AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1996
Registration No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-----------------------------
BROOKS FIBER PROPERTIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
4813
(Primary Standard IndustrialClassification Code Number)
43-1656187
(I.R.S. Employer Identification No.)
-----------------------------
425 Woods Mill Road South, Suite 300
Town & Country, Missouri 63017
(314) 878-1616
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
-----------------------------
David L. Solomon
Senior Vice President and Chief Financial Officer
Brooks Fiber Properties, Inc.
425 Woods Mill Road South, Suite 300
Town & Country, MO 63017
(314) 878-1616
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
-----------------------------
Copies to:
John P. Denneen, Esq.
Bryan Cave LLP
211 N. Broadway, Suite 3600
St. Louis, Missouri 63102-2750
(314) 259-2000
-----------------------------
Approximate date of commencement of proposed sale
of the securities to the public:
As soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
-----------------------------
<TABLE>
CALCULATION OF REGISTRATION FEE
===================================================================================================================
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Aggregate Offering Amount of
Securities to be Registered Registered Price Per Unit <F1> Price <F1> Registration Fee
- -------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
10-7/8% Senior Discount Notes
due March 1, 2006 $425,000,000 $537.50 $228,437,500 $78,772
===================================================================================================================
<FN>
<F1> Estimated solely for purposes of calculating the registration fee under
Rule 457(f); the proposed maximum offering price is based on the average
of the high and low bid prices of the Notes on June 21, 1996.
</FN>
</TABLE>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
BROOKS FIBER PROPERTIES, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 404(a) and Item 501(b) of Regulation S-K
Showing Location in Prospectus of the Information
Required by Part I of Form S-4
1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus............. Facing Page; Cross
Reference Sheet; Outside
Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................. Additional Information;
Outside Back Cover Page
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............... Summary; Risk Factors;
Selected Historical and Pro
Forma Financial and Other
Operating Data
4. Terms of the Transaction...................... Summary; The Exchange
Offer; Description of the
Notes; Certain United
States Federal Income Tax
Considerations
5. Pro Forma Financial Information............... Summary Historical and Pro
Forma Financial and Other
Operating Data; Selected
Historical and Pro Forma
Financial and Other
Operating Data; Unaudited
Pro Forma Combined
Consolidated Financial
Statements
6. Material Contacts with the Company Being
Acquired.................................... Not Applicable
7. Additional Information Required for Reoffering
by Persons and Parties Deemed to be
Underwriters................................ Not Applicable
8. Interests of Named Experts and Counsel........ Validity of the Exchange
Notes
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................. Not Applicable
10. Information with Respect to S-3 Registrants... Not Applicable
11. Incorporation of Certain Information by
Reference................................... Not Applicable
12. Information with Respect to S-2 or S-3
Registrants................................. Not Applicable
13. Incorporation of Certain Information by
Reference................................... Not Applicable
14. Information with Respect to Registrants Other
Than S-2 or S-3 Registrants................. Summary; Selected
Historical and Pro Forma
Financial and Other
Operating Data;
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations; Business of the
Company; Independent
Auditors; Consolidated
Financial Statements
15. Information with Respect to S-3 Companies..... Not Applicable
16. Information with Respect to S-2 or S-3
Companies................................... Not Applicable
17. Information with Respect to Companies Other
Than S-2 or S-3 Companies................... Not Applicable
18. Information if Proxies, Consents or
Authorizations are to be Solicited.......... Not Applicable
19. Information if Proxies, Consents or
Authorizations are not to be Solicited or
in an Exchange Offer........................ Management; Principal
Stockholders
- --------------------------------------------------------------------------------
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED JUNE 25, 1996
PROSPECTUS
[CORPORATE LOGO]
OFFER TO EXCHANGE
10-7/8% Senior Discount Notes due March 1, 2006
for all outstanding 10-7/8% Senior Discount Notes due March 1, 2006
of
Brooks Fiber Properties, Inc.
The Exchange Offer will expire at 5:00 p.m, New York City time
on ____________________, 1996 unless extended.
Brooks Fiber Properties, Inc., a Delaware corporation (the "Company"), is
hereby offering (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange $1,000 principal amount
of its 10-7/8% Senior Discount Notes due March 1, 2006 (the "Exchange Notes"),
which exchange has been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a registration statement of which this
Prospectus is a part (the "Registration Statement"), for each $1,000 principal
amount of its outstanding 10-7/8% Senior Discount Notes due March 1, 2006 (the
"Private Notes"), of which $425,000,000 in aggregate principal amount was issued
on February 26, 1996 and is outstanding as of the date hereof. The form and
terms of the Exchange Notes are identical in all material respects to those of
the Private Notes, except for certain transfer restrictions and registration
rights relating to the Private Notes and except for certain interest provisions
related to such registration rights. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be entitled to
the benefits of an Indenture dated as of February 26, 1996 governing the Private
Notes and the Exchange Notes (the "Indenture"). The Private Notes and the
Exchange Notes are sometimes referred to herein collectively as the "Notes." See
"The Exchange Offer" and "Description of the Notes."
The Exchange Notes will be redeemable at the option of the Company, in
whole or in part, at any time on or after March 1, 2001 at the redemption prices
set forth herein plus accrued and unpaid interest, if any, to the date of
redemption. In the event of a Strategic Equity Investment on or before March 1,
1999, then up to a maximum of 33-1/3% of the aggregate principal amount of the
Notes originally issued would, at the option of the Company, be redeemable from
the net cash proceeds of such Strategic Equity Investment at a redemption price
equal to 110% of the Accreted Value thereof. See "Description of the
Notes--Optional Redemption." In the event of a Change of Control, holders of the
Exchange Notes will have the right to require the Company to purchase their
Exchange Notes, in whole or in part, at a price equal to 101% of their Accreted
Value on or before March 1, 2001 or 101% of their stated principal amount, plus
accrued and unpaid interest, if any, thereon to the date of purchase, after
March 1, 2001. See "Description of the Notes--Covenants--Change of Control."
The Exchange Notes will be senior unsecured obligations of the Company, will
rank pari passu in right of payment with the Private Notes and all other
existing and future senior unsecured obligations of the Company and will rank
senior in right of payment to any future subordinated obligations of the
Company. Holders of secured obligations of the Company will, however, have
claims that are prior to the claims of the holders of the Notes with respect to
the assets securing such secured obligations. The Notes will be effectively
subordinated to all obligations, including trade payables, of the Company's
subsidiaries. As of March 31, 1996 (i) the total amount of outstanding
liabilities of the Company (parent only), including trade payables and the
Private Notes, was approximately $259.7 million, none of which represented
secured obligations, and (ii) the total amount of outstanding liabilities of the
Company's subsidiaries, including trade payables, was approximately $60.7
million, of which approximately $46.0 million represented secured obligations.
See "Description of Other Credit Facilities."
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m., New York City time, on , 1996, unless
the Exchange Offer is extended by the Company in its sole discretion (the
"Expiration Date"). Tenders of Private Notes may be withdrawn at any time prior
to the Expiration Date. Private Notes may be tendered only in integral multiples
of $1,000. The Exchange Offer is subject to certain customary conditions. See
"The Exchange Offer."
See "Risk Factors" on pages 14 through 19 for a discussion of certain
factors that investors should consider in connection with the Exchange Offer and
an investment in the Exchange Notes.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------
The date of this Prospectus is ____________________, 1996
NOTICE TO INVESTORS
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a holder thereof without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the holder is acquiring the Exchange Notes in the ordinary course of its
business, is not participating and has no arrangement or understanding with any
person to participate in the distribution of the Exchange Notes and is not an
"affiliate" of the Company within the meaning of Rule 405 of the Securities Act.
Holders of Private Notes wishing to accept the Exchange Offer must represent to
the Company that such conditions have been met. Each broker-dealer who holds
Private Notes acquired for its own account as a result of market-making or other
trading activities and who receives Exchange Notes for its own account in
exchange for such Private Notes pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Company believes that none of the registered holders of the Private
Notes is an "affiliate" (as such term is defined in Rule 405 under the
Securities Act) of the Company.
This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Notes
received in exchange for Private Notes acquired by such broker-dealer as a
result of market-making or other trading activities. The Letter of Transmittal
states that by acknowledging that it will deliver a prospectus in connection
with any resale of such Exchange Notes, and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. The Company has agreed to make this Prospectus
(as it may be amended or supplemented) available to any such broker-dealer that
requests copies of such Prospectus in the Letter of Transmittal for use in
connection with any such resale for a period of up to 90 days after the
Expiration Date. See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the
Exchange Notes. There can be no assurance as to the liquidity of any markets
that may develop for the Exchange Notes, the ability of holders to sell the
Exchange Notes, or the price at which holders would be able to sell the Exchange
Notes. The Company does not intend to apply for listing of the Exchange Notes
for trading on any securities exchange or for inclusion of the Exchange Notes in
any automated quotation system. The National Association of Securities Dealers,
Inc. ("NASD") has designated the Private Notes as securities eligible for
trading in the Private Offerings, Resales and Trading through Automatic Linkages
("PORTAL") market of the NASD (see "Price Range of the Private Notes") and the
Company has been advised that Goldman, Sachs & Co., Bear, Stearns & Co. Inc. and
Salomon Brothers Inc have heretofore acted as market makers for the Private
Notes. The Company has been advised by each of the aforesaid market makers that
it currently intends to make a market in the Exchange Notes. Future trading
prices of the Exchange Notes will depend on many factors, including among other
things, prevailing interest rates, the Company's operating results and the
market for similar securities. Historically, the market for securities similar
to the Exchange Notes, including non-investment grade debt, has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that any market for the Exchange Notes, if
such market develops, will not be subject to similar disruptions. See "Risk
Factors--No Prior Public Market for Exchange Notes; Possible Volatility of
Market Price of Exchange Notes."
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection with
the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
[Map of the United States indicating locations of
the Registrant's networks in operation and under construction]
SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this Summary is qualified in its
entirety by, the more detailed information, including the Company's consolidated
financial statements and notes thereto, contained herein. Unless otherwise
noted, references to the "Company" are to Brooks Fiber Properties, Inc., a
Delaware corporation, and its consolidated subsidiaries. Capitalized terms used
in this Prospectus, which are not otherwise defined herein, have the respective
meanings ascribed to them in the Glossary included as Annex A hereto.
The Company. The Company is a leading full service provider of competitive
local telecommunications services (commonly referred to as a competitive access
provider ("CAP") when providing local dedicated access services and as a
competitive local exchange carrier ("CLEC") when also providing local switched
services) in selected markets within the United States (see "The Competitive
Access Industry--Local Exchange Services" for a description of CAPs and CLECs).
The Company acquires and constructs its own state-of-the-art fiber optic
networks and facilities and leases network capacity from others to provide long
distance carriers ("IXCs") and business, government and institutional end users
with an alternative to the local exchange companies (the "LECs") for a broad
array of high quality voice, data and other telecommunications services.
The Company currently has systems in 26 cities, consisting of systems in
operation in 18 cities and under construction in 8 cities. The Company's
networks under construction are all expected to become operational by the end of
1996. Networks are considered operational when they are able to begin providing
services to customers. The Company's networks are located in three regions --
the Eastern Region, Central Region and Western Region. See "Business of the
Company--Cities Served." The Company specifically targets second and third tier
markets (those with populations ranging from 250,000 to two million) with
attractive demographic, economic, competitive and telecommunications demand
characteristics. The Company's networks are generally designed to access at
least 70% to 80% of the identified business, government and institutional end
user revenue base and the IXC facilities ("Points of Presence" or "POPs") and
the principal central offices of the LECs within their markets. The Company has
switches in its networks in Sacramento, California, Grand Rapids, Michigan and
Hartford, Connecticut and, subject to regulatory approvals, plans to have
switching, frame relay and Asynchronous Transfer Mode ("ATM")-based packet
transport capabilities in approximately 20 of its operating networks by the end
of 1996 and in all of its operating networks by the end of 1997. The Company has
increased the number of networks in operation or under construction from eleven
at December 31, 1994 to 26 at present. At April 30, 1996, the Company had a
total of 532 route miles of optical fiber cable installed, 191,987 voice grade
equivalent (VGE) circuits in service and 561 buildings connected.
The Company plans to have systems in operation or under construction in a
total of 30 cities by the end of 1996 and 50 cities by the end of 1998. The
Company expects its expansion into additional cities will be accomplished by the
acquisition of existing networks as well as the construction of new networks.
The Company currently has no agreement, understanding or arrangement for any
acquisition, except for an agreement to acquire ALD Communications, Inc. and its
wholly-owned subsidiary, Tenant Network Services, Inc. See "--Recent
Developments." For a discussion of the steps the Company takes in acquiring and
developing new networks, see "Business of the Company--Network Acquisition,
Development and Design" and "--Network Construction." The Company estimates that
it will spend approximately $290 million during 1996 and 1997 to fund the
Company's expansion to 30 networks that are expected to be in operation or under
construction by the end of 1996 and the installation of switching electronics
and other enhanced capabilities in these networks. See "Risk
Factors--Significant Future Capital Requirements; Substantial Indebtedness,"
"--Risks Associated with Implementation of Growth Strategy" and "--Risks
Associated with Possible Acquisitions."
The Company believes that there are attractive return opportunities for
CAPs/CLECs in second and third tier markets due to the combination of (i) recent
regulatory trends that have increased the addressable market for CAP/CLEC
services and (ii) the competitive dynamics which have heretofore focused
CAP/CLEC network development primarily in larger markets. See "The Competitive
Access Industry" and "Regulatory Overview."
The Company's total revenues in 1995 were $14.2 million ($23.1 million on a
pro forma basis giving effect to the acquisition of Brooks Telecommunications
Corporation ("BTC") on January 2, 1996 and the acquisition of City Signal, Inc.
(the "City Signal Acquisition") on January 31, 1996). The Company's total
revenues in 1994, the Company's first full year of operation, were $2.8 million.
Since inception, the Company's operations have resulted in earnings (losses)
before minority interests, interest, taxes, depreciation and amortization
(EBITDA) of ($204,000) for the period from November 10, 1993 through December
31, 1993, ($2.7) million for the year ended December 31, 1994, ($4.4) million
for the year ended December 31, 1995 and ($2.7) million for the quarter ended
March 31, 1996. As of March 31, 1996, the Company had an accumulated deficit of
approximately $20.3 million. At March 31, 1996, the Company had cash, cash
equivalents and marketable securities of $279.0 million, total assets of $449.1
million, long term debt of $298.5 million and total capitalization of $427.3
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
To date, the Company's revenues have been derived primarily from end user
to end user private line connections and from a variety of access services
including: (i) access between IXCs, (ii) access between end users and IXCs,
(iii) collocated special access and (iv) collocated POP to LEC switched access
transport. The Company plans to expand its revenue base by entering new markets,
by continuing to develop and add to its existing systems and by continuing to
add capabilities to offer switched services and local dial tone, Centrex and
desk top products, as well as other enhanced services such as high speed video
conferencing, frame relay and ATM-based packet transport services and Internet
access products in all of its operating networks by the end of 1997, subject to
regulatory approvals. See "Business of the Company--Current Products and
Services" and "--Planned Products and Services." The Company has switches
installed in its networks in Sacramento, California, Grand Rapids, Michigan and
Hartford, Connecticut. The Company currently is authorized as a CLEC to offer
switched services in California, Connecticut, Massachusetts, Michigan and
Tennessee and has filed for authority to offer switched services in Arizona,
Arkansas, Mississippi, Nevada, New Mexico, Ohio, Oklahoma and Rhode Island. In
addition, the Company has entered into interconnection (Co-carrier) arrangements
with LECs in California, Connecticut, Massachusetts, Michigan and Rhode Island,
under tariffs or under individual agreements, and has entered into negotiations
with other LECs. While the Company continues to pursue a state-by-state
regulatory strategy, the Company believes that, following the recent enactment
of federal telecommunications reform legislation, The Telecommunications Act of
1996, the entire United States could be open to local competition on an
accelerated basis. See "Regulatory Overview."
The Company has assembled an experienced management, sales and operations
team with extensive experience and strong contacts within the telecommunications
industry. See "Management."
CAP/CLEC Market Potential. Industry sources have estimated that the 1995
aggregate revenues of all LECs approximated $102 billion. Initially, CAPs were
able to compete for only the non-switched special access/private line services
portion of this market (which accounted for an estimated $8.6 billion of LEC
revenues in 1995). Accordingly, the development of CAP networks occurred
initially in larger metropolitan areas that have proportionately greater revenue
potential for this limited portion of the local exchange market. However, since
February 1994, as a result of actions by the FCC requiring LECs to allow CAPs to
connect their networks to the LECs' networks (the "Interconnection Decisions"),
CAPs have also been permitted to compete for the collocated special access and
switched access transport/termination services portion of this market (which
together accounted for an estimated $13.8 billion of LEC revenues in 1995). This
has enhanced the opportunities for the development of CAP networks in second and
third tier cities, which constitute a significant portion of the local exchange
market. In addition, over one-half of the states have taken regulatory and
legislative action to open local communications markets to various degrees of
local exchange competition and Co-carrier status, including nine states in which
the Company operates or currently plans to operate networks (Arizona,
California, Connecticut, Massachusetts, Michigan, Nevada, Ohio, Oklahoma and
Tennessee). The Company expects continuing pro-competitive regulatory changes,
including those mandated by The Telecommunications Act of 1996, together with
increasing customer demand, will create more opportunities to introduce
additional services, expand the Company's networks and address a larger customer
base. The Company also expects that CAP access revenues from IXCs will increase
as the IXCs move their access business away from the LECs (which are seeking the
regulatory approvals necessary to compete with the IXCs in providing long
distance service) to competitive providers of local telecommunications services.
If regulatory and other industry trends continue, the Company believes that,
ultimately, the entire $102 billion local exchange market may be open to
CAP/CLEC competition. However, there is no assurance that such trends will
continue or that future regulatory developments will be favorable to CAPs and
CLECs (see "Regulatory Overview").
Corporate Strategy. The Company's goal is to become the primary full
service provider of competitive local telecommunications services to IXCs and
business, government and institutional end users in selected cities by offering
superior products with excellent customer service at prices below those charged
by the LECs. The principal elements of the Company's strategy include:
Target second and third tier markets. The Company believes that the trend
toward deregulation and the broadening range of services that can be
offered by CAPs/CLECs present attractive opportunities for new CAP/CLEC
entrants in second and third tier markets where there are typically fewer
CAP/CLEC competitors than in first tier markets and where the LECs
generally have placed a lower priority on installing fiber optic systems
comparable to those being installed by the Company. As an early entrant in
selected second and third tier markets, the Company believes it can attain
a leadership position by securing needed franchises and rights-of-way,
installing robust state-of-the-art CAP/CLEC networks and facilities (i.e.,
networks which are capable of reaching at least 70% to 80% of identified
business end-users) and establishing customer relationships with IXCs and
business, government and institutional end users that will enable it to
take advantage of the attractive potential growth rates for local exchange
service revenues in those markets.
Continue to increase the number of cities served. The Company currently has
systems in operation or under construction in a total of 26 cities. The
Company plans to have systems in operation or under construction in a total
of 30 cities by the end of 1996 and 50 cities by the end of 1998. The
Company's expansion into additional cities is expected to be accomplished
by the acquisition of existing networks as well as the development of new
networks. See "Business of the Company--Network Acquisition, Development
and Design" and "--Network Construction." By adding networks, the Company
believes it can increase revenues and obtain economies of scale in service
costs.
Continue to build out existing systems. The Company strives to build a
sufficient revenue base in each of its systems to generate the cash flow
necessary to enable it to devote more resources to developing its systems
as opposed to funding initial operating losses. The Company believes that
its access to significant capital and technical resources and its on-going
efforts to develop close working relationships with its IXC customers (see
"--Develop Strategic Relationships" below) will enable it to more rapidly
develop and expand its systems, add to its service offerings and establish
the strong customer relationships necessary to solidify its competitive
position in its selected markets.
Develop Strategic Relationships. In order to capitalize on the competitive
dynamics of the changing IXC/LEC relationships, the Company is pursuing the
establishment of business alliances with major IXCs, including joint
ventures and preferred vendor relationships. In accordance with this
strategy, (1) in September 1995, the Company and MCImetro Access
Transmission Services, Inc. ("MCI/Metro"), a wholly-owned subsidiary of MCI
Communications Corporation ("MCI"), formed a joint venture company to
operate and expand the Company's existing CAP networks in San Jose,
California and its environs, and in May and June 1996, the Company and
MCI/Metro entered into agreements which provide that, until September 30,
2001, the Company will be MCI/Metro's preferred provider of certain local
access services in a number of the Company's markets and pursuant to which
MCI/Metro has acquired a 15% interest in the Company's Sacramento,
California network for $4.5 million, and MCI/Metro has invested an
additional $3.5 million in the San Jose joint venture company, and (2) in
December 1995, the Company concluded a national preferred vendor agreement
with AT&T Communications, Inc. ("AT&T Communications"), a wholly-owned
subsidiary of AT&T Corp. ("AT&T"), pursuant to which the Company expects to
become AT&T Communications' preferred supplier of local access services in
most of the Company's markets. The Company believes preferred vendor
relationships with IXCs will provide opportunities to leverage its
partners' sales channels and market support to sell the Company's products
and services and expand the Company's potential revenue base. In addition,
the Company believes that relationships with IXCs will facilitate its entry
into new markets by providing access between the IXCs and their customers.
The Company has organized a national account marketing organization to
manage such relationships. The Company believes this marketing effort,
along with its number of cities served, financial resources and
telecommunications expertise, will position it well to develop and maintain
these strategic relationships. See "Business of the Company--Strategic
Relationships."
Expand the range of services offered. The Company's principal services
currently include special access IXC connections (high capacity circuits
used to connect IXC POPs), special access end user to IXC connections
(medium to high capacity circuits used to connect customer locations with
IXCs), private line connections (low to medium capacity circuits used to
connect multiple customer locations) and collocated special access and
switched access transport services. The Company has switches installed in
three of its operating networks and, as regulations permit, plans to
leverage its networks and customer relationships by offering switched
access termination and origination services and local dial tone, Centrex
and desk top products, as well as other enhanced services such as high
speed video conferencing, Internet access, frame relay and ATM-based packet
transport services. The Company expects to offer such services and products
in approximately 20 of its operating networks by the end of 1996 and in all
of its operating networks by the end of 1997, subject to regulatory
approvals. The Company also plans to continue to upgrade and add to its
systems and services as technology and regulations permit.
Leverage upon GLA's Significant Telecommunications Infrastructure
Capabilities. GLA International, Inc. ("GLA"), a wholly-owned subsidiary of
the Company, offers a full range of consulting, management, engineering and
information system solutions for telecommunications companies. GLA provides
a full range of network engineering, construction, design and strategic
planning services, as well as financial and management software products,
including specifically designed software for billing systems, toll rating,
plant records and financial applications. GLA's capabilities also serve as
an internal source for the telecommunications infrastructure support needed
to facilitate the Company's penetration of the CLEC business.
Recent Developments. In May 1996, the Company and MCI/Metro entered into an
amendment to the Company's master service agreement with MCI/Metro which
provides that, until September 30, 2001, the Company will be MCI/Metro's
preferred provider of certain local access services in a number of the Company's
markets at a discount to prevailing optimized LEC rates for comparable circuits.
In June 1996, the Company and MCI/Metro entered into a subscription agreement
pursuant to which MCI/Metro has acquired a 15% interest in the Company's
Sacramento, California network for $4.5 million, and MCI/Metro has invested an
additional $3.5 million in the San Jose joint venture company.
Pursuant to an agreement dated as of June 24, 1996, the Company has agreed
to acquire the stock of ALD Communications, Inc. ("ALD"), a switchless reseller
of long distance services, and Tenant Network Services, Inc. ("TNS"), a
wholly-owned subsidiary of ALD which acts as a shared tenant service provider of
telecommunications services, both of which provide their services primarily to
customers in the San Francisco, California area and have aggregate annualized
monthly revenues of approximately $5.8 million, based on March 1996 results
provided to the Company by ALD and TNS.
On June 25, 1996, the Company formed a strategic alliance with World-Net
Access, Inc., a privately-held development stage company founded to form a
national Internet Service Provider network. The Company has made a direct
investment for a 20% fully-diluted interest in World-Net Access, Inc. The
Company intends that both companies will seek ways to work together to provide
customer oriented Internet and Intranet communications solutions.
Financing Plan. The Company believes its financing plan will enable it to
implement the pace and scope of its business strategy. To date, the Company has
raised financing primarily from the following sources:
Equity Capital. The Company was initially capitalized in November 1993
with approximately $41 million of equity financing, primarily from a
group of venture capital funds that included the Centennial Funds,
Burr, Egan, Deleage & Co., Fleet Equity Partners, Media/Communications
Partners, the One Liberty Venture Group, Norwest Equity Partners and
Providence Media Partners. In August 1995, the Company completed a
second round equity financing of approximately $70 million with a
group of institutional and high net worth investors (including all of
the venture capital investors who participated in the first round
investment). In addition, the Company financed the City Signal
Acquisition and the merger with BTC with the issuance of approximately
three million additional shares of Common Stock and other equity
securities. In May 1996, the Company completed an initial public
offering of 7,385,331 shares of its Common Stock (the "IPO"), for
which it received proceeds net of underwriting discounts, advisory
fees and expenses of approximately $185.2 million. See
"Capitalization," "Certain Relationships and Related Transactions,"
and "Unaudited Pro Forma Combined Consolidated Financial Information."
Debt Financing. On February 26, 1996, the Company completed the
issuance and sale of the Private Notes for which the Company received
proceeds net of underwriting discounts of approximately $241.0 million
(the "Private Note Offering"). Subsidiaries of the Company have also
obtained $59.2 million of secured financing under a line of credit
from AT&T Credit Corporation ("AT&T Credit") which totals $49.2
million (the "AT&T Credit Facility") and a $10 million secured
revolving line of credit from Fleet National Bank (the "Bank Credit
Facility"). Under the terms of the AT&T Credit Facility, AT&T Credit
has invested 6.5% of the equity in each local operation of the Company
which it has financed, resulting in equity investments by AT&T Credit
in three subsidiaries of the Company totalling $1.2 million. The
Company has agreed that AT&T Credit may exchange such equity
investments for an aggregate of 234,260 shares of the Company's Common
Stock and AT&T Credit has agreed to convert the existing AT&T Credit
Facility to a $50 million corporate facility on substantially similar
terms. See "Description of Other Credit Facilities."
The Company estimates that it will spend approximately $290 million
during 1996 and 1997 to fund the Company's expansion to 30 networks
that are expected to be in operation or under construction by the end
of 1996 and the installation of switched electronics and other
enhanced capabilities in these networks. In addition, the Company's
longer-term strategy contemplates that the Company will have networks
serving a total of 50 cities in operation or under construction by the
end of 1998, which will require substantial additional capital. The
Company's expansion into additional cities is expected to be
accomplished by the acquisition of existing networks as well as the
development of new networks. The Company will continue to evaluate
additional revenue opportunities in each of its markets and, as
attractive additional opportunities may develop, the Company plans to
make additional capital investments in its networks that might be
required to pursue such opportunities, such as costs required to
extend a network or install additional electronics to meet specific
customer requirements. The Company expects to meet such additional
capital needs with the net proceeds from the IPO, the remaining net
proceeds from the Private Note Offering, the proceeds from existing
and future credit facilities and other borrowings, and the proceeds
from sales of additional equity securities and joint ventures.
However, there can be no assurance that the Company will be able to
generate or raise sufficient capital to enable it to fully realize all
of its strategic objectives.
The Company's expectations of required future capital expenditures are
based on the Company's current estimates. There can be no assurance that actual
expenditures will not be significantly higher or lower. See "Risk
Factors--Significant Future Capital Requirements; Substantial Indebtedness" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Information Regarding Forward Looking Statements
The statements contained in this Prospectus which are not historical facts
are forward-looking statements that involve risks and uncertainties. Management
wishes to caution the reader that these forward-looking statements, such as the
Company's plans to have systems in operation or under construction in a total of
30 cities by the end of 1996 and 50 cities by the end of 1998 and its
expectations for the installation of switches serving 20 of its markets by the
end of 1996, are only predictions; actual events or results may differ
materially as a result of risks facing the Company. Such risks include, but are
not limited to, the Company's ability to access markets, identify, finance and
complete suitable acquisitions, design fiber optic backbone routes, install
cable and facilities, including switching, and obtain rights-of-way, building
access rights and any required governmental authorizations, franchises and
permits, all in a timely manner, at reasonable costs and on satisfactory terms
and conditions, as well as favorable regulatory, legislative and judicial
developments.
The Exchange Offer
The Exchange Offer........... The Company is hereby offering to exchange $1,000
principal amount of Exchange Notes for each
$1,000 principal amount of Private Notes that are
properly tendered and accepted. The Company will
issue Exchange Notes on or as promptly as
practicable after the Expiration Date. As of the
date hereof, there is $425,000,000 aggregate
principal amount of Private Notes outstanding.
See "The Exchange Offer."
Based on interpretations by the staff of the
Commission set forth in no-action letters issued
to third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Private Notes may be
offered for resale, resold and otherwise
transferred by a holder thereof without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that the holder is acquiring Exchange
Notes in the ordinary course of its business, is
not participating and has no arrangement or
understanding with any person to participate in
the distribution of the Exchange Notes and is not
an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act. Each
broker-dealer who holds Private Notes acquired
for its own account as a result of market-making
or other trading activities and who receives
Exchange Notes pursuant to the Exchange Offer for
its own account in exchange therefor must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange
Notes.
This Prospectus, as it may be amended or
supplemented from time to time, may be used by a
broker-dealer in connection with resales of
Exchange Notes received in exchange for Private
Notes acquired by such broker-dealer as a result
of market-making activities or other trading
activities. The Letter of Transmittal that
accompanies this Prospectus states that by so
acknowledging and by delivering a prospectus, a
broker- dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the
Securities Act. Any holder of Private Notes who
tenders in the Exchange Offer with the intention
to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes could not rely on the above-referenced
position of the staff of the Commission and, in
the absence of an exemption therefrom, would have
to comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction. Failure
to comply with such requirements in such instance
could result in such holder incurring liability
under the Securities Act for which the holder is
not indemnified by the Company. See "The Exchange
Offer--Resale of the Exchange Notes."
Registration Rights
Agreement.................... The Private Notes were sold by the Company on
February 26, 1996 to Goldman, Sachs & Co., Bear,
Stearns & Co., Inc. and Salomon Brothers Inc
(collectively, the "Initial Purchasers") pursuant
to a Purchase Agreement, dated February 16, 1996,
by and among the Company and the Initial
Purchasers (the "Purchase Agreement"). Pursuant
to the Purchase Agreement, the Company and the
Initial Purchasers entered into an Exchange and
Registration Rights Agreement, dated as of
February 26, 1996 (the "Registration Rights
Agreement"), which grants the holders of the
Private Notes certain exchange and registration
rights. The Exchange Offer is intended to satisfy
such rights, which will terminate upon the
consummation of the Exchange Offer. The holders
of the Exchange Notes will not be entitled to any
exchange or registration rights with respect to
the Exchange Notes. See "The Exchange
Offer--Termination of Certain Rights." The
Company will not receive any proceeds from, and
has agreed to bear the expenses of, the Exchange
Offer.
Expiration Date.............. The Exchange Offer will expire at 5:00 p.m., New
York City time, on ____________________, 1996,
unless the Exchange Offer is extended by the
Company in its sole discretion, in which case the
term "Expiration Date" shall mean the latest date
and time to which the Exchange Offer is extended.
See "The Exchange Offer--Expiration Date;
Extensions; Amendments."
