<PAGE>
As filed with the Securities and Exchange Commission on May 12, 2000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
----------------
For the Quarterly Period Ended March 31, 2000 Commission file number 333-49397
----------------
Focal Communications Corporation
(Exact name of registrant as specified in its charter)
----------------
Delaware 36-4167094
(State of incorporation) (IRS Employer Identification
Number)
200 N. LaSalle Street
Suite 1100
Chicago, IL 60601
(Address of principal executive offices, including zip code)
(312) 895-8400
(Registrant's telephone number)
----------------
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or required for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes X No
The number of shares outstanding of the issuer's common stock, as of April
28, 2000:
Common stock ($.01 par value) 60,967,193 shares
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)............................... 4
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999........................... 4
Condensed Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999.............................................. 5
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999........................... 6
Condensed Notes to Interim Consolidated Financial Statements... 7
Management's Discussion and Analysis of Financial Condition and
Item 2. Results of Operations.......................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 17
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 19
Item 2. Changes in Securities and Use of Proceeds...................... 19
Item 3. Defaults Upon Senior Securities................................ 19
Item 4. Submission of Matters to a Vote of Security Holders............ 19
Item 5. Other Information.............................................. 19
Item 6. Exhibits and Reports on Form 8-K............................... 19
SIGNATURES.............................................................. 20
</TABLE>
<PAGE>
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
We make statements in this Report on Form 10-Q 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, regulatory developments, 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
affect these statements or 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 our 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
3
<PAGE>
Part I--Financial Information
Item 1. Financial Statements
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended March 31, 2000 and 1999
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three months
ended March 31
------------------------
2000 1999
----------- -----------
<S> <C> <C>
REVENUES:
Data services..................................... $ 32,190 $ 19,979
Telecom services.................................. 13,139 6,025
----------- -----------
Total revenues.................................. 45,329 26,004
----------- -----------
EXPENSES:
Customer service and network operations........... 33,255 10,369
Selling, general and administrative............... 14,581 5,666
Depreciation and amortization..................... 10,376 4,027
Non-cash compensation expense..................... 1,448 1,560
----------- -----------
Total operating expenses........................ 59,660 21,622
----------- -----------
OPERATING INCOME (LOSS)............................. (14,331) 4,382
----------- -----------
OTHER INCOME (EXPENSE):
Interest income................................... 5,808 1,306
Interest expense, net............................. (12,875) (5,404)
Other income (expense), net....................... 242 --
----------- -----------
Total other expense............................. (6,825) (4,098)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................... (21,156) 284
INCOME TAX BENEFIT.................................. 331 --
----------- -----------
NET INCOME (LOSS)................................... $ (20,825) $ 284
=========== ===========
BASIC NET INCOME (LOSS) PER SHARE OF COMMON STOCK... $ (0.35) $ 0.01
=========== ===========
DILUTED NET INCOME (LOSS) PER SHARE OF COMMON
STOCK.............................................. $ (0.35) $ 0.01
=========== ===========
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING.................................. 60,150,761 43,961,000
=========== ===========
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON
STOCK OUTSTANDING.................................. 60,150,761 51,803,000
=========== ===========
</TABLE>
The accompanying condensed notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
As of March 31, 2000 and December 31, 1999
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................... $403,735 $178,142
Short-term investments...................... 10,035 10,000
Accounts receivable, net of allowance for
doubtful accounts of $8,000 and $7,700 at
March 31, 2000 and December 31, 1999,
respectively............................... 35,018 27,247
Other current assets........................ 5,424 4,543
-------- --------
Total current assets...................... 454,212 219,932
-------- --------
PROPERTY, PLANT and EQUIPMENT, at cost........ 276,670 224,470
Less--Accumulated depreciation and
amortization............................... (38,058) (28,169)
-------- --------
Property, Plant and Equipment, net........ 238,612 196,301
OTHER NONCURRENT ASSETS....................... 10,917 4,753
-------- --------
$703,741 $420,986
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................ $ 36,021 $ 15,324
Accrued liabilities......................... 11,146 7,560
Current maturities of long-term debt........ 9,484 9,252
-------- --------
Total current liabilities................. 56,651 32,136
-------- --------
LONG-TERM DEBT, net of current maturities..... 521,215 244,534
-------- --------
COMMITMENTS AND CONTINGENCIES
OTHER NONCURRENT LIABILITIES.................. 2,365 1,829
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 100,000,000
shares authorized; 60,897,488 and
60,748,981 issued and outstanding at March
31, 2000 and December 31, 1999,
respectively............................... 609 607
Additional paid-in capital.................. 178,328 177,535
Deferred compensation....................... (866) (1,919)
Accumulated deficit......................... (54,561) (33,736)
-------- --------
Total stockholders' equity................ 123,510 142,487
-------- --------
$703,741 $420,986
======== ========
</TABLE>
The accompanying condensed notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended March 31, 2000 and 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
For the three months ended
March 31
----------------------------
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ (20,825) $ 284
Adjustments to reconcile net income (loss) to net
cash
provided by(used in) operating activities--
Depreciation and amortization.................. 10,376 4,027
Non-cash compensation expense.................. 1,448 1,560
Gain on sale of investment in affiliate........ (199) --
Loss on disposal of property, plant and
equipment..................................... 99 --
Amortization of obligation under capital
lease......................................... 559 --
Amortization of discount on senior notes....... 5,612 4,952
Provision for losses on accounts receivable.... 1,772 1,145
Changes in operating assets and liabilities--
Accounts receivable.......................... (9,543) (7,328)
Other current assets......................... (881) (305)
Accounts payable and accrued liabilities..... 24,283 (6,695)
Other noncurrent assets and liabilities,
net......................................... 622 1,055
------------- -------------
Net cash provided by (used in) operating
activities................................ 13,323 (1,305)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................... (52,314) (24,476)
Change in short-term investments............... (35) 499
Proceeds from sale of investment in affiliate.. 900 --
------------- -------------
Net cash used in investing activities...... (51,449) (23,977)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred debt issuance costs................... (7,424) --
Proceeds from issuance of long-term debt....... 273,020 5,807
Payments on long-term debt..................... (2,277) (509)
Net proceeds from the issuance of common
stock......................................... 400 542
------------- -------------
Net cash provided by financing activities.. 263,719 5,840
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 225,593 (19,442)
CASH AND CASH EQUIVALENTS, beginning of period... 178,142 126,041
------------- -------------
CASH AND CASH EQUIVALENTS, end of period......... $ 403,735 $ 106,599
============= =============
</TABLE>
The accompanying condensed notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share amounts)
1. Basis of Presentation
Except as otherwise required by the context, references in this Form 10-Q to
"Focal", "we", "us", or "our" refer to the combined businesses of Focal
Communications Corporation and all of its subsidiaries. The accompanying
interim condensed consolidated financial statements reflect all adjustments,
consisting of normal recurring accruals, which we believe are necessary to
present fairly the financial position, results of operations, and cash flows
for Focal for the respective periods presented. Certain information and
footnote disclosures normally included in the annual consolidated financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission for Form 10-Q. These
interim condensed consolidated financial statements should be read in
conjunction with our Annual Report on Form 10-K for the year ended December
31, 1999, filed on March 10, 2000. The consolidated balance sheet at December
31, 1999 included herein was derived from our audited consolidated financial
statements, but does not include all disclosures required under generally
accepted accounting principles.
Certain amounts in the prior period's consolidated financial statements have
been reclassified to conform with the current period presentation.
2. Risks and Uncertainties
As a result of several trends in our business and the current regulatory
environment, we expect revenues from reciprocal compensation to decline as a
percentage of total revenues. A reduction in or elimination of revenues
attributable to reciprocal compensation which is not offset by increases in
other revenues generated by us may have a material adverse effect on us and
our results of operations.
