ========
</TABLE>
22
<PAGE>
DILUTION
The net tangible book value of our common stock as of December 31, 1999 was
$142.5 million or approximately $2.35 per share. Net tangible book value per
share represents the amount of our stockholders' equity, less intangible
assets, divided by the number of shares of common stock outstanding.
Net tangible book value dilution per share represents the difference between
the following:
(1) the amount paid per share by purchasers of common stock in the offering
(2) the adjusted net tangible book value per share of purchasers of common
stock in the offering immediately after completion of the offering
After giving effect to our sale of 4,000,000 shares of common stock in this
offering, our adjusted net tangible book value as of December 31, 1999, based
on an assumed offering price of $ per share, would have been $ or
$ per share of common stock. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an
immediate dilution of net tangible book value of $ per share to you. The
following table illustrates this dilution:
<TABLE>
<S> <C>
Assumed public offering price per share of common stock............. $
Net tangible book value per share of common stock as of December 31,
1999............................................................... 2.35
Net increase in net tangible book value per share of common stock
attributable to this offering......................................
-------
Pro forma net tangible book value per share as of December 31, 1999
after giving effect to the offering................................
-------
Immediate dilution per share to new investors....................... $
=======
</TABLE>
The table below summarizes on a pro forma basis as of December 31, 1999,
based on an assumed offering price of $ per share, the difference between
our existing stockholders and the new investors in the offering with respect to
the number of shares purchased from us, the total consideration paid and the
average price per share paid.
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration
------------------ ---------------- Average Price
Number Percent Amount Percent per Share
---------- ------- -------- ------- -------------
(Dollars in thousands,
except share data)
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 60,748,981 93.8% $164,662 % $2.71
New investors................. 4,000,000 6.2
---------- ---- -------- ---- -----
Total....................... 64,748,981 100% $ % $
========== ==== ======== ==== =====
</TABLE>
The tables above assume no exercise of outstanding options. As of April 3,
2000, there were 7,787,257 shares of common stock reserved for issuance upon
exercise of outstanding options at a weighted average exercise price of $11.27
per share. The tables above also assume no exercise of the underwriters' over-
allotment option. To the extent that any shares are issued in connection with
outstanding options or the underwriters' over-allotment option, you will
experience further dilution. See "Underwriting."
23
<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. 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
Operations Years Ended December 31,
(May 31, 1996) to ----------------------------------
December 31, 1996 1997 1998 1999
----------------- ---------- ---------- ----------
(Dollars in thousands, except share data)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................. $ -- $ 4,024 $ 43,532 $ 126,861
Expenses:
Customer service and
network operations.... -- 2,155 15,284 70,910
Selling, general and
administrative........ 422 2,887 12,210 32,486
Depreciation and
amortization.......... 1 616 6,671 23,763
Non-cash compensation
expense............... 108 1,300 3,070 7,186
--------- ---------- ---------- ----------
Operating income (loss).. (531) (2,934) 6,297 (7,484)
Other income (expense),
net..................... 17 68 (9,606) (14,302)
Provision for income
taxes................... -- -- (4,660) (600)
Accretion to redemption
value of Class A common
stock................... -- (104) -- --
--------- ---------- ---------- ----------
Net loss applicable to
common stockholders..... $ (514) $ (2,970) $ (7,969) $ (22,386)
========= ========== ========== ==========
Basic net loss per share. $ (0.06) $ (0.07) $ (0.18) $ (0.45)
========= ========== ========== ==========
Diluted net loss per
share................... $ (0.06) $ (0.07) $ (0.18) $ (0.45)
========= ========== ========== ==========
Basic weighted average
common stock
outstanding............. 8,498,000 42,186,500 43,763,000 50,066,315
========= ========== ========== ==========
Diluted weighted average
common stock
outstanding............. 8,498,000 42,186,500 43,763,000 50,066,315
========= ========== ========== ==========
Other Financial Data:
EBITDA................... $ (422) $ (1,018) $ 16,038 $ 23,465
Capital expenditures..... 82 11,655 64,229 128,550
Summary Cash Flow Data:
Net cash provided by
(used in) operating
activities.............. $ (153) $ (1,634) $ 22,507 $ 18,549
Net cash used in
investing activities.... (82) (11,655) (72,189) (130,590)
Net cash provided by
financing activities.... 4,025 11,756 173,466 164,142
Operating Data:
Access lines in service.. -- 7,394 52,011 181,103
Minutes of use
(millions).............. -- 282 3,568 13,362
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------
1999
(Pro Forma
1996 1997 1998 1999 As Adjusted)
------ ------- -------- -------- ------------
(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 $
Current assets................. 3,807 4,738 144,637 219,932
Fixed assets, net.............. 81 11,177 69,973 196,301 196,301
Total assets................... 3,888 15,915 219,574 420,986
Long-term debt, including
current portion............... -- 3,537 185,296 253,786 526,806
Total stockholders' equity
(deficit)..................... (405) (2,075) 19,328 142,487
</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, and $2.5 million for 1999, 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,
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, 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.
. We count access lines as of the end of the period indicated and on a one-
for-one basis using DS-0 equivalents.
. The "Pro Forma As Adjusted" column in the balance sheet data table
reflects the sale of the shares of common stock offered by this
prospectus (assuming an offering price of $ per share) and the sale of
our 2000 notes, completed in January 2000, which resulted in our receipt
of net proceeds of $ million and $265.7 million, respectively, as if
these transactions had been consummated on December 31, 1999.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
General. We provide data, voice and colocation services to large,
communications-intensive users in major cities. We began operations in 1996 and
initiated service first in May 1997. As of December 31, 1999, we offered
service in a total of 16 markets, which encompass a total of 40 metropolitan
statistical areas, or MSAs, and plan to serve 24 markets, or 56 MSAs, by the
end of 2001. As of February 29, 2000, we had sold 270,000 access lines, of
which 215,565 were installed and in service. During 2000, we estimate that we
will install over 225,000 additional access lines as our existing markets
continue to mature and as we launch service in additional new markets. We also
intend to launch our DSL and managed high-speed Internet access, colocation and
peering services during 2000.
Our operating results are expected to change during 2000 as a result of
several trends in our business and in the regulatory environment. First, we
anticipate that the mix of lines we sell will shift from being dominated by ISP
customer lines to being more evenly balanced among ISP, corporate and VAR
customer lines due to expanded marketing efforts. Second, we expect our
revenues from, and margin on, ISP lines to decline due to the impact of
regulatory developments on the potential collection of reciprocal compensation
in certain markets and the renegotiation of our interconnection agreements in
each state in which we operate, as described below. In connection with these
trends, we intend to emphasize the sale of new products that leverage our
network to maximize revenues per line and operating margins. We expect these
products to include high-speed access to the Internet and LANs connected via
DSL technology, as well as managed high-speed Internet access, colocation and
peering services, which will be made possible by our planned Focal Internet
eXchanges, or FIXs. Third, 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. Our revenues are 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 revenues 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. On July 1, 1999, we began
excluding certain reciprocal compensation revenues generated from our
operations in a number of states where recent regulatory developments have
impeded the potential collection of reciprocal compensation receivables in
those states. Reciprocal compensation represented approximately 81%, 75%, 55%
and 36% of total revenues for 1997, 1998, 1999 and December of 1999,
respectively.
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. The most significant
impact of the reduction in reciprocal compensation occurred on October 28,
1999, when our existing interconnection agreement with Ameritech Illinois
expired. As of December 31, 1999, revenues from reciprocal compensation are
being recognized at an effective average rate of $.0025 per minute of use on a
company-wide basis. While per minute of use rates may decline further, we
believe that any decline will be modest. See "Business-- Regulation." We expect
to generate additional revenues from other services that will offset this
anticipated
26
<PAGE>
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. See "Business--Regulation."
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. See the notes to our Consolidated Financial Statements that are
incorporated by reference in this prospectus.
27
<PAGE>
Quarterly Results
The following table sets forth unaudited financial, operating and
statistical data for each of the specified quarters of 1999 and 1998. The
unaudited quarterly financial information has been prepared on the same basis
as our Consolidated Financial Statements, which are incorporated by reference
in this prospectus, 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>
1998 1999
------- -------------------------------------
Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Revenues....................... $17,596 $26,004 $30,327 $34,484 $36,046
EBITDA......................... $6,393 $9,968 $8,422 $5,783 $(708)
Lines Sold to Date............. 68,184 85,329 133,536 169,122 237,167
Lines Installed to Date........ 52,011 70,572 106,749 137,033 181,103
Estimated ISP Lines (% of
installed lines).............. 71% 71% 72% 72% 72%
Lines on Switch (%)............ 100% 100% 100% 100% 100%
ILEC Central Offices
Interconnected................ 340 443 771 948 1,209
ILEC Central Office Colocations
in Service or Under
Development................... -- 23 58 201 221
Average Monthly Revenue Per
Line.......................... $138 $141 $114 $94 $76
Quarterly Minutes of use
switched (in millions)........ 1,444 2,033 2,657 3,514 5,158
Markets in Operation........... 10 12 13 14 16
MSAs Served.................... 29 31 34 38 40
Switches Operational........... 6 7 9 10 12
Focal Customer Colocation Space
in Service (Sq. Ft.).......... 23,302 29,282 41,081 53,478 70,105
Capital Expenditures ($ in
millions)..................... $21 $24 $57(1) $34 $34
Employees...................... 233 312 418 478 592
Sales Force (2)................ 47 65 93 105 116
</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
customers support personnel.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Our 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.
28
<PAGE>
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 outstanding senior discount 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.
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
29
<PAGE>
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 two additional markets in 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 eXchange sites 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, 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 and new
services 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 $128.6 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. We may
also choose to raise additional capital to take advantage of favorable
conditions in the capital markets. See "Risk Factors--Significant Capital
Requirements" and "--Substantial Debt."
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 our 1998 notes, which was offset by
additional net losses of $14.4 million and the increase in our 1999 accounts
receivable, which 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 $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 six new markets and the continued
30
<PAGE>
expansion of our existing markets. Our capital expenditures of $128.6 million
in 1999 exceeded 1998 by $64.4 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.
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 our 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.
The Credit Agreement provides that NTFC Capital Corporation will make term
loans to us solely for the purchase of telecommunications equipment and related
software licenses. To secure the loans, we have granted NTFC a security
interest in the assets acquired with the loans. Loans must be repaid over a
five-year period from the date of the borrowing. Principal and interest
payments are due monthly, and interest accrues based on the five-year swap
rate, plus additional basis points. Interest will accrue at a lower rate if we
meet specified financial tests. As of December 31, 1999, there were no
borrowings available to us under this facility and we had $44.2 million
outstanding under this term loan facility.
We have historically incurred net losses and have an accumulated deficit of
$33.7 million and $11.3 million as of December 31, 1999 and 1998, respectively.
We funded a large portion of our operating losses and capital expenditures
through the offering of our 1998 notes, the August 1999 equity offering, the
January 2000 offering of our 2000 notes and other financings. On February 18,
1998, we received $150 million in gross proceeds from the sale of the 1998
notes. The 1998 notes will accrete to an aggregate stated principal amount of
$270 million by February 15, 2003. 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. During August 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 underwriters' 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 issue of our 2000 notes. The 2000 notes interest payment
dates are July 15 and January 15, commencing July 15, 2000. The net proceeds
from the sale of the 2000 notes, together with the net proceeds of this
offering, amounts available from our existing cash balances and future cash
flow from ongoing operations, will be used to finance the cost to acquire
equipment and network assets, to fund operating losses, for working capital and
potential acquisitions and for general corporate purposes. In addition, we may
choose to obtain future debt or equity financing to fund additional new
products and services.
Prior to these financings, a substantial portion of our funding needs was
met through the private sale of equity securities. In November 1996, we entered
into a stock purchase agreement that provided for the contribution over time of
approximately $26.1 million of equity funding by a group of investors. As of
February 13, 1998, we had received the entire $26.1 million. In addition, in
1997, our Illinois subsidiary borrowed approximately $3.5 million under a bank
credit facility. We used a portion of the net proceeds from the issuance of the
1998 notes to repay this indebtedness and cancel this facility.