Procedures for Tendering
Private Notes................ Each holder of Private Notes wishing to accept
the Exchange Offer must complete, sign and date
the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or
such facsimile, together with such Private Notes
and any other required documentation to The Bank
of New York, as exchange agent (the "Exchange
Agent"), at the address set forth herein. By
executing the Letter of Transmittal, the holder
will represent to and agree with the Company
that, among other things, (i) the Exchange Notes
to be acquired by such holder of Private Notes in
connection with the Exchange Offer are being
acquired by such holder in the ordinary course of
its business, (ii) such holder has no arrangement
or understanding with any person to participate
in a distribution of the Exchange Notes, and
(iii) such holder is not an "affiliate," as
defined in Rule 405 under the Securities Act, of
the Company. If the holder is a broker-dealer
that will receive Exchange Notes for its own
account in exchange for Private Notes that were
acquired as a result of market-making or other
trading activities, such holder will be required
to acknowledge in the Letter of Transmittal that
such holder will deliver a prospectus in
connection with any resale of such Exchange
Notes; however, by so acknowledging and by
delivering a prospectus, such holder will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. See
"The Exchange Offer --Procedures for Tendering."
Special Procedures for
Beneficial Owners............ Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Private Notes in
the Exchange Offer should contact such registered
holder promptly and instruct such registered
holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender
on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering such owner's Private
Notes, either make appropriate arrangements to
register ownership of the Private Notes in such
owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time
and may not be able to be completed prior to the
Expiration Date. See "The Exchange
Offer--Procedures for Tendering."
Guaranteed Delivery
Procedures................... Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any
other documentation required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Private Notes
according to the guaranteed delivery procedures
set forth under "The Exchange Offer--Guaranteed
Delivery Procedures."
Acceptance of the Private
Notes and Delivery of the
Exchange Notes............... Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company
will accept for exchange any and all Private
Notes that are properly tendered in the Exchange
Offer prior to the Expiration Date. The Exchange
Notes issued pursuant to the Exchange Offer will
be delivered on the earliest practicable date
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Withdrawal Rights............ Tenders of Private Notes may be withdrawn at any
time prior to the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders."
Certain Federal Income Tax
Considerations............... For a discussion of certain federal income tax
considerations relating to the exchange of the
Exchange Notes for the Private Notes, see
"Certain Federal Income Tax Considerations."
Exchange Agent............... The Bank of New York is serving as the Exchange
Agent in connection with the Exchange Offer. The
Bank of New York also serves as trustee under the
Indenture.
The Notes
The Exchange Offer applies to $425,000,000 aggregate principal amount of
the Private Notes. The form and terms of the Exchange Notes are identical in all
material respects to the form and terms of the Private Notes except that (i) the
exchange will have been registered under the Securities Act and, therefore, the
Exchange Notes will not bear legends restricting the transfer thereof, (ii)
holders of the Exchange Notes will not be entitled to any of the registration
rights of holders of the Private Notes under the Registration Rights Agreement,
which rights will terminate upon consummation of the Exchange Offer and (iii)
the Company will not have certain rights to redeem the Exchange Notes in the
event of an Initial Public Equity Offering of the Company, because such an
Initial Public Equity Offering has already occurred. The Exchange Notes will
evidence the same indebtedness as the Private Notes (which they replace) and
will be issued under, and be entitled to the benefits of, the Indenture. For
further information and for definitions of certain capitalized terms used below,
see "Description of the Notes."
Notes........................ $425,000,000 principal amount of 10-7/8% Senior
Discount Notes due March 1, 2006.
Maturity Date................ March 1, 2006.
Interest..................... The Notes accrete from February 26, 1996 at a
rate of 10-7/8% compounded semi-annually, to an
aggregate principal amount of $425,000,000 by
March 1, 2001. No interest will be payable on the
Notes prior to September 1, 2001. The Notes will
accrue cash interest at the rate of 10-7/8% per
annum from March 1, 2001, payable semi-annually
in arrears on March 1 and September 1, commencing
September 1, 2001.
Yield........................ 10-7/8% per annum, computed on a semi-annual
bond-equivalent basis and calculated from
February 26, 1996.
Ranking...................... The Notes are senior unsecured obligations of the
Company, rank pari passu in right of payment with
all existing and future senior unsecured
obligations of the Company at the parent level
and rank senior in right of payment to any future
subordinated obligations of the Company at the
parent level. However, holders of secured
obligations of the Company have claims that are
prior to the claims of the holders of the Notes
with respect to the assets securing such
obligations. The Notes are effectively
subordinated to all debt and other liabilities
and commitments (including trade payables) of the
Company's subsidiaries (including obligations
under the AT&T Credit Facility and the Bank
Credit Facility). As of March 31, 1996, (i) the
total amount of outstanding liabilities of the
Company (parent only), including trade payables
and the Private Notes, was approximately $259.7
million, none of which represented secured
obligations and (ii) the total amount of
outstanding liabilities of the Company's
subsidiaries, including trade payables, was
approximately $60.7 million, of which
approximately $46.0 million represented secured
obligations. See "--Covenants" below.
Optional Redemption.......... The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or
after March 1, 2001 at the redemption prices set
forth herein plus accrued and unpaid interest, if
any, to the date of redemption. In the event of a
Strategic Equity Investment on or before March 1,
1999, then up to a maximum of 33-1/3% of the
aggregate principal amount of the Notes would, at
the option of the Company, be redeemable from the
net cash proceeds of such Strategic Equity
Investment at a redemption price equal to 110% of
the Accreted Value thereof.
Change of Control............ In the event of a Change of Control, the holders
of the Notes would have the right to require the
Company to purchase their Notes at a price equal
to 101% of the Accreted Value thereof on or
before March 1, 2001 or 101% of the stated
principal amount thereof, plus accrued and unpaid
interest, if any, thereon to the date of
purchase, after March 1, 2001.
Original Issue Discount...... The issuance of the Private Notes resulted in
original issue discount for United States federal
income tax purposes. Thus, although interest will
not accrue on the Notes prior to March 1, 2001,
and there will be no periodic payments of
interest on the Notes prior to September 1, 2001,
original issue discount (that is, the difference
between the stated redemption price at maturity
and the issue price of the Private Notes) will
accrue from February 26, 1996 and will be
includible as interest income periodically in a
holder's gross income for United States federal
income tax purposes in advance of receipt of the
cash payments to which the income is
attributable. See "Certain United States Federal
Income Tax Considerations."
Covenants.................... The indenture governing the Notes (the
"Indenture") contains certain covenants that,
among other things, limit the ability of the
Company and its subsidiaries to incur additional
indebtedness, issue stock in subsidiaries, pay
dividends or make other distributions, repurchase
equity interests or subordinated indebtedness,
engage in sale and leaseback transactions, create
certain liens, enter into certain transactions
with affiliates, sell assets of the Company and
its subsidiaries, and enter into certain mergers
and consolidations. The Indenture permits the
Company and its subsidiaries to incur, among
other indebtedness, up to $160 million of secured
indebtedness (including the AT&T Credit and Bank
Credit Facilities).
Reported Price Range......... The Private Notes were designated for trading in
the PORTAL market of the NASD effective
February 29, 1996. During the period ended
June 21, 1996, the range of reported high and low
bid quotations for the Private Notes in the
PORTAL market was $61.50 to $51.00, respectively.
Such reported quotations may not reflect actual
transactions. See "Price Range of the Private
Notes."
Book-Entry, Delivery and
Form......................... It is expected that delivery of the Exchange
Notes will be made in book-entry or certificated
form. The Company expects that the Exchange Notes
exchanged for Private Notes currently represented
by the Global Notes deposited with, or on behalf
of, The Depository Trust Company (the
"Depository") and registered in its name or in
the name of Cede & Co., its nominee, will be
represented by Global Notes and deposited upon
issuance with the Depository and registered in
its name or the name of its nominee. Beneficial
interests in the Global Note(s) representing the
Notes will be shown on, and transfers thereof
will be effected through, records maintained by
the Depository and its participants.
For additional information regarding the Notes, see "Notice to Investors",
"Description of the Notes" and "Certain United States
Federal Income Tax Considerations."
Risk Factors
Prospective investors should carefully consider the matters set forth under
"Risk Factors" on pages 14 through 19.
Address and Telephone Number
The Company's principal executive offices are located at 425 Woods Mill
Road South, Suite 300, Town & Country, Missouri 63017, and its telephone number
is (314) 878-1616.
Summary Historical and Pro Forma Financial and Other Operating Data
The summary financial data presented below (other than the pro forma data)
as of and for the periods ended December 31, 1995, 1994 and 1993 are derived
from and qualified by reference to the audited consolidated financial statements
of the Company contained herein. The Company's consolidated financial statements
as of December 31, 1995, 1994 and 1993, and for the years ended December 31,
1995 and 1994, and for the period from inception to December 31, 1993, have been
audited by KPMG Peat Marwick LLP, independent auditors. The selected
consolidated financial data for the three months ended March 31, 1996 have been
derived from the unaudited consolidated financial statements of the Company,
which have been prepared on the same basis as the audited consolidated financial
statements of the Company and, in the opinion of management, reflect all normal
recurring adjustments necessary for a fair presentation of the financial
position and results of operations as of the end of and for such period. The
results for the three months ended March 31, 1996 are not necessarily indicative
of the operating results to be expected for the entire year. The unaudited pro
forma statement of operations data for the year ended December 31, 1995 gives
effect to the merger with BTC and the City Signal Acquisition using the purchase
method of accounting and assuming that such transactions were consummated on
January 1, 1995. The unaudited pro forma data as of and for the three months
ended March 31, 1996 give effect to the IPO and the City Signal Acquisition
using the purchase method of accounting and assuming (i) for purposes of the pro
forma statement of operations data, that the City Signal Acquisition was
consummated on January 1, 1996 and (ii) for purposes of the pro forma balance
sheet data, that the IPO was consummated on March 31, 1996. The pro forma data
presented below are derived from the Company's records and from the records of
City Signal, Inc. and BTC. All of the summary financial data should be read in
conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the "Unaudited
Pro Forma Combined Consolidated Financial Information," and the Consolidated
Financial Statements of the Company, BTC and City Signal, Inc. and notes thereto
contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Pro Forma
Period from Pro Forma Three Three
November 10, Year Year Year Months Months
1993<F1> to Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, March 31, March 31,
1993 1994 1995 1995 1996 1996
-------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data: (Amounts in thousands except per share data)
Telecommunications
service revenue............. $ 2 $2,809 $14,160 $23,072 $6,795 $7,245
Costs and expenses:
Service costs............... -- 1,557 7,177 16,319 2,868 3,051
Selling, general and
administrative expenses... 206 3,966 11,405 15,352 6,621 7,065
Depreciation and
amortization................ 3 663 4,118 8,018 2,427 2,720
------------------------------------------------------------------------------------------------
209 6,186 22,700 39,689 11,916 12,836
Loss from operations.......... (207) (3,377) (8,540) (16,617) (5,121) (5,591)
Interest and other income
(expense), net.............. 2 (598) (2,096) (2,142) (2,042) (2,064)
------------------------------------------------------------------------------------------------
Net loss before
minority interests..... (205) (3,975) (10,636) (18,759) (7,163) (7,655)
Minority interests<F2>... -- 78 1,085 1,085 523 523
------------------------------------------------------------------------------------------------
Net loss................. $ (205) $(3,897) $ (9,551) $(17,674) $(6,640) $(7,132)
================================================================================================
Pro forma net loss
per share<F3>............... $ (.49) $ (.84) $ (.34) $(.37)
=====================================================
Pro forma weighted average
number of shares
outstanding<F3>............. 19,523,584 20,951,862 19,523,584 19,523,584
=====================================================
<CAPTION>
Pro Forma
Period from Pro Forma Three Three
November 10, Year Year Year Months Months
1993<F1> to Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, March 31, March 31,
1993 1994 1995 1995 1996 1996
-------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Other Data: (Amounts in thousands)
EBITDA<F4>.................. $ (204) $(2,714) $(4,422) $(8,492) $(2,694) $(2,871)
Capital expenditures,
including acquisitions
of businesses, net of
cash...................... -- 42,362 41,518 48,883 15,577 17,620
Ratio of earnings to
combined fixed charges
and preferred stock
dividends<F5>............. -- -- -- -- -- --
<CAPTION>
As of Pro Forma
December 31, As of as of
---------------------------------- March 31, March 31,
1994 1995 1996 1996
-----------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data: (Amounts in thousands)
Cash and cash equivalents ........................................ $8,795 $59,913 $253,796 $439,045
Marketable securities............................................. 25,159 25,159
Working capital................................................... 15,862 57,913 264,772 450,022
Total assets...................................................... 71,325 146,610 449,135 634,384
Long-term debt, less current portion.............................. 29,403 43,977 298,529 298,529
Total stockholders' equity........................................ 36,699 93,455 97,264 282,514
<CAPTION>
As of As of As of
December 31, March 31, April 30,
1994 1995 1996 1996
-----------------------------------------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Network Data:
Cities in operation............................................... 5 11 3 14
Cities under construction......................................... 6 10 12 11
Buildings connected............................................... 62 216 495 561
Route miles....................................................... 107 262 506 532
Fiber miles....................................................... 6,437 17,111 26,659 28,869
VGE circuits<F6>.................................................. 59,208 122,617 165,122 191,987
Switches installed................................................ -- 1 3 3
Employees......................................................... 89 165 456 488
- ---------------
<FN>
<F1> The Company was organized on November 10, 1993.
<F2> Minority interests represent the ownership interests of minority investors
in certain of the Company's subsidiaries.
<F3> Pro forma net loss per share has been computed using the number of shares
of Common Stock and Common Stock equivalents outstanding. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, shares
issued at prices below the IPO price of $27.00 per share and stock options
and warrants granted with exercise prices below the IPO price during the
twelve-month period preceding the date of the initial filing of the IPO
Registration Statement have been included in the calculation of Common
Stock equivalent shares, using the treasury stock method, as if such
shares, options and warrants were outstanding for all of 1995 and the first
quarter of 1996.
<F4> EBITDA consists of net income (loss) before minority interests, interest,
income taxes, depreciation and amortization. It is a measure commonly used
in the telecommunications industry and is presented to assist in
understanding the Company's operating results. However, it is not intended
to represent cash flow in accordance with generally accepted accounting
principles. See the Company's Consolidated Statements of Cash Flows
appearing elsewhere in this Prospectus.
<F5> For purposes of calculating the ratio of earnings to fixed charges: (i)
earnings consist of loss before income taxes and minority interests, plus
fixed charges excluding capitalized interest and (ii) fixed charges consist
of interest expensed and capitalized, plus amortization of deferred
financing costs, plus the portion of rent expense under operating leases
deemed by the Company to be representative of the interest factor. For the
period from November 10, 1993 to December 31, 1993, the years ended
December 31, 1994 and December 31, 1995 and the three months ended March
31, 1996, the Company's earnings were insufficient to cover fixed charges
by $205,000, $3,975,000, $10,636,000 and $7,163,000, respectively. On a pro
forma basis, for the year ended December 31, 1995 and the three months
ended March 31, 1996, the Company's earnings would have been insufficient
to cover fixed charges by $18,759,000 and $7,655,000, respectively.
<F6> Voice grade equivalent circuits.
</FN>
</TABLE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the following
risk factors should be carefully considered in evaluating the Company and its
businesses before deciding to surrender Private Notes in exchange for Exchange
Notes pursuant to the Exchange Offer.
Limited History of Operations; Negative Cash Flow and Operating
Losses
The Company was formed in November 1993. Only four of the Company's
networks, which the Company acquired in January 1994, October 1994, March 1995
and January 1996, respectively, have been in operation for more than 24 months.
Prospective investors, therefore, have limited historical financial information
about the Company upon which to base an evaluation of the Company's performance
and an investment in shares of the Common Stock of the Company. Given the
Company's limited operating history, there is no assurance that it will be able
to generate sufficient cash flow to service its debt and to compete successfully
in the telecommunications business.
The development of the Company's businesses and the acquisition,
installation and expansion of its networks require significant expenditures, a
substantial portion of which are made before any revenues may be realized. These
expenditures, together with the associated early service costs, result in
negative cash flow and operating losses until an adequate revenue base may be
established. There can be no assurance that an adequate revenue base will be
established in each of the Company's systems. Since inception, the Company's
operations have resulted in earnings (losses) before minority interests,
interest, taxes, depreciation and amortization (EBITDA) of ($204,000) for the
period from November 10, 1993 through December 31, 1993, ($2.7) million for the
year ended December 31, 1994, ($4.4) million for the year ended December 31,
1995 and ($2.7) million for the three months ended March 31, 1996. As of March
31, 1996, the Company had an accumulated deficit of approximately $20.3 million.
On a pro forma basis, assuming the merger with BTC and the City Signal
Acquisition were completed on January 1, 1995, the Company would have had EBITDA
of ($8.5) million for the year ended December 31, 1995, and, assuming the City
Signal Acquisition was completed on January 1, 1996, the Company would have had
EBITDA of ($2.9) million on a pro forma basis for the three months ended March
31, 1996. EBITDA is a measure commonly used in the telecommunications industry
and is presented to assist in an understanding of the Company's operating
results. It is not intended to represent cash flow or results of operations in
accordance with generally accepted accounting principles. Certain of the
expenditures are expensed as incurred, while certain other expenditures are
capitalized. The Company will continue to incur expenditures in connection with
the acquisition, development and expansion of its networks, services and
customer base. There can be no assurance that the Company will achieve or
sustain profitability or generate sufficient positive cash flow to service its
debt.
Significant Future Capital Requirements; Substantial Indebtedness
Expansion of the Company's existing networks and services, the acquisition
and development of new networks and services and the funding of initial
operating losses will require significant capital expenditures. The Company
plans to have systems in operation or under construction in a total of 30 cities
by the end of 1996 and 50 cities by the end of 1998 and to introduce switching
electronics and other enhanced capabilities in approximately 20 of its operating
networks by the end of 1996 and in all of its operating networks by the end of
1997, subject to regulatory approvals. The Company estimates that it will spend
approximately $290 million during 1996 and 1997 to fund the Company's expansion
to 30 networks that are expected to be in operation or under construction by the
end of 1996 and the installation of switched electronics and other enhanced
capabilities in these networks. The Company's growth into 50 cities will require
substantial additional capital. The Company will continue to evaluate additional
revenue opportunities in each of its markets and, as attractive additional
opportunities may develop, the Company plans to make additional capital
investments in its networks that might be required to pursue such opportunities.
The Company expects to meet its capital needs with the net proceeds from the
IPO, the remaining net proceeds from the Private Note Offering, the proceeds
from existing and future credit facilities and other borrowings, and the
proceeds from sales of additional equity securities and joint ventures. There
can be no assurance, however, that the Company will be successful in raising
sufficient additional debt or equity capital on terms that it will consider
acceptable or that the Company's operations will produce positive consolidated
cash flow in sufficient amounts. Failure to raise and generate sufficient funds
may require the Company to delay or abandon some of its planned future expansion
or expenditures, which could have a material adverse effect on the Company's
growth and its ability to compete in the telecommunications services industry.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company's expectations of required future capital expenditures are based
on the Company's current estimates. There can be no assurance that actual
expenditures will not be significantly higher or lower.
In February 1996, the Company completed its Private Note Offering,
providing the Company with proceeds net of underwriting discounts of
approximately $241.0 million. No cash payments of interest will be required on
the Private Notes or the Exchange Notes prior to September 1, 2001. The Company
will be required to make annual interest payments on the Notes of approximately
$46.2 million commencing at such time. At March 31, 1996, the Company's total
consolidated debt was $298.5 million.
Holding Company Structure; Effective Subordination of the
Exchange Notes
The Company is a holding company which derives substantially all of its
revenues from its subsidiaries. The Exchange Notes are not secured by any of the
assets of the Company. The Indenture permits certain indebtedness of the Company
to be secured, including, among other things, purchase money indebtedness, which
the Indenture permits the Company to incur in unlimited amounts, and
indebtedness up to $160 million under secured credit facilities. Holders of any
secured indebtedness of the Company will have claims that are prior to the
claims of the holders of the Exchange Notes with respect to the assets securing
such other indebtedness. In addition, the Exchange Notes will be effectively
subordinated to indebtedness and other liabilities and commitments (including
trade payables) of the Company's subsidiaries. See "Description of the
Notes--Covenants--Limitation on Consolidated Debt" and "--Limitation on Debt and
Preferred Stock of Subsidiaries."
The Company will be dependent to some extent upon dividends and other
payments from its subsidiaries to generate the funds necessary to meet its
obligations, including the payment of principal of and interest on the Notes.
The ability of the Company's subsidiaries to make such payments will be subject
to, among other things, the availability of sufficient surplus funds and
restrictive covenants in subsidiary level and incurred debt covenants that may
restrict the ability of such subsidiaries to pay dividends to the Company. See
"Description of Other Credit Facilities."
Risks Associated with Implementation of Growth Strategy
The expansion and development of the Company's operations will depend, among
other things, on the Company's ability to assess markets, identify, finance and
complete suitable acquisitions, design fiber optic network backbone routes,
install cable and facilities, including switches, and obtain rights-of-way,
building access rights and any required government authorizations, franchises
and permits, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions. As a result, there can be no assurance that the Company
will be able successfully to expand its existing networks or acquire or develop
new networks in a timely manner in accordance with its strategic objectives.
The Company expects to continue to enhance its systems in order to offer
its customers switched access termination and origination services and local
dial tone, Centrex and desk top products, as well as other enhanced services in
all of its systems as quickly as practicable and as permitted by applicable
regulations. The Company believes its ability to offer, market and sell these
additional products and services will be important to the Company's ability to
meet its long term strategic growth objectives, but is dependent on the
Company's ability to obtain the needed capital, favorable regulatory,
legislative and judicial developments and the acceptance of such products and
services by the Company's customers. No assurance can be given that the Company
will be able to obtain such capital or that such developments or acceptance will
occur.
Risks Associated with Possible Acquisitions
The Company expects a substantial part of its future growth will come from
acquisitions. The acquisition of additional systems will depend on the Company's
ability to identify suitable acquisition candidates and to finance any such
acquisitions. The Company will also be subject to competition for suitable
acquisition candidates. Any acquisitions, if made, could divert the resources
and management time of the Company and would require integration with the
Company's existing networks and services. As a result, there can be no assurance
that any such acquisitions will occur or that any such acquisitions, if made,
would be made in a timely manner or on terms favorable to the Company or would
be successfully integrated into the Company's operations.
Competition
In each of the cities served by the Company's networks, the services
offered by the Company compete principally with the services offered by the LEC
serving that area. LECs have long-standing relationships with their customers,
have the potential to subsidize competitive services from monopoly service
revenues, and benefit from favorable state and federal regulations. While the
FCC's Interconnection Decisions and The Telecommunications Act of 1996 provide
increased business opportunities to CAPs/CLECs such as the Company, they also
provide the LECs with increased pricing flexibility for their private line and
special access and switched access services. In addition, the FCC recently
proposed a rule that would provide for additional LEC pricing flexibility and
deregulation after certain competitive levels are reached, and The
Telecommunications Act of 1996 also contains provisions that afford the LECs
increased pricing flexibility and other regulatory relief, which could also have
a material adverse effect on CAPs/CLECs, including the Company. If the LECs are
allowed by regulators to lower their rates for access and private line services,
engage in substantial volume and term discount pricing practices for their
customers, or seek to charge CAPs/CLECs substantial fees for interconnection to
the LECs' networks, the income of CAPs/CLECs, including the Company, could be
materially adversely affected.
The Company also faces, and expects to continue to face, competition from
other current and potential market entrants, including other CAPs/CLECs, AT&T,
MCI, Sprint and other IXCs, cable television companies, electric utilities,
microwave carriers, wireless telephone system operators and private networks
built by large end users. In January 1994, MCI announced that its MCI/Metro unit
would invest more than $2.0 billion in fiber optic rings and local switching
equipment in major metropolitan markets in the United States to provide direct
connection to its customers and to provide alternative local telephone services
to other IXCs. Sprint has also been developing a local service strategy with
Teleport Communications Group, an alliance of four of the nation's leading cable
and media companies. AT&T has also indicated its intention to offer local
telecommunications services in certain U.S. markets, either directly or in
conjunction with CAPs/CLECs or cable operators.
In addition, a continuing trend toward combinations and strategic alliances
in the telecommunications industry, including potential consolidation among
CAPs/CLECs in second and third tier cities and transactions between telephone
companies and cable companies outside of the telephone company's service area,
could give rise to significant new competitors.
The Company believes that various legislative initiatives, including The
Telecommunications Act of 1996, as well as a recent series of completed and
proposed transactions between LECs, IXCs and cable companies, increase the
likelihood that barriers to local exchange competition will be removed more
quickly than had earlier been anticipated. The introduction of such competition,
however, also means that LECs will be authorized to provide long distance
services under provisions of The Telecommunications Act of 1996 more quickly
than had earlier been anticipated. When LECs are permitted to provide such
services, they will ultimately be in a position to offer single source service.
See "Regulatory Overview."
The Company also competes with equipment vendors and installers, and
telecommunications management companies with respect to certain portions of its
business.
Many of the Company's current and potential competitors have financial,
personnel and other resources substantially greater than those of the Company,
as well as other competitive advantages over the Company. See "Competition" for
more detailed information on the competitive environment faced by the Company.
Dependence on Business from IXCs
For the three months ended March 31, 1996, approximately 26% of the
Company's consolidated revenues were attributable to access services provided to
IXCs. Approximately 16% of such consolidated revenues were attributable to
services provided to MCI and its affiliates. The loss of access revenues from
IXCs in general or the loss of MCI as a customer could have a material adverse
effect on the Company's business. See "Business of the Company--Strategic
Relationships" and "--Sales and Marketing--Wholesale Customers."
In addition, the Company's growth strategy assumes increased revenues from
IXCs following the deployment of switches on its networks and the provision of
switched access origination and termination services. There is no assurance that
the IXCs will continue to increase their utilization of the Company's services,
or will not reduce or cease their utilization of the Company's services, which
could have a material adverse effect on the Company.
Regulation
The Company is subject to varying degrees of federal, state and local
regulation. The Company is not currently subject to price cap or rate of return
regulation, nor is it currently required to obtain FCC authorization for the
installation, acquisition or operation of its network facilities. However, the
FCC has determined that non-dominant carriers, such as the Company and its
subsidiaries, are required to file interstate tariffs on an ongoing basis. The
Company's subsidiaries that provide intrastate services are also generally
subject to certification and tariff filing requirements by state regulators.
Challenges to these tariffs by third parties could cause the Company to incur
substantial legal and administrative expenses. Although the trend in federal and
state regulation appears to favor increased competition, no assurance can be
given that changes in current or future regulations adopted by the FCC or state
regulators or other legislative or judicial initiatives relating to the
telecommunications industry would not have a material adverse effect on the
Company. In particular, the Company's belief that the entire $102 billion local
exchange market may ultimately be open to CAP/CLEC competition depends upon
continued favorable pro-competitive regulatory changes, and the ability of the
Company to compete in these new market segments may be adversely affected by the
greater pricing flexibility and other regulatory relief granted to LECs under
The Telecommunications Act of 1996. See "Regulatory Overview" for more detailed
information on the regulatory environment in which the Company operates.
Need to Obtain and Maintain Permits and Rights-of-Way
In order to acquire and develop its networks, the Company must obtain local
franchises and other permits, as well as rights to utilize underground conduit
and pole space and other rights-of-way from entities such as LECs and other
utilities, railroads, long distance providers, state highway authorities, local
governments and transit authorities. The Telecommunications Act of 1996 requires
that local governmental authorities treat telecommunications carriers in a
competitively neutral, non-discriminatory manner, and that most utilities,
including most LECs and electric companies, afford CAPs/CLECs access to their
poles and conduits and rights-of-way at reasonable rates on non-discriminatory
terms and conditions. There can be no assurance that the Company will be able to
maintain its existing franchises, permits and rights or to obtain and maintain
the other franchises, permits and rights needed to implement its business plan
on acceptable terms. Although the Company does not believe that any of the
existing arrangements will be canceled, or will not be renewed, as needed in the
near future, cancellation or non-renewal of certain of such arrangements could
materially adversely affect the Company's business in the affected city. In
addition, the failure to enter into and maintain any such required arrangements
for a particular network, including a network which is already under
construction, may affect the Company's ability to develop that network. See
"Business of the Company--Network Construction."
Rapid Technological Changes
The telecommunications industry is subject to rapid and significant changes
in technology. While the Company believes that for the foreseeable future these
changes will neither materially affect the continued use of optical fiber
telecommunications networks nor materially hinder the Company's ability to
acquire necessary technologies, the effect of technological changes on the
businesses of the Company cannot be predicted. Thus, there can be no assurance
that technological developments will not have a material adverse effect on the
Company.
Dependence on Key Personnel
The Company's businesses are managed by a small number of management and
operating personnel, the loss of certain of whom could have a material adverse
effect on the Company. See "Management." The Company believes that its ability
to manage its planned growth successfully will depend in large part on its
continued ability to attract and retain highly skilled and qualified personnel.
None of the Company's key executives has a written employment agreement or
non-compete agreement with the Company, nor does the Company maintain keyperson
life insurance on such persons. See "Management" for detailed information on the
Company's management and directors.
No Prior Public Market for Exchange Notes; Possible Volatility of
Market Price of Exchange Notes
The NASD has designated the Private Notes as securities eligible for trading
in the PORTAL market of the NASD (see "Price Range of the Private Notes").
However, the Exchange Notes are new securities for which there is currently no
market. The Company does not intend to apply for listing of the Exchange Notes
on any securities exchange or for inclusion of the Exchange Notes in any
automated quotation system. The Company has been advised by each of the Initial
Purchasers that it currently intends to make a market in the Exchange Notes.
However, there can be no assurance as to the development or liquidity of any
market for the Exchange Notes. If a market for the Exchange Notes were to
develop, the Exchange Notes could trade at prices that may be higher or lower
than their Accreted Value depending upon many factors, including prevailing
interest rates, the Company's operating results and the markets for similar
securities. Historically, the market for non-investment grade debt has been
subject to disruptions that have caused substantial volatility in the prices of
securities similar to the Exchange Notes. There can be no assurance that, if a
market for the Exchange Notes were to develop, such a market would not be
subject to similar disruptions.
Failure to Exchange Private Notes
The Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly completed
and duly executed Letter of Transmittal and all other required documentation.
Therefore, holders of Private Notes desiring to tender such Private Notes in
exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. Neither the Exchange Agent nor the Company is under any duty to give
notification of defects or irregularities with respect to tenders of Private
Notes for exchange. Private Notes that are not tendered or are tendered but not
accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. In addition, any
holder of Private Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer who holds Private
Notes acquired for its own account as a result of market-making or other trading
activities and who receives Exchange Notes for its own account in exchange for
such Private Notes pursuant to the Exchange Offer, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. To
the extent that Private Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Private Notes
could be adversely affected due to the limited amount, or "float," of the
Private Notes that are expected to remain outstanding following the Exchange
Offer. Generally, a lower "float" of a security could result in less demand to
purchase such security and could, therefore, result in lower prices for such
security. For the same reason, to the extent that a large amount of Private
Notes are not tendered or are tendered and not accepted in the Exchange Offer,
the trading market for the Exchange Notes could be adversely affected. See "Plan
of Distribution" and "The Exchange Offer."
Original Issue Discount; Possible Unfavorable Tax and Other Legal
Consequences for Holders of the Exchange Notes and the Company
The Private Notes were issued at a substantial discount from the stated
principal amount thereof. Consequently, purchasers of the Exchange Notes should
be aware that, although interest will not accrue on the Exchange Notes prior to
March 1, 2001, and there will be no periodic payments of cash interest on the
Exchange Notes prior to September 1, 2001, original issue discount (that is, the
difference between the stated redemption price at maturity and the issue price
of the Private Notes) will accrue from February 26, 1996 and will be includible
as interest income periodically (including for periods ending prior to March 1,
2001) in a holder's gross income for U.S. federal income tax purposes in advance
of receipt of the cash payments to which the income is attributable. Similar
results may apply under state and other tax laws.
If a bankruptcy case is commenced by or against the Company under the U.S.
Bankruptcy Code after the issuance of the Exchange Notes, the claim of a holder
of Exchange Notes with respect to the principal amount thereof may be limited to
an amount equal to the sum of (i) the initial offering price of the Private
Notes and (ii) that portion of the original issue discount that is not deemed to
constitute "unmatured interest" for purposes of the U.S. Bankruptcy Code. Any
original issue discount that was not amortized as of any such bankruptcy filing
would constitute "unmatured interest."