Reciprocal compensation payments are amounts paid by one carrier to send
traffic to another carrier's network. Reciprocal compensation is currently a
significant component of our total revenues representing approximately 73% and
39% of total revenues for the three months ended March 31, 1999 and 2000,
respectively. Reciprocal compensation represented approximately 35% of our
total revenues for the first quarter of 2000, if adjusted to exclude
reciprocal compensation revenues earned in prior periods.
7
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
3. Property, Plant and Equipment
Property, plant and equipment are stated at cost, which includes direct costs
and capitalized interest, and are depreciated once placed in service using the
straight line method.
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Building and improvements.......................... $ 8,433 $ 8,365
Communications network............................. 134,152 106,723
Computer equipment................................. 13,831 11,646
Leasehold improvements............................. 30,825 24,756
Furniture and fixtures............................. 5,594 5,020
Motor vehicles..................................... 218 152
Construction in progress........................... 62,700 46,891
Assets under capital lease......................... 20,917 20,917
-------- --------
276,670 224,470
Less--Accumulated depreciation and amortization.... (38,058) (28,169)
-------- --------
Total............................................ $238,612 $196,301
======== ========
</TABLE>
4. Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
12.125% senior discount notes due 2008, net of un-
amortized discount of $77,614 and $83,184 at March
31, 2000 and December 31, 1999,
respectively...................................... $192,386 $186,816
11.875% senior notes due 2010, net of unamortized
discount of $1,938 at
March 31, 2000.................................... 273,062 --
Secured equipment term loan, maximum borrowing
level at $50,000.................................. 42,100 44,214
Obligation under capital lease..................... 22,552 21,994
Term loan payable in monthly installments through
June 2001 at an
interest rate of 6.5%............................. 599 762
-------- --------
530,699 253,786
Less--current maturities........................... 9,484 9,252
-------- --------
Total............................................ $521,215 $244,534
======== ========
</TABLE>
8
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
Aggregate maturities of long-term debt outstanding as of March 31, 2000, are
as follows:
<TABLE>
<S> <C>
2000............................................................. $ 6,974
2001............................................................. 9,912
2002............................................................. 10,638
2003............................................................. 11,728
2004............................................................. 3,447
Thereafter....................................................... 488,000
--------
Total.......................................................... $530,699
========
</TABLE>
On January 12, 2000, we received net proceeds of approximately $265,000 from
the issuance of our $275,000 11 7/8% senior notes due 2010 ("2000 Notes"). The
2000 Notes bear interest at a rate of 11.875% per annum payable in cash on
July 15 and January 15, commencing July 15, 2000. 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. The 2000 Notes are senior in right
of payment to all of our future subordinated indebtedness. We may elect to
redeem all or part of the 2000 Notes at any time from time to time, on or
after January 15, 2005 at specified redemption prices. 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.
5. Loss Per Share
We compute basic earnings per common share based on the weighted average
number of shares of common stock outstanding for the period. This calculation
excludes certain unvested shares of common stock held by our executives.
Diluted earnings per common share are adjusted for the assumed exercise of
dilutive stock options and unvested shares of common stock. Since the
adjustments required for the calculation of diluted weighted average common
shares outstanding are anti-dilutive for the three months ended March 31,
2000, this calculation has been excluded from the loss per share calculation.
Our basic and diluted weighted average number of shares outstanding for the
three months ended March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
---------- ----------
<S> <C> <C>
Basic weighted average number of common shares
outstanding......................................... 60,150,761 43,961,000
Dilutive stock options and unvested common shares.... 6,403,554 7,842,000
---------- ----------
Dilutive weighted average number of common shares
outstanding......................................... 66,554,315 51,803,000
========== ==========
</TABLE>
6. Commitments and Contingencies
Under the terms of various short- and long-term contracts and agreements, we
are obligated to make payments for office rents and for leasing components of
our communications network through 2019. The office rent contracts provide for
certain scheduled increases and for possible escalation of basic rentals based
on a change in the cost of living or on other factors. We expect to enter into
other contracts for additional components of our communications network,
office space, other facilities, equipment and maintenance services.
9
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
A summary of such fixed commitments at March 31, 2000 is as follows:
<TABLE>
<CAPTION>
Year Amount
---- --------
<S> <C>
2000............................................................. $ 30,727
2001............................................................. 27,351
2002............................................................. 29,684
2003............................................................. 29,564
2004............................................................. 21,829
Thereafter....................................................... 87,983
--------
Total.......................................................... $227,138
========
</TABLE>
Rent expense under operating leases for office rent and for leasing
components of our communications network was approximately $2,153 and $1,122
for the three months ended March 31, 2000 and 1999, respectively.
7. Stock Options
We established the Focal Communications Corporation 1997 Non Qualified Stock
Option Plan (the "1997 Plan") effective February 27, 1997. The 1997 Plan is
administered by the compensation committee of our Board of Directors ("the
Board").
We adopted the Focal Communications Corporation 1998 Equity and Performance
Incentive Plan (the "1998 Plan") on August 21, 1998. The Board and, with
respect to non-executive employees, the stock option committee of our Board of
Directors, has sole and complete authority to select participants and grant
options, and other equity-based instruments for our common stock.
On August 21, 1998, we also adopted the 1998 Equity Plan for Non-Employee
Directors of Focal Communications Corporation (the "1998 Non-Employee Plan").
The Board has sole and complete authority to select participants and grant
options for our common stock, as defined in the 1998 Non-Employee Plan.
The total number of shares available under the amended 1997 Plan, the 1998
Plan, and the 1998 Non-Employee Plan shall not exceed 8,530,000 shares.
Under our stock option plans, the Board and stock option committee have
complete discretion in determining vesting periods and terms of each
participant's options granted. The options granted to participants under our
stock option plans typically vest at 25% on the first anniversary from grant
date, with vesting at 12.5% every six months for the remainder of vesting
years. The term of each option has a life of 10 years. In addition, the plans
provide for accelerated vesting upon certain events.
10
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
The following summarizes option activity:
<TABLE>
<CAPTION>
Weighted
Shares of Average
Common Exercise Exercise
Stock Prices Price
--------- ------------- -------- ---
<S> <C> <C> <C> <C>
Outstanding at December 31, 1999..... 6,353,820 $ 0.58-$25.00 $ 4.14
Activity for the three months ended
March 31, 2000:
Options Granted...................... 854,791 26.25- 44.50 27.15
Options Exercised.................... (173,507) 0.58- 3.73 2.31
Options Canceled..................... (148,410) 2.21- 26.25 13.61
--------- ------------- ------
Outstanding at March 31, 2000........ 6,886,694 $ 0.58-$44.50 $ 6.84
========= ============= ======
</TABLE>
The following table summarizes information about fixed stock options
outstanding at March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Options Contractual Exercise Options Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
At December 31, 1999.... 6,353,820 8.7 $ 4.14 943,023 $ 2.12
========= === ====== ======= ======
$0.58-$4.51............. 5,762,903 8.6 $ 2.99 979,170 $ 2.13
$22.53 -$27.04.......... 1,071,093 9.4 25.90 -- --
$40.53-$44.50........... 52,698 9.9 40.82 268 44.50
--------- --- ------ ------- ------
At March 31, 2000....... 6,886,694 8.7 $ 6.84 979,438 $ 2.14
========= === ====== ======= ======
</TABLE>
8. Segment Information
We are organized primarily on the basis of strategic geographic operating
segments that provide communications services in each respective geographic
region. All of our geographic operating segments have been aggregated into one
reportable segment as of and for the periods ended March 31, 2000 and 1999,
and as of December 31, 1999.