Year 2000 Compliance
We did not experience any significant malfunctions or errors in our
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, we do not expect any
31
<PAGE>
significant impact to our on-going business as a result of the "Year 2000
issue." However, it is possible that the full impact of the date change, which
was of concern due to computer programs that use two digits instead of four
digits to define years, has not been fully recognized. For example, it is
possible that Year 2000 or similar issues such as leap year-related problems
may occur with billing, payroll or financial closings at month, quarterly or
year end. We believe that any such problems are likely to be minor and
correctable. In addition, we could still be negatively impacted if our
customers or suppliers are adversely affected by the Year 2000 or similar
issues. We are not currently aware of any significant Year 2000 or similar
problems that have arisen for our customers and suppliers. We spent a total of
$0.3 million on Year 2000 readiness efforts in 1998 and 1999. All of these
costs were expensed as they were incurred.
The discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward-looking statements. Our
future performance is subject to a number of risks and uncertainties that could
cause actual results to differ substantially from those discussed in these
forward-looking statements. Factors that could impact the variability of future
results include those described under "Information Regarding Forward-Looking
Statements."
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.
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 December 31, 1999
------------------------------------
Average
Expected Interest
Maturity Fixed Debt Rate
---------------- ---------- --------
(Dollars
in
thousands)
<S> <C> <C>
1999 $ -- --
2000 -- --
2001 -- --
2002 -- --
2003 -- --
Thereafter 270,000 12.125%
-------- ------
$270,000 12.125%
======== ======
Fair Market
Value $176,850
========
</TABLE>
32
<PAGE>
BUSINESS
Introduction
We are a rapidly growing competitive provider of integrated communications
services. We provide data, voice and colocation 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 Seattle
San Francisco Los Angeles Philadelphia
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 our planned expansion, we will provide service in 24 markets,
encompassing a total of 56 metropolitan statistical areas. As of February 29,
2000, we had sold 270,000 access lines, of which 215,565 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,
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<PAGE>
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 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 voice 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
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<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 for the metropolitan markets we intend to serve by
the end of 2000.
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<PAGE>
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
Residential
Launch Period Switched 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...................... Second 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 substititue other markets.
36
<PAGE>
Strategy
Our objective is to become the provider of choice for data, voice and
colocation 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 voice 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:
IBM Sony Citigroup United Airlines
E*Trade Merrill Lynch MindSpring GTE
CompuServe Nortel Networks Sears Internetworking
OnSite Access Seren InnovationsUniDial CommunicationsMotorola
Sprint
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 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 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.
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<PAGE>
. 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. 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 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
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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.
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
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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
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 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
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customers with faster, reliable solutions to Internet connectivity. We expect
these services will 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.
Voice 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.
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
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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.
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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.
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.
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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 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,
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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. 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.
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. Ameritech Illinois and
Bell Atlantic New York
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accounted for approximately 43% and 20% of our consolidated revenues in 1999,
respectively, and 59% and 16% of our consolidated revenues in 1998,
respectively. Ameritech Illinois accounted for approximately 81% of our
consolidated revenues in 1997. The revenues from these carriers for the three
years ended December 31, 1999 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.
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."
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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 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 ISP
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.
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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 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
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conclusion of negotiations and arbitrations. Failing to reach agreement on
renegotiations, we have filed for arbitration in states in Bell Atlantic and
Ameritech territory. See "Risk Factors--Internet-Related Reciprocal
Compensation" and "--Relationship with ILECs."
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.
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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 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
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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 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 had
been held in abeyance pending the outcome of the federal case.
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 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 28 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 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. In addition, of the seven Federal
District Courts and the three 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
jurisdictionally interstate and therefore 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 lower reciprocal compensation
rates 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 end office 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.
Interstate Access Charges. In addition to charging other carriers reciprocal
compensation for terminating local traffic, we also collect 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. Accordingly, we are actively considering
filing a collection action against AT&T and Sprint for their underpayment of
our tariffed 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.
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 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
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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 February 29, 2000, we employed 669 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, PennsylvaniaWashington, 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 February 29,
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 March 31,
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 Executive Vice President and Chief Financial Officer
Michael L. Mael ........ 43 Executive Vice President and President, Focal Data Communications
Renee M. Martin......... 44 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. Mr. Beatty is a co-founder
of Focal and is responsible for all financial operations and information
systems. From 1994 to 1996,
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Mr. Beatty was a Vice President with NationsBanc Capital Markets, where he was
responsible for investment research coverage of the telecommunications
industry. From 1992 to 1994, Mr. Beatty was a Vice President of
Duff & Phelps Credit Rating Company with responsibility for credit ratings in
the telecommunications and electric utility sectors. From 1985 to 1992, Mr.
Beatty held various technical management positions with Centel Corporation's
local exchange carrier division. Mr. Beatty received his M.B.A. with a
concentration in Finance from the University of Chicago Graduate School of
Business and is a Chartered Financial Analyst. 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.
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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.
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, APAC 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)
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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 3, 2000, there were options covering 5,759,341 shares of Focal's
common stock outstanding under the 1997 Plan with a weighted average exercise
price of $2.99 per share.
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. 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 3, 2000, there were options covering 2,025,218 shares of Focal's
common stock outstanding under the 1998 Plan with a weighted average exercise
price of $34.78 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 3, 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.
The total number of shares available under the 1997 Plan, the 1998 Plan and
the 1998 Non-Employee Plan may not exceed 8,530,000.
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PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth information regarding beneficial ownership of our
common stock as of February 29, 2000 and as adjusted to reflect the sale of the
shares of common stock offered by this prospectus for:
.Each of the Named Executive Officers
.Each of our directors
.All of our executive officers and directors as a group
.Each of the selling stockholders that are not our executive officers or
directors
Except as set forth below, there are no other persons who to our knowledge
as of February 29, 2000 beneficially owned 5% or more of our common stock. The
percentages specified below are based on 60,852,316 shares of common stock
outstanding as of February 29, 2000 and 64,852,316 shares of common stock
outstanding after the offering. 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>
Before this Offering After this Offering
----------------------------------- -----------------------------------
Shares to
Percent be Sold Percent
Number of Shares Beneficially in the Number of Shares Beneficially
Name Beneficially Owned (1) Owned Offering Beneficially Owned (1) Owned
- ---- ---------------------- ------------ --------- ---------------------- ------------
<S> <C> <C> <C> <C> <C>
Named Executive Officers
Robert C. Taylor, Jr.
(2).................... 2,865,385 4.7% 100,000 2,765,385 4.3%
John R. Barnicle (3).... 2,794,585 4.6% 100,000 2,694,585 4.2%
Joseph A. Beatty (4).... 2,865,385 4.7% 100,000 2,765,385 4.3%
Renee M. Martin (5)..... 35,687 * -- 35,687 *
Directors
James N. Perry, Jr. (6). 21,606,425 35.5% 1,529,320(17) 20,077,105 31.0%
Paul J. Finnegan (7).... 21,606,425 35.5% 1,529,320(17) 20,077,105 31.0%
James E. Crawford III
(8).................... 10,084,010 16.6% 713,700(17) 9,369,280 14.5%
Richard D. Frisbie (9).. 5,041,365 8.3% 356,980(17) 4,684,385 7.2%
Paul G. Yovovich (10)... 289,850 * -- 289,850 *
John A. Edwardson (11).. 202,134 * -- 202,134 *
All Executive Officers
and Directors as a
Group
(13 persons) (12)...... 45,988,013 75.3% 2,900,000(17) 43,088,013 66.2%
Selling Stockholders
Madison Dearborn Capital
Partners, L.P. (13).... 21,606,425 35.5% 1,529,320 20,077,105 31.0%
Frontenac VI, L.P. (14). 10,082,980 16.6% 713,700 9,369,280 14.5%
Battery Ventures III,
L.P. (15).............. 5,041,365 8.3% 356,980 4,684,385 7.2%
Brian F. Addy (16)...... 2,690,385 4.4% 100,000 2,590,385 4.0%
</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 February 29, 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.
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(2) Includes 175,000 shares of common stock subject to vesting provisions
contained in the executive's Restricted Stock Agreement. Also includes
1,115,385 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. Assumes no exercise of the
underwriters' over-allotment option.
(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. Assumes no exercise of the
underwriters' over-allotment option.
(4) Includes 175,000 shares of common stock subject to vesting provisions
contained in the executive's Restricted Stock Agreement. Also includes
865,000 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. Assumes no exercise
of the underwriters' over-allotment option.
(5) Consists of shares of common stock subject to options which are
exercisable within 60 days of February 29, 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
February 29, 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
February 29, 2000.
(12) Includes 45,741,871 shares of common stock and an additional 246,142
shares of common stock subject to options which are exercisable within 60
days of February 29, 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. Assumes no exercise of the underwriters' over-allotment
option.
(17) None of Messrs. Perry, Finnegan, Crawford or Frisbie is selling any shares
in his individual capacity. Madison Dearborn, Frontenac and Battery
Ventures are selling shares of their common stock. See footnotes 13, 14
and 15 above. Assumes no exercise of the underwriters' over-allotment
option.
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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 12, 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 20, 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 CAPITAL STOCK
Focal's authorized capital stock consists of 100,000,000 shares of common
stock, $.01 par value per share, and 2,000,000 shares of preferred stock, $.01
par value per share. As of February 29, 2000, 60,852,316 shares of common stock
were issued and outstanding, and no shares of preferred stock were issued or
outstanding.
Common Stock
Holders of common stock are entitled to one vote per share on all matters to
be voted upon by the stockholders generally, including the election of
directors. Holders of common stock will be entitled to receive dividends, if
any, declared from time to time by the board of directors out of funds legally
available for dividends. If Focal is liquidated, dissolved or wound-up, holders
of common stock will share proportionately in all assets available for
distribution. However, dividend and distribution rights of holders of common
stock will be subject to the rights of any holders of any series of preferred
stock as described below. The holders of common stock have no preemptive or
conversion rights. The common stock does not have cumulative voting rights. As
a result, the holder or holders of more than half of the shares of common stock
voting for the election of directors can elect all directors being elected at
that time. All shares of common stock outstanding immediately following the
offering will be fully paid and will not be subject to further calls or
assessments. There are no redemption or sinking fund provisions applicable to
the common stock.
Preferred Stock
The certificate of incorporation gives our board of directors the authority,
without further stockholder action, to issue shares of preferred stock in one
or more series and to fix the relative powers, preferences, rights,
qualifications, limitations or restrictions of the preferred stock, including:
. Dividend rates
. Conversion rights
. Voting powers
. Terms of redemption
. Redemption prices
. Amounts payable upon liquidation
. The number of shares constituting any series or the designation of such
series
The issuance of preferred stock may have the effect of delaying, deferring
or preventing a change in control of Focal and may adversely affect the voting
and other rights of the holders of the common stock. These effects may include
the loss of voting control to others. We currently have no plans to issue any
shares of preferred stock.
Delaware Law and Anti-Takeover Provisions
Section 203 of the Delaware General Corporation Law. We are subject to the
provisions of Section 203 of the Delaware General Corporation Law. Section 203
provides that a Delaware corporation may not engage in any of a broad range of
business combinations with a person or affiliate or associate of the person who
is an
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interested stockholder for a period of three years from the date that the
person became an interested stockholder, unless any of the following occurs:
. the transaction resulting in a person becoming an interested stockholder,
or the business combination, is approved by the board of directors of the
corporation before the person becomes an interested stockholder
. the interested stockholder acquires 85% or more of the outstanding voting
stock of the corporation in the same transaction that makes the person an
interested stockholder, excluding shares owned by persons who are both
officers and directors of the corporation and shares held by employee
stock ownership plans
. on or after the date the person became an interested stockholder, the
business combination is approved by the corporation's board of directors
and by the holders of at least 66 2/3% of the corporation's outstanding
voting stock at a stockholder meeting, excluding shares held by the
interested stockholder
An "interested stockholder" is defined as any person who is:
. The owner of 15% or more of the outstanding voting stock of the
corporation
. An affiliate or associate of the corporation and was the owner of 15% or
more of the outstanding voting stock of the corporation at any time
within the three-year period immediately prior to the date on which it is
sought to be determined whether the person is an interested stockholder
Section 203 may have the effect of delaying, deferring or preventing a
change in control of Focal.