See "Certain United States Federal Income Tax Considerations" for a more
detailed discussion of the federal income tax consequences to the holders
regarding the purchase, ownership and disposition of the Notes.
NO CASH PROCEEDS TO THE COMPANY
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the Exchange Notes offered hereby and has
agreed to pay the expenses of the Exchange Offer. In consideration for issuing
the Exchange Notes as contemplated in this Prospectus, the Company will receive,
in exchange, Private Notes in like principal amount. The form and terms of the
Exchange Notes are identical in all material respects to the form and terms of
the Private Notes, except as otherwise described herein under "The Exchange
Offer--Terms of the Exchange Offer." The Private Notes surrendered in exchange
for the Exchange Notes will be retired and cancelled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any increase in
the outstanding debt of the Company.
PRICE RANGE OF THE PRIVATE NOTES
The Private Notes were designated for trading in the PORTAL market of the
NASD effective February 29, 1996. The following table sets forth, for the
periods indicated, the range of reported high and low bid quotations for the
Private Notes in the PORTAL market as reported by Goldman, Sachs & Co., a market
maker:
High Low
----------------
Quarter Ended March 31, 1996 (beginning February 29, 1996).... $61.50 $58.75
Quarter Ending June 30, 1996 (through June 21, 1996).......... 58.75 51.00
Such reported quotations may not reflect actual transactions. On June 21,
1996, the closing bid quotation for the Private Notes was $53.75 (representing
approximately 88% of Accreted Value). As of June 14, 1996, there were two record
holders of the Private Notes and approximately 27 participants in the Global
Note deposited with the Depository.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 and as adjusted to reflect the sale of 7,385,331 shares of the
Company's Common Stock for proceeds net of underwriting discounts, advisory fees
and expenses of approximately $185.2 million in the Company's initial public
offering in May 1996:
<TABLE>
<CAPTION>
Actual As Adjusted
-----------------------------
<C> <C> <C>
Cash and cash equivalents......................................... $253,796,000 $439,045,000
=============================
Marketable securities............................................. $ 25,159,000 $ 25,159,000
=============================
Long-term debt.................................................... $298,529,000 $298,529,000
-----------------------------
Minority interests<F1>............................................ 3,470,000 3,470,000
-----------------------------
Common Stock, subject to redemption option, 2,240,000 shares
(2,016,000 shares as adjusted)<F2>.............................. 28,000,000 25,200,000
Stockholders' Equity:
Common Stock, $0.01 par value, 50,000,000 shares authorized,
2,167,360 (26,304,611 as adjusted) issued and
outstanding<F1><F3><F4>................................... 22,000 263,000
Series A-1 Preferred Stock, $0.01 par value, 489,600 shares
authorized, 389,650 (none as adjusted) issued and
outstanding<F3>........................................... 38,965,000 --
Series A-2 Preferred Stock, $0.01 par value, 439,927 shares
authorized, 419,704 (none as adjusted) issued and
outstanding<F3>........................................... 65,593,000 --
Series B-1 Preferred Stock, $0.01 par value, 12,000 shares
authorized, 12,000 (none as adjusted) issued and
outstanding<F3>........................................... 1,200,000 --
Series B-2 Preferred Stock, $0.01 par value, 4,545 shares
authorized, 4,545 (none as adjusted) issued and
outstanding<F3>........................................... 711,000 --
Series C Junior Participating Preferred Stock, $0.01 par value,
50,000 authorized, none issued or outstanding<F5>......... -- --
Additional paid-in capital<F6>................................ 11,079,000 305,356,000
Accumulated deficit........................................... (20,305,000) (20,305,000)
-----------------------------
Total stockholders' equity........................................ $97,265,000 $285,314,000
-----------------------------
Total capitalization.............................................. $427,264,000 $612,513,000
=============================
- ---------------
<FN>
<F1> Minority interests represent cash investments in certain of the Company's
subsidiaries from minority investors totaling approximately $5.2 million
through March 31, 1996 less the minority investors' interests in such
subsidiaries' respective operating losses. Common shares outstanding does
not include 243,149 shares which the Company has agreed to issue in
exchange for such minority interests.
<F2> Shown as Common Stock, subject to redemption option, because the holder of
such shares has the option to require the Company to repurchase all or any
of such shares at a price of $12.50 per share on or before February 1,
1998. In conjunction with the Company's IPO, the holder of such shares sold
10% of such shares. Accordingly, 224,000 shares are no longer subject to
redemption. The holder of such shares has not indicated to the Company that
it has any current intention to exercise such option. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
<F3> As adjusted common shares includes (i) 7,385,331 shares sold by the Company
in May 1996 and (ii) 16,527,920 shares issued upon the conversion of
Preferred Stock upon completion of the Company's initial public offering
(including 9,940 shares of Preferred Stock issued upon the exercise of
warrants prior thereto). All outstanding shares of Series A Preferred Stock
and Series B Preferred Stock were automatically converted into shares of
Common Stock upon the Company's initial public offering. The issued and
outstanding shares of Series A-1 and Series B-1 Preferred Stock were
converted into 8,033,000 shares of Common Stock. The issued and outstanding
shares of Series A-2 and Series B-2 Preferred Stock were converted into
8,484,980 shares of Common Stock.
<F4> Excludes 5,250,840 shares of Common Stock issuable upon exercise of stock
options and warrants outstanding at March 31, 1996, of which 3,475,774 were
exercisable within 60 days. At March 31, 1996, options to purchase an
aggregate of 846,914 shares of Common Stock at exercise prices ranging from
$4.00 to $11.35 per share and warrants to purchase an aggregate of
2,628,860 shares of Common Stock at exercise prices ranging from $8.25 to
$31.04 per share were exercisable within 60 days. See
"Management--Executive Compensation--Stock Option Plan" and "Certain
Relationships and Related Transactions."
<F5> Reserved for issuance upon the exercise of the Company's Preferred Stock
Purchase Rights pursuant to the terms set forth in the Company's
Shareholder Rights Agreement dated as of February 29, 1996.
<F6> Additional paid-in capital represents the amount of capital in excess of
par value. As adjusted additional paid-in capital includes the capital in
excess of par value resulting from (i) shares sold by the Company in May
1996 and (ii) shares issued upon the automatic conversion of Preferred
Shares.
</FN>
</TABLE>
THE EXCHANGE OFFER
Purpose of the Exchange Offer
The Private Notes were sold by the Company on February 26, 1996 (the
"Closing Date") to the Initial Purchasers pursuant to the Purchase Agreement.
The Initial Purchasers subsequently sold the Private Notes to (i) "qualified
institutional buyers" ("QIBs"), as defined in Rule 144A under the Securities Act
("Rule 144A"), in reliance on Rule 144A and (ii) a limited number of
institutional "accredited investors" ("Accredited Institutions"), as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act. As a condition to the
sale of the Private Notes, the Company and the Initial Purchasers entered into
the Registration Rights Agreement on February 26, 1996. Pursuant to the
Registration Rights Agreement, the Company agreed that it would (i) file with
the Commission within 120 days after the Closing Date a registration statement
under the Securities Act with respect to the Exchange Notes and (ii) use its
reasonable best efforts to cause such Registration Statement to become effective
under the Securities Act within 165 days after the Closing Date. The Company
further agreed to hold the Exchange Offer open for at least 30 days and to
exchange Exchange Notes for all Private Notes validly tendered and not withdrawn
before the expiration of the Exchange Offer. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The Registration Statement is intended to satisfy
certain of the Company's obligations under the Registration Rights Agreement and
the Purchase Agreement.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date.
The Company will issue $1,000 principal amount of Exchange Notes in exchange
for each $1,000 principal amount of outstanding Private Notes validly tendered
pursuant to the Exchange Offer and not withdrawn prior to the Expiration Date.
Private Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof, (ii) holders of the Exchange Notes will not be
entitled to any of the registration rights of holders of Private Notes under the
Registration Rights Agreement, which rights will terminate upon the consummation
of the Exchange Offer and (iii) the Company will not have certain rights to
redeem the Exchange Notes in the event of an Initial Public Equity Offering of
the Company, because such an Initial Public Equity Offering has already
occurred. The Exchange Notes will evidence the same indebtedness as the Private
Notes (which they replace) and will be issued under, and be entitled to the
benefits of, the Indenture, which also authorized the issuance of the Private
Notes, such that both series of Notes will be treated as a single class of debt
securities under the Indenture.
As of the date of this Prospectus, $425,000,000 in aggregate principal
amount of the Private Notes was outstanding. Approximately $424,750,000
principal amount of Private Notes are registered in the name of Cede & Co., as
nominee for The Depository Trust Company (the "Depository") and the remainder of
the Private Notes are registered in the name of Goldman Sachs & Co. Only a
registered holder of the Private Notes (or such holder's legal representative or
attorney-in-fact) as reflected on the records of the Trustee under the Indenture
may participate in the Exchange Offer. Solely for reasons of administration, the
Company has fixed the close of business on May 31, 1996 as the record date for
the Exchange Offer for purposes of determining the persons to whom this
Prospectus and the Letter of Transmittal will be mailed initially. There will be
no fixed record date for determining registered holders of the Private Notes
entitled to participate in the Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the General Corporation Law of the State of Delaware or Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the provisions of the Registration Rights Agreement and
the applicable requirements of the Securities Act and the rules and regulations
of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, and if, the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time on
___________________, 1996, unless the Company, in its sole discretion, extends
the Exchange Offer, in which case the term "Expiration Date" shall mean the
latest date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, (ii) mail to the
registered holders an announcement thereof and (iii) issue a press release or
other public announcement which shall include disclosure of the approximate
number of Private Notes deposited to date, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if, in
the opinion of counsel for the Company, the consummation of the Exchange Offer
would violate any applicable law, rule or regulation or any applicable
interpretation of the staff of the Commission, to terminate or amend the
Exchange Offer by giving oral or written notice of such delay, extension,
termination or amendment to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered holders. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
Without limiting the manner in which the Company may choose to make a public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
Interest on the Exchange Notes
The Private Notes and the Exchange Notes accrete from February 26, 1996 at a
rate equal to 10-7/8% compounded semi-annually to an aggregate principal amount
of $425,000,000 on March 1, 2001. No interest will be payable on the Notes prior
to September 1, 2001. The Notes will accrue cash interest at the rate of 10-7/8%
per annum from March 1, 2001, payable semi-annually in arrears on March 1 and
September 1 of each year, commencing September 1, 2001.
Resale of the Exchange Notes
With respect to the Exchange Notes, based upon interpretations by the staff
of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder who exchanges Private Notes for
Exchange Notes in the ordinary course of business, who is not participating,
does not intend to participate, and has no arrangement with any person to
participate in a distribution of the Exchange Notes, and who is not an
"affiliate" of the Company within the meaning of Rule 405 of the Securities Act,
will be allowed to resell Exchange Notes to the public without further
registration under the Securities Act and without delivering to the purchasers
of the Exchange Notes a prospectus that satisfies the requirements of Section 10
of the Securities Act. However, if any holder acquires Exchange Notes in the
Exchange Offer for the purpose of distributing or participating in the
distribution of the Exchange Notes, such holder cannot rely on the position of
the staff of the Commission enumerated in certain no-action letters issued to
third parties and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction,
unless an exemption from registration is otherwise available. Each broker-dealer
that receives Exchange Notes for its own account in exchange for Private Notes
acquired by such broker-dealer as a result of market- making or other trading
activities must acknowledge that it will deliver a prospectus in connection with
any resale of such Exchange Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of any Exchange Notes
received in exchange for Private Notes acquired by such broker-dealer as a
result of market-making or other trading activities. Pursuant to the
Registration Rights Agreement, the Company has agreed to make this Prospectus,
as it may be amended or supplemented from time to time, available to any such
broker- dealer that requests copies of such Prospectus in the Letter of
Transmittal for use in connection with any such resale for a period of up to 90
days after the Expiration Date. See "Plan of Distribution."
Procedures for Tendering
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile to
the Exchange Agent at the address set forth below under "--Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Private Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Private Notes, if such procedure is
available, into the Exchange Agent's account at the Depository pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the holder must comply with
the guaranteed delivery procedures described below.
The tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. DO NOT SEND THE LETTER OF TRANSMITTAL OR ANY PRIVATE
NOTES TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed by
an Eligible Institution (as defined below) unless the Private Notes tendered
pursuant thereto are tendered (i) by a registered holder who has not completed
the box titled "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be made by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act which is a member of one of
the recognized signature guarantee programs identified in the Letter of
Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be endorsed
or accompanied by a properly completed bond power, signed by such registered
holder exactly as such registered holder's name appears on such Private Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Private
Notes not properly tendered or any Private Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Private Notes. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Private Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Private Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Private Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Private Notes that are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or make
offers for any Private Notes that remain outstanding subsequent to the
Expiration Date and, to the extent permitted by applicable law, purchase Private
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each holder of Private Notes will represent to the Company
that, among other things, (i) the Exchange Notes to be acquired by such holder
of Private Notes in connection with the Exchange Offer are being acquired by
such holder in the ordinary course of business of such holder, (ii) such holder
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) such holder acknowledges and agrees
that any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on the
position of the staff of the Commission set forth in certain no-action letters,
(iv) such holder understands that a secondary resale transaction described in
clause (iii) above and any resales of Exchange Notes obtained by such holder in
exchange for Private Notes acquired by such holder directly from the Company
should be covered by an effective registration statement containing the selling
security holder information required by Item 507 or Item 508, as applicable, of
Regulation S-K of the Commission and (v) such holder is not an "affiliate," as
defined in Rule 405 under the Securities Act, of the Company. If the holder is a
broker-dealer that will receive Exchange Notes for such holder's own account in
exchange for Private Notes that were acquired as a result of market-making
activities or other trading activities, such holder will be required to
acknowledge in the Letter of Transmittal that such holder will deliver a
prospectus in connection with any resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus, such holder will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
Return of Private Notes
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are withdrawn
or are submitted for a greater principal amount than the holders desire to
exchange, such unaccepted, withdrawn or non-exchanged Private Notes will be
returned without expense to the tendering holder thereof (or, in the case of
Private Notes tendered by book-entry transfer into the Exchange Agent's account
at the Depository pursuant to the book-entry transfer procedures described
below, such Private Notes will be credited to an account maintained with the
Depository) as promptly as practicable.
Book-Entry Transfer
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depository for purposes of the Exchange Offer within
two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's systems may make
book-entry delivery of Private Notes by causing the Depository to transfer such
Private Notes into the Exchange Agent's account at the Depository in accordance
with the Depository's procedures for transfer. However, although delivery of
Private Notes may be effected through book-entry transfer at the Depository, the
Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under
"--Exchange Agent" on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
Guaranteed Delivery Procedures
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided by the Company (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder, the certificate number(s) of such Private Notes and the principal amount
of Private Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or a facsimile thereof), together
with the certificate(s) representing the Private Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof), as
well as the certificate(s) representing all tendered Private Notes in proper
form for transfer and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within five New York Stock Exchange trading
days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Private Notes) and (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal by which such
Private Notes were tendered (including any required signature guarantees). All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, in its sole discretion, whose
determination shall be final and binding on all parties. Any Private Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer, and no Exchange Notes will be issued with respect thereto unless
the Private Notes so withdrawn are validly retendered. Properly withdrawn
Private Notes may be retendered by following one of the procedures described
above under "The Exchange Offer--Procedures for Tendering" at any time prior to
the Expiration Date.
Termination of Certain Rights
All registration rights under the Registration Rights Agreement accorded to
holders of the Private Notes (and all rights to receive additional interest in
the event of a Registration Default as defined therein) will terminate upon
consummation of the Exchange Offer except with respect to the Company's
continuing obligation for a period of up to 90 days after the Expiration Date to
keep the Registration Statement effective and to provide copies of the latest
version of the Prospectus to any broker-dealer that requests copies of such
Prospectus in the Letter of Transmittal for use in connection with any resale by
such broker-dealer of Exchange Notes received for its own account pursuant to
the Exchange Offer in exchange for Private Notes acquired for its own account as
a result of market-making or other trading activities.
Exchange Agent
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Registered or Certified Mail: By Hand/Overnight Delivery:
The Bank of New York The Bank of New York
101 Barclay Street - 7E 101 Barclay Street
New York, New York 10286 Corporate Trust Services Window
Attn: Reorganization Section Ground Level
New York, New York 10286
Attn: Reorganization Section
(For Eligible Institutions Only)
Confirm by Telephone: By Facsimile:
(212) 815-2742 (212) 571-3080
The Bank of New York also serves as Trustee under the Indenture.
Fees and Expenses
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, facsimile transmission, telephone or in person by
officers and regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable, out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$__________. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Private Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
Consequence of Failure to Exchange
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
Private Notes that are not exchanged for the Exchange Notes pursuant to the
Exchange Offer will remain "restricted securities" within the meaning of Rule
144(a)(3)(iv) of the Securities Act. Accordingly, such Private Notes may not be
offered, sold, pledged or otherwise transferred except (i) to a person whom the
seller reasonably believes is a "qualified institutional buyer" within the
meaning of Rule 144A under the Securities Act purchasing for its own account or
for the account of a qualified institutional buyer in a transaction meeting the
requirements of Rule 144A, (ii) in an offshore transaction complying with Rule
903 or Rule 904 of Regulation S under the Securities Act, (iii) pursuant to an
exemption from registration under the Securities Act provided by Rule 144
thereunder (if available), (iv) pursuant to an effective registration statement
under the Securities Act or (v) to institutional accredited investors in a
transaction exempt from the registration requirements of the Securities Act,
and, in each case, in accordance with all other applicable securities laws.
Accounting Treatment
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the remaining term of the Notes.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OTHER OPERATING DATA
The selected financial data presented below (other than the pro forma data)
as of and for the periods ended December 31, 1995, 1994 and 1993 are derived
from and qualified by reference to the audited consolidated financial statements
of the Company contained herein. The Company's consolidated financial statements
as of December 31, 1995, 1994 and 1993, and for the years ended December 31,
1995 and 1994, and for the period from inception to December 31, 1993, have been
audited by KPMG Peat Marwick LLP, independent auditors. The selected
consolidated financial data for the three months ended March 31, 1996 have been
derived from the unaudited consolidated financial statements of the Company,
which have been prepared on the same basis as the audited consolidated financial
statements of the Company and, in the opinion of management, reflect all normal
recurring adjustments necessary for a fair presentation of the financial
position and results of operations as of the end of and for such period. The
results for the three months ended March 31, 1996 are not necessarily indicative
of the operating results to be expected for the entire year. The unaudited pro
forma statement of operations data for the year ended December 31, 1995 gives
effect to the merger with BTC and the City Signal Acquisition using the purchase
method of accounting and assuming that such transactions were consummated on
January 1, 1995. The unaudited pro forma data as of and for the three months
ended March 31, 1996 give effect to the IPO and the City Signal Acquisition
using the purchase method of accounting and assuming (i) for purposes of the pro
forma statement of operations data, that the City Signal Acquisition was
consummated on January 1, 1996 and (ii) for purposes of the pro forma balance
sheet data, that the IPO was consummated on March 31, 1996. The pro forma data
presented below are derived from the Company's records and from the records of
City Signal, Inc. and BTC. All of the selected financial data should be read in
conjunction with, and are qualified by reference to, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the "Unaudited
Pro Forma Combined Consolidated Financial Information," and the Consolidated
Financial Statements of the Company, BTC and City Signal, Inc. and notes thereto
contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Pro Forma
Period from Pro Forma Three Three
November 10, Year Year Year Months Months
1993<F1> to Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, March 31, March 31,
1993 1994 1995 1995 1996 1996
-------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data: (Amounts in thousands except per share data)
Telecommunications
service revenue............. $ 2 $2,809 $14,160 $23,072 $6,795 $7,245
Costs and expenses:
Service costs............... -- 1,557 7,177 16,319 2,868 3,051
Selling, general and
administrative expenses... 206 3,966 11,405 15,352 6,621 7,065
Depreciation and
amortization................ 3 663 4,118 8,018 2,427 2,720
------------------------------------------------------------------------------------------------
209 6,186 22,700 39,689 11,916 12,836
Loss from operations.......... (207) (3,377) (8,540) (16,617) (5,121) (5,591)
Interest and other income
(expense), net.............. 2 (598) (2,096) (2,142) (2,042) (2,064)
------------------------------------------------------------------------------------------------
Net loss before
minority interests..... (205) (3,975) (10,636) (18,759) (7,163) (7,655)
Minority interests<F2>... -- 78 1,085 1,085 523 523
------------------------------------------------------------------------------------------------
Net loss................. $ (205) $(3,897) $ (9,551) $(17,674) $(6,640) $(7,132)
================================================================================================
Pro forma net loss
per share<F3>............... $ (.49) $ (.84) $ (.34) $(.37)
=====================================================
Pro forma weighted average
number of shares
outstanding<F3>............. 19,523,584 20,951,862 19,523,584 19,523,584
=====================================================
<CAPTION>
Pro Forma
Period from Pro Forma Three Three
November 10, Year Year Year Months Months
1993<F1> to Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, March 31, March 31,
1993 1994 1995 1995 1996 1996
-------------------------------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Other Data: (Amounts in thousands)
EBITDA<F4>.................. $ (204) $(2,714) $(4,422) $(8,492) $(2,694) $(2,871)
Capital expenditures,
including acquisitions
of businesses, net of
cash...................... -- 42,362 41,518 48,883 15,577 17,620
Ratio of earnings to
combined fixed charges
and preferred stock
dividends<F5>............. -- -- -- -- -- --
<CAPTION>
As of Pro Forma
December 31, As of as of
---------------------------------- March 31, March 31,
1994 1995 1996 1996
-----------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data: (Amounts in thousands)
Cash and cash equivalents ........................................ $8,795 $59,913 $253,796 $439,045
Marketable securities............................................. 25,159 25,159
Working capital................................................... 15,862 57,913 264,772 450,022
Total assets...................................................... 71,325 146,610 449,135 634,384
Long-term debt, less current portion.............................. 29,403 43,977 298,529 298,529
Total stockholders' equity........................................ 36,699 93,455 97,264 282,514
<CAPTION>
As of As of As of
December 31, March 31, April 30,
1994 1995 1996 1996
-----------------------------------------------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Network Data:
Cities in operation............................................... 5 11 3 14
Cities under construction......................................... 6 10 12 11
Buildings connected............................................... 62 216 495 561
Route miles....................................................... 107 262 506 532
Fiber miles....................................................... 6,437 17,111 26,659 28,869
VGE circuits<F6>.................................................. 59,208 122,617 165,122 191,987
Switches installed................................................ -- 1 3 3
Employees......................................................... 89 165 456 488
- ---------------
<FN>
<F1> The Company was organized on November 10, 1993.
<F2> Minority interests represent the ownership interests of minority investors
in certain of the Company's subsidiaries.
<F3> Pro forma net loss per share has been computed using the number of shares
of Common Stock and Common Stock equivalents outstanding. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, shares
issued at prices below the IPO price of $27.00 per share and stock options
and warrants granted with exercise prices below the IPO price during the
twelve-month period preceding the date of the initial filing of the IPO
Registration Statement have been included in the calculation of Common
Stock equivalent shares, using the treasury stock method, as if such
shares, options and warrants were outstanding for all of 1995 and the first
quarter of 1996.
<F4> EBITDA consists of net income (loss) before minority interests, interest,
income taxes, depreciation and amortization. It is a measure commonly used
in the telecommunications industry and is presented to assist in
understanding the Company's operating results. However, it is not intended
to represent cash flow in accordance with generally accepted accounting
principles. See the Company's Consolidated Statements of Cash Flows
appearing elsewhere in this Prospectus.
<F5> For purposes of calculating the ratio of earnings to fixed charges: (i)
earnings consist of loss before income taxes and minority interests, plus
fixed charges excluding capitalized interest and (ii) fixed charges consist
of interest expensed and capitalized, plus amortization of deferred
financing costs, plus the portion of rent expense under operating leases
deemed by the Company to be representative of the interest factor. For the
period from November 10, 1993 to December 31, 1993, the years ended
December 31, 1994 and December 31, 1995 and the three months ended March
31, 1996, the Company's earnings were insufficient to cover fixed charges
by $205,000, $3,975,000, $10,636,000 and $7,163,000, respectively. On a pro
forma basis, for the year ended December 31, 1995 and the three months
ended March 31, 1996, the Company's earnings would have been insufficient
to cover fixed charges by $18,759,000 and $7,655,000, respectively.
<F6> Voice grade equivalent circuits.
</FN>
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's audited Consolidated Financial Statements and the notes thereto
appearing elsewhere in this Prospectus.
Overview
The Company is a leading full service provider of competitive local
telecommunications services in selected markets in the United States. The
Company acquires and constructs its own state-of-the-art fiber optic networks
and facilities and leases network capacity from others to provide IXCs and
business, government and institutional end-users with an alternative to the LECs
for a broad array of high quality voice, data and other telecommunications
services.
The Company's goal is to become the primary full service provider of
competitive local telecommunications services to IXCs and business, government
and institutional end-users in selected cities by offering superior products
with excellent customer service at prices below those charged by the LECs. The
Company currently has systems in 26 cities, consisting of systems in operation
in 18 cities and under construction in 8 cities. The Company plans to expand its
network operations to have systems in operation or under construction in a total
of 30 cities by the end of 1996 and a total of 50 cities by the end of 1998. The
Company has recently installed switches in its networks in Sacramento,
California and Hartford, Connecticut and, in connection with the Company's
recent acquisition of City Signal, Inc., obtained a fully-operational switch
serving Grand Rapids, Michigan, and subject to regulatory approvals, plans to
have switching, frame relay and ATM based packet transport capabilities in 20 of
its operating networks by the end of 1996.
As of December 31, 1995, the Company had completed three acquisitions,
including the acquisition of competitive local telecommunications networks in
operation in three cities (Springfield, Massachusetts; Sacramento, California;
and Tulsa, Oklahoma), and five networks that were under construction at the time
of acquisition (Providence, Rhode Island; Hartford, Connecticut; and San Jose,
Santa Clara and Sunnyvale, California), as well as two providers of integrated
telecommunications and facilities management services to medium and small
businesses in the San Francisco Bay area of California. The Company has since
completed the construction of the Hartford, Providence, San Jose, Santa Clara
and Sunnyvale networks. The acquisitions have been accounted for as purchases
and, accordingly, the Company's consolidated financial statements include the
results of operations from the dates of acquisition. The acquired assets and
liabilities were recorded at their estimated fair value on the acquisition
dates, and appropriate amounts were allocated to intangible assets, including
goodwill.
During 1994, the Company also initiated plans for the development and
construction of networks in Oklahoma City, Oklahoma; Little Rock, Arkansas; and
Knoxville, Tennessee. Initial construction of the Oklahoma City and Little Rock
networks was completed during the first quarter of 1995, and construction of the
Knoxville network is underway. During 1995, the Company also commenced the
construction and development of nine additional networks and the expansion of
several of the Company's existing networks. Effective September 1995, the
Company and MCI/Metro formed a joint venture company to operate and expand
significantly the Company's existing networks in San Jose and its environs and,
in May and June 1996, the Company and MCI/Metro entered into agreements which
provide that, until September 30, 2001, the Company will be MCI/Metro's
preferred provider of certain local access services in a number of the Company's
markets and pursuant to which MCI/Metro has acquired a 15% interest in the
Company's Sacramento, California network for $4.5 million, and MCI/Metro has
invested an additional $3.5 million in the San Jose joint venture company. In
December 1995, the Company entered into a national vendor agreement with AT&T
pursuant to which the Company expects to become AT&T's preferred supplier of
dedicated special access, switched access transport and switched business and
residential line services in most of the Company's markets. The Company is
currently providing certain services to AT&T under the agreement in cities in
California, Connecticut, Massachusetts and Rhode Island and expects to add
additional services in these markets and to add additional markets in stages
during the balance of 1996. The Company's provision of services in any
additional markets and additional services in California, Connecticut,
Massachusetts and Rhode Island is subject to the mutual agreement of the Company
and AT&T with respect to each market, including satisfactory completion of
network validation tests. As a result, there is no assurance that the national
vendor agreement will be extended to cover additional markets and services. See
"Business of the Company--Strategic Relationships."
On January 31, 1996, the Company completed the City Signal Acquisition
which included networks in operation or under construction in four cities in
Michigan and Ohio, including an installed switch in Grand Rapids, Michigan. At
the date of acquisition, the acquired networks had approximately 208 route miles
of fiber, 30,456 VGE circuits and 226 buildings connected. In addition,
effective January 2, 1996, BTC, a founding stockholder of the Company, was
merged into the Company. As a result, the Company acquired BTC's wholly-owned
subsidiary, GLA, which offers a full range of consulting, management,
engineering and information systems solutions for telecommunications companies.
GLA's capabilities also serve as an internal source for the telecommunications
infrastructure support needed to facilitate the Company's network growth and
penetration of the CLEC business. See "Summary--Recent Developments," "Business
of the Company," "Certain Relationships and Related Transactions" and "Unaudited
Pro Forma Combined Consolidated Financial Information."
Pursuant to an agreement dated as of June 24, 1996, the Company has agreed
to acquire the stock of ALD Communications, Inc. ("ALD"), a switchless reseller
of long distance services, and Tenant Network Services, Inc. ("TNS"), a
wholly-owned subsidiary of ALD which acts as a shared tenant service provider of
telecommunications services, both of which provide their services primarily to
customers in the San Francisco, California area and have aggregate annualized
monthly revenues of approximately $5.8 million, based on March 1996 results
provided to the Company by ALD and TNS.
Results of Operations
Three Months Ended March 31, 1996 Compared to Three Months Ended
March 31, 1995
Revenues
The Company's revenues for the first quarter of 1996 increased 125% as
compared to the first quarter of 1995 to $6.8 million for the three months ended
March 31, 1996 as compared with revenues of $3.0 million for the three months
ended March 31, 1995. On a pro forma basis, after giving effect to the City
Signal Acquisition, revenues for the first three months of 1996 would have been
$7.2 million. Network capacity as reflected in VGEs in service increased to
165,122 VGEs as of March 31, 1996 as compared with 84,384 VGEs as of March 31,
1995. These increases reflect the impact of the Company's acquisition and
development activities as well as increased utilization of the Company's network
facilities arising from the sales of additional services to current and new
customers. A significant contributor to the Company's revenue growth for the
first quarter of 1996 relates to the Company's entry into switched services in
Grand Rapids, Michigan via the Company's City Signal acquisition. Switched
services revenues for the quarter ended March 31, 1996, representing two months'
revenues from the Company's switched services activities in Grand Rapids,
totaled $754,000 or $4.5 million on an annualized basis.
Costs and Expenses
Service costs increased to $2.9 million for the three months ended March
31, 1996 from $1.7 million for the three months ended March 31, 1995. Service
costs consist of costs associated directly with the operation of the Company's
networks, facilities management services, and consulting and system support
activities for third parties including technical salaries and benefits,
rights-of-way fees, and local and long distance service costs. Service costs as
a percentage of telecommunications services revenues declined to approximately
42% for the three months ended March 31, 1996 as compared to approximately 55%
for the three months ended March 31, 1995.
The Company's selling, general and administrative expenses ("SG&A") for the
three months ended March 31, 1996 were $6.6 million, as compared with SG&A
expenses of $2.3 million for the three months ended March 31, 1995. The increase
was principally due to the increasing number and continued expansion of the
Company's competitive access networks, including the introduction of switched
services, and related marketing activities. There is typically a period of
higher SG&A expense and a lag time in the generation of revenues following the
acquisition and development of a competitive access network. Management expects
SG&A expenses to continue to increase during the remainder of 1996 as the
Company continues to expand its networks, services and marketing activities.
Depreciation and amortization expense increased to $2.4 million for the
three months ended March 31, 1996, from $745,000 for the three months ended
March 31, 1995 as a result of the Company's acquisitions and the continued
expansion of the Company's networks.