Our chief operating decision maker views earnings before interest, income
taxes, depreciation and amortization ("EBITDA") as the primary measure of
profit and loss. The following represents information about revenues, EBITDA
(which excludes non-cash compensation), total assets and capital expenditures
as of March 31, 2000 and December 31, 1999; and for the three months ended
March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
March 31, March 31,
2000 1999
--------- ------------
<S> <C> <C>
Data services revenue................................ $ 32,190 $ 19,979
Telecom services revenue............................. 13,139 6,025
-------- --------
Total revenues....................................... 45,329 26,004
EBITDA............................................... $ (3,841) $ 10,000
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Total assets......................................... $249,072 $202,324
Capital expenditures................................. 52,314 128,550
======== ========
</TABLE>
11
<PAGE>
FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
The following reconciles our total segment EBITDA to our consolidated net
income (loss) before income taxes for the three months ended March 31, 2000
and 1999:
<TABLE>
<CAPTION>
Three months Three months
Ended ended
March 31, March 31,
2000 1999
------------ ------------
<S> <C> <C>
Total EBITDA for reportable segment................ $ (3,841) $10,000
Corporate EBITDA................................... 1,334 (31)
Depreciation and amortization...................... (10,376) (4,027)
Interest expense, net.............................. (12,875) (5,404)
Interest income.................................... 5,808 1,306
Other income (expense), net........................ 242 --
Non-cash compensation.............................. (1,448) (1,560)
-------- -------
Net income (loss) before income taxes............ $(21,156) $ 284
======== =======
</TABLE>
The following reconciles our total segment assets to our consolidated total
assets as of March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
March
31, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Total assets for reportable segment.................... $249,072 $202,324
Cash and short-term investments........................ 413,770 188,142
Other current assets................................... 4,019 3,745
Property, plant and equipment, net..................... 25,963 22,022
Other noncurrent assets................................ 10,917 4,753
-------- --------
Total consolidated assets............................ $703,741 $420,986
======== ========
</TABLE>
We currently operate solely in the United States. We have no customers that
accounted for more than 10% of our revenues during the three months ended
March 31, 2000 and 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 months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Three months Three months
Ended Ended
March 31, March 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenue contribution from Ameritech................ $11,543 $13,265
Revenue contribution from Bell Atlantic............ $ 9,736 $ 5,762
</TABLE>
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
General. Focal provides data and telecom services to large, communications-
intensive users in major cities. We began operations in 1996 and initiated
service first in May 1997. We currently serve a total of 18 markets, which
encompass a total of 47 metropolitan statistical areas, or MSAs, and plan to
serve 24 markets, or 56 MSAs, by the end of 2001. As of March 31, 2000, we
sold 291,443 access lines, of which 238,697 were installed and in service.
During 2000, we estimate that we will install at least 250,000 new access
lines as our existing markets continue to mature and as we launch services in
additional new markets. We also intend to launch our DSL and managed high-
speed Internet access, colocation and peering services during 2000.
We expect our continued expansion to result in continued negative operating
cash flows and operating losses for a period of time. We expect to again
produce positive operating cash flows during the second half of 2001 once
these trends stabilize and operating activities in our newer markets are
established and mature. If, however, these trends do not stabilize or our
operating activities are not established or do not mature as expected, we may
continue to sustain negative operating cash flows and net losses.
Revenues. Our data and telecom services revenue is comprised of monthly
recurring charges, usage charges and initial, non-recurring charges. Monthly
recurring charges include the fees paid by our customers for lines in service,
additional features on those lines, and colocation space. Monthly recurring
charges are derived only from end user customers. Usage charges consist of
fees paid by end users for each call made, fees paid by the ILEC and other
CLECs as reciprocal compensation, and access charges paid by the IXCs for long
distance traffic that we originate and terminate. Non-recurring revenues are
typically derived from fees charged to install new customer lines.
We earn reciprocal compensation revenue for calls made by customers of
another local exchange carrier to our customers. Conversely, we incur
reciprocal compensation expense to other local exchange carriers for calls by
our customers to their customers. Reciprocal compensation has historically
been a significant component of our total revenue due to the preponderance of
inbound applications utilized by our customers. Reciprocal compensation
represented approximately 73% and 39% of total revenues for the three months
ended March 31, 1999 and 2000, respectively. Reciprocal compensation
represented approximately 35% of our total revenues for the first quarter of
2000, if adjusted to exclude reciprocal compensation revenues earned in prior
periods.
We expect the proportion of revenues represented by reciprocal compensation
to modestly decrease in the future as a result of the expiration and
subsequent renegotiation of our existing interconnection agreements with the
ILECs and the impact of recent and future regulatory developments. While per
minute of use rates may decline further, we believe that any decline will be
modest. We expect to generate additional revenues from other services which
will offset this anticipated decrease in reciprocal compensation revenues. A
reduction in or elimination of reciprocal compensation revenues that are not
offset by increases in other revenues generated by us could have a material
adverse effect on us and our results of operations.
Operating Expenses. Our operating expenses are categorized as customer
service and network operations, selling, general and administrative,
depreciation and amortization, and non-cash compensation expense. Settlement
costs are a significant portion of customer service and network operations
expense and are comprised of leased transport charges and reciprocal
compensation payments. Leased transport charges are the lease payments we make
for the use of fiber transport facilities connecting our customers to our
switches and for our connection to the ILECs' and other CLECs' networks. Our
strategy of initially leasing rather than building our own fiber transport
facilities has resulted in our cost of service being a significant component
of total costs. To date, we have been successful in negotiating lease
agreements that match the duration of our customer contracts, thereby allowing
us to avoid the risk of incurring expenses associated with transport
facilities that are not being used by revenue generating customers.
13
<PAGE>
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.
14
<PAGE>
Quarterly Results
The following table sets forth unaudited financial, operating and
statistical data for each of the specified quarters of 2000 and 1999. The
unaudited quarterly financial information has been prepared on the same basis
as our Consolidated Financial Statements and, in our opinion, contains all
normal recurring adjustments necessary to fairly state this information. The
operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
2000 1999
-------- ---------------------------------------
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Data Services Revenue ($
mil)...................... $ 32,190 $ 26,306 $ 26,339 $ 24,232 $19,979
Telecom Services Revenue ($
mil)...................... $ 13,139 $ 9,740 $ 8,145 $ 6,095 $ 6,025
Lines Sold to Date......... 291,443 237,167 169,122 133,536 85,329
Lines Installed to Date.... 238,697 181,103 137,033 106,749 70,572
Estimated ISP Lines (% of
Installed Lines).......... 71% 72% 72% 72% 71%
Lines on Switch (%)........ 100% 100% 100% 100% 100%
ILEC Switches
Interconnected............ 1,447 1,209 948 771 443
ILEC Central Office
Colocations in Service or
Under Development......... 223 221 201 58 23
Markets in Operation....... 18 16 14 13 12
Markets Under Development.. 6 4 6 7 4
MSAs Served................ 47 40 38 34 31
MSAs Under Development..... 9 10 12 16 11
Circuit Switches
Operational............... 14 12 10 9 7
Circuit Switches Under
Development............... 7 7 7 6 6
ATM Switches Deployed...... 6 2 -- -- --
Fiber Miles Operational.... 864 -- -- -- --
Focal Customer Colocation
Space in Service
(Sqr. Ft.)................ 73,840 70,105 53,478 41,081 29,282
Focal Customer Colocation
Space Under Development
(Sqr. Ft.)................ 36,549 24,654 20,362 29,024 35,459
Capital Expenditures ($
mil)...................... $ 52 $ 34 $ 34 $ 57(1) $ 24
Employees.................. 747 592 478 418 312
Sales Force (2)............ 124 116 105 93 65
</TABLE>
- --------
(1) Includes approximately $21 million of assets acquired under a capital
lease during the second quarter of 1999.