Classified Board of Directors. Our board of directors is divided into three
classes of directors. Each class serves a staggered three-year term. As a
result, approximately one-third of the board of directors is elected each year.
Generally a director stands for election only once every three years. The board
of directors believes that a classified board helps to assure the continuity
and stability of the board and our business strategies and policies. The
classified board provision could have the effect, however, of discouraging a
third party from making a tender offer or otherwise attempting to obtain
control of Focal, even though the attempt might be beneficial to us and our
stockholders. In addition, the classified board provision could delay
stockholders who do not agree with the policies of the board from removing a
majority of the board for two years.
Other Provisions. Our certificate of incorporation and bylaws provide, in
general, that:
. the directors in office will fill any vacancy or newly created
directorship on the board of directors, with any new director to serve
for the remaining term of the class of directors to which he or she is
elected
. directors may be removed by our stockholders only for cause and by a vote
of the holders of at least 66 2/3% of our stock entitled to vote
generally in the election of directors
. special meetings of stockholders may be called only by the board of
directors or a committee of the board of directors expressly authorized
to call a special meeting, and the business permitted to be conducted at
a special meeting is limited to business brought before the meeting by
the board of directors
. election of directors and votes regarding amendments to the certificate
of incorporation or bylaws must be by written ballot
. stockholders may not act by written consent and must act on all proposals
at an annual or special meeting
The bylaws also require that stockholders wishing to bring any business,
including director nominations, before an annual meeting of stockholders
deliver written notice to us not later than 60 days or more than 90 days prior
to the date on which we first mailed our proxy materials for the prior year's
annual meeting of stockholders. If, however, our annual meeting is set for a
date that is not within 30 calendar days of the anniversary of the prior year's
meeting, notice by the stockholder must be delivered to us not later than the
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close of business on the tenth day following the day on which we publicly
announce the date of our annual meeting. The bylaws further require that the
notice by the stockholder set forth, among other things:
. A description of the business to be brought before the meeting, including
information with respect to a nominated director
. The reasons for conducting the business at the meeting
. Specific information concerning the stockholder proposing the business
and the beneficial owner, if any, on whose behalf the proposal is made
The certificate of incorporation and bylaws provide that the provisions
summarized above and the provisions relating to the classification of the
board of directors may not be amended by our stockholders, nor may any
provision inconsistent therewith be adopted by our stockholders, without the
affirmative vote of the holders of at least 66 2/3% of Focal's voting stock,
voting together as a single class.
The foregoing provisions of the certificate of incorporation and bylaws
relating to removal of directors, special meetings of stockholders and advance
notice of stockholder proposals may discourage or make more difficult the
acquisition of control of Focal by means of a tender offer, open market
purchase, proxy contest or otherwise. These provisions may have the effect of
discouraging specific types of coercive takeover practices and inadequate
takeover bids and may encourage persons seeking to acquire control of Focal
first to negotiate with the board of directors. We believe that these measures
benefit us and our stockholders by enhancing our ability to negotiate with the
proponent of any unfriendly or unsolicited proposal to acquire or restructure
Focal. We also believe that the benefits outweigh the disadvantages of
discouraging these proposals because, among other things, negotiation of these
proposals could result in better terms.
Registration Rights
Focal has granted registration rights to some holders of its common stock.
See "Certain Transactions--Registration Rights" for a description of these
registration rights.
Listing
The common stock is quoted on the Nasdaq Stock Market's National Market
under the symbol "FCOM."
Transfer Agent and Registrar
Harris Trust and Savings Bank serves as the transfer agent and registrar
for our common stock.
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<PAGE>
DESCRIPTION OF NOTES
The following description is a summary of the material provisions of the
notes and the notes indentures. It does not restate those agreements in their
entirety. We urge you to read the notes indentures and sample notes, which we
have previously filed with the Securities and Exchange Commission.
1998 Notes
On February 18, 1998, we issued $270 million stated principal amount at
maturity of our 12.125% Senior Discount Notes due 2008, which we refer to as
the "1998 notes." The following description is a summary of the material
provisions of the 1998 notes and the indenture dated February 18, 1998, under
which the 1998 notes were issued, and which we refer to as the "1998
indenture."
The 1998 notes have the following characteristics:
. They mature on February 15, 2008 and are limited to a 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 1998 notes are not secured by any of our assets and rank equally in
right of payment with all our unsubordinated and unsecured indebtedness,
including the 2000 notes described below. The 1998 notes are senior in
right of payment to all of our future subordinated indebtedness.
. They bear interest on the Issue Price at a rate of 12.125% per annum
computed on a semiannual note equivalent basis from the date of issuance
. 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%
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<PAGE>
so long as at least 65% of the original aggregate stated principal amount at
maturity of the 1998 notes remains outstanding after each redemption. We do not
intend to redeem any 1998 notes with the net proceeds of the offering.
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 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 (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 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
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<PAGE>
. Enter into sale and leaseback transactions
. Make investments
. 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
An event of default will occur under the 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
. 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
2000 Notes
On January 12, 2000, we issued $275 million aggregate principal amount of
our 11.875% Senior Notes due 2010, which we refer to as the "2000 notes." The
following description is a summary of the material provisions of the 2000 notes
and the indenture dated January 12, 2000, under which the 2000 notes were
issued, and which we refer to as the "2000 indenture."
The 2000 notes have the following characteristics:
. They mature on January 15, 2010 and are limited to an aggregate principal
amount of $275,000,000
. They were issued at an issue price of $992.80 per $1,000 principal amount
of 2000 notes, which represents 99.28% of the principal amount at
maturity
. They generated gross proceeds to Focal of $265,744,000
. The 2000 notes are not secured by any of our assets and rank equally in
right of payment with all our unsubordinated and unsecured indebtedness,
including the 1998 notes described above. The 2000 notes are senior in
right of payment to all of our future subordinated indebtedness.
. They bear interest at a rate of 11.875% per annum, payable in cash semi-
annually in arrears on each July 15 and January 15, commencing July 15,
2000
We may elect to redeem all or part of the 2000 notes at any time of from
time to time, on or after January 15, 2005 at the redemption prices set forth
below, which are 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 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 notes with the proceeds from one or more
registered underwritten primary public offerings of common stock at a price of
111.875% of the principal amount of the 2000 notes so long as at least 65% of
the original aggregate principal amount of the 2000 notes remains outstanding
after each redemption. We do not intend to redeem any 2000 notes with the net
proceeds of this offering.
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<PAGE>
An event of default will occur under the 2000 indenture if, among other
things:
. any principal payment in excess of $10,000,000 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 $10,000,000
. 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
The 2000 indenture also contains restrictive covenants of the type contained
in the 1998 indenture.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
After this offering, there will be 64,852,316 shares of common stock
outstanding (based on the number of shares of common stock outstanding as of
February 29, 2000 and assuming no exercise of outstanding options after that
date). Of these shares, the 7,000,000 shares offered by this prospectus,
together with the 11,442,500 shares we previously registered and sold to the
public, will be freely transferable without restriction or further registration
under the Securities Act, except for shares purchased by our "affiliates," as
that term is defined in Rule 144 under the Securities Act of 1933. In addition,
approximately 45.8 million shares of our common stock are "restricted
securities" under Rule 144 and may in the future be sold without registration
under the Securities Act of 1933 to the extent permitted by Rule 144 or any
other applicable exemption under the Securities Act of 1933.
Some holders of outstanding shares of our common stock may, under certain
circumstances, include their shares in a registration statement filed by Focal
for a public offering of common stock. Some existing stockholders also have the
right to demand that we register their shares of common stock for resale. See
"Description of Capital Stock--Registration Rights."
In connection with the offering, Focal and the selling stockholders have
agreed that, subject to specified exceptions, they will not offer, sell,
contract to sell, pledge, assign or otherwise dispose of or hedge any shares of
common stock or any securities convertible into or exchangeable for common
stock without the prior written consent of Salomon Smith Barney Inc. for a
period of 90 days after the date of this prospectus. Salomon Smith Barney Inc.
has sole discretion to release any of the shares subject to these lock-up
agreements at any time without notice.
In general, under Rule 144, a person, or persons whose shares are
aggregated, including an affiliate, who has beneficially owned "restricted
securities" for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of (i) 1% of
the number of shares of common stock then outstanding, which will equal
approximately 648,523 shares immediately after the offering (based on the
number of shares of common stock outstanding as of February 29, 2000 and
assuming no exercise of outstanding options after that date) or (ii) the
average weekly trading volume of the common stock on the Nasdaq Stock Market's
National Market during the four calendar weeks preceding the filing with the
Securities and Exchange Commission of a notice on Form 144 with respect to the
sale. Sales under Rule 144 are also subject to other requirements regarding the
manner of sale, notice and availability of current public information about
Focal. Under Rule 144(k), a person who is not deemed to have been an affiliate
of Focal at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner except an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Of the
64,852,316 shares of common stock outstanding immediately following the
offering (based on the number of shares of common stock outstanding as of
February 29, 2000 and assuming no exercise of stock options after that date),
approximately 45.8 million shares will be eligible for sale under Rule 144,
subject to the limitations described above. Of these shares, approximately 2.9
million shares will be eligible for sale under Rule 144(k) and approximately 45
million shares will be subject to lock-up agreements.
As of April 3, we had granted options to purchase an aggregate of 7,787,257
shares of common stock to some of our officers, directors and employees under
our equity incentive plans. Approximately 1,306,496 of the shares subject to
these options are immediately exercisable and 6,480,761 of these shares will
become exercisable at various times following completion of the offering,
subject to conditions contained in our equity incentive plans and in the
agreements covering the options. We have registered the sale of these shares.
As a result, these shares may be freely traded unless they are subject to
vesting restrictions, limitations on resale by "affiliates" under Rule 144 or
the 90-day lock-up agreement described above.
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<PAGE>
UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a summary of the material United States federal income and
estate tax consequences of the ownership and disposition of Focal common stock
applicable to non-U.S. holders. You are a "non-U.S. holder" for United States
federal tax purposes if you are a beneficial owner of Focal common stock and
are any of the following:
. A nonresident alien individual as to the United States
. A corporation (or other entity treated as a corporation under the United
States Internal Revenue Code of 1986 and the Treasury Regulations
thereunder) that is not created or organized under the laws of the United
States or of any State
. A partnership (or other entity treated as a partnership under the United
States Internal Revenue Code of 1986 and the Treasury Regulations
thereunder) that is not created or organized under the laws of the United
States or of any State, except to the extent that future Treasury
Regulations may otherwise provide
. An estate that is not subject to United States federal income tax on a
net income basis in respect of income or gain on the common stock
. A trust, if its administration is not subject to the primary supervision
of a United States court or with respect to which no United States
persons (as defined in the United States Internal Revenue Code of 1986)
have authority to control all substantial decisions of the trust
If you are an individual who is not a United States citizen, you should be
aware that the rules for determining whether you are a nonresident alien
individual as to the United States (and thus subject to United States federal
income and estate taxation as described below) or a resident alien individual
(and thus subject to United States federal income and estate taxation in the
same manner as a United States citizen) are highly complex. You may be a
resident alien individual as to the United States for United States federal
income tax purposes for any year if you are not a United States citizen and any
of the following apply:
. You are a lawful permanent resident of the United States at any time
during the year
. You have elected to be treated as a resident alien individual under the
provisions of the United States Internal Revenue Code of 1986
. You are physically present in the United States for at least 31 days
during the year and a number of other conditions are satisfied
For United States federal estate tax purposes, if you are not a United
States citizen, you will be classified as a nonresident alien individual or as
a resident alien individual according to your domicile. You should consult your
own tax advisors regarding your status as a non-U.S. holder of Focal common
stock.
This discussion does not deal with all aspects of United States federal
income and estate taxation and does not consider the specific facts and
circumstances that may be relevant to a particular non-U.S. holder in light of
such holder's personal investment or tax position. In addition, it does not
address the treatment of non-U.S. holders of Focal common stock under the laws
of any state, local or non-United States taxing jurisdiction.
This discussion is based on the federal tax laws of the United States,
including the Internal Revenue Code of 1986, the Treasury Regulations
promulgated thereunder, rulings and pronouncements of the United States
Internal Revenue Service and judicial decisions now in effect, all of which are
subject to change at any time. Any of these changes may be applied
retroactively in a manner that could cause the tax consequences to vary
substantially from the consequences described below, possibly having an adverse
effect on a beneficial owner of Focal common stock.