Interest Income (Expense)
Interest expense totaling $3.8 million was recorded during the three months
ended March 31, 1996, as compared to interest expense of $819,000 for the three
months ended March 31,1995. The primary contributor to the substantial increase
in interest expense as compared to the comparable period in the prior year is
non-cash interest totaling $2.6 million attributable to the Private Note
Offering (see "--Liquidity and Capital Resources") which was completed by the
Company on February 26, 1996. For the quarters ended March 31, 1996 and 1995,
interest income totaling $1.8 million and $107,000, respectively, was derived
from the Company's available cash and cash equivalents and marketable
securities.
Net Loss
For the reasons stated above, the Company's net loss before minority
interest increased to $7.2 million for the quarter ended March 31, 1996, from
$2.4 million for the quarter ended March 31, 1995. Minority interests in net
losses, representing minority investors' interests in certain of the Company's
subsidiaries, totaled $523,000 and $142,000 for the quarters ended March 31,
1996 and 1995, respectively. As a result, the Company's net loss for the quarter
ended March 31, 1996 was $6.6 million as compared to a net loss of $2.2 million
for the quarter ended March 31, 1995.
EBITDA
Earnings before interest, taxes, depreciation and amortization (EBITDA)
decreased to ($2.7) million for the three months ended March 31, 1996, from
($899,000) for the three months ended March 31, 1995, a decrease of $1.8
million. The decrease reflects the increasing operating and SG&A expenses noted
above resulting from the acquisition, development and expansion of the Company's
networks and the introduction of switched services in certain of the Company's
markets.
EBITDA is a measure commonly used in the telecommunications industry, is
presented to assist in an understanding of the Company's operating results and
is not intended to represent cash flow or results of operations in accordance
with generally accepted accounting principles.
Year Ended December 31, 1995 Compared to Year Ended December 31,
1994
Revenues
Telecommunications services revenues grew from $2.8 million in the year
ended December 31, 1994 to $14.2 million ($23.1 million on a pro forma basis
after giving effect to the merger with BTC and the City Signal Acquisition) in
the year ended December 31, 1995. Network capacity as reflected in VGEs in
service increased from 59,208 VGEs as of December 31, 1994 to 122,617 VGEs
(153,073 VGEs on a pro forma basis) as of December 31, 1995. These increases
reflect the impact of the Company's acquisition and development activities as
well as increased utilization of the Company's network facilities arising from
the sales of additional services to current and new customers.
Costs and Expenses
Service costs increased from $1.6 million for the year ended December 31,
1994 to $7.2 million for the year ended December 31, 1995. Service costs consist
of costs associated directly with the operation of the Company's competitive
access networks and facilities management services.
Service costs for the year ended December 31, 1995 consist principally of
local and long distance service costs totaling $5.7 million, salaries and
benefits totaling $1.0 million and rights-of-way fees totaling $353,000. Service
costs as a percentage of telecommunications services revenues approximated 55%
for 1994 as compared to approximately 51% for 1995. Due to the fixed nature of
certain costs associated with the development of the Company's competitive
access networks, the Company expects that the ratio of service costs to network
revenues will decline as network usage increases.
The Company's selling, general and administrative expenses ("SG&A") for the
year ended December 31, 1995 were $11.4 million, as compared with SG&A expenses
of $4.0 million for 1994. The increase was principally due to the increasing
number and continued expansion of the Company's competitive access networks and
related marketing activities; however, such costs did not increase to the same
degree as the Company's revenues. There is typically a period of higher SG&A
expenses and a lag time in the generation of revenues following the acquisition
and development of a competitive access network. Management expects SG&A
expenses to continue to increase during 1996 as the Company continues to expand
its networks, services and marketing activities.
Depreciation and amortization expense increased from $663,000 for the year
ended December 31, 1994 to $4.1 million for 1995 as a result of the Company's
acquisitions and the continued expansion of the Company's networks.
Interest Income (Expense)
Interest expense totaling $3.7 million ($2.2 million on a pro forma basis
giving effect to the Private Note Offering) and $693,000 was recorded during
1995 and 1994, respectively, as a result of the incurrence of secured
indebtedness to finance the acquisition and development of certain of the
Company's operations. Under the AT&T Credit Facility, $3.8 million and $135,000
of the interest expense were added to the principal balance during 1995 and
1994, respectively. No cash payments of interest are required on the Private
Notes until September 1, 2001. During the years ended December 31, 1995 and
1994, interest income totaling $1.6 million and $95,000, respectively, was
derived from the Company's available cash balances.
Net Loss
For the reasons stated above, the Company's net loss before minority
interest increased from $4.0 million in 1994 to $10.6 million in 1995. Minority
interests in net losses, representing minority investors' interests in certain
of the Company's subsidiaries, totaled $1.1 million and $78,000 for the years
ended December 31, 1995 and 1994, respectively. As a result, the Company's net
loss for 1995 was $9.5 million as compared to a net loss of $3.9 million for
1994.
EBITDA
EBITDA decreased from ($2.7) million for the year ended December 31, 1994
to ($4.4) million for the year ended December 31, 1995, a decrease of $1.7
million. The decrease reflects the increasing operating and SG&A expenses noted
above resulting from the acquisition, development and expansion of the Company's
networks. On a pro forma basis, EBITDA for 1995 was ($8.5) million.
EBITDA is a measure commonly used in the telecommunications industry, is
presented to assist in an understanding of the Company's operating results and
is not intended to represent cash flow or results of operations in accordance
with generally accepted accounting principles.
Year Ended December 31, 1994 Compared to the Period from November 10, 1993 to
December 31, 1993
The Company commenced operations on November 10, 1993, and it does not
believe that a comparison of results for the period ended December 31, 1993 with
the year ended December 31, 1994 is meaningful.
Comparisons of Annualized Monthly Recurring Revenue for
March 1996, December 1995 and December 1994
Annualized monthly recurring telecommunications revenues grew from $11.9
million based on December 1994 results to $15.5 million based on December 1995
results. These increases reflect the increased utilization of the Company's
network facilities arising from the sale of additional services and the impact
of the Company's acquisition of the Tulsa network during March 1995. Annualized
monthly recurring telecommunications revenues were $28.0 million based on March
1996 results as compared to $15.5 million based on December 1995 results. This
increase reflects the impact of the Company's acquisition of City Signal, Inc.
as of January 31, 1996 ($4.9 million), the merger with BTC effective January 2,
1996 ($4.3 million) and incremental revenues since the dates of acquisition
($3.3 million). Monthly recurring telecommunications revenues represents monthly
service charges for telecommunications services to customers through the last
day of the month indicated, excluding non-recurring revenues for certain
one-time services, such as equipment and installation charges. Annualizing the
Company's monthly recurring revenues is one measure of the incremental change in
the Company's telecommunications revenues but is not necessarily indicative of
the results to be expected for an entire year.
Liquidity and Capital Resources
The Company's total assets increased from $146.6 million as of December 31,
1995 to $449.1 million at March 31, 1996. The Company's current assets of $286.6
million at March 31, 1996, including cash and cash equivalents and marketable
securities of $279.0 million, exceeded current liabilities of $21.9 million,
providing working capital of $264.7 million. Network and equipment totaled $97.8
million at March 31, 1996 as compared to $50.0 million at December 31, 1995.
Other assets, principally goodwill, net of accumulated amortization, increased
to $64.7 million at March 31, 1996 from $33.5 million at December 31, 1995,
primarily as a result of the Company's acquisitions of both City Signal, Inc.
and BTC, and debt issuance costs associated with the Company's recent $250
million gross proceeds from the Private Note Offering.
During 1994, subsidiaries of the Company established a secured line of
credit with AT&T Credit which totals $49.2 million to fund the acquisition and
construction of networks in cities approved by AT&T Credit on a
project-by-project basis. The AT&T Credit Facility provides for individual
borrowings by subsidiaries of the Company on terms which provide for two years
of capitalized interest, one year of interest-only payments, and a six-year
principal and interest repayment thereafter. The notes bear interest at the
90-day commercial paper rate plus 4.5% per annum (10.12% at March 31, 1996). The
arrangement also provides AT&T Credit the opportunity to purchase, for cash and
on the same basis as the Company, a 6.5% equity interest in the networks it
finances. AT&T Credit has exercised this option on all of the networks it has
financed, resulting in equity investments of $1.2 million as of March 31, 1996.
The Company has agreed that AT&T Credit may exchange such equity investments for
an aggregate of 234,260 shares of Common Stock. At March 31, 1996, there was a
total of $45.0 million of outstanding indebtedness (including capitalized
interest commitments) under the AT&T Credit Facility.
During August 1995, a wholly-owned subsidiary of the Company established a
$10 million revolving line of credit with Fleet National Bank, which is secured
by the assets and stock of the Company's Tulsa, Oklahoma network. The Bank
Credit Facility provides the subsidiary with the ability to borrow up to $10
million from time to time prior to June 30, 1997, with a final maturity of all
loans no later than June 30, 2002, with interest-only payments through August
31, 1997 and a 4.5 year principal payout period thereafter. The subsidiary of
the Company has borrowed $100,000 under the Bank Credit Facility, leaving an
availability of $9.9 million, at an interest rate equal to 2% over the bank's
prime rate (9.75% at March 31, 1996).
On February 26, 1996, the Company sold $425.0 million aggregate principal
amount the Private Notes, providing gross proceeds of approximately $250
million, and proceeds net of underwriting fees of approximately $241 million. No
cash payments of interest are required on the Private Notes until September 1,
2001.
On May 2, 1996, the Company sold 7,385,331 shares of the Company's common
stock in an initial public offering at a price of $27.00 per share. Gross
proceeds from this offering totaled approximately $199.4 million and proceeds
net of underwriting discounts, advisory fees and expenses totalled approximately
$185.2 million.
The competitive local telecommunications services business is a
capital-intensive business. The Company's operations have required and will
continue to require substantial capital investment for (i) the installation of
electronics for switched services in the Company's operating networks; (ii) the
expansion and improvement of the Company's operating systems, including the
installation of capabilities to provide other enhanced services; and (iii) the
acquisition, design, construction and development of additional networks. For
the three months ended March 31, 1995 and 1996, the Company made expenditures,
for the acquisition, design, construction and development of systems totaling
$18.2 million and $15.6 million, respectively. For the years ended December 31,
1994 and 1995, the Company made expenditures for the acquisition, design,
construction and development of systems totaling $42.4 million and $41.5
million, respectively.
The Company plans to continue to make substantial capital investments in
connection with the entry into new markets and the continued development of its
existing systems, including the capital required to provide switched and other
enhanced services as technology and regulations permit. The Company currently
intends to use the net proceeds from the Company's IPO, together with the
remaining net proceeds from the Private Note Offering and minority investments
in individual networks to fund the Company's expansion as well as initial
operating losses. The Company estimates that it will spend approximately $290
million during 1996 and 1997 to fund the Company's expansion to 30 networks that
are expected to be in operation or under construction by the end of 1996 and the
installation of switching electronics and other enhanced capabilities in these
networks. The Company's strategic plan calls for having systems in operation or
under development in a total of 50 cities by the end of 1998, which will require
substantial additional capital. The Company expects its expansion into
additional cities will be accomplished by the acquisition of existing networks
as well as the construction of new networks. The Company will continue to
evaluate additional revenue opportunities in its existing markets and, as such
opportunities may develop, the Company may determine to make additional capital
investments in its networks that may be required to pursue such opportunities,
such as costs required to extend a network or install additional electronics to
meet customer requirements. Due to the number and variability of the factors
which could affect the amount of capital that will be required for such
purposes, the Company cannot provide a reasonable estimate of such additional
capital needs. For example, the size of a particular network to be developed or
acquired and the types of electronics installed can impact significantly the
amount of capital required. Similarly, the potential cost of acquiring
additional networks is not determinable, and it is possible that the Company
could acquire existing networks using a variety of financing alternatives. The
Company expects to meet such additional capital needs with the net proceeds from
the Company's IPO, the remaining net proceeds from the Private Note Offering,
the proceeds from existing and future credit facilities and other borrowings,
and the proceeds from sales of additional equity securities and joint ventures.
The Company's expectations of required future capital expenditures are based on
the Company's current estimates and the current state and federal regulatory
environment (see "Regulatory Overview"). There can be no assurance that actual
expenditures will not be significantly higher or lower. In addition, there can
be no assurance that the Company will be able to raise or generate sufficient
funds to enable it to meet its strategic objectives or that such funds, if
available at all, will be available on a timely basis or on terms that are
acceptable to the Company. See "Risk Factors--Significant Future Capital
Requirements; Substantial Indebtedness."
In connection with the City Signal Acquisition, the seller, Ronald H.
Vander Pol, received an option to require the Company to repurchase any or all
of the 2,240,000 shares of the Company's Common Stock issued in the City Signal
Acquisition at a price of $12.50 per share at any time on or before February 1,
1998. The National Christian Charitable Foundation, Inc., which received all of
such shares from Mr. Vander Pol on May 1, 1996 and currently owns 2,016,000 of
such shares, has not indicated to the Company that it has any current intention
to exercise such option.
Effect of New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of, which will require the Company to review for the
impairment of long-lived assets and certain identifiable intangibles to be held
and used by the Company whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Adoption of SFAS
No. 121 is required in fiscal year 1996.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value based method for financial
accounting and reporting for stock-based employee compensation plans. However,
the new standard allows compensation to continue to be measured by using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, but requires
expanded disclosures. SFAS No. 123 is effective in fiscal year 1996.
While the Company does not know precisely the impact that will result from
adopting SFAS No. 121 and SFAS No. 123, the Company does not expect the adoption
of SFAS No. 121 or SFAS No. 123 to have a material effect on the Company's
consolidated financial position or results of operations.
Inflation
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
BUSINESS OF THE COMPANY
CAP/CLEC Market Potential
The first CAPs were established in the mid-1980's to serve the increasing
demand for telecommunication services by business, finance, government,
education and healthcare entities by providing competitive alternatives to the
LECs in non-switched, special access and private line services. The deregulation
of the U.S. telecommunications industry, rapid changes in technology and the
increasingly information intensive nature of the U.S. economy have significantly
expanded the role of telecommunications for these entities. Industry sources
estimate that voice traffic of such end users is growing at a rate of
approximately seven percent per year, while data communications are growing at
three to five times this rate due to the increase in computerized transactions
processing and video applications, the movement to distributed data processing,
the rise of decentralized management structures and growing demand for Internet
access services, which require the transmission of large amounts of information
with speed, accuracy and reliability.
The present structure of the telecommunications industry has evolved
largely as a result of increased market demand, deregulation, the implementation
of new technologies and increased competition. The rapid development of fiber
optic and digital electronics technologies has encouraged the growth of cost
effective alternatives to the monopolistic position of the LECs in many of the
local exchange markets. In particular, the IXCs, who industry sources estimate
may pay as much as 45% of their total revenues in local access charges, have
supported competition in the local exchange markets.
Initially, CAPs were permitted to provide only non-switched special access
and private line services. The FCC's Interconnection Decisions in 1992 and 1993
granted CAPs the right to interconnect their private networks to the LEC
networks to provide collocated special access and switched access transport
services, which enabled CAPs to access new customers and new markets without
physically expanding their networks.
The Company believes that the competitive local telecommunications business
is positioned for dramatic growth. Of the $32 billion of access fees paid by
IXCs to the LECs in 1994, CAPs accounted for only $294 million or less than 1%.
The Company expects that the entry of the LECs into the long distance business
will increase these penetration rates as IXCs may seek alternatives to the LECs
as sources of access to their customers. Over one-half of the states have taken
regulatory and legislative action to open local communications markets to
various degrees of local exchange competition and Co-carrier status. The Company
also expects continuing pro-competitive regulatory changes, including those
mandated by The Telecommunications Act of 1996, together with increasing
customer demand, will create more opportunities for CAPs/CLECs to introduce
additional services, expand their networks and address a larger customer base.
With these changes, CAPs/CLECs would be able to offer local dial tone, Centrex,
desk top and other enhanced services. The Company believes that these changes
afford CAP/CLECs the potential to grow significantly over the next several
years. However, there is no assurance that such regulatory and other industry
trends will continue or that future regulatory developments will be favorable to
CAPs and CLECs.
See "The Competitive Access Industry," "Competition" and "Regulatory
Overview" below.
Overview of the Company
The Company, founded in November 1993, is a leading full service provider
of competitive local telecommunications services to IXCs and business,
government and institutional end users in selected second and third tier cities
within the United States. The Company is organized as a holding company with
individual operating subsidiaries which focus on specific market segments.
Through its operating subsidiaries, the Company acquires and constructs its own
state-of-the-art digital optical fiber telecommunications networks and
facilities and leases network capacity from others to provide IXCs and business,
government and institutional end users with an alternative source for a broad
array of high quality voice, data and other telecommunications services. Two of
the Company's subsidiaries located in California, which were acquired in October
1994 in connection with the acquisition of the Sacramento, San Jose, Sunnyvale
and Santa Clara networks, currently provide single source integrated local and
long distance telecommunications services and facilities management for medium
and small businesses utilizing the facilities of other providers. GLA, acquired
in the merger with BTC on January 2, 1996, provides a full range of consulting,
network engineering and construction, strategic planning, infrastructure
planning and design and information system services and solutions for the
Company and a wide variety of other telecommunications providers.
The Company's networks are organized to take advantage of ongoing
technological, competitive and regulatory changes. They sell their services
primarily to IXCs and business, government and institutional customers who are
high volume users of telecommunications services. Expenditures by IXCs for
access connections to their customers represent their largest single expense and
are estimated by industry sources to represent as much as 45% of the revenues
generated by long distance calls. Through the deployment of state-of-the-art
fiber optic networks and switches, the Company is able to provide the IXCs
served by its networks with high quality, reliable services at prices less than
those the regulated LECs currently charge. The Company can expand its
capabilities to offer these services beyond the locations served by its networks
by interconnecting its facilities with the facilities of the LECs, IXCs and
other providers of telecommunications services.
For financial information regarding the Company, see the financial
statements and related notes listed under "Index to Consolidated Financial
Statements."
Corporate Strategy
The Company's goal is to become the primary full service provider of
competitive local telecommunications services to IXCs and business, government
and institutional end users in selected cities by offering superior products
with excellent customer service at prices below those charged by the LECs. The
principal elements of the Company's strategy include:
Target Second and Third Tier Markets. The Company believes that the trend
towards deregulation and the broadening range of services that can be
offered by CAP/CLECs present attractive opportunities for new CAP/CLEC
entrants in second and third tier cities where there are typically fewer
CAP/CLEC competitors than in first tier markets and where the LECs
generally have placed a lower priority on installing fiber optic systems
comparable to those being installed by the Company. As an early entrant in
selected second and third tier cities, the Company believes it can attain a
leadership position by securing needed franchises and rights-of-way,
installing robust state-of-the-art CAP/CLEC networks and facilities (i.e.,
networks which are capable of reaching at least 70% to 80% of identified
business end users) and establishing customer relationships with IXCs and
business, government and institutional end users that will enable it to
take advantage of the attractive potential growth rates for local exchange
service revenues in those markets.
Continue to Increase the Number of Cities Served. The Company currently has
systems in operation or under construction in a total of 26 cities. All of
the 8 networks currently under construction are expected to become
operational by the end of 1996. The Company plans to have systems in
operation or under construction in a total of 30 cities by the end of 1996
and 50 cities by the end of 1998. The Company's expansion into additional
cities is expected to be accomplished by the acquisition of existing
networks as well as the construction of new networks. In adding networks,
the Company believes it can increase revenues and yield economies of scale
in service costs.
Continue to Build Out Existing Systems. The Company strives to build a
sufficient revenue base in each of its systems to generate the cash flow
necessary to enable it to devote more resources to developing its systems
as opposed to funding initial operating losses. The Company believes its
access to significant capital and technical resources and its on-going
efforts to develop close working relationships with its IXC customers (see
"--Develop Strategic Relationships" below) will enable it to more rapidly
develop and expand its systems, add to its service offerings and establish
the strong customer relationships necessary to solidify its competitive
position in its selected markets.
Develop Strategic Relationships. In order to capitalize on the competitive
dynamics of the changing IXC/LEC relationships, the Company is pursuing the
establishment of business alliances with major IXCs, including joint
ventures and preferred vendor relationships. In accordance with this
strategy, (1) in September 1995, the Company and MCI/Metro formed a joint
venture company to operate and expand the Company's existing CAP networks
in San Jose, California and its environs and, in May and June 1996, the
Company and MCI/Metro entered into agreements which provide that, until
September 30, 2001, the Company will be MCI/Metro's preferred provider of
certain local access services in a number of the Company's markets at a
discount to prevailing optimized LEC rates for comparable circuits, and
pursuant to which MCI/Metro has acquired a 15% interest in the Company's
Sacramento, California network for $4.5 million, and MCI/Metro has invested
an additional $3.5 million in the San Jose joint venture company, and (2)
in December 1995, the Company concluded a national preferred vendor
agreement with AT&T Communications. The Company believes preferred vendor
relationships with IXCs will provide opportunities to leverage its
partners' sales channels and market support to sell the Company's products
and services and expand the Company's potential revenue base. In addition,
the Company believes that relationships with IXCs will facilitate its entry
into new markets by providing access between the IXCs and their customers.
The Company has organized a national account marketing organization to
manage such relationships. The Company believes this marketing effort,
along with its planned critical mass of cities served and financial
resources, will position it well to develop and maintain these strategic
relationships. See "--Strategic Relationships" below.
Expand the Range of Services Offered. The Company's principal services
currently include special access IXC connections (high capacity lines used
to connect IXC POPs), special access end user to IXC connections (medium to
high capacity circuits used to connect customer locations with IXCs),
private line connections (low to medium capacity circuits used to connect
multiple customer locations) and collocated special access and switched
access transport services. The Company has switches installed in three of
its operating networks and, as regulations permit, plans to leverage its
networks and customer relationships by offering switched access termination
and origination services and local dial tone, Centrex and desk top
products, as well as other enhanced services such as high speed video
conferencing, frame relay and ATM-based packet transport services and
Internet access products. The Company expects to offer all of such services
and products in approximately 20 of its operating networks by the end of
1996 and in all of its operating networks by the end of 1997, subject to
regulatory approvals, which the Company expects will be accelerated under
The Telecommunications Act of 1996. The Company also plans to continue to
upgrade and add to its systems and services as technology and regulations
permit.
Leverage upon GLA's Significant Telecommunications Infrastructure
Capabilities. The acquisition of GLA provides the Company with an internal
source for the telecommunications infrastructure support needed to
facilitate the Company's penetration of the CLEC business. GLA provides the
Company with a full range of network engineering, construction, design and
strategic planning services, as well as financial and management software
products, including specifically designed software for billing systems,
toll rating, plant records and financial applications.
Current Products and Services
Special and Switched Access and Private Line Services. The Company
currently provides several types of special and switched access and private line
services to its IXC and end-user customers. Historically, CAPs such as the
Company were able to offer only non-switched special access and private line
services which involved the installation of dedicated lines to provide the
following types of communications links:
o POP-to-POP Special Access -- Telecommunications lines linking the POPs of
one IXC or the POPs of different IXCs in a market, allowing these POPs to
exchange transmissions for transport to their final destinations.
o End-User/IXC Special Access -- Telecommunications lines between an end
user, such as a large business, and the local POP of its selected IXC.
o Private Line -- Telecommunications lines connecting various locations of
a customer's operations, suitable for transmitting voice and data traffic
internally.
The Interconnection Decisions allowed CAPs to provide a broader range of
services by enabling them to access additional customers through connections
with the LECs' networks. These new services include:
o Collocated Special Access -- A dedicated line carrying switched
transmissions from the IXC POP, through the LEC's central office to the
end user.
o Collocated POP-to-LEC Switched Access Transport -- A dedicated line
carrying switched transmissions from the LEC's central office to an IXC's
POP.
To provide these services, the Company offers various types of highly
reliable, dedicated fiber optic lines that operate at different speeds and
handle varying amounts of traffic to provide tailor-made solutions to its
customers' needs.
o DS-0 -- A dedicated line service that meets the requirements of everyday
business communications, with transmission capacity of up to 64 kilobits
of bandwidth per second (a voice grade equivalent circuit). This service
offers a basic low capacity dedicated digital channel for connecting
telephones, fax machines, personal computers and other telecommunications
equipment.
o DS-1 -- A high speed channel typically linking high volume customer
locations to IXCs or other customer locations. Used for voice
transmissions as well as the interconnection of Local Area Networks
("LANs"), DS-1 service accommodates transmission speeds of up to 1.544
megabits per second, the equivalent of 24 voice-grade equivalent
circuits. The Company offers this high-capacity service for customers who
need a larger communications pipeline.
o DS-3 -- This service provides a very high capacity digital channel with
transmission capacity of 45 megabits per second, which is equivalent to
28 DS-1 circuits or 672 voice grade equivalent circuits. This is a
digital service used by IXCs for central office connections and by some
large commercial users to link multiple sites.
Centrex and Long-Distance Resale. Retail business customers in LATAs served
by the Company's subsidiaries in California can acquire Centrex and
long-distance services direct from the Company. The Company's subsidiaries
purchase those services in bulk from the LEC and the IXCs and provide their
retail customers with a single source of integrated local and long distance
telecommunications services and facilities management at a discount from the
published retail LEC tariff rates. By using Centrex service instead of a private
branch exchange ("PBX") to direct their telecommunications traffic, customers
can avoid the large investment in equipment required and the fixed costs
associated with maintaining a PBX network infrastructure. The Company's Centrex
service allows medium to small business customers who lack the size or resources
to support their own PBX to benefit from a sophisticated telecommunications
system.
Consulting Services. Through GLA, the Company provides a full range of
consulting, management, engineering and information system solutions for
telephone, cable television and power companies, wireless providers and other
telecommunications infrastructure owners and operators in the United States and
elsewhere. GLA significantly expanded its capabilities through the acquisition
of Design Extenders, Inc. in January 1994 and its acquisition of Graphic Data
Solutions, a telecommunications software and mapping firm, in January 1995.
Following is a brief description of the services offered by each of GLA's
divisions:
Consulting Services. Provides specialized consulting services to telephone,
cable television and other telecommunications providers. GLA consulting
professionals combine extensive experience in telecommunications and cable
network technology for support of a wide variety of assignments that
include engineering planning, network design, strategic planning,
opportunity and technical assessments, plus project management and due
diligence initiatives. In addition to its management consulting services,
GLA also provides field services that support outside plant design,
engineering and construction management. Efforts include field survey and
design, project engineering and engineering project management, plus
central office equipment and outside plant installation services.
Design Extender. One of the industry's leaders in providing engineering,
design and mapping services for hybrid fiber-coax systems, serving large
cable television systems operators. Services include systems design and
analysis, as-built and strand mapping, and digitizing.
Teledata. Provides engineering and CAD services for the conversion of
telecommunications systems, maps and drawings for use with applications on
clients' automated mapping/facilities management/geographical information
systems (AM/FM/GIS).
Telemap. Designs AM/FM/GIS software products for clients engaged in
designing telecommunications networks.
Telesystems. Designs and installs financial and management software
products for telecommunications companies. Products include software for
billing systems, toll rating, plant records and financial applications.
Planned Products and Services
The Company is currently adding capabilities to provide switched access
termination and origination services, local dial tone, Centrex and desk top
products and other enhanced services, such as high speed video conferencing,
Internet access, frame relay and ATM-based packet transport services in selected
cities. The Company plans to have such capabilities in approximately 20 of its
operating networks by the end of 1996 and in all of its operating networks by
the end of 1997, subject to regulatory approvals which the Company expects will
be accelerated under The Telecommunications Act of 1996. The Company has
installed advanced, state-of-the-art 5ESS(R)-2000 switches in its networks in
Sacramento, California and Hartford, Connecticut. In addition, pursuant to the
City Signal Acquisition, the Company acquired an installed state-of-the-art
DMS-500 switch serving the Grand Rapids, Michigan network.
These capabilities will enable the Company to offer switched services billed
on a minutes of use basis and a variety of other types of flexible, enhanced
services where the transport function is combined with a specific application to
provide an integrated turnkey solution to its customer's voice, data and video
transmission requirements. These enhanced services include applications such as
LAN-to-LAN interconnect services, packet transport services, high speed video
conferencing, Internet access, frame relay, remote database access and backup
services, and fractional bandwidth services, utilizing both the Company's
networks and switching as well as facilities and services provided by others.
This will enable the Company to provide a customer with all of its business
lines and offer a wide range of switched-based value-added services, such as
directory and operator assistance, audio and video conferencing, calling cards,
800-numbers, voice mail, Internet access and other enhanced services.
Over one-half of the states have taken regulatory and legislative action to
open local communications markets to various degrees of local exchange
competition and Co-carrier status, including nine states where the Company
operates or currently plans to operate networks (Arizona, California,
Connecticut, Massachusetts, Michigan, Nevada, Ohio, Oklahoma and Tennessee). The
Company currently is authorized as a CLEC to offer switched services in
California, Connecticut, Massachusetts, Michigan and Tennessee and has filed for
authority to offer switched services in Arizona, Arkansas, Mississippi, Nevada,
New Mexico, Ohio, Oklahoma and Rhode Island. In addition, the Company has
entered into interconnection (Co-Carrier) arrangements with LECs in California,
Connecticut, Massachusetts, Michigan and Rhode Island, under tariffs or under
individual agreements, and has entered into negotiations with other LECs. The
Company expects continuing pro-competitive regulatory changes, including those
mandated by The Telecommunications Act of 1996, together with increasing
customer demand, will create more opportunities to introduce additional
services, expand the Company's networks and address a larger customer base. See
"Regulatory Overview."
Strategic Relationships
From time to time, the Company has held discussions with other
communications entities concerning the establishment of possible strategic
relationships, including transactions involving preferred vendor relationships
and equity investments in the Company and one or more of its subsidiaries.
Effective September 1995, a subsidiary of the Company formed a
majority-owned joint venture with MCI/Metro to operate and significantly expand
the Company's existing CAP network in San Jose, California and its environs. The
joint venture company operated the network and provided the Company and
MCI/Metro with the network services needed for their respective customers.
On May 30, 1996, the Company and MCI/Metro entered into an amendment to the
Company's master service agreement with MCI/Metro which provides that, until
September 30, 2001, the Company will be MCI/Metro's preferred provider of
certain local access services in a number of the Company's markets at a discount
to prevailing optimized LEC rates for comparable circuits. Under the amended
master service agreement, MCI/Metro has agreed to purchase from the Company,
with certain provisos, all of MCI/Metro's required local access in specified
markets for new end-user services (and, at MCI/Metro's election, existing end
user services), and has given the Company a right of first refusal on a
circuit-by-circuit basis to provide other access services required by MCI/Metro
in such markets. The Company and MCI/Metro also entered into a subscription
agreement on June 24, 1996 pursuant to which MCI/Metro has acquired a 15%
interest in the Company's Sacramento, California network for $4.5 million and
MCI/Metro has invested an additional $3.5 million in the San Jose joint venture
company. The subscription agreement gives MCI/Metro the option (i) to exchange
the agreed value of its September 1995 investment in the San Jose network for an
aggregate of 692,053 shares of the Company's Common Stock (based on the
September 1995 price of $8.25 per share), if exchanged prior to October 24,
1996, or for an aggregate of 389,200 shares (based on a price of $15.50 per
share), if exchanged thereafter but on or prior to April 24, 1997 and (ii) to
exchange the agreed value of its June 1996 investments in both networks for an
aggregate of 266,667 shares (based on a price of $30.00 per share), if exchanged
prior to October 24, 1996, or for an aggregate of 210,000 shares (based on a
price of $40.00 per share), if exchanged thereafter but on or prior to April 24,
1997. If MCI/Metro elects not to exchange such investments for shares of the
Company's Common Stock, MCI/Metro would retain the right to require the Company
to repurchase its investment in the Sacramento, California network at cost plus
equity appreciation of 10% per annum.