(2) Quota bearing sales professionals. Does not include sales engineers or
customer support personnel.
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
Data services revenue increased 61% from $20.0 million in the first quarter
of 1999 to $32.2 million during the first quarter of 2000. Telecom services
revenue increased 118% from the first quarter of 1999 to $13.1 million during
the first quarter of 2000. This increase in data and telecom services revenue
is primarily due to the generation of revenues from a number of new markets
that went into operation subsequent to the first quarter of 1999 and from an
increase in revenues from our more mature markets in the first quarter of
2000. In addition, we installed 26,566 and 12,467 more data and telecom
services lines, respectively, during the first quarter of 2000 compared to the
first quarter of 1999. Customer service and network operations expenses
totaled $33.3 million for the first quarter of 2000 compared to $10.4 million
for the first quarter of 1999. This $22.9 million increase resulted from our
rapid expansion into new markets and related costs for leased facilities,
usage settlements, customer care and operational personnel, equipment
maintenance and other operating expenses. Selling, general and administrative
("SG&A") expenses increased by $8.9 million, from $5.7 million during the
three months ended March 31, 1999 to $14.6 million during the first quarter of
2000 as a result of our rapid expansion. In addition, our overall customer
service, network operations, and SG&A expenses increased between comparable
three month periods due to a corresponding increase in our employee base of
435 employees.
15
<PAGE>
Depreciation and amortization increased from $4.0 million to $10.4 million
in the comparative three-month periods. This increase of $6.4 million is a
result of our expansion into an additional six new markets, to a total of 18
markets in operation as of March 31, 2000.
Interest income increased from $1.3 million in the first quarter of 1999, to
$5.8 million in the comparable period of 2000. This $4.5 million increase is
primarily due to our cash, cash equivalents, and short-term investments
increasing from $114.1 million at March 31, 1999 to $413.8 million at March
31, 2000 due to the receipt of approximately $137.0 million in net proceeds
from our initial public offering that was completed in August 1999 and the
receipt of $265.7 million in net proceeds from our 11 7/8% senior notes ("2000
Notes") offering completed in January 2000. Interest expense increased from
$5.4 million in the first quarter of 1999 to $12.9 million in the first
quarter of 2000. This $7.5 million increase is due to $7.2 million of interest
expense charged relating to our 2000 Notes, an additional $0.7 million of
amortization of discount on our 2000 Notes and our $270 million 12.125% senior
discount notes ("1998 Notes"), $0.6 million of interest expense on our secured
equipment term loan that we entered into during December 1998, and $0.6
million of interest expense relating to our capital lease obligation for dark
fiber transport capacity, which was partially offset by interest capitalized
during the first quarter of 2000 totaling $1.6 million.
Liquidity and Capital Resources
We intend to continue to increase our coverage of major U.S. cities by
expanding our services to another two markets during 2000 and four additional
markets in 2001. Our business plan will require that we expand our existing
networks and services, deploy our own fiber capacity in a majority of our
markets, construct our Focal Internet eXchanges and expanded colocation
centers, and fund our initial operating losses. We will require significant
capital to fund the purchase and installation of voice and data switches,
routers, equipment, infrastructure and fiber facilities and/or long-term
rights to use fiber transport capacity. The implementation of this plan
requires significant capital expenditures, a substantial portion of which will
be incurred before significant related revenues from our new markets are
expected to be realized. These expenditures, together with associated early
operating expenses, may result in our having substantial negative operating
cash flow and substantial net operating losses for the foreseeable future,
including 2000 and 2001. Although we believe that our cost estimates and the
scope and timing of our build-out are reasonable, we cannot assure you that
actual costs or the timing of the expenditures, or that the scope and timing
of our build-out, will be consistent with current estimates.
Our capital expenditures were approximately $52.3 million for the first
three months of 2000, primarily reflecting capital spending for the build-out
of our additional markets and the roll-out of new services. We estimate that
our capital expenditures in connection with our current business plan will be
approximately $300 million for 2000 and approximately $305 million for 2001.
The 2000 capital expenditures are expected to be made primarily for the build-
out of additional markets, the expansion of our existing markets, the roll-out
of new services, including managed high-speed Internet access, colocation and
peering services, and the purchase of local dark fiber transport capacity in a
majority of our markets.
Our expectations of our future capital requirements and cash flows from
operations are based on current estimates. If our plans or assumptions change
or prove to be inaccurate, we may be required to seek additional sources of
capital or seek additional capital sooner than currently anticipated.
Net cash provided by operating activities for the first three months of 2000
was $13.3 million, an increase of $14.6 million from the same period in 1999.
This increase is primarily the result of a $6.4 million increase in
depreciation and amortization, a $31.0 million increase in accounts payable
and accrued liabilities, and an additional $0.7 million of amortization of
discount on our 2000 and 1998 Notes, which was offset by additional net losses
of $21.1 million and the increase in our March 31, 2000 accounts receivable
relative to the March 31, 1999 balance by approximately $1.6 million. Net cash
used in investing activities was $51.4 million for the first three months of
2000 compared to $24.0 million in the first three months of 1999. This
increase of $27.4 million is primarily the result of our expansion into six
new markets, which resulted in capital expenditures that exceeded
16
<PAGE>
the first three months of 1999 by $27.8 million. Net cash provided by
financing activities for the first three months of 2000 was $263.7 million, an
increase of $257.9 million from the first three months of 1999. This increase
is primarily due to the $265.7 million in net proceeds received from the
issuance of our 2000 Notes.
On February 18, 1998, we received $150 million in gross proceeds from the
sale of our 1998 Notes. The 1998 Notes will accrete to an aggregate stated
principal amount of $270 million by February 15, 2003. As of March 31, 2000,
the principal amount of the 1998 Notes had accreted to approximately $192.4
million. No interest is payable on the 1998 Notes prior to August 15, 2003.
Thereafter, cash interest will be payable semiannually on August 15 and
February 15 of each year. On August 2, 1999, we raised net proceeds of
approximately $137 million in our initial public offering in which we sold
11,442,500 shares of our common stock at a price of $13 per share, which
includes the underwriter's exercise of their over-allotment option to purchase
1,492,500 common shares at $13 per share. On January 12, 2000, we received
approximately $265.7 million in net proceeds from our 2000 Notes offering. The
2000 Notes interest payment dates are July 15 and January 15, commencing July
15, 2000.
We have historically incurred net losses and have an accumulated deficit of
$54.6 million as of March 31, 2000. The aggregate net proceeds totaling
approximately $602.7 million that we received from the offering of our 1998
Notes, the August 1999 equity offering, the 2000 Notes and certain other
financings, have funded a large portion of our operating losses and capital
expenditures through March 31, 2000. We expect that our existing cash and
investment balances of $413.8 million as of March 31, 2000 and future cash
flows that are expected to be provided from ongoing operations will be
sufficient to fund our operations and capital expenditure requirements through
the second quarter of 2001.
We currently have a commitment for a $200 million senior secured credit
facility which we are evaluating. If we choose to establish this facility, we
expect that it will fund our operations and capital expenditure requirements
through the fourth quarter of 2001. In addition, we may choose to obtain
future debt or equity financing to fund additional new products, services and
other general corporate purposes.
The discussions under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contain forward-looking statements. Our
future performance is subject to a number of risks and uncertainties that
could cause actual results to differ substantially from our projections. See
"Information Regarding Forward-looking Statements" on page 3 of this report.