You are urged to consult with your own tax advisors with regard to the
application of the federal income and estate tax laws to your particular
situation, as well as the applicability and effect of any state, local or non-
United States tax laws to which you may be subject.
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<PAGE>
Dividends
If you are a non-U.S. holder of Focal common stock, dividends paid to you
are subject to withholding of United States federal income tax at a 30% rate or
at a lower rate if so specified in an applicable income tax treaty. If,
however, the dividends you receive are effectively connected with the conduct
of a trade or business in the United States by you, or by a partnership, trust
or estate that holds the common stock and of which you are a partner or
beneficiary (and the dividends are attributable to a permanent establishment
that is maintained by you or the partnership, trust or estate in the United
States, if this further requirement must be met under the terms of an
applicable income tax treaty as a condition for subjecting you to United States
federal income taxation on a net income basis on the dividends), then the
"effectively connected" dividends generally are not subject to withholding tax,
provided that you satisfy a number of certification requirements. Instead, the
effectively connected dividends are taxed on a net income basis at the same
graduated rates applicable to United States citizens and resident alien
individuals and United States corporations. In general, you will not be
considered to be engaged in a trade or business in the United States solely as
a result of your ownership of Focal common stock.
Effectively connected dividends received by a non-U.S. holder that is a
corporation may, in some circumstances, be subject to an additional "branch
profits tax" at a 30% rate or at a lower rate if so specified in an applicable
income tax treaty.
Under currently effective United States Treasury Regulations, dividends paid
to an address in a foreign country are presumed to be paid to a resident of
that country, unless the payor has actual knowledge to the contrary, for
purposes of the 30% withholding tax discussed above. Under current
interpretations of these United States Treasury Regulations, this presumption
that dividends paid to an address in a foreign country are paid to a resident
of that country, unless the payor has actual knowledge to the contrary, also
applies for purposes of determining whether a lower rate of withholding tax
applies under an applicable income tax treaty.
Under newly issued United States Treasury Regulations, which will generally
apply to dividends paid after December 31, 2000 (the "final withholding
regulations"), if you claim the benefit of a lower rate of withholding tax
under an applicable income tax treaty, you must satisfy a number of
certification requirements. In addition, in the case of Focal common stock held
by a foreign partnership, the certification requirements generally will apply
to the partners of the partnership, and the partnership itself will have to
provide some information, including a United States taxpayer identification
number. The final withholding regulations also provide look-through rules for
tiered partnerships.
If you are eligible for a reduced rate of United States withholding tax
under an applicable income tax treaty, you may obtain a refund of any excess
amounts withheld by filing a refund claim with the Internal Revenue Service.
Gain on Disposition of Common Stock
If you are a non-U.S. holder, you generally will not be subject to United
States federal income tax on any gain recognized on a sale or other disposition
of Focal common stock unless:
. The gain is effectively connected with the conduct of a trade or business
in the United States by you, or by a partnership, trust or estate that
holds the common stock and of which you are a partner or beneficiary (and
the gain is attributable to a permanent establishment maintained by you
or the partnership, trust or estate in the United States, if this further
requirement must be met under the terms of an applicable income tax
treaty as a condition for subjecting you to United States federal income
taxation on a net income basis on gain from the sale or other disposition
of the common stock)
. You are an individual, you or a partnership, trust or estate of which you
are a partner or beneficiary holds the common stock as a capital asset,
and you are present in the United States for 183 or more days during the
year of the sale or other disposition and several other conditions are
satisfied
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<PAGE>
. You are an individual who is a former citizen or long-term resident alien
of the United States and are subject to tax pursuant to the provisions of
the United States federal income tax laws applicable to United States
expatriates
or
. Focal is or has been a "United States real property holding corporation"
for United States federal income tax purposes and you held, directly or
indirectly, at any time during the five-year period ending on the date of
the sale or other disposition, more than 5% of the total outstanding
common stock of Focal (and you are not eligible for any exemption under
an applicable income tax treaty)
Focal has not been, is not and does not anticipate becoming a "United States
real property holding corporation" for United States federal income tax
purposes.
Effectively connected gains are taxed on a net income basis at the same
graduated rates applicable to United States citizens and resident alien
individuals and United States corporations. Effectively connected gains
recognized by a non-U.S. holder that is a corporation may, in some
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or at a lower rate if so specified in an applicable income tax treaty.
Federal Estate Taxes
Focal common stock owned by an individual non-U.S. holder at the time of
death will be included in the holder's gross estate for United States federal
estate tax purposes and thus may be subject to United States federal estate
tax, at graduated rates of up to 55%, unless an applicable estate tax treaty
provides otherwise.
Information Reporting and Backup Withholding Tax
In general, United States information reporting requirements and backup
withholding tax will not apply to dividends paid to you if you are either:
. Subject to the 30% withholding tax discussed above
or
. Not subject to the 30% withholding tax because an applicable income tax
treaty reduces or eliminates the withholding tax
although dividend payments to you will be reported to the Internal Revenue
Service for purposes of the withholding tax. See "--Dividends." If you do not
meet either of these requirements for exemption and you fail to provide
necessary information (including your United States taxpayer identification
number) or otherwise establish your status as an "exempt recipient," you may be
subject to backup withholding of United States federal income tax at a rate of
31% on dividends paid to you with respect to your Focal common stock.
Under current law, Focal may generally treat dividends paid to a payee with
an address outside the United States as exempt from backup withholding tax and
information reporting requirements unless Focal has actual knowledge that the
payee is a United States person. However, under the final withholding
regulations, dividends paid after December 31, 2000 will generally be subject
to backup withholding and information reporting unless a number of
certification requirements are met. See "--Dividends" for the rules applicable
to foreign partnerships under the final withholding regulations.
United States information reporting requirements and backup withholding tax
generally will not apply to a payment of the proceeds of a sale or other
disposition of Focal common stock made outside the United States through an
office outside the United States of a non-U.S. broker. However, United States
information reporting requirements, but not backup withholding tax, will apply
to a payment of the proceeds of a sale or other
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disposition of common stock made outside the United States through an office
outside the United States of a broker that:
. Is a United States person
. Is a non-United States person who derives 50% or more of its gross income
for a specified period preceding the year of the sale or other
disposition from the conduct of a trade or business in the United States
. Is a "controlled foreign corporation" as to the United States for United
States federal income tax purposes
or
. With respect to payments made after December 31, 2000, is a foreign
partnership, if at any time during its tax year:
. one or more of its partners are United States persons, as defined in
applicable Treasury Regulations, who in the aggregate hold more than
50% of the income or capital interests in the partnership
or
. the foreign partnership is engaged in the conduct of a trade or
business in the United States
unless that broker has documentary evidence in its records that the holder or
beneficial owner of the common stock disposed of is a non-U.S. holder (and the
broker has no actual knowledge to the contrary), or the payee otherwise
establishes its entitlement to an exemption.
Payment of the proceeds of a sale or other disposition of Focal common stock
through a United States office of a broker is subject to both United States
information reporting requirements and backup withholding tax at the rate of
31% unless the non-U.S. holder certifies as to its non-U.S. status under
penalties of perjury or otherwise establishes its entitlement to an exemption.
Backup withholding is not an additional tax. A non-U.S. holder generally may
obtain a refund of any excess amounts withheld under the backup withholding
rules by filing a refund claim with the Internal Revenue Service.
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UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus, each underwriter named below has severally
agreed to purchase, and Focal and the selling stockholders have agreed to sell
to such underwriter, the number of shares set forth opposite the name of such
underwriter. Salomon Smith Barney Inc. and Credit Suisse First Boston
Corporation are acting as joint bookrunning managers of the offering.
<TABLE>
<CAPTION>
Name Number of Shares
---- ----------------
<S> <C>
Salomon Smith Barney Inc. ...............................
Credit Suisse First Boston Corporation...................
Goldman, Sachs & Co. ....................................
Bear, Stearns & Co. Inc. ................................
Donaldson, Lufkin & Jenrette Securities Corporation......
Thomas Weisel Partners LLC...............................
---------
Total..................................................
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of specific legal matters by counsel and to some other conditions. The
underwriters are obligated to purchase all of the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation, Goldman, Sachs & Co., Bear, Stearns & Co. Inc., Donaldson,
Lufkin & Jenrette Securities Corporation and Thomas Weisel Partners LLC are
acting as representatives, propose to offer some of the shares directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the shares to selected dealers at the public offering
price less a concession not in excess of $ per share. The underwriters
may allow, and these dealers may reallow, a concession not in excess of
$ per share on sales to other dealers. If all of the shares are not sold
at the initial offering price, the representatives may change the public
offering price and other selling terms.
The selling stockholders have granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase up to
1,050,000 additional shares of common stock at the public offering price less
the underwriting discount. The underwriters may exercise this option solely for
the purpose of covering any over-allotments, if any, in connection with this
offering. To the extent the option is exercised, each underwriter will be
obligated, subject to specified conditions, to purchase a number of additional
shares approximately proportionate to that underwriter's initial purchase
commitment.
Focal and the selling stockholders have agreed that, subject to specified
exceptions, for a period of 90 days after the date of this prospectus, we and
they will not, without the prior written consent of Salomon Smith Barney Inc.,
offer, sell, contract to sell, pledge, assign or otherwise dispose of or hedge
any shares of our common stock or securities convertible into or exchangeable
for common stock. Salomon Smith Barney Inc., in its sole discretion, may
release any of the shares subject to these lock-up agreements at any time
without notice.
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us and the selling stockholders in connection with
this offering. These amounts are shown assuming both no exercise and the full
exercise of the underwriters' option to purchase additional shares of common
stock.
75
<PAGE>
<TABLE>
<CAPTION>
Paid by
Paid by Focal Selling Stockholders
------------------------- -------------------------
No Exercise Full Exercise No Exercise Full Exercise
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Per share............ $ $ $ $
Total................ $ $ $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may purchase and sell shares of common stock in the open market.
These transactions may include over-allotment, syndicate covering transactions
and stabilizing transactions. Over-allotment involves syndicate sales of common
stock in excess of the number of shares to be purchased by the underwriters in
the offering, which creates a syndicate short position. Syndicate covering
transactions involve purchases of the common stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Stabilizing transactions consist of specific bids or purchases of common stock
made for the purpose of preventing or retarding a decline in the market price
of the common stock while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
In addition, in connection with this offering, certain of the underwriters
(and selling group members) may engage in passive market making transactions in
the common stock on the Nasdaq Stock Market's National Market, prior to the
pricing and completion of the offering. Passive market making consists of
displaying bids on the Nasdaq Stock Market's National Market no higher than the
bid prices of independent market makers and making purchases at prices no
higher than those independent bids and effected in response to order flow. Net
purchases by a passive market on each day are limited to a specified percentage
of the passive market maker's average daily trading volume in the common stock
during a specified period and must be discontinued when such limit is reached.
Passive market making may cause the price of the common stock to be higher than
the price that otherwise would exist in the open market in the absence of such
transactions. If passive market making is commenced, it may be discontinued at
any time.
Any of these activities may cause the price of the common stock to be higher
than the price that otherwise would exist in the open market in the absence of
these transactions. These transactions may be effected on the Nasdaq Stock
Market's National Market or in the over-the-counter market, or otherwise and,
if commenced, may be discontinued at any time.
Thomas Weisel Partners LLC, one of the representatives, was organized and
registered as a broker/dealer in December 1998. Since December 1998, Thomas
Weisel Partners has acted as a lead or co-manager on numerous public offerings
of equity securities. Thomas Weisel Partners does not have any material
relationship with us or any of our officers, directors or other controlling
persons, except with respect to its contractual relationship with us under the
underwriting agreement entered into in connection with this offering.
We estimate that our total expenses of this offering will be $1,000,000.
We and the selling stockholders have agreed to indemnify the underwriters
against specified liabilities, including liabilities under the Securities Act,
or to contribute to payments the underwriters may be required to make in
respect of any of those liabilities.