In December 1995, the Company and AT&T Communications signed a national
preferred vendor agreement pursuant to which the Company expects to become AT&T
Communications' preferred supplier of dedicated special access, switched access
transport and switched business and residential line services in most of the
Company's markets. The agreement provides that the Company will provide such
services to AT&T Communications at a discount to the tariffed or published LEC
rates. The Company is currently providing certain services under the agreement
in cities in California, Connecticut, Massachusetts and Rhode Island and expects
to add additional services in these markets and to add additional markets during
the balance of 1996. Based on the plans currently being implemented by the
Company and AT&T Communications and the level of services that the Company
currently expects to provide in 1996 pursuant to this agreement, the Company
currently expects that its 1996 revenues from this national vendor agreement
will not exceed 10% of the Company's total revenues for 1996. The Company's
provision of services in any additional markets and additional services in
California, Connecticut, Massachusetts and Rhode Island is subject to the mutual
agreement of the Company and AT&T Communications with respect to each market,
including satisfactory completion of network validation tests. As a result,
there is no assurance that the national vendor agreement will be extended to
cover additional markets and services. See "Risk Factors--Dependence on Business
from IXCs."
Cities Served
In January 1994, the Company completed its first acquisition, an operating
system in Springfield, Massachusetts and rights of way for the development of
networks in Hartford, Connecticut and Providence, Rhode Island, where networks
have recently been constructed by the Company and are now operational. In
October 1994, the Company acquired an operating system serving Sacramento, a
system under construction in San Jose, and a local and long distance resale
operation based in San Francisco, California that serves small to medium sized
businesses in the San Francisco Bay area. The San Jose network was activated
during December 1994 and has been expanded into Sunnyvale and Santa Clara,
California. A 37 mile expansion of the San Jose network is being completed,
which will extend the current 32 mile network into Milpitas and Palo Alto,
California. See "--Strategic Relationships" above.
During 1994, the Company also developed business plans and obtained
right-of-way agreements and the necessary operating rights to construct networks
in Oklahoma City, Oklahoma, and Little Rock, Arkansas. These networks, which
added a total of 46 route miles to the Company's networks, became operational
during the first half of 1995.
During March 1995, the Company acquired the assets of a 105-mile CAP network
in Tulsa, Oklahoma. The Company has recently commenced the construction of
networks in Bakersfield, Fresno and Stockton, California, Albuquerque, New
Mexico, Knoxville, Tennessee, Jackson, Mississippi, Reno, Nevada and Tucson,
Arizona, all of which are expected to become operational in the first half of
1996.
Effective January 31, 1996, the Company acquired the business of City
Signal, Inc., a CAP/CLEC with a 208 mile network in Grand Rapids, Michigan, an
operating network in Lansing, Michigan and networks under construction in Ann
Arbor, Michigan and Toledo, Ohio.
During the first half of 1996, networks were activated in Tucson, Arizona,
Albuquerque, New Mexico and Bakersfield, Fresno
and Stockton, California.
Subsidiaries of the Company currently have systems in operation or under
construction in the following cities:
Networks of the Company Other CAP Fiber Networks in City
City served Current Announced
- -------------------------------------------- --------------- -----------------
Eastern Region
Springfield, Massachusetts. 0 0
Providence, Rhode Island 1 0
Hartford, Connecticut 2 1
Grand Rapids, Michigan 0 0
Lansing, Michigan 0 1
Ann Arbor, Michigan(1) 0 0
Toledo, Ohio(1) 0 1
Central Region
Oklahoma City, Oklahoma 2 0
Tulsa, Oklahoma 0 0
Little Rock, Arkansas 1 0
Tucson, Arizona 2 0
Albuquerque, New Mexico 2 0
Knoxville, Tennessee(1) 0 2
Jackson, Mississippi(1) 0 2
Kansas City, Missouri(1) 1 0
Western Region
Sacramento, California 1 1
San Jose, California 2 0
Sunnyvale, California 2 0
Santa Clara, California 2 0
Stockton, California 0 0
Fresno, California 0 1
Bakersfield, California 0 1
Milpitas, California(1) 2 0
Palo Alto, California(1) 2 0
Reno, Nevada(1) 0 1
San Francisco, California(2) N/A N/A
- ---------------
(1) Networks under construction.
(2) Facilities management operation serving the San Francisco
Bay area.
The Company believes its regional aggregation strategy will yield economies
of scale in service costs and allow service-affecting decisions to occur closer
to its customers.
Network Acquisition, Development and Design
Before determining to acquire or construct a network in a particular city,
the Company's corporate development staff reviews the demographic, economic,
competitive and telecommunications demand characteristics of the city, including
its location, the concentration of potential business, government and
institutional end user customers, the economic prospects for the area, available
data regarding IXC and end user special access and switched access transport
demand and actual and potential CAP/CLEC competitors. Market demand is estimated
on the basis of market research performed by Company personnel and others,
utilizing a variety of data including estimates of the number of interstate
access and intrastate private lines in the city based primarily on FCC reports
and commercial data bases.
If a particular city targeted for development is deemed to have sufficiently
attractive demographic, economic, competitive and telecommunications demand
characteristics, the Company's network planning and design personnel design a
network targeted to provide access to 70% to 80% of the identified business,
government and institutional end user revenue base, to the IXC POPs and the
LEC's principal central office(s) in the city, utilizing a "self-healing"
optical fiber ring architecture (build-out to 100% of the identified end users
is not considered to be cost-effective in most cases because a portion of the
demand is located in low density areas). Concurrently, the Company's corporate
development personnel visit the location of the proposed network to begin
discussions with city officials, right-of-way providers, IXCs and potential end
user customers.
Based on the data developed during these preliminary studies and visits, in
connection with either an acquisition or the construction of a network,
including estimates of the costs for fiber optic cable, transmission and other
electronic equipment, engineering, distribution and construction, building
entrance requirements and right-of-way acquisition, the Company develops
detailed financial estimates based on the anticipated demand for the Company's
current services (at present, the financial estimates prepared by the Company
for this purpose generally do not include potential future revenues for switched
services or other enhanced products and services which, subject to regulatory
approvals, the Company plans to offer in approximately 20 of its operating
networks by the end of 1996 and in all of its operating networks by the end of
1997). If the financial estimates meet or exceed the Company's minimum rate of
return thresholds using a discounted cash flow analysis, the Company's corporate
development personnel prepare a detailed business and financial plan for the
proposed network, including competitive, regulatory and right-of-way analyses.
In the case of acquisitions, Company personnel perform due diligence in
order to determine if the city and network involved meet the foregoing
development and construction criteria. The ability of the Company to acquire
suitable additional systems will be subject to competition for acquisition
candidates.
Network Construction
When the Company decides to build a network, the Company's corporate
development staff obtains any needed city franchises and other permits. In some
cities, a construction permit is all that is required. In other cities, a
license agreement or franchise may also be required. Such licenses and
franchises are generally for a term of limited duration. The Telecommunications
Act of 1996 requires that local governmental authorities treat
telecommunications carriers in a competitively neutral, non-discriminatory
manner. The Company's current licenses and franchises expire in different years,
ranging from 2000 to 2010. City franchises often require payment of franchise
taxes which in some cases can be included as part of customer charges for use of
the network. The Company's corporate development staff also finalizes
arrangements for needed rights-of-way. The Company strives to obtain
rights-of-way on favorable terms that afford the opportunity to expand the
networks as business develops. Rights-of-way are typically leased under
multi-year agreements with renewal options and are generally non-exclusive. The
Company leases underground conduit and pole space and other rights-of-way from
entities such as LECs and other utilities, railroads, long distance providers,
state highway authorities, local governments and transit authorities. The
Telecommunications Act of 1996 requires most utilities, including most LECs and
electric companies, to afford CAPs/CLECs access to their poles and conduits and
rights-of-way at reasonable rates on non-discriminatory terms and conditions.
The Company's networks are constructed to cost-effectively access areas of
significant end user telecommunications traffic, as well as the POPs of most
IXCs and the principal LEC central offices in the city. The Company establishes
general requirements for network design which are then provided to an
engineering firm that renders drawings of the contemplated network and the
required deployment. Construction and installation services are provided by
independent contractors selected through a competitive bidding process. Company
personnel provide project management services, including contract negotiation
and supervision of the construction, testing and certification of all
facilities. The construction period for a new network varies depending upon the
number of route miles to be installed, the initial number of buildings targeted
for connection to the network, the general deployment of the network and other
factors. Networks that the Company has installed to date generally have become
operational within four to six months after the beginning of construction.
Equipment Supply
The Company purchases fiber optic cable and transmission and other
electronic equipment from Lucent Technologies, Inc. (formerly AT&T Network
Systems) and other suppliers at prevailing market prices. The Company expects
that fiber optic cable, equipment and supplies for the construction and
development of its networks will continue to be readily available from Lucent
Technologies, Inc. and other suppliers as required. In August 1995, the Company
entered into an agreement with Lucent Technologies, Inc. under which, as of May
31, 1996, it has accepted delivery of eight state-of-the-art 5ESS(R)-2000
switches for installation in the Company's networks.
Connections to Customer Locations
Office buildings are connected by network backbone extensions to one of a
number of physical rings of fiber optic cable, which originate and terminate at
the Company's central node. Signals are sent through a network backbone to the
central node simultaneously on both primary and alternate protection paths. Most
buildings served have a discreet Company presence (referred to as a "remote
node") located in the building. Within each building, Company-owned internal
wiring connects the Company's remote node to the customer premises. Customer
equipment is connected to Company-provided electronic equipment generally
located in the remote node where customer transmissions are digitized, combined
and converted to an optical signal. The traffic is then transmitted through the
network backbone to the Company's central node where originating traffic can be
reconfigured for routing to its ultimate destination on the network.
The Company locates its remote node electronic equipment either in a room
leased from the building owner or on a customer's premises. Leasing space from a
building owner enables the Company to share electronic equipment among multiple
customers, causes little interruption for customers during installation and
maintenance and allows the Company to introduce new services rapidly and at low
incremental cost. For these reasons, the Company believes that leasing or
otherwise controlling equipment rooms in buildings served is desirable and has
therefore chosen to establish such arrangements where possible. When the Company
is unable to lease space from the building owner, the Company generally utilizes
space provided by the customer at no cost to the Company.
Sales and Marketing
The Company seeks to leverage its networks through sales and marketing
activities targeted at two separate customer groups: wholesale and retail.
Wholesale customers consist of IXCs and information service providers such as
commercial data processing services and Internet providers. Retail customers are
composed of businesses, government and institutional telecommunications users
that have high volume dedicated telecommunications requirements. Services are
offered in accordance with tariffs filed with the FCC for interstate services
and state regulatory authorities for intrastate services. Since they are
classified by the FCC as non-dominant carriers, the Company's subsidiaries do
not have to cost-justify their rates and in certain cases may enter into
customer and product specific arrangements.
Wholesale Customers. The Company currently targets the major IXCs, such as
AT&T, MCI, Sprint, WorldCom and Frontier, and major information service
providers on a national basis. The Company believes that it can effectively
compete to provide access products (i.e., DS-1, DS-3, frame relay, ATM and
Internet hub servers) to these target customers in the cities in which it
operates based on price, reliability, state-of-the-art technology, route
diversity, ease of ordering and customer service. The Company provides
POP-to-POP and POP-to-end user non-switched access services and switched access
termination and origination services at prices below those the regulated LECs
currently charge. The Company strives to establish close working relationships
with its IXC customers through "electronic bonding" of its operations with those
of the IXCs. Electronic bonding provides a seamless integration of the Company's
networks with the IXC's network which enables the IXC to access service, billing
and other data direct from the Company's networks and permits the IXC to enter
automated service requests (ASRs) electronically through the integrated network.
Wholesale customers are currently marketed by national account
representatives since the major IXCs and information service providers have
established national or regional groups to manage and coordinate their
purchasing of access services. These groups assess CAPs/CLECs not only upon
price, quality, service and ease of provisioning in a particular market, but
also upon size, scope of operations and financial stability in order to maximize
the leverage of their CAP/CLEC relationships. The Company focuses on serving its
IXC customers in all of the Company's cities with a view to establishing
national preferred vendor relationships.
For the three months ended March 31, 1996, approximately 26% of the
Company's consolidated revenues were attributable to access services provided to
IXCs pursuant to numerous individual service orders. Approximately 16% of such
consolidated revenues were attributable to services provided to MCI and its
affiliates pursuant to more than 200 individual service orders. The loss of
access revenues from IXCs in general or the loss of MCI as a customer could have
a material adverse effect on the Company's business.
IXC customers typically place individual service orders for specific
circuits for the Company to provide private line or local access services under
master service agreements which do not obligate the customer to any level of
business. Most of such current service orders can be terminated by the customer
on 60 days or less notice, subject, in certain cases, to specified termination
liabilities. However, as indicated above under "--Strategic Relationships," the
Company has recently entered into a national preferred vendor agreement with
AT&T Communications under which, subject to mutual agreement, the Company
expects to become AT&T Communications' preferred supplier of certain specified
services in certain specified markets, and has recently entered into an
amendment to its master service agreement with MCI/Metro which provides that,
until September 30, 2001, the Company will be MCI/Metro's preferred supplier of
local access services in a number of the Company's markets. Information service
providers typically commit to a service agreement for a term of up to three to
five years which is either renegotiated or, with certain contracts,
automatically renewed for successive one-year periods or converted to a
month-to-month arrangement at the end of the contract term. The Company's
wholesale rates are generally based on published tariffs, which are subject to
revision from time to time, based upon changes in the published tariffs. The
Company believes that it is well positioned to serve the IXCs and information
service providers and generally has good relationships with its IXC and
information service provider customers.
Retail Customers. The Company primarily targets four retail customer
segments -- government, finance, health care and education -- all of which have
high volume telecommunications requirements. The Company is currently providing
these customers private line services such as point-to-point communications,
dedicated DS-Os, DS-1s and DS-3s and dedicated high-speed Internet access. Upon
introduction of switching, local dial tone, frame relay and ATM-based packet
transport capabilities, the Company will have the capability to offer a wide
range of switch-based, value added services, such as directory and operator
assistance, audio and video conferencing, calling cards, 800-numbers, voice mail
and enhanced fax, Internet access and a variety of native speed LAN-to-LAN and
FDDI transport services, as well as high quality video transport. These services
will provide customers with cost effective data transmission and access to
services such as the Internet. ATM-based packet transport capabilities will also
provide a vehicle for launching future services such as ultra high speed data
and compressed video transport.
The Company believes that it can effectively compete for business,
government and institutional end user customers based upon price, reliability,
product diversity, service and custom solutions to the customer's needs. The
Company offers such services to retail customers at prices below those currently
offered by the regulated LECs. In addition, the Company's self-healing optical
rings ("SONET") provide reliability which the Company believes is generally
superior to the reliability provided by many of the LECs in second and third
tier cities.
Retail customers are currently marketed through Company direct sales
representatives in each city. The national sales organization also provides
support for the local sales groups and develops new product offerings and
customized telecommunications applications and solutions which address the
specific requirements of particular customers. In addition, the Company markets
its products through advertisements, trade journals, media relations, direct
mail and participation in trade conferences.
Retail customers typically commit to a service agreement for a term of three
to five years which is either renegotiated or automatically converted to a
month-to-month arrangement at the end of the contract term. Retail contracts are
generally at fixed rates. The Company believes that it has generally good
relationships with its retail customers.
Consulting Customers. GLA's sales and marketing efforts are directed towards
a wide variety of telephone, cable television and power companies, wireless
providers and other telecommunications infrastructure owners and operators in
the United States and elsewhere. GLA offers multi-faceted solutions to
customers' telecommunications infrastructure requirements utilizing its varied
technical and engineering expertise to offer a complete package of consulting,
field service and information systems support. GLA's engineering and technical
personnel include professionals who have significant technical and engineering
expertise in most of the critical voice, video, data and wireless
telecommunications technologies.
Network Operations
The Company's networks consist of fiber optic digitally-based communications
paths which allow for high-speed, high quality transmission of voice, data and
video communications. The Company typically installs backbone fiber optic cables
containing either 96 or 144 fiber strands, which have significantly greater
bandwidth carrying capacity than traditional analog copper cables. Using current
electronic transmitting devices, a single pair of glass fibers on the Company's
networks can transmit up to 32,256 simultaneous voice conversations, whereas a
typical pair of wires in a traditional analog copper cable installed in many
current LEC networks can currently carry only a maximum of 24 simultaneous voice
conversations. The Company expects that continuing developments in compression
technology and multiplexing equipment will increase the capacity of each fiber,
thereby providing more bandwidth carrying capacity at relatively low incremental
cost.
The Company offers end-to-end fully protected fiber services utilizing SONET
ring architecture which routes customer traffic simultaneously in both
directions around the ring to provide protection against fiber cuts. Back-up
electronics for high-speed circuits become operational in the event of failure
of the primary components adding further redundancy to the Company's systems.
The Company's networks are monitored seven days per week, 24 hours per day
by the Company's NOC Centers (Network Operations Control Centers) in St. Louis,
Missouri and Grand Rapids, Michigan. The NOC Centers provide a single point of
contact for network monitoring, troubleshooting and dispatching, as well as
capabilities for "electronic bonding" with customers.
With full time monitoring, service problems are detected, diagnosed and, in
most cases, repaired remotely from the NOC Centers, typically before they
adversely affect the Company's customer and often before the customer even
notices a problem. The NOC Centers provide real-time alarm status and
performance information for each of the Company's networks around the country.
They also afford improved disaster recovery to customers through remote circuit
provisioning and cross-connect features.
Corporate Office
The Company's principal executive offices are located at 425 Woods Mill Road
South, Suite 300, Town & Country, Missouri 63017, and its telephone number at
those offices is (314) 878-1616.
Network Facilities and Offices
The Company leases network hub sites and other facility locations and sales
and administrative offices in each of the cities in which it has operations.
During the years ended December 31, 1994 and 1995, rental expense for such
locations and offices totaled $245,000 and $688,000, respectively. At December
31, 1995, minimum future rental payments under noncancelable leases covering
such locations and offices totaled $5.9 million. A wholly-owned subsidiary of
the Company owns a 42,000 square foot office building in Grand Rapids, Michigan
that houses a switch, NOC Center and office facilities.
Employees
At May 31, 1996, the Company had approximately 530 full-time employees, none
of whom was represented by a union or covered by a collective bargaining
agreement. The Company believes it has a highly capable and motivated work force
with whom relations are good. In connection with the construction and
maintenance of its fiber optic networks, the Company uses third-party
contractors, some of whose employees may be represented by unions or covered by
collective bargaining agreements.
Legal Proceedings
On September 22, 1995, GST Tucson Lightwave, Inc. ("Lightwave") was
permitted to intervene in litigation originally filed by Brooks Fiber
Communications of Tucson, Inc., a wholly-owned subsidiary of the Company ("BFC
Tucson"), styled Brooks Fiber Communications of Tucson, Inc. v. City of Tucson,
cause No. CIV 95-655-TUC-RMB, U.S. District Court, District of Arizona. On
October 2, 1995, Lightwave filed a counterclaim against BFC Tucson, the Company
and Tucson Electric Power Company ("TEP"), charging BFC Tucson, the Company and
TEP with violations of antitrust laws, all of which alleged violations stem from
an agreement between BFC Tucson and TEP that allowed BFC Tucson exclusive
rights, for one year, to utilize certain of TEP's rights of way. The original
causes of action have been settled; however, the counterclaim by Lightwave is
currently still pending. The counterclaim seeks treble damages, attorneys' fees,
costs (all in an unspecified amount) and such other relief as the court deems
proper. The Company believes the claims are without merit and intends to defend
vigorously against this action. The Company believes that resolution of the
matter will not have a material adverse effect on the consolidated financial
condition or results of operations of the Company.
Neither the Company nor any of its subsidiaries is a party to any other
legal proceedings.
THE COMPETITIVE ACCESS INDUSTRY
Long Distance Services
The 1982 court-directed breakup of AT&T (the "Divestiture") specifically
provided for competition in the long distance segment of the market, but
prohibited the RBOCs from entering the inter-LATA long distance market.
Competitors in the long distance market now include AT&T, MCI, Sprint, WorldCom,
Frontier and numerous other smaller inter-exchange carriers. These long distance
carriers provide only the interconnection between local telephone networks and
pay access charges to the LECs for originating and terminating the calls carried
by the IXC. By 1992, it is estimated that more than one-third of the nation's
long distance market was controlled by competitors of AT&T. Following the
Divestiture, service levels in the long distance market have improved, product
offerings have increased and prices for long distance service generally have
declined, all of which has resulted in increased consumer demand and significant
market growth for long distance services.
Local Exchange Services
In contrast to the long distance telecommunications inter-exchange market,
the local exchange market, until recently, has remained the domain of the LECs
as the result of regulatory policy. LECs include the seven RBOCs and their 22
Bell operating company subsidiaries ("BOCs"), the GTE operating companies,
United Telecom Corp. and approximately 1,000 other independent local exchange
carriers. It is estimated that 1995 LEC revenues approximated $102 billion
nationally, including Local Exchange Services. In general, the LECs connect end
users within a LATA and also provide the local portion of most long distance
calls. The LECs are required to serve all residential and business users within
restricted geographic areas defined by the LATAS. The market for Local Exchange
Services consists of a number of distinct services and related charges that
include:
1. Switched Local and Private Line Services -- The basic dial tone, Centrex
and private line services;
2. Long Distance Access Services -- The access services provided by the
LECs to IXCs for the local origination or termination of long distance
telephone calls; and
3. Intra-LATA Long Distance Services -- Long distance calls originating and
terminating within a LATA.
Traditionally, the LECs' costs of providing certain Switched Local Services
have been subsidized by Long Distance Access Services and Intra-LATA Long
Distance.
The following schematics illustrate the general structure of a CAP/CLEC
network and an IXC long distance network.
[Diagram of a Local Exchange CAP Network]
[Diagram of Long Distance Network]
Competitive Access Providers
Although the Divestiture did not mandate competition in the local exchange
market, the rapid development of fiber optic and digital electronic technologies
has encouraged the growth of cost effective alternatives to the monopolistic
position of the LECs in many of the local exchange markets. In addition, the
IXCs have lobbied for competition in the local exchange markets due to the
significant fees paid by IXCs to the LECs. Industry sources estimate that local
access charges paid by IXCs equal as much as 45% of the long distance industry's
total revenues.
The first CAPs were established in the mid-1980s to provide nonswitched
special access and private line services in direct competition with the LECs.
Initially the CAPs could compete effectively only for the $8.6 billion special
access and private line services portion of the local exchange market. These
services were provided to customers in buildings physically connected to
separate, privately-owned CAP networks. Within this framework, the CAPs offered
three types of special access and private line services:
1. Special access long distance carrier connections. High capacity lines
used to transmit telecommunications voice and data between the Points of
Presence of an IXC or from one IXC to another ("POP to POP-Special
Access");
2. Special access, end user to IXC connections. Medium to high capacity
lines to connect business, government and institutional end users to
IXCs ("POP to End User-Special Access"); and
3. Private line, end user to end user connections. Low to medium capacity
lines used to interconnect multiple customer locations ("End User to End
User Private Line").
In September 1992, the FCC ordered the RBOCs and all but one of the larger
LECs (those having in excess of $100 million in gross annual revenues) to
provide interconnection in the LECs' central offices to any competitive access
provider seeking such interconnection for the provision of interstate special
access services. The FCC also ordered the LECs to file interconnection tariffs
by February 1993; these tariffs became effective in June 1993. This decision
granted CAPs the right to interconnect their private networks to the networks of
the LECs, thereby enabling the CAPs to access new customers and new markets
without physically expanding their networks ("Collocated Special Access").
Initially, the FCC's new rules were restricted to the provision of the $2.5
billion interstate collocated special access services portion of the local
exchange market.
In August 1993, the FCC adopted rules for switched access transport
services, which largely mirror the FCC's special access rules. Switched access
transport is an identical service to special access except that it connects with
a LEC central office at one end and carries traffic to an IXC POP that has been
switched by the LEC at the central office. This represents a $4.3 billion
portion of the local exchange market. The FCC ordered the larger LECs to file
new tariffs reflecting interconnection by CAPs by November 1993; these tariffs
became effective in February 1994 for switched access transport ("Collocated
Switched Access Transport").
In the August 1993 decision, the FCC issued additional rulings concerning
expanded interconnection for competitive access services. First, the FCC
reaffirmed its Special Access Order adopted in September 1992, in which the FCC
ordered the larger LECs to allow CAPs interconnection with LECs for special
access. The FCC also reaffirmed its "Fresh Look" policy which allows certain
customers who have entered into long-term contracts with LECs for access
services to terminate those agreements with only limited termination charges.
This policy is intended to allow local competitive access providers to penetrate
a market more quickly since it permits end users to move their
telecommunications traffic to a CAP with minimal transfer costs.
The FCC also granted LECs additional pricing flexibility for switched access
services in the form of zone density pricing similar to zone density pricing
allowed for special access interconnection. In addition, the FCC allowed the
local exchange carriers to offer volume discounts and term discounts, subject to
certain limitations.
In total, the FCC's Interconnection Decisions permitted CAPs to compete for
an additional $13.8 billion portion of the local exchange market (including $7.0
million of switched access termination).
The Telecommunications Act of 1996, which contains provisions that are
favorable to the furtherance of local and long distance telecommunications
services competition, was enacted into law on February 8, 1996 (see
"Regulatory Overview").
Potential Additional Markets and Services
Several local exchange services have not yet been opened to competition and
remain the monopoly of the LECs. However, initiatives to encourage competition
in these areas are now mandated by The Telecommunications Act of 1996.
In parallel with the FCC's recent initiatives and rulings, a number of
states are proceeding to encourage increased competition in various aspects of
intrastate local exchange services including intrastate access services and
basic local exchange service, including switching. The Company believes that
these proceedings may be accelerated under The Telecommunications Act of 1996.
The Company has begun to deploy switches on its networks and, subject to
regulatory approvals, plans to have switching capability in approximately 20 of
its operating networks by the end of 1996 and in all of its operating networks
by the end of 1997.
When the first CAP networks were built in the 1980s, they could compete
effectively only for the approximately $8.6 billion special access and private
line services portion of the local exchange market (POP to POP Special Access,
POP to End User Special Access and End User to End User Private Line). Beginning
in 1994, after the FCC's Interconnection Decisions, which allowed CAPs to
provide Collocated Special Access, Collocated Switched Access Transport and,
with the installation of a switch, Switched Access Termination services, CAPs
were allowed to compete for an additional estimated $13.8 billion portion of the
market. If regulatory and other industry trends continue, the Company believes
that ultimately the entire approximately $102 billion total U.S. market may be
open to competition as CAPs/CLECs deploy switches capable of providing the full
array of local exchange services and as state public utility commissions
("PUCs") authorize CLECs to provide full local telecommunications services.
The following chart illustrates the potential CAP/CLEC revenue
opportunities, based on the total 1995 local exchange revenues, both before and
after a CAP/CLEC deploys a switch in its local network.
CAP/CLEC POTENTIAL REVENUE OPPORTUNITIES*
Total 1995 U.S. Local
Exchange Market
($ Billions)
---------------------
CAP Access/Private Line Services (Non-Switched)
- ---------------------------------------------------------
1. POP to POP -- Special Access $ 2.0
2. POP to End User -- Special Access 2.6
3. End User to End User -- Private Line 4.0
4. Collocated Special Access 2.5
5. Collocated Switched Access Transport 4.3
CLEC Services (Switched)
- ---------------------------------------------------------
6. Switched Access Termination 7.0
7. Switched Access Origination 4.7
8. End User Common Line Access Charge (Business) 5.9
(Residential) 5.4
9. Co-Carrier Switched Local Services (Centrex)
(Business) 23.0
10. Co-Carrier Switched Local Services (Residential) 20.8
11. Intralata Toll and Other 17.6
12. Unclassified "other" 2.0
---------------------
TOTAL U.S. MARKET $101.8
=====================
- ---------------
* Source: Connecticut Research, Inc. Includes data for Tier 1, Tier 2, Tier 3
and all other markets.
COMPETITION
As noted above, the regulatory environment continues to promote competition
as the FCC has set the industry on an open competition course with its
Interconnection Decisions. State regulatory authorities are beginning to follow
the lead by requiring Co-carrier status for CAPs and LEC open network scenarios.
In addition, the Company believes that the recently enacted Telecommunications
Act of 1996 and court orders at the federal level may further accelerate the
open competition process.
LECs
In each city served by its networks, the Company faces, and expects to
continue to face, significant competition from the LECs, which currently
dominate their local telecommunications markets. As competition in the local
exchange market proceeds, the Company believes that a fundamental division
between the needs of business/governmental/institutional end users and
residential end users will drive the creation of differentiated
telecommunications services and service providers. The Company believes that the
IXCs and business, governmental and institutional end users on which it focuses
will have distinct requirements including maximum reliability, consistent high
quality transmissions, capacity for high speed data transmissions, diverse
routing, responsive customer service and continuous attention to service
enhancement and new service development.
The Company competes with the LECs for these customers in its markets on the
basis of price, reliability, state-of-the-art technology, product offerings,
route diversity, ease of ordering and customer service. However, the LECs have
long-standing relationships with their customers and provide those customers
with various transmission and switching services that the Company, in many
cases, is not currently allowed by regulators to offer. The Company has sought,
and will continue to seek, to achieve parity with the LECs in order to become
able to provide a full range of local telecommunications services. The CAP/CLEC
industry continues to challenge, before federal and state regulators, many
advantages which exist because of the LECs' historical status, but there can be
no assurance that the CAP/CLEC industry will succeed in these endeavors. See
"Regulatory Overview" for additional information concerning the regulatory
environment in which the Company operates.
Existing competition for private line and special access services is based
primarily on quality, capacity and reliability of network facilities, customer
service, response to customer needs, service features and price, and is not
based on any proprietary technology. As a result of the comparatively recent
installation of the Company's fiber optic networks, its dual path architectures
and the state-of-the-art technology used in its networks, the Company may have
cost and service quality advantages over some currently available LEC networks.
Moreover, because of its customer service orientation and its focus on business,
governmental and institutional customers, the Company believes that, in general,
it provides more attention and responsiveness to its customers than do its LEC
competitors. The Company also believes it will be able to successfully compete
with the LECs in the cities served by its networks because the Company believes
the LECs have generally been less focused on competition in second and third
tier cities and, accordingly, place a lower priority on replacing their existing
copper cable systems in those cities.
Although the LECs generally are subject to greater pricing and regulatory
constraints than CAPs/CLECs, LECs are achieving increased pricing flexibility
for their private line and special and switched access services as a result of,
among other things, the Interconnection Decisions. The Telecommunications Act of
1996 also provides further regulatory flexibility for LECs to allow them to
respond to competition. If the LECs continue to lower rates and/or engage in
substantial volume and term discount pricing practices for their customers,
there would be downward pressure on certain special access and switched access
transport rates which the Company charges, which pressure could adversely affect
the Company's profitability. If regulatory decisions permit the LECs to charge
CAPs/CLECs substantial fees for interconnection to the LECs' networks or afford
LECs other regulatory relief, such decisions could also have a material adverse
effect on CAPs/CLECs, including the Company. However, the Company believes this
effect will be more than offset by the increased revenues available as a result
of access to off-net customers provided through interconnection with LEC
networks and the continuing shift by IXCs to purchasing their access services
from CAPs/CLECs instead of LECs. In addition, the Company believes that lower
rates for special access services will benefit other services offered and
planned to be offered by the Company which utilize leased circuits to provide
value-added services.
The Company believes that various legislative initiatives, including the
recently enacted Telecommunications Act of 1996, as well as a recent series of
completed and proposed transactions between LECs, IXCs and cable companies
increase the likelihood that barriers to local exchange competition will be
removed. The introduction of such competition, however, also means that LECs
will be authorized to provide long distance services under the provisions of The
Telecommunications Act of 1996. When LECs are permitted to provide such
services, they will ultimately be in a position to offer single source service.
The entry of LECs into the long distance business is expected to have a
profound impact on existing market relationships. The Company expects that this
will cause the existing long distance providers to increasingly turn to
CAPs/CLECs to gain access to their customers.