Item 3. 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 and 2000 Notes. For additional
information about our long-term debt obligations, see our condensed
consolidated financial statements and accompanying notes related thereto
appearing elsewhere in this report.
17
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 2000
----------------------
Fixed Average
Expected Maturity Debt Interest Rate
----------------- -------- -------------
<S> <C> <C>
2000.................................................. $ -- --
2001.................................................. -- --
2002.................................................. -- --
2003.................................................. -- --
2004.................................................. -- --
Thereafter............................................ 545,000 12%
-------- ---
$545,000 12%
======== ===
Fair Market Value..................................... $447,750
========
</TABLE>
18
<PAGE>
PART II--OTHER INFORMATION
Item 1. Legal and Administrative Proceedings
With the exception of the matters discussed in our Annual Report on Form 10-
K for the year ended December 31, 1999, filed on March 10, 2000 we are not
aware of any material 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.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Location
------- ------------------- --------------
<C> <S> <C>
4.1 Restricted Shares Agreement with Michael L. Mael, Filed herewith
effective as of January 31, 2000. #
10.1 Executive Employment Agreement with Michael L. Filed herewith
Mael, dated as of January 8, 2000. #
27.1 Financial Data Schedule # Filed herewith
</TABLE>
- --------
#Management contract or compensatory plan
(b) Reports on Form 8-K
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Focal Communications Corporation
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert C. Taylor, Jr. President and Chief May 12, 2000
______________________________________ Executive Officer
Robert C. Taylor, Jr., (Authorized Officer)
/s/ Joseph A. Beatty Executive Vice President May 12, 2000
______________________________________ and Chief Financial
Joseph A. Beatty, Officer (Principal
Financial Officer)
/s/ Gregory J. Swanson Controller (Principal May 12, 2000
______________________________________ Accounting Officer)
Gregory J. Swanson,
</TABLE>
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description Location
------- ------------------- --------
<C> <S> <C>
4.1 Restricted Shares Agreement with Michael L. Filed herewith
Mael, effective as of January 31, 2000.
10.1 Executive Employment Agreement with Michael L. Filed herewith
Mael, dated as of January 8, 2000.
27.1 Financial Data Schedule Filed herewith
</TABLE>
21
<PAGE>
Exhibit 4.1
FOCAL COMMUNICATIONS CORPORATION
Restricted Shares Agreement
---------------------------
WHEREAS, Michael L. Mael (the "Grantee") is an employee of Focal
Communications Corporation, a Delaware corporation (the "Company"); and
WHEREAS, the execution of an agreement in the form hereof (this
"Agreement") has been authorized by a resolution of the Board of Directors of
the Company (the "Board") that was duly adopted on February 18, 2000;
NOW, THEREFORE, pursuant to the Company's 1998 Equity and Performance
Incentive Plan (the "Plan"), the Company hereby grants to the Grantee 150,000
Restricted Shares (as defined in the Plan)(such 150,000 Restricted Shares being
hereinafter referred to as the "Restricted Shares"), effective as of January 31,
2000, and subject to the terms and conditions of the Plan and the terms and
conditions of this Agreement.
1. Definitions. All capitalized terms used herein and not otherwise
defined herein shall have the meanings assigned to them in the Plan.
2. Issuance of Shares. The Restricted Shares shall be issued to the
Grantee effective upon the Date of Grant, shall be fully paid and nonassessable
and shall be represented by a certificate or certificates issued in the name of
the Grantee and endorsed with an appropriate legend referring to the
restrictions hereinafter set forth.
3. Restrictions on Transfer of Shares. The Restricted Shares may not be
sold, assigned, transferred, conveyed, pledged, exchanged or otherwise
encumbered or disposed of by the Grantee, except to the Company, until they have
become nonforfeitable as provided in Section 4; provided, however, that the
Grantee's rights with respect to the Restricted Shares may be transferred by
will or pursuant to the laws of descent and distribution. Any purported
encumbrance or disposition in violation of the provisions of this Section 3
shall be void ab initio, and the other party to any such purported transaction
shall not obtain any rights to or interest in the Restricted Shares. As and when
permitted by the Plan, the Company may in its sole discretion waive the
restrictions on transferability with respect to all or a portion of the
Restricted Shares.
4. Vesting of Shares. (a) One-third of the Restricted Shares shall
become nonforfeitable on each of the first three anniversaries of the Date of
Grant for so long as the Optionee remains in the continuous employ of the
Company or a Subsidiary.
(b) Notwithstanding the provisions of Section 4(a), all of the Restricted
Shares shall immediately become nonforfeitable upon the termination of the
Grantee's employment with the Company (or a successor to the Company following a
Change in Control) or a Subsidiary (i) by the Grantee for Good Reason (as
defined in Section 1(i) of the Executive Employment Agreement between the
Company and the Grantee dated as of January 8, 2000 (the
<PAGE>
"Employment Agreement")), (ii) by the Company (or any such successor to the
Company) or a Subsidiary for any reason other than Cause (as defined in Section
1(h) of the Employment Agreement) or (iii) by reason of the death or Disability
of the Grantee. For the purposes of this Agreement, "Disability" means the
inability of the Optionee to perform his position with the Company by reason of
a medically determined physical or mental impairment that has existed for a
continuous period of at least 26 weeks and which, in the judgment of a physician
who certifies thereto, is expected to be of indefinite duration or result in
imminent death.
5. Forfeiture of Shares. Except as and to the extent otherwise provided
in Section 4, the Restricted Shares shall be forfeited by the Grantee, if the
Grantee ceases to be employed by the Company or a Subsidiary prior to the third
anniversary of the Date of Grant, and the certificate(s) representing Restricted
Shares so forfeited shall be canceled.
6. Dividend, Voting and Other Rights. (a) Except as otherwise provided
in this Agreement, from and after the Date of Grant, the Grantee shall have all
of the rights of a stockholder with respect to the Restricted Shares, including
the right to vote the Restricted Shares and receive any dividends that may be
paid thereon; provided, however, that any additional Common Shares or other
securities that the Grantee may become entitled to receive pursuant to a stock
dividend, stock split, recapitalization, combination of shares, merger,
consolidation, separation or reorganization or any other change in the capital
structure of the Company shall be subject to the same risk of forfeiture and
restrictions on transfer as the forfeitable Restricted Shares in respect of
which they are issued or transferred and shall become Restricted Shares for the
purposes of this Agreement.
(b) Cash dividends on the Restricted Shares shall be sequestered by the
Company from and after the Date of Grant until such time as any of such
Restricted Shares become nonforfeitable in accordance with Section 4, whereupon
such dividends shall be paid to the Grantee in cash to the extent such dividends
are attributable to Restricted Shares that have become nonforfeitable. To the
extent that Restricted Shares are forfeited pursuant to Section 5, and all
dividends sequestered with respect to such Restricted Shares shall also be
forfeited. No interest shall be payable with respect to any such dividends.
7. Retention of Stock Certificate(s) by the Company. The certificate(s)
representing the Restricted Shares shall be held in custody by the Company,
together with a stock power endorsed in blank by the Grantee with respect
thereto, until such shares have become nonforfeitable in accordance with Section
4.
8. Compliance with Law. The Company shall make reasonable efforts to
comply with all applicable federal and state securities laws; provided, however,
notwithstanding any other provision of this Agreement, the Company shall not be
obligated to issue or release from restrictions on transfer any Common Shares
pursuant to this Agreement if such issuance or release would result in a
violation of any such law.