LEGAL MATTERS
Jones, Day, Reavis & Pogue in Chicago, Illinois will pass upon for Focal the
validity of the shares of common stock offered under this prospectus. Swidler
Berlin Shereff Friedman, LLP in Washington, D.C. will pass upon for Focal
specific regulatory legal matters. Paul, Hastings, Janofsky & Walker LLP in New
York, New York will pass upon specific legal matters for the underwriters.
76
<PAGE>
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 indicated 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.
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 Focal and our common
stock. 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 450 New York Regional Office Chicago Regional Office
Fifth Street, N.W. Room 7 World Trade Center Citicorp Center 500 West
1024 Washington, D.C. Suite 1300 New York, New Madison Street Suite 1400
20549 York 10048 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.
. 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.
77
<PAGE>
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
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 other
equally prompt means, within two business days after we receive your request.
78
<PAGE>
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.
79
<PAGE>
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 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 or an
Internet service provider--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).
80
<PAGE>
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.
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 switches/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.
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<PAGE>
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.
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.
82
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7,000,000 Shares
Focal Communications Corporation
Common Stock
[Logo of FOCAL]
----------------
PROSPECTUS
, 2000
----------------
Salomon Smith Barney
Credit Suisse First Boston
Goldman, Sachs & Co.
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Thomas Weisel Partners LLC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following is a statement of estimated expenses, to be paid solely by
Focal, in connection with the distribution of the securities being registered:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 98,822
NASD filing fee............................................... 30,500
Nasdaq National Market listing fee............................ 17,500
Printing expenses............................................. 400,000
Accounting fees and expenses.................................. 25,000
Legal fees and expenses....................................... 280,000
Miscellaneous expenses........................................ 148,178
----------
Total..................................................... $1,000,000
==========
</TABLE>
Item 15. Indemnification of Directors and Officers.
Delaware General Corporation Law. Focal has statutory authority to indemnify
the officers and directors. The applicable provisions of the DGCL state that,
to the extent such person is successful on the merits or otherwise, a
corporation may indemnify any person who was or is a party or who is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation), by reason of the fact
that he is or was a director, officer, employee or agent of the corporation or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise ("such Person"), against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by such Person, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In any threatened,
pending or completed action by or in the right of the corporation, a
corporation also may indemnify any such Person for costs actually and
reasonably incurred by him in connection with that action's defense or
settlement, if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation; however, no
indemnification shall be made with respect to any claim, issue or matter as to
which such Person shall have been adjudged to be liable to the corporation,
unless and only to the extent that a court shall determine that such indemnity
is proper.
Under the applicable provisions of the DGCL, any indemnification shall be
made by the corporation only as authorized in the specific case upon a
determination that the indemnification of the director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct. Such determination shall be made:
(1) By the board of directors by a majority vote of directors who are
not parties to such action, suit or proceeding, even if less than a quorum;
(2) By a committee of directors designated by a majority vote of
directors who are not parties to such action, suit or proceeding, even if
less than a quorum;
(3) If there are no such directors, or if the directors so direct, by
independent legal counsel in a written opinion; or
(4) By the stockholders.
Focal's certificate of incorporation provides for indemnification to the
full extent permitted by the laws of the State of Delaware against and with
respect to threatened, pending or completed actions, suits or proceedings
II-1
<PAGE>
arising from or alleged to arise from, a party's actions or omissions as a
director, officer, employee or agent of Focal or of any subsidiary of Focal or
of any other corporation, partnership, joint venture, trust or other enterprise
which he has served in such capacity at the request of Focal if such acts or
omissions occurred or were or are alleged to have occurred, while said party
was a director or officer of Focal.
Item 16. Exhibits and Financial Statement Schedules.
(A) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
1.1 Form of Underwriting Agreement.+
1.2 Purchase Agreement with Salomon Smith Barney Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, Morgan Stanley & Co.
Incorporated, TD Securities (USA) Inc. and Banc of America
Securities LLC, dated January 7, 2000.+
2.1 Plan of Reorganization and Agreement by and among Focal
Communications Corporation and its Subsidiaries, dated June 12,
1997. (Incorporated by reference to Exhibit No. 2.1 of Focal's
Registration Statement on Form S-4, originally filed with the
Securities and Exchange Commission on April 3, 1998, as amended
(Registration No. 333-49397) (the "S-4"))
3.1 Form of Amended and Restated Certificate of Incorporation.
(Incorporated by reference to Exhibit No. 3.3 of Focal's
Registration Statement on Form S-1, originally filed with the
Securities and Exchange Commission on May 7, 1999, as amended
(Registration No. 333-77995) (the "S-1"))
3.2 Form of Amended and Restated By-Laws. (Incorporated by reference
to Exhibit No. 3.5 of the S-1)
4.1 Indenture with Harris Trust and Savings Bank, dated February 18,
1998. (Incorporated by reference to Exhibit No. 4.1 of the S-4)
4.2 Initial Global 12.125% Senior Discount Note Due February 15, 2008,
dated February 18, 1998. (Incorporated by reference to Exhibit No.
4.2 of the S-4)
4.3 Stock Purchase Agreement with Madison Dearborn Capital Partners,
L.P., Frontenac VI, L.P., Battery Ventures III, L.P., Brian F.
Addy, John R. Barnicle, Joseph Beatty and Robert C. Taylor Jr.,
dated November 27, 1996. (Incorporated by reference to Exhibit No.
4.5 of the S-4)
4.4 Amendment No. 1 to Stock Purchase Agreement with Madison Dearborn
Capital Partners, L.P., Frontenac VI, L.P., Battery Ventures III,
L.P., Brian F. Addy, John R. Barnicle, Joseph Beatty and Robert C.
Taylor Jr., dated January 23, 1998. (Incorporated by reference to
Exhibit No. 4.6 of the S-4)
4.5 Amendment No. 2 to Stock Purchase Agreement with Madison Dearborn
Capital Partners, L.P., Frontenac VI, L.P., Battery Ventures III,
L.P., Brian F. Addy, John R. Barnicle, Joseph Beatty and Robert C.
Taylor, Jr., dated as of August 21, 1998. (Incorporated by
reference to Exhibit No. 4.8 to Focal's Quarterly Report on Form
10-Q for the period ending September 30, 1998, originally filed
with the Securities and Exchange Commission on November 16, 1998
(the "3rd Quarter 1998 10-Q"))
4.6 Vesting Agreement with Madison Dearborn Capital Partners, L.P.,
Brian F. Addy, John R. Barnicle, Joseph Beatty and Robert C.
Taylor, Jr., dated as of November 27, 1996. (Incorporated by
reference to Exhibit No. 4.1 of the 3rd Quarter 1998 10-Q)
4.7 Vesting Agreement with Frontenac VI, L.P., Brian F. Addy, John R.
Barnicle, Joseph Beatty and Robert C. Taylor, Jr., dated as of
November 27, 1996. (Incorporated by reference to Exhibit No. 4.2
of the 3rd Quarter 1998 10-Q)
</TABLE>
II-2
<PAGE>
(A) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
4.8 Vesting Agreement with Battery Ventures III, L.P., Brian F. Addy,
John R. Barnicle, Joseph Beatty and Robert C. Taylor, Jr., dated
as of November 27, 1996. (Incorporated by reference to Exhibit No.
4.3 of the 3rd Quarter 1998 10-Q)
4.9 Amendment No. 1 to Vesting Agreement and Consent as of August 21,
1998, between Focal Communications Corporation with Madison
Dearborn Capital Partners, L.P., Frontenac VI, L.P., Battery
Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph Beatty
and Robert C. Taylor, Jr., dated as of August 21, 1998.
(Incorporated by reference to Exhibit No. 4.4 of the 3rd Quarter
1998 10-Q)
4.10 Amendment No. 1 to Vesting Agreement and Consent as of August 21,
1998, between Focal Communications Corporation with Madison
Dearborn Capital Partners, L.P., Frontenac VI, L.P., Battery
Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph Beatty
and Robert C. Taylor, Jr., dated as of August 21, 1998.
(Incorporated by reference to Exhibit No. 4.5 of the 3rd Quarter
1998 10-Q)
4.11 Amendment No. 1 to Vesting Agreement and Consent as of August 21,
1998, between Focal Communications Corporation with Madison
Dearborn Capital Partners, L.P., Frontenac VI, L.P., Battery
Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph Beatty
and Robert C. Taylor, Jr., dated as of August 21, 1998.
(Incorporated by reference to Exhibit No. 4.6 of the 3rd Quarter
1998 10-Q)
4.12 Form of Restricted Stock Agreement, dated September 30, 1998
between Focal Communications Corporation and each of Brian F.
Addy, John R. Barnicle, Joseph Beatty and Robert C. Taylor, Jr.
(Incorporated by reference to Exhibit No. 4.7 of the 3rd Quarter
1998 10-Q)
4.13 Stockholders Agreement with Madison Dearborn Capital Partners,
L.P., Frontenac VI, L.P., Battery Ventures III, L.P., Brian F.
Addy, John R. Barnicle, Joseph Beatty and Robert C. Taylor, Jr.,
dated November 27, 1996. (Incorporated by reference to Exhibit No.
4.11 of the S-4)
4.14 Amendment No. 1 to Stockholders Agreement with Madison Dearborn
Capital Partners, L.P., Frontenac VI, L.P., Battery Ventures III,
L.P., Brian F. Addy, John R. Barnicle, Joseph Beatty and Robert C.
Taylor, Jr., dated as of July 7, 1998. (Incorporated by reference
to Exhibit No. 4.9 of the 3rd Quarter 1998 10-Q)
4.15 Amendment No. 2 to Stockholders Agreement with Madison Dearborn
Capital Partners, L.P., Frontenac VI, L.P., Battery Ventures III,
L.P., Brian F. Addy, John R. Barnicle, Joseph Beatty and Robert C.
Taylor, Jr., dated as of August 21, 1998. (Incorporated by
reference to Exhibit No. 4.10 of the 3rd Quarter 1998 10-Q)
4.16 Amendment No. 3 to Stockholders Agreement with Madison Dearborn
Capital Partners, L.P., Frontenac VI, L.P., Battery Ventures III,
L.P., Brian F. Addy, John R. Barnicle, Joseph Beatty and Robert C.
Taylor, Jr., dated February 16, 1999. (Incorporated by reference
to Exhibit No. 4.16 of Focal's Annual Report on Form 10-K for the
year ended December 31, 1998, originally filed with the Securities
and Exchange Commission on March 31, 1999, as amended. (the "1998
10-K"))
4.17 Amendment No. 4 to Stockholders Agreement with Madison Dearborn
Capital Partners, L.P., Frontenac VI, L.P., Battery Ventures III,
L.P., Brian F. Addy, John R. Barnicle, Joseph Beatty, and Robert
C. Taylor, Jr., dated May 21, 1999. (Incorporated by reference to
Exhibit No. 4.27 of the S-1)
</TABLE>
II-3
<PAGE>
(A) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
4.18 Executive Stock Agreement and Employment Agreement with Brian F.
Addy, dated November 27, 1996. (Incorporated by reference to
Exhibit No. 4.12 of the S-4) #
4.19 Executive Stock Agreement and Employment Agreement with John R.
Barnicle, dated November 27, 1996. (Incorporated by reference to
Exhibit No. 4.13 of the S-4) #
4.20 Executive Stock Agreement and Employment Agreement with Joseph A.
Beatty, dated November 27, 1996. (Incorporated by reference to
Exhibit No. 4.14 of the S-4) #
4.21 Executive Stock Agreement and Employment Agreement with Robert C.
Taylor, Jr., dated November 27, 1996. (Incorporated by reference
to Exhibit No. 4.15 of the S-4) #
4.22 Amendment No. 1 to Executive Employment Agreement and Consent with
Brian F. Addy, dated as of August 21, 1998. (Incorporated by
reference to Exhibit No. 4.11 of the 3rd Quarter 1998 10-Q) #
4.23 Amendment No. 1 to Executive Employment Agreement and Consent with
John R. Barnicle, dated as of August 21, 1998. (Incorporated by
reference to Exhibit No. 4.12 of the 3rd Quarter 1998 10-Q) #
4.24 Amendment No. 1 to Executive Employment Agreement and Consent with
Joseph Beatty, dated as of August 21, 1998. (Incorporated by
reference to Exhibit No. 4.13 of the 3rd Quarter 1998 10-Q) #
4.25 Amendment No. 1 to Executive Employment Agreement and Consent with
Robert C. Taylor, Jr., dated as of August 21, 1998. (Incorporated
by reference to Exhibit No. 4.14 of the 3rd Quarter 1998 10-Q) #
4.26 Registration Agreement with Madison Dearborn Capital Partners,
L.P., Frontenac VI, L.P., Battery Ventures III, L.P., Brian F.