CAPs/CLECs and Other Competitors
The Company also faces, and expects to continue to face, competition from
other CAPs/CLECs and other potential competitors in certain of the cities in
which the Company offers its services, some of which competitors have financial,
personnel and other resources substantially greater than those of the Company,
as well as other competitive advantages over the Company. However the Company
believes that, as a result of its strategy to operate in second and third tier
cities, where there are generally fewer CAP/CLEC competitors, and to pursue the
establishment of strategic relationships with the major IXCs, combined with its
own capital, technical and management resources, these competitors will not pose
an untenable threat.
In addition to the LECs and other CAPs/CLECs, potential competitors capable
of offering private line and special access services include long distance
carriers, cable television companies, electric utilities, microwave carriers,
wireless telephone system operators, and private networks built by large end
users. Previous impediments to certain utility companies entering
telecommunications markets under The Public Utility Holding Company Act of 1935
were removed by The Telecommunications Act of 1996.
MCI announced in January 1994 that its MCI/Metro unit would invest more that
$2 billion to build in fiber optic rings and local switching equipment in major
metropolitan markets to provide direct connection to its customers and to
provide alternative local telephone services to other IXCs. The Company believes
that this affirms the opportunity in the CAP/CLEC industry and the Company's
decision to focus on lower tier cities. Since the Company is focusing on
different markets, it does not expect to compete directly against MCI/Metro in
most of its markets, and it may provide complementary markets to certain
MCI/Metro markets. See "Business of the Company-Strategic Relationships" for
information concerning the existing and proposed contractual relationships
between the Company and MCI/Metro. AT&T and Sprint have also indicated their
intention to offer local telecommunications services to certain U.S. markets,
either directly or in conjunction with CAPs/CLECs or cable operators.
Cable television companies are upgrading their networks with fiber optics
and installing facilities to provide fully interactive transmission of broadband
voice, video and data communications. Cable company-controlled CAPs, such as
Teleport and U.S. West/Time Warner, historically have possessed certain
advantages over other CAPs in the provision of competitive access services
resulting from certain rights in favor of the cable television companies to use
third-party rights-of-way and to obtain building access at advantageous costs,
and possible cost advantages as a result of statutorily-prescribed limits on the
amounts that electric utilities and LECs may charge cable companies for use of
utility-owned poles and conduits. However, The Telecommunications Act of 1996
contains provisions that require most utilities, including most LECs and
electric companies, to afford CAPs/CLECs access to their poles and conduits and
rights-of-way at reasonable rates on non-discriminatory terms and conditions.
Recent court decisions invalidating the FCC's prohibition of cross-ownership of
cable companies and telephone companies in the same local service territory
could permit LECs to compete with cable television companies in the provision of
cable television service in residential markets. However, the Company believes
that the convergence of these industries will not be a direct threat because
their focus is oriented on residential customers rather than the business
customers which the Company targets.
Electric utilities may install fiber optic telecommunications cable to allow
remote meter reading, peak load monitoring, customer service and interactive
billing. The Telecommunications Act of 1996 facilitates the provision of
telecommunications services by electric utilities over those networks.
Cellular and PCS providers may also be a source of competitive local
telephone service. However, the Company believes wireless operators will be
large users of CAP/CLEC access services to transport their calls among their
radio transmitter/receiver sites through networks that avoid the LECs with whom
they compete.
The Company also competes with equipment vendors and installers, and
telecommunications management companies, with respect to certain portions of its
business.
A continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors to the
Company. Many of the Company's existing and potential competitors have
financial, personnel and other resources significantly greater than those of the
Company. However, the Company believes that its strategy of targeting second and
third tier cities, its capital, technical and management resources and its
orientation toward IXCs and other commercial telecommunications users will
enable it to achieve its strategic objectives.
REGULATORY OVERVIEW
Overview
The Company's services are subject to varying degrees of federal, state and
local regulation. The FCC exercises jurisdiction over all facilities of, and
services offered by, telecommunications common carriers to the extent those
facilities are used to provide, originate or terminate interstate or
international communications. The state regulatory commissions retain
jurisdiction over the same facilities and services to the extent they are used
to originate or terminate intrastate communications. Local governments sometimes
impose franchise or licensing requirements on CAPs/CLECs and regulate street
opening and construction activities. The Company actively supports additional
regulatory reform at all levels to further open telecommunications markets to
competition.
The following table summarizes the key regulatory and legislative
initiatives, often referred to as "Co-carrier status," being pursued at the FCC
and with state regulators under the recently enacted Telecommunications Act of
1996 and their anticipated effect on the Company's ability to become a full
service provider of switched telecommunications services:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Issue Definition Anticipated Effect
- -------------------------- --------------------------------------- ---------------------------------
<C> <C> <C>
Interconnection Efficient network Allows CAPs/CLECs to
interconnection to service customers
transfer calls back and forth not directly
between LECs and connected to their
competitive networks networks
(including 911, 0+,
directory assistance, etc.)
Local Loop Allows competitors to Reduces the capital
Unbundling selectively gain access at and service costs of
cost-based rates to LEC CAPs/CLECs to serve
wires from central offices customers not
to customers' premises directly connected
to their networks
Reciprocal Mandates reciprocal Improves CAP/CLEC
Compensation compensation for local margins for local
traffic exchange between service
LECs and competitors
Number Portability Allows customers to change Allows customers to
local carriers without switch to CAP/CLEC
changing numbers. True provided local
portability allows service without
incoming calls to be changing phone
routed directly to a numbers
competitor. Interim
portability allows
incoming calls to be routed
through the LEC to a
competitor at the economic
equivalent of true
portability
Access to Phone Mandates assignment of new Allows CAPs/CLECs to
Numbers telephone numbers to provide telephone
CAP/CLEC customers numbers to new
customers on the
same basis as the LEC
- ------------------------------------------------------------------------------------------------------
</TABLE>
As of January 1, 1996, over one-half of the states have taken regulatory and
legislative action to open local communications markets to various degrees of
local exchange competition and Co-carrier status, including nine states where
the Company operates or currently plans to operate networks (Arizona,
California, Connecticut, Massachusetts, Michigan, Nevada, Ohio, Oklahoma and
Tennessee). The Company currently has entered into interconnection (Co-carrier)
arrangements with LECs in California, Connecticut, Massachusetts, Michigan and
Rhode Island, under tariffs or under individual agreements, and has entered into
negotiations with other LECs. With the enactment of The Telecommunications Act
of 1996, which became effective on February 8, 1996, the Company believes the
entire United States could be open to local and long distance competition on an
accelerated basis.
Federal Regulation
The FCC has adopted a "forbearance" policy for non-dominant carriers, such
as the Company and its subsidiaries, under which no prior approval is needed for
network construction or acquisition, and only minimal tariff and reporting
requirements are in effect. In their provision of certain services, incumbent
LECs in most markets are regulated by the FCC as dominant carriers. As a result
of the Interconnection Decisions, the Company is able to offer interstate
Collocated Special Access and Collocated Switched Access Transport services to
virtually every business, government and institutional end user in the cities in
which the Company provides services without being directly connected to such
customers. The Interconnection Decisions enabled CAPs to compete for transport
of switched long distance calls between LEC central offices and IXC POPs. At the
same time, the LECs were granted greater pricing flexibility for those services.
Certain aspects of the Interconnection Decisions were subsequently overturned as
a result of court appeals by the LECs. In particular, the FCC was not allowed to
insist that the LECs offer actual physical interconnection of CAP facilities in
the LEC central offices. Instead, in February 1994, the FCC modified its
decision to permit either such physical interconnection or "virtual"
interconnection in which LECs own, install, maintain and lease to CAPs the
equipment to interconnect the CAP networks with the LEC facilities. The recently
enacted Telecommunications Act of 1996 mandates physical interconnection in all
instances where it is practical. The Company believes that either physical or
virtual collocation of its facilities in timely fashion for appropriate rates
and terms will accommodate its purposes.
In March 1995, a major CAP introduced an initiative before the FCC calling
for the nationwide unbundling of the "local loops" controlled by the LECs in
order to make those facilities available on a cost-based basis to all eligible
local service providers following initiation of local competition. The local
loop is the part of the LEC networks that physically connects the customer's
premises to the LEC central office and is used to receive and originate all
local and long distance calls. To date the FCC has not acted on this initiative.
In July 1995, the FCC took two actions related to the assignment of
telephone numbers, first mandating that over the course of the next year
responsibility for administering and assigning local telephone numbers be
transferred from the BOCs and a few other LECs to a neutral entity and second,
proposing a regulatory structure under which a wide range of number portability
issues would be resolved.
In September 1995, the FCC issued a Notice of Proposed Rulemaking which
proposes rules that, among other things, would increase LEC pricing flexibility
and deregulation as competition increases.
Under The Telecommunications Act of 1996, the FCC must undertake certain
actions within six months in order to implement many of the law's competitive
requirements. On April 19, 1996, the FCC issued a Notice of Proposed Rulemaking
in which it proposed rules to implement the interconnection provisions of The
Telecommunications Act of 1996 that the Company expects will likely become
effective in the third quarter of 1996.
Federal Legislation
The Telecommunications Act of 1996, which became law on February 8, 1996,
establishes local exchange and long distance competition as a national policy by
preempting laws that prohibit competition in the local exchange and by the
establishment of prescribed requirements and standards for interconnection,
unbundling and other elements of Co-carrier status. To the extent this
legislation establishes national standards of interconnection and unbundling for
local exchange services and other procedures affecting local competition, it
enhances the Company's ability to expand its service offerings. The new law also
provides regulatory flexibility for LECs to allow them to respond to
competition. To the extent such flexibility is provided, the Company's ability
to compete for certain services may be adversely affected. The new law also
provides specific guidelines under which BOCs can provide in-region interLATA
services. This will permit BOCs to compete with the Company in the provision of
both local and long distance services and ultimately to offer single source
services.
State Regulation
A small percentage of the Company's current circuits may be classified as
intrastate and therefore subject to state regulation. However, the Company
expects that as its business and product lines expand, the Company will offer
more intrastate service. In all states where certification as a common carrier
is currently required, the Company's operating subsidiaries are certificated.
State authorizations vary in the scope of the intrastate services permitted. The
Company is in the process of seeking to expand the scope of its intrastate
certification in various jurisdictions, a process which will depend upon
regulatory action and, in some cases, legislative action in the individual
states. State laws and regulations that prohibit or have the effect of
prohibiting, local and long-distance telecommunications competition are
preempted under The Telecommunications Act of 1996.
In most states, the Company is required to file tariffs setting forth the
terms, conditions and prices for services which are classified as intrastate. In
some states, the Company's tariff can list a range of prices for particular
services, and in others, such prices can be set on an individual customer basis.
The Company is not subject to price cap or to rate of return regulation in any
state in which it currently provides services.
Under The Telecommunications Act of 1996, implementation of the Company's
plans to compete in local markets is and will continue to be, to a certain
extent, controlled by the individual states. The Company continues to support
efforts at the state government level to more quickly implement competition in
their markets under the new federal law and to permit CAPs/CLECs to operate on
the same basis and with the same rights as the LECs, sometimes referred to as
"Co-carrier status." Currently, a number of state PUCs have authorized varying
degrees of Co-carrier privileges to new competitors. As of January 1, 1996, over
one-half of the states have taken regulatory and legislative action to open
local communications markets to various degrees of local exchange competition
and Co-carrier status, including nine states in which the Company operates or
currently plans to operate networks (Arizona, California, Connecticut,
Massachusetts, Michigan, Nevada, Ohio, Oklahoma and Tennessee). The California
PUC has announced a goal of opening all local exchange markets to competition by
January 1, 1997 and has granted CAPs/CLECs authority to offer local exchange
service in major markets beginning as of January 1, 1996. The Company believes
that most of the states in which it operates will open all local exchange
markets to competition in 1996 in accordance with the requirements of the new
federal law. When Co-carrier status is granted in a particular state, CAPs/CLECs
would expect to realize lower costs for providing intrastate switched local
services in that state.
Since early 1995, several CAPs/CLECs have entered into a number of
Co-carrier agreements with several LECs which addressed CLEC/LEC interconnection
issues, such as reciprocal compensation and number portability. The Company
believes that these agreements, which are the first of their kind, combined with
previous agreements on interconnection, direct assignment of numbers and local
loop unbundling, could provide a model for future Co-carrier arrangements with
other LECs. The Company has entered into interconnection (Co-carrier)
arrangements with Pacific Bell Telephone Company in California, New England
Telephone and Telegraph Company in Massachusetts and Rhode Island, Michigan Bell
Telephone Company (Ameritech Michigan) in Michigan and Southern New England
Telephone Company (SNET) in Connecticut through tariffs and individual
agreements, and has entered into negotiations with other LECs. While The
Telecommunications Act of 1996 mandates the implementation of interconnection
arrangements, there can be no assurance that such negotiations will enable the
Company to secure its desired Co-carrier arrangements in a timely fashion or for
appropriate rates and terms.
Local Government Authorizations
In certain locations, the Company is required to obtain local franchises,
licenses or other operating rights and street opening and construction permits
to install and expand its fiber optic networks. In some of the areas where the
Company provides network services, the Company's subsidiaries pay license or
franchise fees based on a percent of gross revenues or on a per linear foot
basis. There is no assurance that certain cities that do not impose fees will
not seek to impose fees, nor is there any assurance that, following the
expiration of existing franchises, fees will remain at their current levels.
The Telecommunications Act of 1996 prohibits local governmental authorities
from discriminating among telecommunications carriers and mandates competitively
neutral treatment.
If any of the Company's existing franchise or license agreements were
terminated prior to its expiration date and the Company was forced to remove its
fiber from the streets or abandon its network in place, such termination would
have a material adverse effect on the Company's subsidiary in that metropolitan
area and could have a material adverse effect on the Company.
MANAGEMENT
Executive Officers and Directors
Name Age Position
- ------------------------------------------ --- -------------------------------
Executive Officers
Robert A. Brooks(1)..................... 64 Chairman; Director
James C. Allen(1,4)..................... 49 Vice Chairman & Chief Executive
Officer; Director
D. Craig Young(4)....................... 42 President & Chief Operating
Officer; Director
John C. Shapleigh....................... 47 Executive Vice President-
Regulatory and Corporate
Development
Richard P. Anthony...................... 47 Senior Vice President-Marketing
and Strategy
James A. Brasunas....................... 47 Senior Vice President-Carrier
Sales
John K. Brooks.......................... 35 Senior Vice President and
President, JB Telecom, Inc.
Gregory J. Christoffel.................. 47 Senior Vice President & General
Counsel
Jim A. Moffit........................... 50 Senior Vice President and
Managing Director-GLA
International
David L. Solomon........................ 36 Senior Vice President & Chief
Financial Officer
Non-Management Directors
Robert F. Benbow(3)..................... 60 Director
William J. Bresnan(1,3,5)............... 62 Director
Jonathan M. Nelson(1,2,4,5)............. 40 Director
G. Jackson Tankersley, Jr.(1,2,4,5)..... 47 Director
Ronald H. Vander Pol(2,3,4)............. 44 Director
- ---------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
(4) Member of Finance Committee
(5) Member of Board Governance Committee
Executive Officers
Robert A. Brooks, Chairman. Mr. Brooks has been Chairman of the Company
since its formation in November 1993. Mr. Brooks was founder and previously
served as Chairman of the Board and CEO of BTC. Mr. Brooks has 39 years
experience as entrepreneur, business planner and developer, cable system
operator, investor, engineer, consultant, project manager, expert witness and
management advisor in cable television and broadband telecommunications. Mr.
Brooks was a founder and Chairman for ten years of Cencom Cable Associates,
which was founded in 1982 with initial capitalization of approximately $300,000
and was purchased in 1991 by Crown Media (a Hallmark affiliate) in a transaction
valued at approximately $1 billion. Mr. Brooks previously served as a Director
of OneComm and Chem Design Corporation. He has a B.S.E.E. from Northeastern
University and currently is a member of its Corporation. Mr. Brooks currently
serves as a member of President's Council of St. Louis University and is a
Registered Professional Engineer, a Member of N.S.P.E., a Senior Member of
I.E.E.E. and an inducted member of the prestigious Cable Television Pioneers
Club.
James C. Allen, Vice Chairman, CEO. Mr. Allen has been Vice Chairman and
CEO of the Company since its formation in November 1993. Mr. Allen previously
served as President and COO of BTC. Mr. Allen has 25 years experience as an
entrepreneur, business planner and developer, cable system operator, financier,
expert witness and advisor in cable television and broadband telecommunications.
Mr. Allen was a founder and President, CFO and COO of Cencom Cable Associates,
Vice President of Operations of Telcom Engineering, Inc., a telecommunications
engineering and consulting firm with clients in both the telephone and cable
television industries, Vice President of Operations of United Cable Television,
Divisional Manager of Continental Telephone Corporation, and Vice President for
Finance of National Communications Service Corporation. He served as Chief
Financial and Chief Operating Officer of David Lipscomb University, from which
he holds a B.S. degree.
D. Craig Young, President, COO. Mr. Young has served as President and COO
of the Company since April 1995. Mr. Young has 16 years experience in the
telecommunications industry. He served as Vice President-Sales Operations,
Custom Business Services of Ameritech, Inc. from 1993 to 1995; Vice
President-Sales and Service, Business and Government Services of U.S. West
Communications, Inc. from 1992 to 1993; Vice President-Sales, Large Business
Service from 1989 to 1992; and Vice President and General Manager-U.S. West
Information Systems from 1986 to 1988. Mr. Young's responsibilities at
Ameritech, Inc. and U.S. West Communications, Inc. included the management of
all voice and data sales, engineering and pricing activities for large
commercial and government end users, and full P&L responsibility for more than
$650 million in revenue and direction of a work force of more than 400
employees. Prior to that he served as President of Executone Information
Systems, a franchise distributor of voice products. He joined the Company in
1995. He has a B.S., Business Administration/Marketing degree from California
State University and has attended the Executive Management Program at Columbia
University.
John C. Shapleigh, Executive Vice President -- Regulatory and Corporate
Development. Mr. Shapleigh has been Executive Vice President in charge of the
Company's regulatory and corporate development activities since its formation in
November 1993. Mr. Shapleigh has 22 years of entrepreneurial, management,
regulatory, government policy and legal experience. He is currently Chairman and
previously served for two years as President of the Association for Local
Telecommunications Services (ALTS), the national trade association for
competitive local telecommunications companies. He also served for one year as
Associate Administrator of the National Telecommunications and Information
Administration (NTIA) in the U.S. Department of Commerce, a key federal
telecommunications policy position where he directed NTIA TELECOM 2000: Charting
the Course for a New Century, a comprehensive review of 18 telecommunications,
mass media and information industries, including telephone, television and cable
television, three years as Vice President and General Counsel of LDX Net and
Wiltel, developers of regional fiber optic telephone networks, positions
involving the negotiation of over $100 million in debt financing agreements and
oversight of all federal, state and local regulatory matters, and three years as
Commissioner, then Chairman, of the Missouri Public Service Commission. He has
an A.B. degree from Dartmouth College (Senior Honors) and a J.D. degree from the
Washington University School of Law (Law Quarterly). He is a recipient of the
President's Award of the Missouri Bar Association.
Richard P. Anthony, Senior Vice President of Marketing and Strategy. Mr.
Anthony has 24 years experience in management, marketing, engineering, and
operations for telecommunications, cable television, competitive access and long
distance companies. He is a former Vice President of Telecommunications for
Cablevision Industries, Inc., responsible for establishing a telecommunications
business for that company; Senior Vice President of Strategy, Marketing, and
Networks for Intermedia Communications of Florida, Inc., a competitive access
provider that was one of the first CAPs to market enhanced services such as wide
area network interface and frame relay and was one of the first CAPs to go
public. He joined Cablevision Industries, Inc. and Intermedia Communications of
Florida, Inc. in 1993 and 1987, respectively. He has also served as Director of
Data Communications for Telecom USA, President of Comlink, and Regional Manager
for the St. Louis area for U.S. West, as well as serving in city government and
the U.S. Air Force. He joined the Company as Senior Vice President of Marketing
and Strategy in 1994. Mr. Anthony has M.S. and B.S. degrees from the University
of Missouri.
John K. Brooks, Senior Vice President and President-JB Telecom, Inc. Mr.
Brooks has over 11 years of entrepreneurial, cable TV system management,
marketing and regulatory experience. He was Vice President of Operations of
Cencom Cable Associates, Inc. from 1983 until Cencom was acquired by a
subsidiary of Hallmark Cards, Inc. in 1991. Previous positions with Cencom
included Corporate Vice President - Operations; Regional Vice President -
Operations; Corporate Vice President - Government and Public Relations;
Assistant Vice President - Marketing and Programming; and South Carolina State
Manager - Cable Operations. Mr. Brooks has also been involved in cable system
acquisition due diligence, financing and franchise negotiations. He holds a B.A.
in Political Science from the University of Missouri and is a former officer and
director of the Missouri Cable Television Association. Mr. Brooks served as
Senior Vice President of Corporate Development of BTC from 1992 to 1994, as
Executive Vice President of Operations of the Company from 1994 to 1995, and as
President of JB Telecom, Inc. (formerly a subsidiary of BTC, which became a
subsidiary of the Company in January 1996) from 1995 to present. He has served
as Senior Vice President of the Company since February 1996.
James A. Brasunas, Senior Vice President of Carrier Sales. Mr. Brasunas has
over 12 years of sales/management experience within the telecommunications
industry with a distinguished record in business development, revenue
enhancement, budgeting and forecasts. He joined Northern Telecom in 1984, as
Manager-Marketing Services, with responsibility for designing and implementing
training programs for account managers and analyzing market share data. He was
promoted to National Account Manager with responsibility for the sale of
transmission products including fiber optics, microwave radio and digital loop
carriers to key government accounts. He then served as Senior Manager
Metropolitan Network Sales providing sales levels in excess of $45 million and
launching the introduction of PCS product into the CAP/CATV market. He joined
the Company as Senior Vice President of Carrier Sales in 1994. Mr. Brasunas has
a Bachelor of Science degree from Massachusetts Institute of Technology and has
taken graduate studies at the Institute for Comparative Studies,
Gloucestershire, United Kingdom.
Gregory J. Christoffel, Senior Vice President & General Counsel. Mr.
Christoffel has been Senior Vice President and General Counsel of the Company
since February 1996. Mr. Christoffel has 21 years of legal, regulatory and
management experience, principally in the telecommunications industry. He served
as former General Attorney for Mergers & Acquisitions and International Business
of Southwestern Bell Corporation. His experience at Southwestern Bell included
structuring and executing several industry-leading acquisitions in cellular
telephone, cable television and foreign telecommunications privatizations, as
well as extensive participation in critical legal proceedings before the Federal
District Court enforcing the Divestiture Decree and before the Federal
Communications Commission in proceedings regarding regulatory reform. Early in
his career, he served as First Assistant Public Counsel, representing the
consumer interest in rate proceedings before the Missouri Public Service
Commission, and as Assistant Attorney General in the Antitrust Division of the
Missouri Attorney General's office. In private practice, Mr. Christoffel served
his firm as managing partner and provided corporate, securities and transaction
counsel for a variety of companies involved in telecommunications equipment
manufacturing, domestic and foreign SMR wireless service and other
telecommunications businesses, including service as Acting General Counsel of
MobileMedia Communications, a leading provider of local, regional and nationwide
paging services. Mr. Christoffel joined the Company in 1996 after serving as the
President of Brooks Telecommunications International, Inc., responsible for
overseeing the development of a broadband integrated services digital network in
a joint venture in Guangzhou, China. Mr. Christoffel holds an A.B. (Classical)
in philosophy and languages from St. Louis University School of Philosophy and
Letters and a J.D. cum laude from St. Louis University School of Law (Law
Journal, Woolsack).
Jim A. Moffit, Senior Vice President and Managing Director--GLA
International. Mr. Moffit has 26 years experience as a financial officer,
business and financial planner, specialist in regulatory matters, accountant,
expert witness, consultant and auditor, including 24 years with a large
independent telephone company and an international accounting firm. Mr. Moffit
was President of Contel Corporation Central Region for four years until Contel
was merged into GTE in 1991. Other positions with Contel included five years as
Vice President-Financial Director, Western Region; two years as Assistant Vice
President-Revenue Requirements, Western Region; four years as Assistant Vice
President-Financial Planning, Western Region; and five years as corporate chief
accountant. Mr. Moffit also spent four years on the audit staff of Arthur
Andersen. He holds a B.S., Accounting degree, with honors, from Northeast
Missouri State University and an MBA from Washington University. Mr. Moffit also
has a CPA and is licensed to practice accounting in Missouri. He was named as
one of the telecommunications industry's "Rising Stars" by Telephony Magazine in
1989. He has served the Company in various positions since its formation in 1993
and was an executive officer of BTC from 1991 to 1993.
David L. Solomon, Senior Vice President & Chief Financial Officer. Mr.
Solomon has 13 years experience in financial management and reporting, auditing
and business advisory services with KPMG Peat Marwick LLP, most recently as
partner. Responsibilities included working with SEC registrants including
participation in initial public offerings, equity offerings, debt offerings and
required filings. Clients served included organizations in the banking, thrift,
insurance, and real estate industries. He joined the Company as Senior Vice
President and CFO and has previously served as Secretary and Chief Financial
Officer of BTC in 1994. He is a member of the American Institute and Tennessee
Society of CPAs. He has a Bachelor of Science degree from David Lipscomb
University.
Non-Management Directors
Robert F. Benbow, Director. Mr. Benbow is a Vice President of Burr, Egan,
Deleage & Co. and a General Partner in certain funds affiliated with Burr, Egan,
Deleage & Co. He joined that firm in 1990. He previously spent 22 years with the
Bank of New England, N.A. where he was Senior Vice President responsible for
special industries lending in the areas of media, project finance and energy. He
holds a B.S. in Finance/Economics from the University of Illinois. He serves as
a director of ST Enterprises, Ltd., a local exchange telephone company;
Datamarine International; Incom Communications Corp.; U.S. One Communications
Corp.; and Teletrac, Inc.
William J. Bresnan, Director. Mr. Bresnan is President and founder of
Bresnan Communications, a company that operates cable systems and/or provides
telephony services in five U.S. states as well as Poland and Chile. He has been
involved in the telecommunications industry since 1958. Mr. Bresnan was
president of Teleprompter Corporation, which at one time was the nation's
largest cable television company, and later was Chairman and Chief Executive
Officer of Group W Cable, Inc., a subsidiary of Westinghouse Electric
Corporation. He is a director of United Video Satellite Group, Inc., which is a
publicly traded company. Mr. Bresnan also serves as a director of numerous
organizations, including National Cable Television Association, C-Span, Cable in
the Classroom, Cable Television Laboratories, the Foundation for Minority
Interests in Media, the National Cable Television Center and Museum, and the
Cable Television Advertising Bureau.
Jonathan M. Nelson, Director. Mr. Nelson is a managing general partner of
Providence Ventures, L.P., which is the general partner of the general partner
of Providence Media Partners L.P. ("PMP"). Mr. Nelson is Co-Chairman of
Providence Ventures Inc. ("Providence"), which is the management company for
PMP. He joined that firm in 1990. Mr. Nelson is also a Managing Director of
Narragansett Capital, Inc. ("Narragansett"), the management company for three
separate equity investment funds. Affiliates of Providence and Narragansett have
equity investments in cellular telephone, paging, wireless data, ESMR, PCS,
cable television and broadcast businesses. Mr. Nelson is currently a director of
Wellman, Inc., and numerous privately-held companies affiliated with Providence
or Narragansett, including, Cellnet Data Systems Inc., Interep National Radio
Sales, Inc., Powerfone Holdings, Inc. and Western Wireless Corporation. Mr.
Nelson received a Master of Business Administration from the Harvard Business
School in 1983 and a Bachelor of Arts from Brown University in 1977.
G. Jackson Tankersley, Jr., Director. Mr. Tankersley is a co-founder and
General Partner of The Centennial Funds ("Centennial"). He joined that firm in
1981. He also serves as the President and Chief Executive Officer of Centennial
Holdings, Inc., which manages Centennial. Since the formation of Centennial in
1981, it has specialized its investment activities in the electronic
communications industries. Previously, Mr. Tankersley served as a vice president
of Continental Illinois Venture Corporation and Continental Illinois Equity
Corporation, the private equity investment arms of Continental Illinois Corp. He
has served on a number of the boards of directors of various public and private
portfolio investments of Centennial. Mr. Tankersley received a B.A. degree (high
honors) from Denison University and an M.B.A. from The Amos Tuck School of
Business Administration at Dartmouth College.
Ronald H. Vander Pol, Director. Mr. Vander Pol has been a participant in the
telecommunications industry for the last 16 years. In 1982, he founded Teledial
America, Inc., a long distance reseller. He started Digital Signal, Inc., a
fiber optic provider, in 1986 and City Signal, Inc., a competitive access
provider, in 1989 (see "Summary--Recent Developments" and "Certain Relationships
and Related Transactions"). Since then, Mr. Vander Pol has started two
additional long distance companies, Teledial of North Carolina and ATS Network
Services in Tennessee. He holds a bachelor's degree from Calvin College in Grand
Rapids, Michigan.
------------------------------
Pursuant to an Amended and Restated Stockholders' Agreement dated as of June
15, 1995 among the Company and the stockholders of the Company prior to the IPO,
each of Messrs. Benbow, Nelson and Tankersley was designated as a director by
the institutional investors in the Company with whom he is affiliated. See
"Principal Stockholders." The right of such institutional investors to designate
directors terminated upon consummation of the IPO.
Officers are elected by and serve at the discretion of the Board of
Directors. John K. Brooks is the son of Robert A. Brooks. There are no other
family relationships among the directors and executive officers of the Company.
The Board of Directors has an Executive Committee, a Finance Committee, an
Audit Committee, a Compensation Committee, a Nominating Committee and an Ad Hoc
Corporate Governance Committee. The Compensation Committee is comprised of
Messrs. Tankersley (Chairman), Nelson and Vander Pol. Directors are not
compensated for their services as directors, but are reimbursed for expenses
incurred in connection with Board and committee meetings attended.
Each of the directors, other than Messrs. Bresnan, Vander Pol, Young and
Tankersley, has served since the formation of the Company in November 1993.
Messrs. Young and Tankersley have served as directors since April 1995 and
December 1995, respectively, and Messrs. Bresnan and Vander Pol have served
since May 22, 1996. The current directors have been elected to serve until the
1996 Annual Meeting of Stockholders and until their respective successors are
elected and qualified or until their earlier death, resignation or removal.
The By-laws of the Company provide for a Board of Directors consisting of
ten directors. At the present time there are two vacancies. The Board of
Directors unanimously adopted a resolution setting forth and declaring the
advisability of a proposed amendment to the Company's Restated Certificate of
Incorporation which would add a new Article Tenth to the Company's Restated
Certificate of Incorporation to provide for three classes of directors having
staggered terms of office. If the proposed amendment to the Company's Restated
Certificate of Incorporation is approved by the Company's stockholders at the
1996 Annual Meetings of Stockholders (currently scheduled for August 20, 1996),
it is expected that, at such Annual Meeting, two directors would be elected to
hold office until the 1997 Annual Meeting of Stockholders, three directors would
be elected to hold office until the 1998 Annual Meeting of Stockholders and
three directors would be elected to hold office until the 1999 Annual Meeting of
Stockholders, and, in each case, until their respective successors are elected
and qualified in the class to which each such director is assigned or until
their earlier death, resignation or removal. If the proposed amendment is not
approved by the stockholders, all eight directors would be nominated for
election at the 1996 Annual Meeting of Stockholders to hold office until the
1997 Annual Meeting of Stockholders.
Executive Compensation
The following table sets forth certain summary information for the fiscal
year ended December 31, 1995 concerning the compensation paid and awarded to the
Chief Executive Officer and each of the other four most highly compensated
executive officers of the Company during such fiscal year for services in all
capacities.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------------------------ -------------
Other Securities All Other
Name and Annual Underlying Compensation
Principal Position Year Salary($) Bonus($)<F2> Compensation Options(#)<F4> ($)<F5>
($)<F3>
- ------------------------------------ ------ ------------- ----------- ------------------ --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Brooks<F1>................ 1995 $250,000 $50,000 $25,749 60,000 --
Chairman of the Board
James C. Allen<F1>.................. 1995 $225,000 $50,000 -- 60,000 $4,500
Vice Chairman & Chief
Executive Officer
D. Craig Young<F6>.................. 1995 $129,619 $50,000 -- 200,000 --
President & Chief
Operating Officer
John C. Shapleigh................... 1995 $146,000 $25,000 -- 0 $2,920
Executive Vice
President-Regulatory and Corporate
Development
David L. Solomon.................... 1995 $165,000 $45,000 -- 60,000 $3,300
Senior Vice President &
Chief Financial Officer
- ---------------
<FN>
<F1> Includes compensation paid by Brooks Telecommunications Corp. ("BTC")
under a Management and Services Agreement between the Company and BTC.