9. Withholding Taxes. If the Company or any Subsidiary shall be required
to withhold any federal, state, local or foreign tax in connection with any
issuance or vesting of Common Shares or other securities pursuant to this
Agreement, and the amounts available to the Company or such Subsidiary for such
withholding are insufficient, the Grantee shall pay the tax or make provisions
that are satisfactory to the Company or such Subsidiary for the payment
2
<PAGE>
thereof. The Grantee may elect to satisfy all or any part of any such
withholding obligation by surrendering to the Company or such Subsidiary a
portion of the Restricted Shares that become nonforfeitable hereunder, and the
Common Shares so surrendered by the Grantee shall be credited against any such
withholding obligation at the Market Value per Share of such Common Shares on
the date of such surrender.
10. Continuous Employment. For the purposes of this Agreement, the
continuous employment of the Grantee with the Company or a Subsidiary shall not
be deemed to have been interrupted, and the Grantee shall not be deemed to have
ceased to be an employee of the Company or a Subsidiary, by reason of the
transfer of his employment among the Company and its Subsidiaries or a leave of
absence approved by the Board.
11. No Employment Contract. Nothing contained in this Agreement shall
confer upon the Grantee any right with respect to continuance of employment by
the Company or a Subsidiary or limit or affect in any manner the right of the
Company or a Subsidiary to terminate the employment or adjust the compensation
of the Grantee.
12. Relation to Other Benefits. Any economic or other benefit to the
Grantee under this Agreement or the Plan shall not be taken into account in
determining any benefits to which the Grantee may be entitled under any profit-
sharing, retirement or other benefit or compensation plan maintained by the
Company or a Subsidiary and shall not affect the amount of any life insurance
coverage available to any beneficiary under any life insurance plan covering
employees of the Company or a Subsidiary.
13. Amendments. Any amendment to the Plan shall be deemed to be an
amendment to this Agreement to the extent that the amendment is applicable
hereto; provided, however, that no amendment shall adversely affect the rights
of the Grantee under this Agreement without the Grantee's consent.
14. Severability. In the event that one or more of the provisions of this
Agreement shall be invalidated for any reason by a court of competent
jurisdiction, any provision so invalidated shall be deemed to be separable from
the other provisions hereof, and the remaining provisions hereof shall continue
to be valid and fully enforceable.
15. Relation to Plan. This Agreement is subject to the terms and
conditions of the Plan. In the event of any inconsistent provisions between this
Agreement and the Plan, the Plan shall govern. The Board acting pursuant to the
Plan, as constituted from time to time, shall except as otherwise expressly
provided herein have the right to determine any questions that arise under this
Agreement.
16. Successors and Assigns. The provisions of this Agreement shall inure
to the benefit of, and be binding upon, the successors, administrators, heirs,
legal representatives and assigns of the Grantee and the successors and assigns
of the Company.
17. Notices. Any notice to the Company provided for herein shall be in
writing to the attention of the Corporate Secretary at Focal Communications
Corporation, 200 North LaSalle Street, Chicago, Illinois 60601, and any notice
to the Grantee shall be addressed to
3
<PAGE>
the Grantee at his address currently on file with the Company. Except as
otherwise provided herein, any written notice shall be deemed to be duly given
if and when hand delivered, or five (5) business days after having been mailed
by United States registered or certified mail, return receipt requested, postage
prepaid, or three (3) business days after having been sent by a nationally
recognized overnight courier service, addressed as aforesaid. Any party may
change the address to which notices are to be given hereunder by written notice
to the other party as herein specified, except that notices of changes of
address shall be effective only upon receipt.
18. Governing Law. The laws of the State of Delaware, without giving
effect to the principles of conflict of laws thereof, shall govern the
interpretation, performance and enforcement of this Agreement.
This Agreement is executed by the Company as of the 4th day of
February 2000.
FOCAL COMMUNICATIONS CORPORATION
/s/ Robert C. Taylor, Jr.
By:____________________________________
Name: Robert C. Taylor, Jr.
Title: President and Chief Executive Officer
The undersigned hereby acknowledges receipt of an executed original of
this Agreement and accepts the award of Restricted Shares granted hereunder on
the terms and conditions set forth herein and in the Plan.
/s/ Michael L. Mael
Date: 2/4/2000 _________________________________________
Michael L. Mael
4
<PAGE>
Exhibit 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
This Executive Employment Agreement is made as of this eighth day of
January, 2000, by and between Focal Communications Corporation and its
Subsidiaries, a Delaware corporation (the "Company") and Michael L. Mael whose
address is 9 Winterset Court, Potomac, MD 20854 (the "Executive").
WHEREAS, the Company and the Executive wish to enter into an agreement for
employment which shall provide certain terms of employment. The parties
acknowledge that all terms of employment may not be contained in this Agreement,
but that as to other conflicting terms of employment, which may be initiated
from time to time by the Company, the terms contained herein, or as amended from
time to time by the parties hereto, shall control.
NOW THEREFORE, in accordance with the premise above, the parties agree as
follows:
1. Terms of Executive's Employment.
-------------------------------
(a) Employment. The Company hereby employs Executive, and Executive
----------
hereby accepts employment and agrees to perform his duties and
responsibilities hereunder, in accordance with the terms and
conditions hereinafter set forth. The Company shall have the
right to terminate the Executive's employment for any reason, at
any time, with or without Cause (defined below). Executive shall
have the right to terminate his employment for any reason,
including Good Reason (as hereinafter defined), at any time, upon
giving the Company written notice two weeks prior to such
termination.
(b) Duties and Responsibilities.
---------------------------
(i) Initially, the Executive shall serve as Executive Vice
President of the Company and the President of [subsidiary],
and so long as Executive is employed by the Company or any
of its Subsidiaries, the Executive shall serve in such
position as may be determined by the Board of Directors
("Board") and shall perform all duties and accept all
responsibilities incident to such position or as may be
assigned to him by the Board, and shall at all times comply
with the policies and procedures adopted by the Company for
its employees.
(ii) The Executive represents and covenants to the Company that
he is not subject or a party to any employment agreement,
non-competition agreement, nondisclosure agreement or any
similar agreement, covenant or restriction that would
prohibit the Executive from executing this Agreement and
performing his duties and responsibilities assigned by the
Company.
<PAGE>
(c) Extent of Service. So long as Executive is employed by the
-----------------
Company or any of its Subsidiaries, the Executive agrees to use
his best efforts to carry out his duties and responsibilities
under paragraph 1 (b) hereof and to devote his full professional
time and attention thereto.
(d) Base Compensation. For all the services rendered by the Executive
-----------------
hereunder, the Company shall, commencing on the agreed upon start
date of January 10, 2000, and continuing so long as Executive is
employed by the Company or any of its Subsidiaries, pay the
Executive an annual salary at the rate of $225,000 per year, plus
any additional amounts, if any, as may be approved by a majority
of the Board, less withholding required by law or agreed to by
the Executive, and payable in installments at such times as is
customary with the Company but in any event no less frequently
than monthly. The Company agrees that the Executive's salary will
be reviewed annually by the Board to determine if any adjustment
is appropriate. For purposes of paragraph 1 (f) and Section 3
herein, Executive's annual salary shall not be less than
$225,000. So long as Executive is employed by the Company or any
of its Subsidiaries, the Executive shall also be entitled to
participate in such vacation pay and any other fringe benefit
plans as may from time to time be adopted by a majority of the
Board and as are made available generally to other senior
executives of the Company.
(e) Incentive Compensation. In addition to the compensation set
----------------------
forth in paragraph 1 (d) above, so long as the Executive is
employed by the Company or its Subsidiaries the Executive shall
be entitled to participate in a discretionary annual bonus plan
providing for the payment to Executive of an annual bonus, in an
amount to be determined by a majority of the Board or another
officer of the Company as the Board determines. Executive shall
be entitled to provide his input on the terms of his annual bonus
plan before it is submitted to the Company's Board, but Executive
acknowledges that such plan is discretionary in nature and is
determined in the exclusive discretion of the Board or other
officer so designated by the Board. The Company may adopt from
time to time a bonus program, in which the Executive shall
participate, the terms of which require the Company to achieve
certain performance goals which are set in advance each year in
the sole discretion of the Board.