Addy, John R. Barnicle, Joseph Beatty and Robert C. Taylor, Jr.,
dated November 27, 1996. (Incorporated by reference to Exhibit No.
4.16 of the S-4)
4.27 Amendment No. 1 to Registration Agreement with Madison Dearborn
Capital Partners, L.P., Frontenac VI, L.P., Battery Ventures III,
L.P., Brian F. Addy, John R. Barnicle, Joseph Beatty and Robert C.
Taylor, Jr., dated as of August 21, 1998. (Incorporated by
reference to Exhibit No. 4.15 of the 3rd Quarter 1998 10-Q)
4.28 Indenture with Harris Trust and Savings Bank, dated January 12,
2000.+
4.29 Form of 11 7/8% Senior Note due January 15, 2010 No. 1 (CUSIP No.
344155AD8).+
4.30 Form of 11 7/8% Senior Note due January 15, 2010 No. 2 (CUSIP No.
U3143AB4).+
4.31 Exchange and Registration Agreement with Salomon Smith Barney
Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Morgan
Stanley & Co. Incorporated, TD Securities (USA) Inc. and Banc of
America Securities LLC, dated January 12, 2000.+
4.32 Restricted Shares Agreement with Michael L. Mael, effective as of
January 31, 2000. #+
</TABLE>
II-4
<PAGE>
(A) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
5.1 Opinion of Jones, Day, Reavis & Pogue.+
10.1 Interconnection Agreement with Ameritech Information Industry
Services, dated October 28, 1996. (Incorporated by reference to
Exhibit No. 10.1 of the S-4)
10.2 Interconnection Agreement with Ameritech Information Industry
Services, dated October 31, 1997. (Incorporated by reference to
Exhibit No. 10.2 of the S-4)
10.3 Interconnection Agreement with New York Telephone Company, dated
November 10, 1997. (Incorporated by reference to Exhibit No. 10.3
of the S-4)
10.4 Amended and Restated Interconnection Agreement with Ameritech
Information Industry Services, dated March 16, 1998. (Incorporated
by reference to Exhibit No. 10.4 of the 1998 S-4)
10.5 Interconnection Agreement with Bell Atlantic-Pennsylvania, dated
April 27, 1998. (Incorporated by reference to Exhibit No. 10.26 of
the S-4)
10.6 Interconnection Agreement with Bell Atlantic-Delaware, dated April
27, 1998. (Incorporated by reference to Exhibit No. 10.25 of the
S-4)
10.7 Interconnection Agreement with Bell Atlantic-New Jersey, dated
April 27, 1998. (Incorporated by reference to Exhibit No. 10.24 of
the S-4)
10.8 Interconnection Agreement with GTE-California, dated June 12,
1998. (Incorporated by reference to Exhibit No. 10.23 of the S-4)
10.9 Interconnection Agreement with Pacific Bell, dated June 15, 1998.
(Incorporated by reference to Exhibit No. 10.22 of the S-4)
10.10 Interconnection Agreement with Bell Atlantic-District of Columbia,
dated October 1, 1998. (Incorporated by reference to Exhibit No.
10.1 to Focal's Quarterly Report on Form 10-Q for the period ended
March 31, 1999, originally filed with the Securities and Exchange
Commission on May 7, 1999, as amended. (the "1st Quarter 1999 10-
Q"))
10.11 Interconnection Agreement with Bell Atlantic-Maryland, dated
October 2, 1998. (Incorporated by reference to Exhibit No. 10.2 to
the 1st Quarter 1999 10-Q)
10.12 Interconnection Agreement with Bell Atlantic-Virginia, dated
October 2, 1998. (Incorporated by reference to Exhibit No. 10.3 to
the 1st Quarter 1999 10-Q)
10.13 Interconnection Agreement with U S WEST, dated January 15, 1999.
(Incorporated by reference to Exhibit No. 10.4 to the 1st Quarter
1999 10-Q)
10.14 Interconnection Agreement with Ameritech Information Industry
Services, on behalf of and as agent for Ameritech Michigan, dated
February 10, 1999. (Incorporated by reference to Exhibit No. 10.5
to the 1st Quarter 1999 10-Q)
10.15 Interconnection Agreement with Bell Atlantic-Massachusetts dated
February 15, 1999. (Incorporated by reference to Exhibit No. 10.6
to the 1st Quarter 1999 10-Q)
10.16 First Amendment to the Interconnection Agreement with Ameritech
Information Industry Services, dated September 8, 1998.
(Incorporated by reference to Exhibit No. 10.1 of the 3rd Quarter
1998 10-Q)
10.17 Network Products Purchase Agreement with Northern Telecom Inc.,
dated January 21, 1997. (Incorporated by reference to Exhibit No.
10.5 of the S-4)*
10.18 Amendments No. 1 and No. 2 to Network Products Purchase Agreement
with Northern Telecom Inc., both dated March 6, 1998.
(Incorporated by reference to Exhibit No. 10.6 of the S-4)*
</TABLE>
II-5
<PAGE>
(A) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
10.19 Amendment No. 3 to Network Products Purchase Agreement with
Northern Telecom Inc., dated March 25, 1999. (Incorporated by
reference to Exhibit No. 10.7 to the 1st Quarter 1999 10-Q)*
10.20 Software License with DPI/TFS, Inc., dated April 10, 1997.
(Incorporated by reference to Exhibit No. 10.17 of the S-4)*
10.21 Second Amendment to Lease Agreement for property located at 200
North LaSalle, Chicago, IL, dated November 15, 1997. (Incorporated
by reference to Exhibit No. 10.9 of the S-4)
10.22 Lease Agreement for property located at 200 North LaSalle,
Chicago, IL, dated December 31, 1996. (Incorporated by reference
to Exhibit No. 10.7 of the S-4)
10.23 First Amendment to Lease Agreement for property located at 200
North LaSalle, Chicago, IL, dated May 14, 1997. (Incorporated by
reference to Exhibit No. 10.8 of the S-4)
10.24 Loan and Security Agreement with NTFC Capital Corporation, dated
December 30, 1998. (Incorporated by reference to Exhibit No. 10.17
of the 1998 10-K)*
10.25 Amendment No. 1 to Loan and Security Agreement with NTFC Capital
Corporation, dated as of April 15, 1999. (Incorporated by
reference to Exhibit No. 10.25 of the S-1)
10.26 Purchase Agreement with XCOM Technologies, Inc., dated January 6,
1999. (Incorporated by reference to Exhibit No. 10.8 to the 1st
Quarter 1999 10-Q)*
10.27 Third Amendment to Lease Agreement for property located at 200
North LaSalle, Chicago, IL, dated March 2, 1998. (Incorporated by
reference to Exhibit No. 10.10 of the S-4)
10.28 Fourth Amendment to Lease Agreement for property located at 200
North LaSalle, Chicago, IL, dated April 4, 1998. (Incorporated by
reference to Exhibit No. 10.18 of the S-4)
10.29 Fifth Amendment to Lease Agreement for property located at 200
North LaSalle, Chicago, IL, dated October 14, 1998. (Incorporated
by reference to Exhibit No. 10.9 to the 1st Quarter 1999 10-Q)
10.30 Sixth Amendment to Lease Agreement for property located at 200
North LaSalle, Chicago, IL, dated February 18, 1999. (Incorporated
by reference to Exhibit No. 10.10 to the 1st Quarter 1999 10-Q)
10.31 Lease Agreement for property located at 32 Old Slip, New York, NY,
dated May 20, 1997. (Incorporated by reference to Exhibit No.
10.11 of the S-4)
10.32 Lease Agreement for property located at 650 Townsend Street, San
Francisco, CA, dated January 26, 1998. (Incorporated by reference
to Exhibit No. 10.12 of the S-4)
10.33 First Amendment to Lease Agreement for property located at 650
Townsend Street, San Francisco, CA, dated March 3, 1998.
(Incorporated by reference to Exhibit No. 10.11 to the 1st Quarter
1999 10-Q)
10.34 Second Amendment to Lease Agreement for property located at 650
Townsend Street, San Francisco, CA, dated June 16, 1998.
(Incorporated by reference to Exhibit No. 10.12 to the 1st Quarter
1999 10-Q)
10.35 Third Amendment to Lease Agreement for property located at 650
Townsend Street, San Francisco, CA, dated February 16, 1999.
(Incorporated by reference to Exhibit No. 10.13 to the 1st Quarter
1999 10-Q)
</TABLE>
II-6
<PAGE>
(A) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
10.36 Lease Agreement for property located at 701 Market Street,
Philadelphia, Pennsylvania, dated March 10, 1998. (Incorporated by
reference to Exhibit No. 10.13 of the S-4)
10.37 Lease Agreement for property located at 1120 Vermont Avenue, NW,
Washington, D.C., dated as of May 4, 1998. (Incorporated by
reference to Exhibit No. 10.19 of the S-4)
10.38 First Amendment to Lease Agreement for property located at 1120
Vermont, NW, Washington, D.C., dated July 23, 1998. (Incorporated
by reference to Exhibit No. 10.6 of the 3rd Quarter 1998 10-Q)
10.39 Lease Agreement for property located at 1200 West Seventh Street,
Los Angeles, California, dated as of May 19, 1998. (Incorporated
by reference to Exhibit No. 10.20 of the 1998 S-4)
10.40 First Amendment to Lease Agreement for property located at 1200
West 7th Street, Los Angeles, CA, dated July 8, 1998.
(Incorporated by reference to Exhibit No. 10.5 of the 3rd Quarter
1998 10-Q)
10.41 Lease Agreement for property located at 1511 6th Avenue, Seattle,
WA, dated August 7, 1998. (Incorporated by reference to Exhibit
No. 10.2 of the 3rd Quarter 1998 10-Q)
10.42 Lease Agreement for property located at 23800 West Ten Mile Road,
Southfield, MI, dated August 31, 1998. (Incorporated by reference
to Exhibit No. 10.3 of the 3rd Quarter 1998 10-Q)
10.43 Lease Agreement for property located at One Penn Plaza, New York,
NY, dated September 25, 1998. (Incorporated by reference to
Exhibit No. 10.4 of the 3rd Quarter 1998 10-Q)
10.44 Lease Agreement for property located at 1950 Stemmons Freeway,
Dallas, TX, dated December 15, 1998. (Incorporated by reference to
Exhibit No. 10.14 to the 1st Quarter 1999 10-Q)
10.45 Lease Agreement for property located at One Main Street,
Cambridge, MA, dated January 6, 1999. (Incorporated by reference
to Exhibit No. 10.15 to the 1st Quarter 1999 10-Q)
10.46 Lease Agreement for property located at 250 Williams Street,
Atlanta, GA, dated February 5, 1999. (Incorporated by reference to
Exhibit No. 10.16 to the 1st Quarter 1999 10-Q)
10.47 Lease Agreement for property located at Christopher Columbus Drive
& Washington Street, Jersey City, NJ, dated February 19, 1999.
(Incorporated by reference to Exhibit No. 10.17 to the 1st Quarter
1999 10-Q)
10.48 Employment Agreement with Renee M. Martin, dated March 20, 1998.
(Incorporated by reference to Exhibit No. 10.16 of the S-4) #
10.49 Amendment No. 1 to Executive Employment Agreement with Renee M.
Martin, dated as of August 21, 1998. (Incorporated by reference to
Exhibit No. 10.10 of the 3rd Quarter 1998 10-Q) #
10.50 1997 Nonqualified Stock Option Plan, amended and restated as of
August 21, 1998. (Incorporated by reference to Exhibit No. 10.7 of
the 3rd Quarter 1998 10-Q) #
</TABLE>
II-7
<PAGE>
(A) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
10.51 Amendment to 1997 Nonqualified Stock Option Plan (amended and
restated as of August 21, 1998), dated as of May 21, 1999.