Effective upon the merger of BTC into the Company on January 2, 1996, the
Company pays all of the compensation of Messrs. Brooks and Allen. See
"Certain Relationships and Related Transactions."
<F2> Represents bonuses earned in 1995, which were paid in 1996. The payment of
bonuses is at the discretion of the Compensation Committee of the Board of
Directors.
<F3> The amount shown for Mr. Brooks reflects personal use of Company provided
transportation. The Company has not included in the Summary Compensation
Table the value of incidental personal perquisites furnished by the
Company to the other named executive officers since such value did not
exceed the lesser of $50,000 or 10% of the total of annual salary and
bonus reported for such named executive officers.
<F4> Represents shares of Common Stock subject to compensatory stock options
granted during 1995.
<F5> Represents contributions made by the Company on behalf of the executive
officer under the Company's 401(k) Plan.
<F6> Hired on April 5, 1995.
</FN>
</TABLE>
Stock Option Plan. Pursuant to the Company's 1993 Stock Option Plan, the
Board of Directors is authorized to grant options and stock appreciation rights
covering up to 3,400,000 shares of Common Stock of the Company. As of May 31,
1996, options for an aggregate of 1,087,000 shares at $4.00 per share, 491,000
shares at $6.60 per share, 320,320 shares at $11.35 per share, 702,000 shares at
$12.50 per share, 130,000 shares at $27.00 per share and 50,000 shares at $33.75
per share were outstanding (including substituted options issued upon
effectiveness of the merger with BTC on January 2, 1996). Options held by the
CEO and each of the other executive officers named in the Summary Compensation
Table as follows: Mr. Brooks -- 60,000 shares at $4.00, 60,000 shares at $6.60,
37,020 shares at $11.35 and 100,000 shares at $12.50; Mr. Allen -- 60,000 shares
at $4.00, 60,000 shares at $6.60, 55,540 shares at $11.35 and 100,000 shares at
$12.50; Mr. Young -- 200,000 shares at $4.00 and 20,000 shares at $12.50; and
Mr. Shapleigh -- 120,000 shares at $4.00, 9,260 shares at $11.35 and 80,000
shares at $12.50; and Mr. Solomon -- 40,000 shares at $4.00, 60,000 shares at
$6.60, 18,520 shares at $11.35 and 100,000 shares at $12.50. All options granted
under the 1993 Stock Option Plan become fully vested upon a change-in-control of
the Company, as defined in such options. The following table presents certain
information concerning stock options granted to the CEO and each of the other
named executive officers during 1995. The exercise price for all of the grants
of stock options was the fair market value of the Common Stock on the date of
grant as determined by the Compensation Committee of the Board of Directors.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
Potential
Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term<F1>
--------------------------------- ----------------------------------
Percent of
Number Total
of Options
Securities Granted to
Underlying Employees Exercise
Options in or Base
Granted Fiscal Price Expiration 5% 10%
Name (#) Year ($/Sh) Date<F2> ($) ($)
- --------------------- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Brooks..... 60,000 6.9% $ 6.60 10/17/05 $ 249,042 $ 631,105
James C. Allen....... 60,000 6.9% $ 6.60 10/17/05 $ 249,042 $ 631,105
D. Craig Young....... 200,000 22.9% $ 4.00 04/13/05 $ 503,112 $1,274,992
John C. Shapleigh.... 0 0 -- -- -- --
David L. Solomon..... 60,000 6.9% $ 6.60 07/13/05 $ 249,042 $ 631,105
- ---------------
<FN>
<F1> The dollar amounts under the 5% and 10% columns are the result of
calculations required by the rules of the Securities and Exchange
Commission and, therefore, are not intended to forecast possible future
appreciation, if any, of the Common Stock price. The amounts shown reflect
the difference between the appreciation and the exercise price at the
assumed annual rates of appreciation through the tenth anniversary of the
dates of grant.
<F2> The options granted to Mr. Brooks and Mr. Allen are two-thirds vested and
become fully vested on November 8, 1996. All other options vest in
one-third increments on the first, second and third anniversaries of the
date of initial grant. Mr. Young's options would fully vest upon a
termination of his employment without cause.
</FN>
</TABLE>
The following table sets forth certain information with respect to the CEO
and the named executive officers regarding the value of their unexercised
options held as of December 31, 1995. No options were exercised during 1995.
<TABLE>
AGGREGATED FISCAL YEAR-END OPTION VALUES
<CAPTION>
Number of Securities Underlying
Unexercised Options at Value of Unexercised in-the-Money
December 31, 1995<F1> Options at December 31, 1995<F2>
------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------- --------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Robert A. Brooks............ 104,680 52,340 $604,382 $ 302,191
James C. Allen.............. 117,027 58,513 618,588 309,290
D. Craig Young.............. -- 200,000 -- 1,700,000
John C. Shapleigh........... 86,173 43,087 687,099 343,550
David L. Solomon............ 25,680 92,840 127,530 587,768
- ---------------
<FN>
<F1> Includes substituted options issued upon the effectiveness of the merger
with BTC on January 2, 1996.
<F2>Reflects the difference between the exercise price and $12.50 per share.
</FN>
</TABLE>
1996 Employee Stock Purchase Plan. In February 1996, the Company
established an Employee Stock Purchase Plan (the "ESPP") to provide employees of
the Company with an opportunity to purchase Common Stock through payroll
deductions. Under the ESPP, up to 500,000 shares of Common Stock have been
reserved for issuance, subject to certain antidilution adjustments. The ESPP
became effective at the time of the Company's initial public offering of Common
Stock in May 1996. The ESPP is intended to qualify as an employee stock purchase
plan within the meaning of Section 423 of the Internal Revenue Code. The first
offering period under the ESPP is from May 1996 through April 30, 1997. The
Board of Directors will have authority to authorize up to four annual offering
periods thereafter. The ESPP terminates on April 30, 2001. Eligible employees
may participate in the ESPP by authorizing payroll deductions during an offering
period within a percentage range determined by the Board of Directors.
Initially, the amount of authorized payroll deductions will be not less than 1%
nor more than 10% of an employee's cash compensation during an offering period,
but not more than $25,000 per year. Amounts withheld from payroll are applied at
the end of each offering period to purchase shares of Common Stock. Participants
may withdraw their contributions at any time before stock is purchased, and in
the event of withdrawal such contributions will be returned to the participants
with interest. The purchase price of the Common Stock is equal to 85% of the
lower of (i) the market price of Common Stock immediately before the beginning
of the applicable offering period or (ii) the market price of Common Stock at
the end of each offering period. All expenses incurred in connection with the
implementation and administration of the ESPP will be paid by the Company.
401(k) Plan. The Company has a 401(k) savings and retirement plan (the
"401(k) Plan") which covers substantially all employees of the Company. All
employees of the Company who are 21 years of age or older are eligible to
participate in the 401(k) Plan upon completion of twelve months of service. The
401(k) Plan allows participants to agree to certain salary deferrals which the
Company allocates to the participant's plan account. These amounts may not
exceed statutorily mandated annual limits set forth in Sections 401(k), 404 and
415 of the Internal Revenue Code. Participants are also eligible to receive
Company matching contributions each year in an amount up to 50% of the
participant's contribution up to a maximum of 4% of such participant's annual
compensation. All contributions to a participant's plan account are subject to
limitations imposed on retirement plans generally and 401(k) plans in
particular. The Company's contributions will generally vest over a five-year
period. Distribution of a participant's account under the 401(k) Plan may be
made at retirement, death, permanent disability or other termination of
employment in a lump-sum form of payment. Participant's may withdraw amounts
from their plan accounts after attainment of age 59-1/2 or in the event of
proven financial hardship, and may also take loans against their plan account
balances.
Compensation Committee Interlocks and Insider Participation
As a result of the City Signal Acquisition, Ronald H. Vander Pol received
2,240,000 shares of the Company's Common Stock. On May 1, 1996, Mr. Vander Pol
transferred all of such shares to the National Christian Charitable Foundation,
Inc., which currently owns 2,016,000 of such shares and has the option to
require the Company to repurchase any or all of such shares at a price of $12.50
per share on or before February 1, 1998.
PRINCIPAL STOCKHOLDERS
Common Stock Ownership of Directors and Executive Officers
The following table sets forth information regarding the amount of the
Company's outstanding Common Stock as of May 31, 1996 beneficially owned by each
director, the Chief Executive Officer, the four other most highly compensated
executive officers and all directors and executive officers of the Company as a
group:
<TABLE>
<CAPTION>
Number of Shares Percent of
Beneficially Common Stock
Name of Beneficial Owner Owned Outstanding<F1>
- ------------------------------------------------------ ---------------- ---------------
<C> <C> <C>
James C. Allen (Named Executive and Director) 265,057 <F2> *
Robert F. Benbow (Director) 1,063,638 <F3> 3.75%
William J. Bresnan (Director) 51,634 <F4> *
Robert A. Brooks (Named Executive and Director) 891,435 <F5> 3.09%
Jonathan M. Nelson (Director) 1,426,638 <F6> 5.03%
John C. Shapleigh (Named Executive) 223,873 <F7> *
David L. Solomon (Named Executive) 69,354 <F8> *
G. Jackson Tankersley, Jr. (Director) 3,700 <F9> *
Ronald H. Vander Pol (Director) 40,000 *
D. Craig Young (Named Executive and Director) 71,690<F10> *
and Director)
All directors and executive officers as a group
(15 persons) 4,543,775 15.36%
- ---------------
<FN>
* Represents beneficial ownership of less than one percent.
<F1> Percentages are determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended.
<F2> Represents 99,120 shares of Common Stock, warrants to purchase 48,540
shares of Common Stock and 117,027 shares of Common Stock subject to
options which are exercisable within 60 days owned by Mr. Allen and 370
shares of Common Stock owned jointly by Mr. Allen and his wife.
<F3> Represents shares beneficially owned by entities to which Burr, Egan,
Deleage & Co., of which Mr. Benbow is a Vice President, directly or
indirectly provides investment advisory services. Includes (i) 1,052,568
shares of Common Stock held by Alta V Limited Partnership and (ii) 11,070
shares of Common Stock held by Customs House Partners. The respective
general partners of Alta V Limited Partnership and Customs House Partners
exercise sole voting and investment power with respect to the shares owned
by such funds. The principals of Burr, Egan, Deleage & Co. are general
partners of Alta V Management Partners, L.P. (which is a general partner
of Alta V Limited Partnership) and Customs House Partners. As general
partners of such funds, they may be deemed to share voting and investment
powers for the shares held by the funds. The principals of Burr, Egan,
Deleage & Co. disclaim beneficial ownership of all such shares held by the
foregoing funds, except to the extent of their proportionate pecuniary
interests therein. Mr. Benbow is a Vice President of Burr, Egan, Deleage &
Co. and general partner of Alta Management Partners, L.P. (which is the
general partner of Alta V Limited Partnership). As a general partner of
the fund, he may be deemed to share voting and investment powers for the
shares held by the fund. He disclaims beneficial ownership of all such
shares held by the aforementioned fund except to the extent of his
proportionate pecuniary interests (if any) therein. He is not compensated
for his duties as a director of the Company and does not directly own any
securities of the Company.
<F4> Represents 29,066 shares of Common Stock, warrants to purchase 18,868
shares of Common Stock and an option to purchase 3,700 shares of Common
Stock which is exercisable within 60 days.
<F5> Includes (i) 383,641 shares of Common Stock, warrants to purchase 375,314
shares of Common Stock, 104,680 shares of Common Stock subject to options
which are exercisable within 60 days held by Robert A. Brooks and (ii)
15,860 shares of Common Stock and warrants to purchase 11,940 shares of
Common Stock held by The Brooks Foundation, of which Mr. Brooks is a
trustee.
<F6> Includes (i) 3,000 shares of Common Stock held by Jonathan M. Nelson and
(ii) 1,423,638 shares of Common Stock owned by Providence Media Partners
L.P. Mr. Nelson is a managing general partner of Providence Ventures,
L.P., which is the general partner of the general partner of Providence
Media Partners, L.P. Mr. Nelson disclaims beneficial ownership of shares
beneficially owned by Providence Media Partners L.P.
<F7> Includes (i) 61,598 shares of Common Stock, warrants to purchase 33,780
shares of Common Stock and 86,173 shares of Common Stock subject to
options which are exercisable within 60 days held by John C. Shapleigh,
(ii) 24,392 shares of Common Stock and warrants to purchase 1180 shares of
Common Stock held by John C. Shapleigh's Individual Retirement Account
(IRA), (iii) 12,120 shares of Common Stock held by John C. Shapleigh
Holdings, L.P., of which Mr. Shapleigh is the General Partner, and (iv)
4,630 shares of Common Stock held by Anne T. Shapleigh, wife of Mr.
Shapleigh.
<F8> Represents 6,640 shares of Common Stock, warrants to purchase 3,700 shares
of Common Stock, and 59,014 shares of Common Stock subject to options
which are exercisable within 60 days.
<F9> Represents 3,700 shares of Common Stock subject to an option which is
exercisable within 60 days. Excludes (i) 1,336,180 shares beneficially
owned by Centennial Fund IV, L.P. ("Centennial IV") including 1,286,400
shares of Common Stock and warrants to purchase 49,780 shares of Common
Stock and (ii) 1,026,080 shares beneficially owned by Centennial Fund III,
L.P. ("Centennial III"), including 684,860 shares of Common Stock and
warrants to purchase 341,220 shares of Common Stock.
Mr. Tankersley is an individual General Partner of each of Centennial
Holdings III, L.P. ("Holdings III") and Centennial Holdings IV, L.P.
("Holdings IV") which serves as the sole General Partner of Centennial III
and Centennial IV, respectively. As the sole General Partner of Centennial
III, Holdings III may be deemed to be the indirect beneficial owner of
Centennial III's shares by virtue of its authority to make investment
decisions regarding the voting and disposition of shares directly
beneficially owned by Centennial III (such decisions are made by the
majority decision of a three member Investment Committee of Holdings III
on which Mr. Tankersley serves). As the sole General Partner of Centennial
IV, Holdings IV may be deemed to be the indirect beneficial owner of
Centennial IV's shares by virtue of its authority to make investment
decisions regarding the voting and disposition of shares directly
beneficially owned by Centennial IV (such decisions are made by the
majority decision of a seven member Investment Committee of Holdings IV on
which Mr. Tankersley serves). Neither Holdings III nor Holdings IV owns
directly any shares of Common Stock.
Mr. Tankersley disclaims beneficial ownership of all shares of the
Company's Common Stock (i) directly or indirectly owned by Centennial III
or Holdings III, and (ii) directly or indirectly by Centennial IV or
Holdings IV. In addition, each of Centennial III and Holding III disclaims
beneficial ownership of all shares directly beneficially owned by
Centennial IV; and each of Centennial IV and Holdings IV disclaims
beneficial ownership of all shares directly beneficially owned by
Centennial III. Finally, all members of the Holdings III and Holdings IV
Investment Committees disclaim beneficial ownership of shares directly
beneficially owned by Centennial III and Centennial IV, respectively.
<F10> Includes (i) 2,420 shares of Common Stock and 66,667 shares of Common
Stock subject to options which are exercisable within 60 days held by D.
Craig Young, (ii) 833 shares of Common Stock held by D. Craig Young's
Individual Retirement Account (IRA), (iii) 1,220 shares of Common Stock
held by The Joan L. Young Revocable Trust of which Ms. Young, the wife of
D. Craig Young, is trustee, and (iv) 550 shares of Common Stock held by
Joan L. Young's Individual Retirement Account (IRA).
</FN>
</TABLE>
Common Stock Ownership of Certain Beneficial Owners
The following table sets forth information regarding the amount of the
Company's outstanding Common Stock as of May 31, 1996 beneficially owned by each
person (or affiliated persons) known to the Company to be the beneficial owner
of more than 5% of the outstanding Common Stock:
Number of Shares Percent of
Beneficially Common Stock
Name of Beneficial Owner Owned Outstanding(1)
- ------------------------------------ ----------------- ----------------------
Media/Communications Partners II 2,041,457(2) 7.19%
Limited Partnership
75 State Street
Boston, MA 02109
National Christian Charitable 2,016,000(3) 7.11%
Foundation, Inc.
1275 Peachtree N.E.
Suite 700
Atlanta, GA 30309
Providence Media Partners, L.P. 1,426,638(4) 5.03%
900 Fleet Center
50 Kennedy Plaza
Providence, RI 02903
- ---------------
(1) Percentages are determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended.
(2) Represents 1,984,805 shares of Common Stock and warrants to purchase
56,652 shares of Common Stock. Media/Communications Partners II Limited
Partnership is an investment fund managed by M/CP II Limited Partnership,
its General Partner. Other entities managed by the principals of M/CP II
Limited Partnership beneficially own 75,077 shares of Common Stock,
including (i) 55,063 shares of Common Stock and warrants to purchase 1,568
shares of Common Stock held by Media/Communications Investors Limited
Partnership and (ii) 17,946 shares of Common Stock and warrants to
purchase 500 shares of Common Stock held by Chestnut Street Partners, Inc.
Media/Communication Partners II Limited Partnership disclaims beneficial
ownership of the shares of Common Stock beneficially owned by
Media/Communications Investors Limited Partnership and Chestnut Street
Partners, Inc.
(3) National Christian Charitable Foundation, Inc. has the option to require
the Company to repurchase any or all such shares at a price of $12.50 per
share on or before February 1, 1998.
(4) Includes (i) 1,423,638 shares of Common Stock held by Providence Media
Partners, L.P. and (ii) 3,000 shares of Common Stock held by Jonathan M.
Nelson. Mr. Nelson is a managing general partner of Providence Ventures,
L.P., which is the general partner of the general partner of Providence
Media Partners, L.P. Providence Media Partners, L.P. disclaims beneficial
ownership of shares beneficially owned by Mr. Nelson.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company was founded in November 1993 by BTC, executives and other
employees of BTC and the Company and a group of venture capital investors who
provided its initial $40.8 million of equity capital. As the Company's founding
shareholder, BTC received 1,162,800 founder's shares of the Company's Common
Stock and founder's warrants exercisable at $220.00 per share to purchase 81,600
shares of the Company's Series A-1 Convertible Preferred Stock (representing
1,632,000 shares of Common Stock on an as-converted basis at $11.00 per share).
BTC also invested $635,000 in the Company's first round financing to acquire
6,350 shares of the Company's Series A-1 Convertible Preferred Stock and
$1,000,065 in the Company's second round financing to acquire 6,061 shares of
Series A-2 Convertible Preferred Stock. On a fully diluted basis, these
securities represented a total of approximately 14.2% of the Company's capital
stock outstanding on January 2, 1996.
Pursuant to an Agreement and Plan of Merger dated December 19, 1995 between
BTC and the Company, BTC was merged into the Company on January 2, 1996,
securities of the Company held by BTC were cancelled and the former holders of
BTC's Common Stock, BTC's Preferred Stock, Convertible Notes, and options and
warrants to purchase BTC Common Stock received shares of the Company's Common
Stock, warrants to purchase shares of the Company's Series A-1 Convertible
Preferred Stock ("Preferred Stock Warrants") and in-the-money options and
warrants to purchase shares of the Company's Common Stock which, at January 2,
1996, represented an aggregate of approximately 18.5% of the fully diluted
shares of Common Stock of the Company, and out-of-the-money warrants to acquire
an additional 3.3% of the Company's fully diluted Common Stock on such date.
Certain of the executive officers, directors and stockholders of the Company
named in tables under "Principal Stockholders" above were also executive
officers, directors and/or stockholders of BTC prior to the merger and received,
as a result of the merger, an aggregate of 690,720 shares of the Company's
Common Stock, Preferred Stock Warrants exercisable on an as converted basis for
520,100 shares of the Company's Common Stock, 164,760 in-the-money Common Stock
options, 55,540 in-the-money Common Stock warrants and 117,320 out-of-the-money
Common Stock warrants, including approximately 149,280 shares of the Company's
Common Stock and Preferred Stock Warrants exercisable on an as converted basis
for approximately 115,400 shares of the Company's Common Stock in exchange for
an aggregate of 94,106 shares of BTC Common Stock acquired since January 1, 1994
for a total of $2,579,261. See "Management" and "Principal Stockholders."
The terms of the merger reflected an agreed value for the Company's Common
Stock of $12.50 per share (as adjusted for the 20 for 1 Common Stock split
effected concurrently with the merger). The transactional value was mutually
determined by the Company and BTC after consultation with their respective
financial advisors. At a valuation of $12.50 per share, BTC's holdings of the
Company's securities were valued at $22.6 million (accounting for approximately
60% of BTC's total value) and BTC's other assets, comprised primarily of the GLA
consulting business, were valued at approximately $13.8 million. At a price of
$12.50 per share, BTC's fully diluted equity was valued at approximately $36.4
million. In exchange for all of the outstanding securities of BTC, the Company
issued 2,167,360 shares of the Company's Common Stock (representing 756,340
incremental shares) valued at approximately $27.1 million, 81,597 Preferred
Stock Warrants valued at approximately $5.0 million, 375,860 in-the-money Common
Stock warrants and options, and 758,980 out-of-the-money Common Stock warrants.
Pursuant to the terms of a Management and Services Agreement dated November
10, 1993 between the Company and BTC (which was cancelled upon effectiveness of
the merger), BTC had assigned and made available to the Company the services of
the Company's Chief Executive Officer on an as-needed basis and the services of
BTC's Chief Executive Officer to act as Chairman of the Board of the Company,
and had provided, at BTC's principal executive offices, sufficient office space
and support services for the Company's principal executive offices, for a fee of
$250,000 per annum, plus the Company's proportionate share of rent, utilities
and telephone expenses. Pursuant to a Consulting Agreement, GLA provided network
engineering, design and other services to the Company. During the year ended
December 31, 1995, the Company paid BTC and GLA a total of $1,478,000 pursuant
to such arrangements.
Pursuant to the terms of a Management and Services Agreement dated as of
January 2, 1996 between the Company and Brooks Telecommunications International,
Inc. ("BTI", a company spun-off to the stockholders of BTC prior to its merger
with the Company), the Company has agreed to assign and make available to BTI,
on a part-time, as needed basis, the services of its Chairman to act as Chairman
and Chief Executive Officer of BTI and provides to BTI sufficient office space
and support services to conduct its business, for a fee of $150,000 per annum
plus BTI's proportionate share of rent, utilities, telephone and other
out-of-pocket expenses.
As a result of the City Signal Acquisition, Ronald H. Vander Pol received
2,240,000 shares of the Company's Common Stock. On May 1, 1996, Mr. Vander Pol
transferred all of such shares to the National Christian Charitable Foundation,
Inc., which currently owns 2,016,000 of such shares and has the option to
require the Company to repurchase any or all of such shares at a price of $12.50
per share on or before February 1, 1998.
DESCRIPTION OF THE NOTES
The Private Notes were and the Exchange Notes will be issued under an
Indenture, dated as of February 26, 1996 (the "Indenture") between the Company
and The Bank of New York, as trustee (the "Trustee"), a copy of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The statements under this caption relating to the Notes and the Indenture
are summaries and do not purport to be complete, and are subject to, and are
qualified in their entirety by reference to, all the provisions of the
Indenture, including the definitions of certain terms therein. The Indenture is
by its terms subject to and governed by the Trust Indenture Act of 1939, as
amended. Unless otherwise indicated, references under this caption to sections,
"[Section Symbol]" or articles are references to the Indenture. Where reference
is made to particular provisions of the Indenture or to defined terms not
otherwise defined herein, such provisions or defined terms are incorporated
herein by reference.
General
The Notes are senior unsecured obligations of the Company limited to
$425,000,000 aggregate principal amount and will mature on March 1, 2006. The
Private Notes were issued at a discount from their principal amount to generate
aggregate gross proceeds of approximately $250.0 million. The Notes accrete from
February 26, 1996 at a rate of 10-7/8% compounded semi-annually, to an aggregate
principal amount of $425,000,000 by March 1, 2001. No interest will be payable
on the Notes prior to September 1, 2001. The Notes will accrue cash interest at
the rate of 10-7/8% per annum from March 1, 2001 or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semi-annually on March 1 and September 1 of each year, commencing September 1,
2001, to the Person in whose name the Note (or any predecessor Note) is
registered at the close of business on the preceding February 15 or August 15,
as the case may be. Interest on the Notes will be computed on the basis of a
360-day year of twelve 30-day months. (Sections 301, 307 and 310).
Principal of and premium, if any, and interest on the Notes will be
payable, and the Notes may be presented for registration of transfer and
exchange, at the office or agency of the Company maintained for that purpose in
the Borough of Manhattan, the City of New York provided that at the option of
the Company, payment of interest on the Notes may be made by check mailed to the
address of the Person entitled thereto as it appears in the Note Register. Until
otherwise designated by the Company, such office or agency will be the corporate
trust office of the Trustee, as Paying Agent and Registrar. (Sections 301, 305
and 1002)
The Notes are issued only in fully registered form, without coupons, in
denominations of $250,000 and any integral multiples of $1,000 in excess
thereof. (Section 302) No service charge will be made for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith. (Section 305)
Ranking
The Notes are senior unsecured obligations of the Company, will rank pari
passu in right of payment with all existing and future senior unsecured
obligations of the Company at the parent level and will rank senior in right of
payment to all future subordinated obligations of the Company at the parent
level. Holders of secured obligations of the Company, however, will have claims
that are prior to the claims of the holders of the Notes with respect to the
assets securing such other obligations.
The Company's principal operations are conducted through its Subsidiaries
and, therefore, the Company is dependent upon the cash flow of its Subsidiaries
to meet its obligations. The Company's Subsidiaries have no obligation to
guarantee or otherwise pay amounts due under the Notes. Therefore, the Notes are
effectively subordinated to all indebtedness and other liabilities and
commitments (including trade payables) of the Company's Subsidiaries (including
obligations under the AT&T Credit Facility and the Bank Credit Facility). Any
right of the Company to receive assets of any of its Subsidiaries upon any
liquidation or reorganization of such Subsidiary (and the consequent right of
holders of the notes to participate in those assets) is effectively subordinated
to the claims of the Subsidiary's creditors, except to the extent that the
Company is itself recognized as a creditor of the Subsidiary. Any recognized
claims of the Company as a creditor of the Subsidiary would be subordinate to
any prior security interest held by any other creditor of the Subsidiary and
obligations of the Subsidiary that are senior to those owing to the Company.
As of March 31, 1996, (i) the total amount of outstanding liabilities of
the Company (parent only), including trade payables and the Private Notes, was
approximately $259.7 million, none of which represented secured obligations and
(ii) the total amount of outstanding liabilities of the Company's subsidiaries,
including trade payables, was approximately $60.7 million, of which
approximately $46.0 million represented secured obligations. See "Description of
Other Credit Facilities."
Form, Denomination and Book-Entry Procedures
Exchange Notes issued in exchange for the Private Notes currently
represented by one or more fully registered global notes will be represented by
one or more fully registered global notes (collectively, the "Global Note"), and
will be deposited upon issuance with the Depository and registered in the name
of the Depository or a nominee of the Depository (the "Global Note Registered
Owner"). Except as set forth below, the Global Note may be transferred, in whole
and not in part, only to another nominee of the Depository or to a successor of
the Depository or its nominee.
Exchange Notes issued in exchange for other Private Notes will be issued in
registered, certificated form without interest coupons.
The Depository has advised the Company that the Depository is a
limited-purpose trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the clearance
and settlement of transactions in those securities between Participants through
electronic book-entry changes in the accounts of its Participants. The
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants or Indirect
Participants may beneficially own securities held by or on behalf of the
Depository only through the Participants or the Indirect Participants. The
ownership interests and transfer of ownership interests of such persons held by
or on behalf of the Depository are recorded on the records of the Participants
and Indirect Participants.
The Depository has also advised the Company that pursuant to procedures
established by it, (i) upon deposit of the Global Note, the Depository will
credit the accounts of its Participants with portions of the principal amount of
the Global Note representing the Exchange Notes issued in exchange for the
Private Notes which each such Participant has instructed the Depository to
surrender for exchange and (ii) ownership of such interests in the Global Note
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by the Depository (with respect to the Participants)
or by the Participants and the Indirect Participants (with respect to other
owners of beneficial interests in the Global Note).
Except as described below, owners of interests in the Global Note will not
have Notes registered in their names, will not receive physical delivery of
Notes in definitive form and will not be considered the registered owners or
holders thereof under the Indenture for any purpose.
Under the terms of the Indenture, the Company and the Trustee will treat
the persons in whose names the Notes, including the Global Note, are registered
as the owners thereof for the purpose of receiving payments in respect of the
principal of and premium, if any, and interest on any Notes and for any and all
other purposes whatsoever. Payments on any Notes registered in the name of the
Global Note Registered Owner will be payable by the Trustee to the Global Note
Registered Owner in its capacity as the registered holder under the Indenture.
Consequently, neither the Company, the Trustee nor any agent of the Company or
the Trustee has or will have any responsibility or liability for (i) any aspect
of the Depository's records or the records of any Participant or Indirect
Participant relating to or payments made on account of beneficial ownership
interests in the Global Note, or for maintaining, supervising or reviewing any
of the Depository's records or records of any Participant or Indirect
Participant relating to the beneficial ownership interests in the Global Note or
(ii) any other matter relating to the actions and practices of the Depository or
any of its Participants or Indirect Participants. The Depository has advised the
Company that its current practice, upon receipt of any payment in respect of
securities such as the Notes (including principal and interest), is to credit
the accounts of the relevant Participants with the payment on the payment date,
in amounts proportionate to their respective holdings in principal amount of
beneficial interests in the relevant security as shown on the records of the
Depository unless the Depository has reason to believe it will not receive
payment on such payment date. Payments by the Participants and the Indirect
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practices and will be the responsibility of the
Participants or the Indirect Participants and will not be the responsibility of
the Depository, the Trustee or the Company. Neither the Company nor the Trustee
will be liable for any delay by the Depository or any of its Participants or
Indirect Participants in identifying the beneficial owners of the Notes, and the
Company and the Trustee may conclusively rely on and will be protected in
relying on instructions from the Global Note Registered Owner for all purposes.
The Global Note is exchangeable for definitive Notes in registered
certificated form if (i) the Depository (x) notifies the Company that it is
unwilling or unable to continue as Depository for the Global Note and fails to
appoint a successor Depository or (y) has ceased to be a clearing agency
registered under the Exchange Act, (ii) the Company, at its option, notifies the
Trustee in writing that it elects to cause the issuance of the Notes in
definitive registered certificated form, (iii) there shall have occurred and be
continuing an Event of Default or any event which after notice or lapse of time
or both would be an Event of Default with respect to the Notes or (iv) as
provided in the following paragraph. Such definitive Notes shall be registered
in the names of the owners of the beneficial interests in the Global Note as
provided by the Participants. Notes issued in definitive registered certificated
form will be in fully registered form, without coupons, in minimum denominations
of $250,000 and integral multiples of $1,000 above that amount. Upon issuance of
Notes in definitive registered certificated form, the Trustee is required to
register the Notes in the name of, and cause the Notes to be delivered to, the
person or persons (or the nominee(s) thereof) identified as beneficial owners as
the Depository shall direct.
A Note in definitive registered certificated form will be issued upon the
resale, pledge or other transfer of any Note or interest therein to any person
or entity that does not participate in the Depository.