2
<PAGE>
(f) Severance Pay. If at any time after the date hereof Executive
-------------
ceases to be employed by the Company and its Subsidiaries
("Termination") for death or disability or by the Company for any
reason other than Cause, or by Executive for Good Reason (a
"Covered Termination"), Executive (or, in the case of death,
Executive's estate) shall, until the end of the Severance Pay
Period (as defined below), be entitled to receive a salary at the
same rate of pay as, and on the same schedule and terms as was
customary for, the salary Executive received under paragraph 1
(d) above immediately prior to the Termination, as well as
(except in the case of Executive's death) comparable medical
benefits to those provided by the Company to Executive
immediately prior to the Termination (such salary and benefits
collectively, the "Severance Pay"); provided that if at any time
during the Severance Pay Period Executive obtains other
employment, Executive's Severance Pay shall during the period of
such employment be reduced (but not below zero) by the amount of
salary and benefits Executive receives as compensation for such
employment; (ii) all restricted stock theretofore granted to
Executive shall vest immediately; and (iii) all stock options
theretofore granted to Executive and scheduled to vest within 12
months of the Covered Termination shall vest immediately. The
payment of such Severance Pay shall in no way be construed as a
continuation of Executive's employment after the Termination. The
"Severance Pay Period" shall be equal to (i) if Executive is
terminated by the Company for any reason other than Cause, the
longer of (A) the period between the Covered Termination and the
12-month anniversary of the start date of employment of
Executive, and (B) the 6-month period commencing on the date of
the Covered Termination, or (ii) if Executive's employment is
terminated due to Good Reason, death or disability, the 6-month
period commencing on the date of the Covered Termination. If
Executive resigns other than for Good Reason or is terminated by
the Company for Cause, the Company shall not be obligated to pay
any Severance Pay or provide vesting of any restricted stock or
stock options as provided in this paragraph.
(g) Nondisclosure and Nonuse of Confidential Information.
----------------------------------------------------
(i) Nondisclosure Obligation. Executive shall not disclose or
------------------------
use at any time, either during his employment with the
Company or thereafter, any Confidential Information (as
defined below) of which Executive is or becomes aware,
whether or not such information is developed by him except
to the extent that such disclosure or use is directly
related to and required by Executive's performance of duties
assigned to Executive by the Company. Executive shall take
all appropriate steps to safeguard Confidential Information
and to protect it against disclosure, misuse, espionage,
loss and theft.
(ii) Confidential Information. As used in this Agreement, the
------------------------
term "Confidential Information" means information that is
not generally known to the public and that is used,
developed or obtained by the Company in connection with its
business, including but not limited to (i) products or
services, (ii) fees, costs and pricing structures, (iii)
designs,
3
<PAGE>
(iv) analysis, (v) drawings, photographs and reports, (vi)
computer software, including operating systems, applications
and program listings, (vii) flow charts, manuals and
documentation, (viii) data bases, (ix) accounting and
business methods, (x) inventions, devices, new developments,
methods and processes, whether patentable or unpatentable
and whether or not reduced to practice, (xi) customers and
clients and customer or client lists, (xii) copyrightable
works, (xiv) all technology and trade secrets, (xv) business
plans and financial models, and (xvi) all similar and
related information in whatever form. Confidential
Information shall not include any information that has been
published in a form generally available to the public prior
to the date Executive proposes to disclose or use such
information. Information shall not be deemed to have been
published merely because individual portions of the
information have been separately published, but only if all
material features constituting such information have been
published in combination.
(h) Cause. Cause means a finding by 2/3rds of the Board members then
-----
serving, after Executive has been given the opportunity for a
formal hearing, of (A) Executive's theft or embezzlement, or
attempted theft or embezzlement, of money or property of the
Company, Executive's perpetration or attempted perpetration of
fraud, or Executive's participation in a fraud or attempted
fraud, on the Company, or Executive's unauthorized appropriation
of, or attempt to misappropriate, any tangible or intangible
assets or property of the Company, (B) any act or acts of
disloyalty, misconduct or moral turpitude by Executive injurious
to the interest, property, operations, business or reputation of
the Company or Executives' conviction of a crime the commission
of which results in injury to the Company, or (C) Executive's
refusal or failure (other than by reason of disability) to carry
out reasonable instructions by his superiors or the Board and in
the case of subsection (C), the failure of Executive to cure the
same within 10 business days, after receipt of written notice
thereof from the Company.
(i) Good Reason. "Good Reason" means (A) a significant adverse change
-----------
by the Company in the nature or scope of the duties attached to
Employee's positions as Executive Vice President and President,
respectively, (B) the willful failure or refusal of Company to
perform its material obligation under Section 1(d) or (e) of this
Agreement, or (C) the reduction by the Company of its
expenditures for the operation of the Company's Data Services
business in an amount that is materially less than the
expenditures set forth in the Company's fiscal year 2000 budget
unless such reduction is part of a reduction applicable generally
to the Company's other operating units, or (D) the Company
requires the Executive to have his principal location of work
changed to a location which is in excess of 50 miles from
Washington, D.C. without Executive's prior written consent, and,
in the case of subsections (A), (B) or (C), the failure of the
Company to cure the same within 10 business days after receipt of
written notice thereof from Executive.
4
<PAGE>
2. The Company's Ownership of Intellectual Property.
------------------------------------------------
(a) Acknowledgment of Company Ownership. In the event that Executive
-----------------------------------
as part of his activities on behalf of the Company generates,
authors or contributes to any invention, design, new development,
device, product, method or process (whether or not patentable or
reduced to practice or constituting Confidential Information),
any copyrightable work (whether or not constituting Confidential
Information) or any other form of Confidential Information
relating directly or indirectly to the Company's business as now
or hereinafter conducted (collectively, "Intellectual Property"),
Executive acknowledges that such Intellectual Property is the
exclusive property of the Company and hereby assigns all right,
title and interest in and to such Intellectual Property to the
Company. Any Intellectual Property that is copyrightable work
prepared in whole or in part by Executive will be deemed "a work
made for hire" under Section 201(b) of the 1976 Copyright Act,
and the Company shall own all of the rights comprised by the
copyright therein. Executive shall promptly and fully disclose to
the Company all Intellectual Property he generates, authors or
contributes to the Company and shall cooperate with the Company
to protect the Company's interests in and rights to such
Intellectual property (including, without limitation, providing
reasonable assistance in securing patent protection and copyright
registrations and executing all documents as reasonably requested
by the Company, whether such requests occur prior to or after
Termination of Executive's employment with the Company).
(b) Executive Invention. Executive understands that paragraph 2 of
-------------------
this Agreement regarding the Company's ownership of Intellectual
Property does not apply to any invention for which no equipment,
supplies, facilities or trade secret information of the Company
were used and which was developed entirely on Executive's own
time, unless (i) the invention relates to the business of the
Company or to the Company's actual or demonstrably anticipated
research or development or (ii) the invention results from any
work performed by Executive for the Company.
(c) Delivery of Materials upon Termination of Employment. As
----------------------------------------------------
requested by the Company from time to time and upon the
Termination of Executive's employment with the Company for any
reason, Executive shall promptly deliver to the Company all
copies and embodiments, in whatever form, of all Confidential
Information and Intellectual Property in Executive's possession
or within his control (including, but not limited to, written
records, notes, photographs, manuals, notebooks, documentation,
program listings, flow charts, magnetic media, disks, diskettes,
tapes and all other materials containing any Confidential
Information or Intellectual Property) irrespective of the
location or form of such material and, if requested by the
Company shall provide the Company with written confirmation that
all such materials have been delivered to the Company.