(Incorporated by reference to Exhibit No. 10.58 of the S-1) #
10.52 Form of Amended and Restated Stock Option Agreement. (Incorporated
by reference to Exhibit No. 10.33 of the 1998 10-K) #
10.53 1998 Equity and Performance Incentive Plan. (Incorporated by
reference to Exhibit No. 10.8 of the 3rd Quarter 1998 10-Q) #
10.54 1998 Equity Plan for Non-Employee Directors. (Incorporated by
reference to Exhibit No. 10.9 of the 3rd Quarter 1998 10-Q) #
10.55 Agreement for Sale of Real Property between Focal Communications
Corporation and United Air Lines, Inc., dated August 13, 1998.
(Incorporated by reference to Exhibit No. 10.36 of the 1998 10-K)
10.56 IRU Agreement dated April 28, 1999, by and between Focal Financial
Services, Inc. and Level 3 Communications, LLC. (Incorporated by
reference to Exhibit No. 10.55 of the S-1)*
10.57 Private Line Service Agreement, dated May 4, 1999, by and between
Focal Communications Corporation and WorldCom Technologies, Inc.
(Incorporated by reference to Exhibit No. 10.56 of the S-1)*
10.58 Fiber Optic Network leased Fiber Agreement between Metromedia
Fiber Network Services, Inc. and Focal Financial Services, Inc.,
dated as of May 24, 1999. (Incorporated by reference to Exhibit
No. 10.57 of the S-1)*
10.59 Executive Employment Agreement with Michael L. Mael, dated as of
January 8, 2000. #+
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Jones, Day, Reavis & Pogue. (included as part of its
opinion filed as Exhibit 5.1)+
24.1 Powers of Attorney.
</TABLE>
- --------
* Portions of this exhibit have been omitted pursuant to an order of the
Securities and Exchange Commission granting confidential treatment, and the
omitted portions have been filed separately with the Securities and Exchange
Commission.
# Management Contract or Compensatory Plan
+To be filed by amendment
II-8
<PAGE>
Item 17. Undertakings.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, office or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) for purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement related to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago, State of Illinois, on April 10, 2000.
Focal Communications Corporation
/s/ Robert C. Taylor, Jr.
By: _________________________________
Robert C. Taylor, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on April 10, 2000.
<TABLE>
<CAPTION>
Signature Title(s)
--------- --------
<S> <C>
/s/ Robert C. Taylor, Jr. President, Chief Executive Officer and
___________________________________________ Director
Robert C. Taylor, Jr. (Principal Executive Officer)
/s/ John R. Barnicle Executive Vice President, Chief Operating
___________________________________________ Officer and Director
John R. Barnicle
/s/ Joseph A. Beatty Executive Vice President and Chief
___________________________________________ Financial
Joseph A. Beatty Officer (Principal Financial Officer)
/s/ Gregory J. Swanson Controller (Principal Accounting Officer)
___________________________________________
Gregory J. Swanson
/s/ James E. Crawford, III* Director
___________________________________________
James E. Crawford, III
/s/ John A. Edwardson* Director
___________________________________________
John A. Edwardson
/s/ Paul T. Finnegan* Director
___________________________________________
Paul T. Finnegan
/s/ Richard D. Frisbie* Director
___________________________________________
Richard D. Frisbie
/s/ James N. Perry, Jr.* Director
___________________________________________
James N. Perry, Jr.
/s/ Paul G. Yovovich * Director
___________________________________________
Paul G. Yovovich
</TABLE>
- --------
* Signed by Joseph A. Beatty pursuant to a power of attorney filed as an
exhibit to this registration statement.
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Location
------- ------------------- --------
<C> <S> <C>
1.1 Form of Underwriting Agreement. To be filed by amendment
1.2 Purchase Agreement with Salomon Smith To be filed by amendment
Barney Inc., Donaldson, Lufkin &
Jenrette Securities Corporation, Morgan
Stanley & Co. Incorporated, TD
Securities (USA) Inc. and Banc of
America Securities LLC, dated January 7,
2000.
2.1 Plan of Reorganization and Agreement by Incorporated by reference
and among Focal Communications
Corporation and its Subsidiaries, dated
June 12, 1997.
3.1 Form of Amended and Restated Certificate Incorporated by reference
of Incorporation.
3.2 Form of Amended and Restated By-Laws. Incorporated by reference
4.1 Indenture with Harris Trust and Savings Incorporated by reference
Bank, dated February 18, 1998.
4.2 Initial Global 12.125% Senior Discount Incorporated by reference
Note Due February 15, 2008, dated
February 18, 1998.
4.3 Stock Purchase Agreement with Madison Incorporated by reference
Dearborn Capital Partners, L.P.,
Frontenac VI, L.P., Battery Ventures
III, L.P., Brian F. Addy, John R.
Barnicle, Joseph Beatty and Robert C.
Taylor Jr., dated November 27, 1996.
4.4 Amendment No. 1 to Stock Purchase Incorporated by reference
Agreement with Madison Dearborn Capital
Partners, L.P., Frontenac VI, L.P.,
Battery Ventures III, L.P., Brian F.
Addy, John R. Barnicle, Joseph Beatty
and Robert C. Taylor Jr., dated January
23, 1998.
4.5 Amendment No. 2 to Stock Purchase Incorporated by reference
Agreement with Madison Dearborn Capital
Partners, L.P., Frontenac VI, L.P.,
Battery Ventures III, L.P., Brian F.
Addy, John R. Barnicle, Joseph Beatty
and Robert C. Taylor, Jr., dated as of
August 21, 1998.
4.6 Vesting Agreement with Madison Dearborn Incorporated by reference
Capital Partners, L.P., Brian F. Addy,
John R. Barnicle, Joseph Beatty and
Robert C. Taylor, Jr., dated as of
November 27, 1996.
4.7 Vesting Agreement with Frontenac VI, Incorporated by reference
L.P., Brian F. Addy, John R. Barnicle,
Joseph Beatty and Robert C. Taylor, Jr.,
dated as of November 27, 1996.
4.8 Vesting Agreement with Battery Ventures Incorporated by reference
III, L.P., Brian F. Addy, John R.
Barnicle, Joseph Beatty and Robert C.
Taylor, Jr., dated as of November 27,
1996.
4.9 Amendment No. 1 to Vesting Agreement and Incorporated by reference
Consent as of August 21, 1998, between
Focal Communications Corporation with
Madison Dearborn Capital Partners, L.P.,
Frontenac VI, L.P., Battery Ventures
III, L.P., Brian F. Addy, John R.
Barnicle, Joseph Beatty and Robert C.
Taylor, Jr., dated as of August 21,
1998.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Location
------- ------------------- --------
<C> <S> <C>
4.10 Amendment No. 1 to Vesting Agreement and Incorporated by reference
Consent as of August 21, 1998, between
Focal Communications Corporation with
Madison Dearborn Capital Partners, L.P.,
Frontenac VI, L.P., Battery Ventures
III, L.P., Brian F. Addy, John R.
Barnicle, Joseph Beatty and Robert C.
Taylor, Jr., dated as of August 21,
1998.
4.11 Amendment No. 1 to Vesting Agreement and Incorporated by reference
Consent as of August 21, 1998, between
Focal Communications Corporation with
Madison Dearborn Capital Partners, L.P.,
Frontenac VI, L.P., Battery Ventures
III, L.P., Brian F. Addy, John R.
Barnicle, Joseph Beatty and Robert C.
Taylor, Jr., dated as of August 21,
1998.
4.12 Form of Restricted Stock Agreement, Incorporated by reference
dated September 30, 1998 between Focal
Communications Corporation and each of
Brian F. Addy, John R. Barnicle, Joseph
Beatty and Robert C. Taylor, Jr.
4.13 Stockholders Agreement with Madison Incorporated by reference
Dearborn Capital Partners, L.P.,
Frontenac VI, L.P., Battery Ventures
III, L.P., Brian F. Addy, John R.
Barnicle, Joseph Beatty and Robert C.
Taylor Jr., dated November 27, 1996.
4.14 Amendment No. 1 to Stockholders Incorporated by reference
Agreement with Madison Dearborn Capital
Partners, L.P., Frontenac VI, L.P.,
Battery Ventures III, L.P., Brian F.
Addy, John R. Barnicle, Joseph Beatty
and Robert C. Taylor, Jr., dated as of
July 7, 1998.
4.15 Amendment No. 2 to Stockholders Incorporated by reference
Agreement with Madison Dearborn Capital
Partners, L.P., Frontenac VI, L.P.,
Battery Ventures III, L.P., Brian F.
Addy, John R. Barnicle, Joseph Beatty
and Robert C. Taylor, Jr., dated as of
August 21, 1998.
4.16 Amendment No. 3 to Stockholders Incorporated by reference
Agreement with Madison Dearborn Capital
Partners, L.P., Frontenac VI, L.P.,
Battery Ventures III, L.P., Brian F.
Addy, John R. Barnicle, Joseph Beatty
and Robert C. Taylor, Jr., dated
February 16, 1999.
4.17 Amendment No. 4 to Stockholders Incorporated by reference
Agreement with Madison Dearborn Capital
Partners, L.P., Frontenac VI, L.P.,
Battery Ventures III, L.P., Brian F.
Addy, John R. Barnicle, Joseph Beatty,
and Robert C. Taylor, Jr., dated May 21,
1999.
4.18 Executive Stock Agreement and Employment Incorporated by reference
Agreement with Brian F. Addy, dated
November 27, 1996. #
4.19 Executive Stock Agreement and Employment Incorporated by reference
Agreement with John R. Barnicle, dated
November 27, 1996. #
4.20 Executive Stock Agreement and Employment Incorporated by reference
Agreement with Joseph A. Beatty, dated
November 27, 1996. #
4.21 Executive Stock Agreement and Employment Incorporated by reference
Agreement with Robert C. Taylor, Jr.,
dated November 27, 1996. #
4.22 Amendment No. 1 to Executive Employment Incorporated by reference
Agreement and Consent with Brian F.
Addy, dated as of August 21, 1998. #
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Location
------- ------------------- --------
<C> <S> <C>
4.23 Amendment No. 1 to Executive Employment Incorporated by reference
Agreement and Consent with John R.
Barnicle, dated as of August 21, 1998. #
4.24 Amendment No. 1 to Executive Employment Incorporated by reference
Agreement and Consent with Joseph
Beatty, dated as of August 21, 1998. #
4.25 Amendment No. 1 to Executive Employment Incorporated by reference
Agreement and Consent with Robert C.
Taylor, Jr., dated as of August 21,
1998. #
4.26 Registration Agreement with Madison Incorporated by reference
Dearborn Capital Partners, L.P.,
Frontenac VI, L.P., Battery Ventures
III, L.P., Brian F. Addy, John R.
Barnicle, Joseph Beatty and Robert C.
Taylor Jr., dated November 27, 1996.
4.27 Amendment No. 1 to Registration Incorporated by reference
Agreement with Madison Dearborn Capital
Partners, L.P., Frontenac VI, L.P.,
Battery Ventures III, L.P., Brian F.
Addy, John R. Barnicle, Joseph Beatty
and Robert C. Taylor, Jr., dated as of
August 21, 1998.
4.28 Indenture with Harris Trust and Savings To be filed by amendment
Bank, dated January 12, 2000.
4.29 Form of 11 7/8% Senior Note due January To be filed by amendment
15, 2010 No. 1 (CUSIP No. 344155AD8).
4.30 Form of 11 7/8% Senior Note due January To be filed by amendment
15, 2010 No. 2 (CUSIP No. U3143AB4).
4.31 Exchange and Registration Agreement with To be filed by amendment
Salomon Smith Barney Inc., Donaldson,
Lufkin & Jenrette Securities
Corporation, Morgan Stanley & Co.
Incorporated, TD Securities (USA) Inc.
and Banc of America Securities LLC,
dated January 12, 2000.
4.32 Restricted Shares Agreement with Michael To be filed by amendment
L. Mael, effective as of January 31,
2000. #
5.1 Opinion of Jones, Day, Reavis & Pogue. To be filed by amendment
10.1 Interconnection Agreement with Ameritech Incorporated by reference
Information Industry Services, dated
October 28, 1996.