3. Noncompetition and Nonsolicitation.
----------------------------------
5
<PAGE>
(a) Noncompetition. Executive acknowledges and agrees with the
--------------
Company that Executive's services to the Company are unique in
nature and that the Company would be irreparably damaged if
Executive were to provide similar services to any person or
entity competing with the Company or engaged in a similar
business. For and in consideration of the terms contained herein
Executive covenants and agrees with the Company that during the
Noncompetition Period (as defined below), Executive shall not,
directly or indirectly, either for himself or for any other
individual, corporation, partnership, joint venture or other
entity, participate in any business division, group or franchise
(or if there are no divisions, any business) where such division,
group or franchise (or business, if applicable) engages or
proposes to engage in any business conducted by the Company or
proposed to be conducted pursuant to a Board resolution or
Subsequent Business Plan (including, but not limited to, the sale
or distribution of local switched dial tone telecommunication
services) in any metropolitan statistical area ("MSA") in which
the Company conducts such business or proposes to conduct such
business pursuant to a Board resolution or Subsequent Business
Plan. For purposes of this Agreement, the term "participate in"
shall include, without limitation, having any direct or indirect
interest in any corporation, partnership, joint venture or other
entity, whether as a sole proprietor, owner, stockholder,
partner, joint venturer, creditor or otherwise, or rendering any
direct or indirect service or assistance to any individual,
corporation, partnership, joint venture and other business entity
(whether as a director, officer, manager, supervisor, employee,
agent, consultant or otherwise), other than ownership of up to 2%
of the outstanding stock of any class which is publicly traded.
(b) Nonsolicitation. During the Noncompetition Period, Executive
---------------
shall not (i) induce or attempt to induce any employee of the
Company to leave the employ of the Company, or in any way
interfere with the relationship between the Company and any
employee thereof, (ii) hire directly or through another entity
any person who was an employee of the Company at any time during
the Noncompetition Period, or (iii) induce or attempt to induce
any customer, supplier, licensee or other business relation of
the Company to cease doing business with the Company, or in any
way interfere with the relationship between any such customer,
supplier, licensee or relation and the Company (including,
without limitation, making any negative statements or
communications concerning the Company).
(c) Noncompetition Period. The "Noncompetition Period" shall commence
---------------------
on the date hereof and continue (i) if Executive is terminated by
the Company with or without Cause, until such date as shall be
specified by the Company in writing within 14 calendar days after
Termination, provided that such date shall not be later than the
first anniversary of the Termination, or (ii) otherwise, until
such date as shall be specified by the Company in writing within
the 30 calendar days after Termination, provided that such date
shall not be later than the 18-month anniversary of the
Termination. After the end
6
<PAGE>
of the Severance Pay Period (or if there is no Severance Pay, the
date upon which the Company elects the duration of the
Noncompetition Period), the Company shall until the end of the
Noncompetition Period pay Executive his Noncompete Compensation
(unless Executive breaches his obligations under this paragraph
3, it being understood that in such case Executive shall continue
to be bound by such obligations as if the Company were continuing
to pay Noncompete Compensation). If there is no Severance Pay,
the Company shall during the period from Termination until such
time as the Company elects the duration of the Noncompetition
Period (the "Interim Period"), pay Executive his Interim
Compensation (unless Executive breaches his obligations under
this paragraph 3, it being understood that in such case Executive
shall continue to be bound by such obligations as if the Company
were continuing to pay Interim Compensation). "Noncompete
Compensation" shall consist of 50% of the salary that Executive
received under paragraph 1 (d) above as compensation from the
Company and its Subsidiaries immediately prior to termination
(Executive's "Previous Salary") together with the continuation of
the medical benefits that the Company provided to Executive
immediately prior to Termination (Executive's "Previous
Benefits"); provided that if at any time during the
Noncompetition Period Executive obtains other employment (i) with
comparable medical benefits to Executive's Previous Benefits,
Executive's Noncompete Compensation shall during the period of
such employment not include the continued provision of medical
benefits, and (ii) with a salary exceeding 50% of Executive's
Previous Salary, Executive's Noncompete Compensation shall during
the period of such employment be reduced (but not below zero) by
the amount of such excess. "Interim Compensation" shall consist
of 100% of Executive's Previous Salary and Previous Benefits,
provided that if at any time during the Interim Period Executive
obtains other employment, Executive's Interim Compensation shall
during the period of such employment be reduced (but not less
than zero) by the amount of salary and benefits received as
compensation for such other employment.
4. Notices. Any notice provided for in this Agreement must be in writing
-------
and must be either personally delivered, mailed by first class mail
(postage prepaid and return receipt requested) or sent by reputable
overnight courier service (charges prepaid) to the recipient at the
address below indicated:
To the Company: Focal Communications Corporation
200 N. LaSalle Street
Chicago, IL 60601
ATTN: Vice President, Human Resources
with a copy to: Focal Communications Corporation
200 N. LaSalle Street
Chicago, IL 60601
ATTN: General Counsel
To Executive:
or to such other address or to the attention of such other person as the
recipient party shall
7
<PAGE>
have specified by prior written notice to the sending party. Any notice
under this Agreement shall be deemed to have been given when personally
delivered, one business day after being sent by reputable overnight courier
service, or three business days after being deposited in the U.S. mail.
5. General Provisions.
------------------
(a) Severability. Whenever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement is
held to be invalid, illegal or unenforceable in any respect under
any applicable law or rule in any jurisdiction, such invalidity,
illegality or unenforceability shall not affect any other
provision or any other jurisdiction as if such invalid, illegal
or unenforceable provision had never been contained herein.
(b) Complete Agreement. This Agreement, those documents expressly
------------------
referred to herein and other documents of even date herewith
embody the complete agreement and understanding among the parties
and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which
may have related to the subject matter hereof, in any way.
(c) Counterparts. This Agreement may be executed in separate
------------
counterparts, none of which need contain the signature of more
than one party hereto but each of which shall be deemed to be an
original and all of which taken together shall constitute one and
the same agreement.
(d) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall bind the parties hereto and their respective
successors and assigns and shall inure to the benefit of and be
enforceable by the parties hereto and their respective successors
and assigns.
(e) Choice of Law. All questions concerning the construction,
-------------
validity, enforcement and interpretation of this Agreement and
the exhibits hereto shall be governed by the laws of the State of
Illinois.
(f) Remedies. Each of the parties to this Agreement shall be entitled
--------
to enforce its rights under this Agreement specifically, to
recover damages and cost (including reasonable attorney's fees)
caused by any breach of any provision of this Agreement and to
exercise all other rights existing in its favor. The parties
hereto agree and acknowledge that money damages would not be an
adequate remedy for any breach of the provisions of this
Agreement and that any party may in its sole discretion apply to
any court of law or equity of competent jurisdiction (without
posting any bond or deposit) for specific performance and/or
other injunctive relief in order to enforce or prevent any
violations of the provisions of this Agreement.
(g) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended
8
<PAGE>
and waived only with the prior written consent of the Company and
Executive.
(h) Business Days. If any time period for giving notice or taking
-------------
action hereunder expires on a day which is a Saturday, Sunday or
legal holiday in the State of Illinois, the time period will be
automatically extended to the business day immediately following
such Saturday, Sunday or holiday.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
FOCAL COMMUNICATIONS CORPORATION
By: /s/ Robert C. Taylor, Jr.
--------------------------
Its: President and Chief Executive Officer
EXECUTIVE:
/s/ Michael L. Mael
______________________________________
9
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