10.2 Interconnection Agreement with Ameritech Incorporated by reference
Information Industry Services, dated
October 31, 1997.
10.3 Interconnection Agreement with New York Incorporated by reference
Telephone Company, dated November 10,
1997.
10.4 Amended and Restated Interconnection Incorporated by reference
Agreement with Ameritech Information
Industry Services, dated March 16, 1998.
10.5 Interconnection Agreement with Bell Incorporated by reference
Atlantic-Pennsylvania, dated April 27,
1998.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Location
------- ------------------- --------
<C> <S> <C>
10.6 Interconnection Agreement with Bell Incorporated by reference
Atlantic-Delaware, dated April 27, 1998.
10.7 Interconnection Agreement with Bell Incorporated by reference
Atlantic--New Jersey, dated April 27,
1998.
10.8 Interconnection Agreement with GTE-- Incorporated by reference
California, dated June 12, 1998.
10.9 Interconnection Agreement with Pacific Incorporated by reference
Bell, dated June 15, 1998.
10.10 Interconnection Agreement with Bell- Incorporated by reference
Atlantic--District of Columbia, dated
October 1, 1998.
10.11 Interconnection Agreement with Bell- Incorporated by reference
Atlantic--Maryland, dated October 2,
1998.
10.12 Interconnection Agreement with Bell Incorporated by reference
Atlantic--Virginia, dated October 2,
1998.
10.13 Interconnection Agreement with U S WEST, Incorporated by reference
dated January 15, 1999.
10.14 Interconnection Agreement with Ameritech Incorporated by reference
Information Industry Services, on behalf
of and as agent for Ameritech Michigan,
dated February 10, 1999.
10.15 Interconnection Agreement with Bell Incorporated by reference
Atlantic--Massachusetts, dated February
15, 1999.
10.16 First Amendment to the Interconnection Incorporated by reference
Agreement with Ameritech Information
Industry Services, dated September 8,
1998.
10.17 Network Products Purchase Agreement with Incorporated by reference
Northern Telecom Inc., dated January 21,
1997.*
10.18 Amendments No. 1 and No. 2 to Network Incorporated by reference
Products Purchase Agreement with
Northern Telecom Inc., both dated March
6, 1998.*
10.19 Amendment No. 3 to Network Products Incorporated by reference
Purchase Agreement with Northern Telecom
Inc., dated March 25, 1999.*
10.20 Software License with DPI/TFS, Inc., Incorporated by reference
dated April 10, 1997.*
10.21 Second Amendment to Lease Agreement for Incorporated by reference
property located at 200 North LaSalle,
Chicago, IL, dated November 15, 1997.
10.22 Lease Agreement for property located at Incorporated by reference
200 North LaSalle, Chicago, IL, dated
December 31, 1996.
10.23 First Amendment to Lease Agreement for Incorporated by reference
property located at 200 North LaSalle,
Chicago, IL, dated May 14, 1997.
10.24 Loan and Security Agreement with NTFC Incorporated by reference
Capital Corporation, dated December 30,
1998.*
10.25 Amendment No. 1 to Loan and Security Incorporated by reference
Agreement with NTFC Capital Corporation,
dated as of April 15, 1999.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Location
------- ------------------- --------
<C> <S> <C>
10.26 Purchase Agreement with XCOM Incorporated by reference
Technologies, Inc., dated January 6,
1999.*
10.27 Third Amendment to Lease Agreement for Incorporated by reference
property located at 200 North LaSalle,
Chicago, IL, dated March 2, 1998.
10.28 Fourth Amendment to Lease Agreement for Incorporated by reference
property located at 200 North LaSalle,
Chicago, IL, dated April 4, 1998.
10.29 Fifth Amendment to Lease Agreement for Incorporated by reference
property located at 200 North LaSalle,
Chicago, IL, dated October 14, 1998.
10.30 Sixth Amendment to Lease Agreement for Incorporated by reference
property located at 200 North LaSalle,
Chicago, IL, dated February 18, 1999.
10.31 Lease Agreement for property located at Incorporated by reference
32 Old Slip, New York, NY, dated May 20,
1997.
10.32 Lease Agreement for property located at Incorporated by reference
650 Townsend Street, San Francisco, CA,
dated January 26, 1998.
10.33 First Amendment to Lease Agreement for Incorporated by reference
property located at 650 Townsend Street,
San Francisco, CA, dated March 3, 1998.
10.34 Second Amendment to Lease Agreement for Incorporated by reference
property located at 650 Townsend Street,
San Francisco, CA, dated June 16, 1998.
10.35 Third Amendment to Lease Agreement for Incorporated by reference
property located at 650 Townsend Street,
San Francisco, CA, dated February 16,
1999.
10.36 Lease Agreement for property located at Incorporated by reference
701 Market Street, Philadelphia,
Pennsylvania, dated March 10, 1998.
10.37 Lease Agreement for property located at Incorporated by reference
1120 Vermont Avenue, NW, Washington,
D.C., dated as of May 4, 1998.
10.38 First Amendment to Lease Agreement for Incorporated by reference
property located at 1120 Vermont, NW,
Washington, D.C., dated July 23, 1998.
10.39 Lease Agreement for property located at Incorporated by reference
1200 West Seventh Street, Los Angeles,
California, dated as of May 19, 1998.
10.40 First Amendment to Lease Agreement for Incorporated by reference
property located at 1200 West 7th
Street, Los Angeles, CA, dated July 8,
1998.
10.41 Lease Agreement for property located at Incorporated by reference
1511 6th Avenue, Seattle, WA, dated
August 7, 1998.
10.42 Lease Agreement for property located at Incorporated by reference
23800 West Ten Mile Road, Southfield,
MI, dated August 31, 1998.
10.43 Lease Agreement for property located at Incorporated by reference
One Penn Plaza, New York, NY, dated
September 25, 1998.
10.44 Lease Agreement for property located at Incorporated by reference
1950 Stemmons Freeway, Dallas, TX, dated
December 15, 1998.
10.45 Lease Agreement for property located at Incorporated by reference
One Main Street, Cambridge, MA, dated
January 6, 1999.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Location
------- ------------------- --------
<C> <S> <C>
10.46 Lease Agreement for property located at Incorporated by reference
250 Williams Street, Atlanta, GA, dated
February 5, 1999.
10.47 Lease Agreement for property located at Incorporated by reference
Christopher Columbus Drive & Washington
Street, Jersey City, NJ, dated February
19, 1999.
10.48 Employment Agreement with Renee M. Incorporated by reference
Martin, dated March 20, 1998. #
10.49 Amendment No. 1 to Executive Employment Incorporated by reference
Agreement with Renee M. Martin, dated as
of August 21, 1998. #
10.50 1997 Nonqualified Stock Option Plan, Incorporated by reference
amended and restated as of August 21,
1998. #
10.51 Amendment to 1997 Nonqualified Stock Incorporated by reference
Option Plan (amended and restated as of
August 21, 1998), dated as of May 21,
1999. #
10.52 Form of Amended and Restated Stock Incorporated by reference
Option Agreement. #
10.53 1998 Equity and Performance Incentive Incorporated by reference
Plan. #
10.54 1998 Equity Plan for Non-Employee Incorporated by reference
Directors. #
10.55 Agreement for Sale of Real Property Incorporated by reference
between Focal Communications Corporation
and United Air Lines, Inc., dated August
13, 1998.
10.56 IRU Agreement dated April 28, 1999, by Incorporated by reference
and between Focal Financial Services,
Inc. and Level 3 Communications, LLC.*
10.57 Private Line Service Agreement, dated Incorporated by reference
May 4, 1999, between Focal
Communications Corporation and WorldCom
Technologies, Inc.*
10.58 Fiber Optic Network leased Fiber Incorporated by reference
Agreement between Metromedia Fiber
Network Services, Inc. and Focal
Financial Services, Inc., dated as of
May 24, 1999.*
10.59 Executive Employment Agreement with To be filed by amendment
Michael L. Mael, dated as of January 8,
2000. #
21.1 Subsidiaries of the Registrant. Filed herewith
23.1 Consent of Arthur Andersen LLP. Filed herewith
23.2 Consent of Jones, Day, Reavis & Pogue. To be filed by amendment
(included as part of its opinion filed
as Exhibit 5.1)
24.1 Powers of Attorney. Filed herewith
</TABLE>
- --------
* Portions of this exhibit have been omitted pursuant to an order of the
Securities and Exchange Commission granting confidential treatment, and the
omitted portions have been filed separately with the Securities and Exchange
Commission.
#Management Contract or Compensatory Plan
6
<PAGE>
Exhibit 21.1
FOCAL COMMUNICATIONS CORPORATION
List of Subsidiaries
Subsidiary State of Incorporation
---------- ----------------------
Focal Communications Corporation of California Delaware
Focal Communications Corporation of Colorado Delaware
Focal Communications Corporation of Florida Delaware
Focal Communications Corporation of Georgia Delaware
Focal Communications Corporation of Illinois Delaware
Focal Communications Corporation of Massachusetts Delaware
Focal Communications Corporation of Michigan Delaware
Focal Communications Corporation of Mid-Atlantic Delaware
Focal Communications Corporation of Minnesota Delaware
Focal Communications Corporation of Missouri Delaware
Focal Communications Corporation of New Jersey Delaware
Focal Communications Corporation of New York Delaware
Focal Communications Corporation of Ohio Delaware
Focal Communications Corporation of Pennsylvania Delaware
Focal Communications Corporation of Texas Delaware
Focal Communications Corporation of Virginia Virginia
Focal Communications Corporation of Washington Delaware
Focal Communications Corporation of Wisconsin Delaware
Focal Financial Services, Inc. Delaware
Focal International Corp. Delaware
Focal Telecommunications Corporation Delaware
<PAGE>
Exhibit 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports dated February 9, 2000
included in Focal Communications Corporation's Form 10-K for the year ended
December 31, 1999, and to all references to our Firm included in this
registration statement.
/s/ Arthur Andersen LLP
- -----------------------------------
Arthur Andersen LLP
Chicago, Illinois
April 7, 2000
<PAGE>
Exhibit 24.1
OFFICERS AND DIRECTORS OF
FOCAL COMMUNICATIONS CORPORATION
POWER OF ATTORNEY
The undersigned officers and/or directors of Focal Communications Corporation
(the "Company") hereby constitute and appoint Robert C. Taylor, Jr., John R.
Barnicle, Joseph A. Beatty and Renee M. Martin, or any of them, with full power
of substitution and resubstitution, as attorneys or attorney of the undersigned,
to sign and file under the Securities Act of 1933, as amended, (i) a
registration statement on Form S-3 relating to the registration of shares of the
Company's common stock to be issued pursuant to an underwritten public offering,
(ii) any registration statement related to the offering which is effective
immediately upon filing pursuant to Rule 462(b) under said Act, and (iii) any
and all amendments, supplements and exhibits to such registration statement,
including post-effective amendments, and any and all applications or other
documents to be filed with the Securities and Exchange Commission pertaining to
such registration statements or amendments, with full power and authority to do
and perform any and all acts and things whatsoever required and necessary to be
done in the premises, hereby ratifying and approving the acts of said attorney
and any of them and any such substitute.
EXECUTED this 5th day of April, 2000.
/s/ Robert C. Taylor, Jr. /s/ John R. Barnicle
- --------------------------------------- -------------------------------------
John R. Barnicle, Director,
Robert C. Taylor, Jr., Director, Executive Vice President and
President and Chief Executive Officer Chief Operating Officer
/s/ Joseph A. Beatty /s/ Gregory J. Swanson
- --------------------------------------- -------------------------------------
Joseph A. Beatty, Executive Vice Gregory J. Swanson, Controller
President and Chief Financial Officer
/s/ James E. Crawford, III /s/ John A. Edwardson
- --------------------------------------- -------------------------------------
James E. Crawford, III, Director John A. Edwardson, Director
/s/ Paul J. Finnegan /s/ Richard D. Frisbie
- --------------------------------------- -------------------------------------
Paul J. Finnegan, Director Richard D. Frisbie, Director
/s/ James N. Perry, Jr. /s/ Paul A. Yovovich
- --------------------------------------- -------------------------------------
James N. Perry, Jr., Director Paul A. Yovovich, Director