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
Optional Redemption
The Notes will be subject to redemption, at the option of the Company, in
whole or in part, at any time on or after March 1, 2001 and prior to maturity,
upon not less than 30 nor more than 60 days' notice mailed to each holder of
Notes to be redeemed at such holder's address appearing in the Note Register, in
amounts of $1,000 or an integral multiple of $1,000, at the following Redemption
Prices (expressed as percentages of the principal amount) plus accreted interest
to but excluding the Redemption Date (subject to the right of holders of record
on the relevant Regular Record Date to receive interest due on an Interest
Payment Date that is on or prior to the Redemption Date), if redeemed during the
12-month period beginning March 1 of the years indicated:
Year Redemption Price
- ---------------------------------------------------------- --------------------
2001...................................................... 104.5%
2002...................................................... 103.0%
2003...................................................... 101.5%
2004 and thereafter....................................... 100.0%
(Sections 203, 1101, 1105 and 1107)
The Notes are redeemable prior to 2001 only in the event that the Company
receives net proceeds from the sale of its Common Stock in a Strategic Equity
Investment on or before March 1, 1999, in which case the Company may, at its
option, use all or a portion of any such net proceeds to redeem Notes in a
principal amount of up to an aggregate amount equal to 33-1/3% of the original
principal amount of the Notes, provided, however, that Notes in an amount equal
to at least 66-2/3% of the original principal amount of the Notes remain
outstanding after such redemption. Such redemption must occur on a Redemption
Date within 75 days of such sale and upon not less than 30 nor more than 60
days' notice mailed to each holder of Notes to be redeemed at such holder's
address appearing in the Note Register, in amounts of $1,000 or an integral
multiple of $1,000 at a redemption price of 110% of the Accreted Value of the
Notes to but excluding the Redemption Date.
If less than all the Notes are to be redeemed, the Trustee shall select, in
such manner as it shall deem fair and appropriate, the particular Notes to be
redeemed or any portion thereof that is an integral multiple of $1,000. (Section
1104)
The Notes will not have the benefit of any sinking fund.
Covenants
The Indenture contains, among others, the following covenants:
Limitation on Consolidated Debt
The Company may not, and may not permit any Subsidiary of the Company to,
Incur any Debt unless either (a) the ratio of (i) the aggregate consolidated
principal amount of Debt of the Company outstanding as of the most recent
available quarterly or annual balance sheet, after giving pro forma effect to
the Incurrence of such Debt and any other Debt Incurred since such balance sheet
date and the receipt and application of the proceeds thereof, to (ii)
Consolidated Cash Flow Available for Fixed Charges for the four full fiscal
quarters next preceding the Incurrence of such Debt for which consoli- dated
financial statements are available, determined on a pro forma basis as if any
such Debt had been Incurred and the proceeds thereof had been applied at the
beginning of such four fiscal quarters, would be less than 5.5 to 1.0 for such
four-quarter periods ending on or prior to December 31, 1999 and 5.0 to 1.0 for
such periods ending thereafter, or (b) the Company's Consolidated Capital Ratio
as of the most recent available quarterly or annual balance sheet, after giving
pro forma effect to the Incurrence of such Debt and any other Debt Incurred
since such balance sheet date and the receipt and application of the proceeds
thereof, is less than 2.0 to 1.0.
Notwithstanding the foregoing limitation, the Company and any Subsidiary
may Incur the following:
(i) Debt under Secured Credit Facilities in an aggregate principal amount
at any one time not to exceed $160 million, and any renewal, extension,
refinancing or refunding thereof in an amount which, together with any principal
amount remaining outstanding or available under all Secured Credit Facilities,
does not exceed the aggregate principal amount outstanding or available under
all Secured Credit Facilities immediately prior to such renewal, extension,
refinancing or refunding;
(ii) Purchase Money Debt, which is incurred for the construction,
acquisition and improvement of Telecommunications Assets, provided that the
amount of such Purchase Money Debt does not exceed 80% of the cost of the
construction, acquisition or improvement of the applicable Telecommunications
Assets;
(iii) Debt owed by the Company to any Wholly-Owned Subsidiary of the
Company or Debt owed by a Subsidiary of the Company to the Company or a
Wholly-Owned Subsidiary of the Company; provided, however, that upon either (x)
the transfer or other disposition by such Wholly-Owned Subsidiary or the Company
of any Debt so permitted to a Person other than the Company or another
Wholly-Owned Subsidiary of the Company or (y) the issuance (other than
directors' qualifying shares), sale, lease, transfer or other disposition of
shares of Capital Stock (including by consolidation or merger) of such
Wholly-Owned Subsidiary to a Person other than the Company or another such
Wholly- Owned Subsidiary, the provisions of this clause (iii) shall no longer be
applicable to such Debt and such Debt shall be deemed to have been Incurred at
the time of such transfer or other disposition;
(iv) Debt Incurred to renew, extend, refinance or refund (each, a
"refinancing") Debt outstanding at the date of the Indenture or Incurred
pursuant to clause (ii) of this paragraph or the Notes in an aggregate principal
amount not to exceed the aggregate principal amount of and accreted interest on
the Debt so refinanced plus the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of the Debt so refinanced
or the amount of any premium reasonably determined by the Company as necessary
to accomplish such refinancing by means of a tender offer or privately
negotiated repurchase, plus the expenses of the Company incurred in connection
with such refinancing; provided, however, that Debt the proceeds of which are
used to refinance the Notes or Debt which is pari passu to the Notes or Debt
which is subordinate in right of payment to the Notes shall only be permitted if
(A) in the case of any refinancing of the Notes or Debt which is pari passu to
the Notes, the refinancing Debt is made pari passu to the Notes or constitutes
Subordinated Debt, and, in the case of any refinancing of Subordinated Debt, the
refinancing Debt constitutes Subordinated Debt and (B) in any case, the
refinancing Debt by its terms, or by the terms of any agreement or instrument
pursuant to which such Debt is issued, (x) does not provide for payments of
principal of such Debt at stated maturity or by way of a sinking fund applicable
thereto or by way of any mandatory redemption, defeasance, retirement or
repurchase thereof by the Company (including any redemption, retirement or
repurchase which is contingent upon events or circumstances, but excluding any
retirement required by virtue of the acceleration of any payment with respect to
such Debt upon any event of default thereunder), in each case prior to the time
the same are required by the terms of the Debt being refinanced and (y) does not
permit redemption or other retirement (including pursuant to an offer to
purchase made by the Company) of such Debt at the option of the holder thereof
prior to the time the same are required by the terms of the Debt being
refinanced, other than a redemption or other retirement at the option of the
holder of such Debt (including pursuant to an offer to purchase made by the
Company) which is conditioned upon a change of control pursuant to provisions
substantially similar to those described under "Change of Control";
(v) Debt consisting of Permitted Interest Rate and Currency Protection
Agreements; and
(vi) Debt not otherwise permitted to be Incurred pursuant to clauses (i)
through (v) above, which, together with any other outstanding Debt Incurred
pursuant to this clause (vi), has an aggregate principal amount not in excess of
$10 million at any time outstanding. (Section 1008)
Limitation on Debt and Preferred Stock of Subsidiaries
The Company may not permit any Subsidiary of the Company that is not a
Guarantor to Incur or suffer to exist any Debt or issue any Preferred Stock
except:
(i) Debt or Preferred Stock outstanding on the date of the Indenture after
giving effect to the application of the proceeds of the Notes;
(ii) Debt Incurred or Preferred Stock issued to and held by the Company or
a Wholly-Owned Subsidiary of the Company (provided that such Debt or Preferred
Stock is at all times held by the Company or a Wholly-Owned Subsidiary of the
Company);
(iii) Debt Incurred or Preferred Stock issued by a Person prior to the time
(A) such Person became a Subsidiary of the Company, (B) such Person merges into
or consolidates with a Subsidiary of the Company or (C) another Subsidiary of
the Company merges into or consolidates with such Person (in a transaction in
which such Person becomes a Subsidiary of the Company), which Debt or Preferred
Stock was not Incurred or issued in anticipation of such transaction and was
outstanding prior to such transaction;
(iv) Debt consisting of Permitted Interest Rate and Currency Protection
Agreements;
(v) Debt or Preferred Stock of a Joint Venture;
(vi) Debt under a Secured Credit Facility which is permitted to be
outstanding under clause (i) of the Limitation on Consolidated Debt; and
(vii) Debt or Preferred Stock which is exchanged for, or the proceeds of
which are used to refinance, refund or redeem, any Debt or Preferred Stock
permitted to be outstanding pursuant to clauses (i) and (iii) hereof (or any
extension or renewal thereof) (for purposes hereof, a "refinancing"), in an
aggregate principal amount, in the case of Debt, or with an aggregate
liquidation preference in the case of Preferred Stock, not to exceed the
aggregate principal amount of the Debt so refinanced or the aggregate
liquidation preference of the Preferred Stock so refinanced, plus the amount of
any premium required to be paid in connection with such refinancing pursuant to
the terms of the Debt or Preferred Stock so refinanced or the amount of any
premium reasonably determined by the Company as necessary to accomplish such
refinancing by means of a tender offer or privately negotiated repurchase, plus
the amount of expenses of the Company and the applicable Subsidiary Incurred in
connection therewith and provided the Debt or Preferred Stock Incurred or issued
upon such refinancing is by its terms, or by the terms of any agreement or
instrument pursuant to which such Debt or Preferred Stock is Incurred or issued,
(x) does not provide for payments of principal or liquidation value at the
stated maturity of such Debt or Preferred Stock or by way of a sinking fund
applicable to such Debt or Preferred Stock or by way of any mandatory
redemption, defeasance, retirement or repurchase of such Debt or Preferred Stock
by the Company or any Subsidiary of the Company (including any redemption,
retirement or repurchase which is contingent upon events or circumstances, but
excluding any retirement required by virtue of acceleration of such Debt upon an
event of default thereunder), in each case prior to the time the same are
required by the terms of the Debt or Preferred Stock being refinanced and (y)
does not permit redemption or other retirement (including pursuant to an offer
to purchase made by the Company or a Subsidiary of the Company) of such Debt or
Preferred Stock at the option of the holder thereof prior to the stated maturity
of the Debt or Preferred Stock being refinanced, other than a redemption or
other retirement at the option of the holder of such Debt or Preferred Stock
(including pursuant to an offer to purchase made by the Company or a Subsidiary
of the Company) which is conditioned upon the change of control of the Company
pursuant to provisions substantially similar to those contained in the Indenture
described under "Change of Control" and provided, further, that in the case of
any exchange or redemption of Preferred Stock of a Subsidiary of the Company,
such Preferred Stock may only be exchanged for or redeemed with Preferred Stock
of such Subsidiary. (Section 1009)
Limitation on Restricted Payments
The Company (i) may not, directly or indirectly, declare or pay any
dividend, or make any distribution, in respect of its Capital Stock or to the
holders thereof, excluding any dividends or distributions payable solely in
shares of its Capital Stock (other than Disqualified Stock) or in options,
warrants or other rights to acquire its Capital Stock (other than Disqualified
Stock), (ii) may not, and may not permit any Subsidiary to, purchase, redeem, or
otherwise retire or acquire for value (a) any Capital Stock of the Company or
any Related Person of the Company (other than a permitted refinancing) or (b)
any options, warrants or rights to purchase or acquire shares of Capital Stock
of the Company or any Related Person of the Company or any securities
convertible or exchangeable into shares of Capital Stock of the Company or any
Related Person of the Company (other than a permitted refinancing), (iii) may
not make, or permit any Subsidiary to make, any Investment in, or payment on a
Guarantee of any obligation of, any Affiliate or any Related Person, other than
the Company or an 80% or more owned Subsidiary of the Company which is an 80% or
more owned Subsidiary prior to such Investment, and which Subsidiary (other than
a wholly-owned Subsidiary) was not established or formed in anticipation or in
furtherance thereof, except for Permitted Investments, and (iv) may not, and may
not permit any Subsidiary to, redeem, defease, repurchase, retire or otherwise
acquire or retire for value, prior to any scheduled maturity, repayment or
sinking fund payment, Debt of the Company which is subordinate in right of
payment to the Notes (each of clauses (i) through (iv) being a "Restricted
Payment") if: (1) an Event of Default, or an event that with the passing of time
or the giving of notice, or both, would constitute an Event of Default, shall
have occurred and be continuing, or (2) upon giving effect to such Restricted
Payment, the Company could not Incur at least $1.00 of additional Debt pursuant
to the terms of the Indenture described in the first paragraph of "Limitation on
Consolidated Debt" above, or (3) upon giving effect to such Restricted Payment,
the aggregate of all Restricted Payments from the date of the Indenture exceeds
the sum of: (a) 50% of cumulative Consolidated Net Income (or, in the case
Consolidated Net Income shall be negative, less 100% of such deficit) since the
end of the last full fiscal quarter prior to the date of the Indenture through
the last day of the last full fiscal quarter ending immediately preceding the
date of such Restricted Payment; plus (b) $5.0 million; provided, however, that
the Company or a Subsidiary of the Company may make any Restricted Payment with
the aggregate net proceeds received after the date of the Indenture, including
the fair value of property other than cash (determined in good faith by the
Board of Directors as evidenced by a resolution of the Board of Directors filed
with the Trustee), as capital contributions to the Company or from the issuance
(other than to a Subsidiary) of Capital Stock (other than Disqualified Stock) of
the Company and warrants, rights or options on Capital Stock (other than
Disqualified Stock) of the Company and the principal amount of Debt of the
Company that has been converted into Capital Stock (other than Disqualified
Stock and other than by a Subsidiary) of the Company after the date of the
Indenture. Notwithstanding the foregoing, (i) the Company may pay any dividend
on Capital Stock of any class of the Company within 60 days after the
declaration thereof if, on the date when the dividend was declared, the Company
could have paid such dividend in accordance with the foregoing provisions, (ii)
the Company may repurchase any shares of its Common Stock or options to acquire
its Common Stock from Persons who were formerly directors, officers or employees
of the Company or any of its Subsidiaries, provided that the aggregate amount of
all such repurchases made pursuant to this clause (ii) shall not exceed $2.0
million, plus the aggregate cash proceeds received by the Company since the date
of the Indenture from issuances of its Common Stock or options to acquire its
Common Stock to directors, officers and employees of the Company or any of its
Subsidiaries, (iii) the Company and Its Subsidiaries may refinance any Debt
otherwise permitted by clause (iv) of the second paragraph under "Limitation on
Consolidated Debt" above, and (iv) the Company and its Subsidiaries may retire
or repurchase any Capital Stock of the Company or of any Subsidiary of the
Company in exchange for, or out of the proceeds of the substantially concurrent
sale (other than to a Subsidiary of the Company) of, Capital Stock (other than
Disqualified Stock) of the Company. (Section 1010)
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries
The Company may not, and may not permit any Subsidiary to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction on the ability of any Subsidiary of the
Company (i) to pay dividends (in cash or otherwise) or make any other
distributions in respect of Its Capital Stock owned by the Company or any other
Subsidiary of the Company or pay any Debt or other obligation owed to the
Company or any other Subsidiary; (ii) to make loans or advances to the Company
or any other Subsidiary; or (iii) to transfer any of its property or assets to
the Company or any other Subsidiary. Notwithstanding the foregoing, the Company
may, and may permit any Subsidiary to, suffer to exist any such encumbrance or
restriction (a) pursuant to any agreement in effect on the date of the
Indenture; lb) pursuant to an agreement relating to any Acquired Debt, which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person so acquired; (c) pursuant to an
agreement effecting a renewal, refunding or extension of Debt Incurred pursuant
to an agreement referred to in clause (a) or (b) above, provided, however, that
the provisions contained in such renewal, refunding or extension agreement
relating to such encumbrance or restriction are no more restrictive in any
material respect than the provisions contained in the agreement the subject
thereof, (d) in the case of clause (iii) above, restrictions contained in any
security agreement (including a Capital Lease Obligation) securing Debt of the
Company or a Subsidiary otherwise permitted under the Indenture, but only to the
extent such restrictions restrict the transfer of the property subject to such
security agreement; (e) in the case of clause (iii) above, customary
nonassignment provisions entered into in the ordinary course of business in
leases and other agreements; (f) any restriction with respect to a Subsidiary of
the Company imposed pursuant to an agreement which has been entered into for the
sale or disposition of all or substantially all of the Capital Stock or assets
of such Subsidiary, provided that the consummation of such transaction would not
result in an Event of Default or an event that, with the passing of time or the
giving of notice or both, would constitute an Event of Default, that such
restriction terminates if such transaction is not consummated and that the
consummation or aban- donment of such transaction occurs within one year of the
date such agreement was entered into; (g) pursuant to applicable law; and (h)
pursuant to the Indenture and the Notes. (Section 1011)
Limitation on Liens
The Company may not, and may not permit any Subsidiary of the Company to,
Incur or suffer to exist any Lien on or with respect to any property or assets
now owned or hereafter acquired to secure any Debt without making, or causing
such Subsidiary to make, effective provision for securing the Notes (x) equally
and ratably with such Debt as to such property for so long as such Debt will be
so secured or (y) in the event such Debt is Debt of the Company which is
subordinate in right of payment to the Notes, prior to such Debt as to such
property for so long as such Debt will be so secured.
The foregoing restrictions shall not apply to: (i) Liens existing on the
date of the Indenture and securing Debt outstanding on the date of the Indenture
or Incurred pursuant to any Secured Credit Facility; (ii) Liens securing Debt in
an amount which, together with the aggregate amount of Debt then outstanding or
available under all Secured Credit Facilities (or under refinancings or
amendments of such Secured Credit Facilities), does not exceed 1.6 times the
Company's Consolidated Cash Flow Available for Fixed Charges for the four full
fiscal quarters preceding the Incurrence of such Lien for which consolidated
financial statements are available, determined on a pro forma basis as if such
Debt had been Incurred and the proceeds thereof had been applied at the
beginning of such four fiscal quarters; (iii) Liens in favor of the Company or
any Wholly-Owned Subsidiary of the Company; (iv) Liens on real or personal
property of the Company or a Subsidiary of the Company acquired, constructed or
constituting improvements made after the date of original issuance of the Notes
to secure Purchase Money Debt which is Incurred for the construction,
acquisition and improvement of Telecommunications Assets and is otherwise
permitted under the Indenture, provided, however, that (a) the principal amount
of any Debt secured by such a Lien does not exceed 100% of such purchase price
or cost of construction or improvement of the property subject to such Liens,
(b) such Lien attaches to such property prior to, at the time of or within 180
days after the acquisition, completion of construction or commencement of
operation of such property and (c) such Lien does not extend to or cover any
property other than the specific item of property (or portion thereof) acquired,
constructed or constituting the improvements made with the proceeds of such
Purchase Money Debt; (v) Liens to secure Acquired Debt, provided, however, that
(a) such Lien attaches to the acquired asset prior to the time of the
acquisition of such asset and (b) such Lien does not extend to or cover any
other asset; (vi) Liens to secure Debt Incurred to extend, renew, refinance or
refund (or successive extensions, renewals, refinancings or refundings), in
whole or in part, Debt secured by any Lien referred to in the foregoing clauses
(i), (ii), (iv) and (v) so long as such Lien does not extend to any other
property and the principal amount of Debt so secured is not increased except as
otherwise permitted under clause (iv) of "-Limitation on Consolidated Debt;"
(vii) Liens not otherwise permitted by the foregoing clauses (i) through (vi) in
an amount not to exceed 5% of the Company's Consolidated Tangible Assets; and
(viii) Permitted Liens. (Section 1015)
Limitation on Sale and Leaseback Transactions
The Company may not, and may not permit any Subsidiary of the Company to,
enter into any Sale and Leaseback Transaction unless (i) the Company or such
Subsidiary would be entitled to Incur a Lien to secure Debt by reason of the
provisions described under "Limitation on Liens" above, equal in amount to the
Attributable Value of the Sale and Leaseback Transaction without equally and
ratably securing the Notes or (ii) the Sale and Leaseback Transaction is treated
as an Asset Disposition and all of the conditions of the Indenture described
under "Limitation on Asset Dispositions" (including the provisions concerning
the application of Net Available Proceeds) are satisfied with respect to such
Sale and Leaseback Transaction, treating all of the consideration received in
such Sale and Leaseback Transaction as Net Available Proceeds for purposes of
such covenant. (Section 1016)
Limitation on Asset Dispositions
The Company may not, and may not permit any Subsidiary of the Company to,
make any Asset Disposition in one or more related transactions occurring within
any 12-month period unless: (i) the Company or the Subsidiary, as the case may
be, receives consideration for such disposition at least equal to the fair
market value for the assets sold or disposed of as determined by the Board of
Directors in good faith and evidenced by a resolution of the Board of Directors
filed with the Trustee; (ii) at least 75% of the consideration for such
disposition consists of (1) cash or readily marketable cash equivalents or the
assumption of Debt of the Company (other than Debt that is subordinated to the
Notes) or of the Subsidiary and release from all liability on the Debt assumed,
(2) Telecommunications Assets, or (3) shares of publicly-traded Voting Stock of
any Person engaged in the Telecommunications Business in the United States; and
(iii) all Net Available Proceeds, less any amounts invested within 360 days of
such disposition in new Telecommunications Assets, are applied within 360 days
of such disposition (1) first, to the permanent repayment or reduction of Debt
then outstanding under any Secured Credit Facility, to the extent such
agreements would require such application or prohibit payments pursuant to
clause (2) following, (2) second, to the extent of remaining Net Available
Proceeds, to make an Offer to Purchase outstanding Notes at 100% of their
Accreted Value (if such Offer to Purchase is made on or before March 1, 2001) or
100% of their principal amount plus accreted and unpaid interest thereon and
premium, if any, to the date of purchase (if such Offer to Purchase is made
thereafter) and, to the extent required by the terms thereof, any other Debt of
the Company that is pari passu with the Notes at a price no greater than 100% of
the principal amount thereof plus accreted interest to the date of purchase (or
100% of the Accreted Value in the case of original issue discount Debt), (3)
third, to the extent of any remaining Net Available Proceeds following the
completion of the Offer to Purchase, to the repayment of other Debt of the
Company or Debt of a Subsidiary of the Company, to the extent permitted under
the terms thereof and (4) fourth, to the extent of any remaining Net Available
Proceeds, to any other use as determined by the Company which is not otherwise
prohibited by the Indenture. (Section 1013)
Limitation on Issuances and Sales of Capital Stock of
Wholly-Owned Subsidiaries
The Company may not, and may not permit any Subsidiary of the Company to,
issue, transfer, convey, sell or otherwise dispose of any shares of Capital
Stock of a Subsidiary of the Company or securities convertible or exchangeable
into, or options, warrants, rights or any other interest with re- spect to,
Capital Stock of a Subsidiary of the Company to any Person other than the
Company or a Wholly-Owned Subsidiary of the Company except (i) a sale of all of
the Capital Stock of such Subsid- iary owned by the Company and any Subsidiary
of the Company that complies with the provisions described under "Limitation on
Asset Dispositions" above to the extent such provisions apply, (ii) in a
transaction that results in such Subsidiary becoming a Joint Venture, provided
such transaction com- plies with the provisions described under "Limitation on
Asset Dispositions" above to the extent such provisions apply (iii) if required,
the issuance, transfer, conveyance, sale or other disposition of direc- tors'
qualifying shares, and (iv) Disqualified Stock issued in exchange for,or upon
conversion of, or the proceeds of the issuance of which are used to redeem,
refinance, replace or refund shares of Disqual- ified Stock of such Subsidiary,
provided that the amounts of the redemption obligations of such Dis- qualified
Stock shall not exceed the amounts of the redemption obligations of, and such
Disqualified Stock shall have redemption obligations no earlier than those
required by, the Disqualified Stock being exchanged, converted, redeemed,
refinanced, replaced or refunded. (Section 1014)
Transactions with Affiliates and Related Persons
The Company may not, and may not permit any Subsidiary of the Company to,
enter into any transaction (or series of related transactions) with an Affiliate
or Related Person of the Company (other than the Company or a Wholly-Owned
Subsidiary of the Company), including any Investment, but excluding transactions
pursuant to employee compensation arrangements approved by the Board of
Directors of the Company, either directly or indirectly, unless such transaction
is on terms no less favorable to the Company or such Subsidiary than those that
could be obtained in a comparable arm's- length transaction with an entity that
is not an Affiliate or Related Person and is in the best interests of such
Company or such Subsidiary. For any transaction that involves in excess of $1.0
million but less than or equal to $5.0 million, the Chief Executive Officer of
the Company shall determine that the transaction satisfies the above criteria
and shall evidence such a determination by a certificate filed with the Trustee.
For any transaction that involves in excess of $5.0 million, a majority of the
disinterested members of the Board of Directors shall determine that the
transaction satisfies the above criteria and shall evidence such a determination
by a Board Resolution filed with the Trustee. (Section 1012)
Change of Control
Within 30 days of the occurrence of a Change of Control, the Company will
be required to make an Offer to Purchase all outstanding Notes at a purchase
price equal to 101% of their Accreted Value (if such Offer to Purchase is made
on or prior to March 1, 2001) or 101% of their principal amount plus accreted
interest to the date of purchase (if such Offer to Purchase is made thereafter).
A "Change of Control" will be deemed to have occurred at such time as either (a)
any Person or any Persons acting together that would constitute a "group" (a
"Group") for purposes of Section 13(d) of the Securities Exchange Act of 1934,
or any successor provision thereto, together with any Affiliates or Related
Persons thereof, shall beneficially own (within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934, or any successor provision thereto) at
least 50% of the aggregate voting power of all classes of Voting Stock of the
Company; or (b) any Person or Group, together with any Affiliates or Related
Persons thereof, shall succeed in having a sufficient number of its nominees
elected to the Board of Directors of the Company such that such nominees, when
added to any existing director or directors remaining on the Board of Directors
of the Company after such election who was a nominee of or is an Affiliate or
Related Person of such Person or Group (excluding in each case any nominee that
is a Continuing Director), will constitute a majority of the Board of Directors
of the Company. (Section 1017)
In the event that the Company makes an Offer to Purchase the Notes, the
Company intends to comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Securities Exchange Act of 1934.
Reports
The Company has agreed that, for so long as any Notes remain outstanding,
the Company will file with the Trustee within 15 days after it files them with
the Commission copies of the annual and quarterly reports and the information,
documents, and other reports that the Company is required to file with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC
Reports"). In the event the Company shall cease to be required to file SEC
Reports pursuant to the Exchange Act, the Company will nevertheless continue to
file such reports with the Commission (unless the Commission will not accept
such a filing) and the Trustee. The Company will furnish copies of the SEC
Reports to the holders of Notes at the time the Company is required to file the
same with the Trustee and will make such information available to investors who
request it in writing. (Section 1018)
Mergers, Consolidations and Certain Sales of Assets
The Company may not, in a single transaction or a series of related
transactions, (i) consolidate with or merge into any other Person or permit any
other Person to consolidate with or merge into the Company, or (ii) directly or
indirectly, transfer, sell, lease or otherwise dispose of all or substantially
all of its assets to any other Person, unless: (1) in a transaction in which the
Company does not survive or in which the Company sells, leases or otherwise
disposes of all or substantially all of its assets to any other Person, the
successor entity to the Company is organized under the laws of the United States
of America or any State thereof or the District of Columbia and shall expressly
assume, by a supplemental indenture executed and delivered to the Trustee in
form satisfactory to the Trustee, all of the Company's obligations under the
Indenture; (2) immediately before and after giving effect to such transaction
and treating any Debt which becomes an obligation of the Company or a Subsidiary
as a result of such transaction as having been Incurred by the Company or such
Subsidiary at the time of the transaction, no Event of Default or event that
with the passing of time or the giving of notice, or both, would constitute an
Event of Default shall have occurred and be continuing; (3) immediately after
giving effect to such transaction, the Consolidated Net Worth of the Company (or
other successor entity to the Company) is equal to or greater than that of the
Company immediately prior to the transaction; (4) immediately after giving
effect to such transaction and treating any Debt which becomes an obligation of
the Company or a Subsidiary as a result of such transaction as having been
Incurred by the Company or such Subsidiary at the time of the transaction, the
Company (including any successor entity to the Company) could Incur at least
$1.00 of additional Debt pursuant to the provisions of the Indenture described
in the first paragraph under "Limitation on Consolidated Debt" above; (5) if, as
a result of any such transaction, property or assets of the Company would become
subject to a Lien prohibited by the provisions of the Indenture described under
"Limitation on Liens" above, the Company or the successor entity to the Company
shall have secured the Notes as required by said covenant; and (6) certain other
conditions are met. (Section 801)
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided. (Section 101)
"Accreted Value" means, as of any date prior to March 1, 2001, an amount
per $1,000 principal amount at maturity of Notes that is equal to the sum of (a)
the offering price ($588.04 per $1,000 principal amount at maturity of Notes) of
such Notes and (b) the portion of the excess of the principal amount of such
Notes over such offering price which shall have been amortized through such
date, such amount to be so amortized on a daily basis and compounded
semi-annually on each March 1 and September 1 at the rate of 10-7/8% per annum
from the date of original issue of the Notes through the date of determination
computed on the basis of a 360-day year of twelve 30-day months, and as of any
date on or after March 1, 2001, the principal amount of each Note.
"Acquired Debt" means, with respect to any specified Person, (i) Debt of
any other Person existing at the time such Person merges with or into or
consolidates with or becomes a Subsidiary of such specified Person and (ii) Debt
secured by a Lien encumbering any asset acquired by such specified Person, which
Debt was not Incurred in anticipation of, and was outstanding prior to, such
merger, consolidation or acquisition.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Disposition" by any Person means any transfer, conveyance, sale,
lease or other disposition by such Person or any of its Subsidiaries (including
a consolidation or merger or other sale of any such Subsidiary with, into or to
another Person in a transaction in which such Subsidiary ceases to be a
Subsidiary of the specified Person, but excluding a disposition by a Subsidiary
of such Person to such Person or a Wholly-Owned Subsidiary of such Person or by
such Person to a Wholly-Owned Subsidiary of such Person) of (i) shares of
Capital Stock or other ownership interests of a Subsidiary of such Person (other
than as permitted by the provisions of the Indenture described above under the
caption "Limitation on Debt and Preferred Stock of Subsidiaries"), (ii)
substantially all of the assets of such Person or any of its Subsidiaries
representing a division or line of business (other than as part of a Permitted
Investment) or (iii) other assets or rights of such Person or any of its
Subsidiaries outside of the ordinary course of business, provided in each case
that the aggregate consideration for such transfer, conveyance, sale, lease or
other disposition is equal to $2.0 million or more in any 12-month period.
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable other than a Capital Lease Obligation, and at any
date as of which the amount thereof is to be determined, the total net amount of
rent required to be paid by such Person under such lease during the initial term
thereof as determined in accordance with generally accepted accounting
principles, discounted from the last date of such initial term to the date of
determination at a rate per annum equal to the discount rate which would be
applicable to a Capital Lease Obligation with like term in accordance with
generally accepted accounting principles. The net amount of rent required to be
paid under any such lease for any such period shall be the aggregate amount of
rent payable by the lessee with respect to such period after excluding amounts
required to be paid on account of insurance, taxes, assessments, utility,
operating and labor costs and similar charges. In the case of any lease which is
terminable by the lessee upon the payment of penalty, such net amount shall also
include the lesser of the amount of such penalty (in which case no rent shall be
considered as required to be paid under such lease subsequent to the first date
upon which it may be so terminated) or the rent which would otherwise be
required to be paid if such lease is not so terminated. "Attributable Value"
means, as to a Capital Lease Obligation, the principal amount thereof.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted account-
ing principles (a "Capital Lease"). The stated maturity of such obligation shall
be the date of the last payment of rent or any other amount due under such lease
prior to the first date upon which such lease may be terminated by the lessee
without payment of a penalty. The principal amount of such obligation shall be
the capitalized amount thereof that would appear on the face of a balance sheet
of such Person in accordance with generally accepted accounting principles.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person;
provided that for purposes of a Public Equity Offering or a Strategic Equity
Investment, Common Stock shall include Capital Stock (other than Disqualified
Stock) that is convertible into or ex- changeable for shares of the Company's
Common Stock.
"Consolidated Capital Ratio" of any Person as of any date means the ratio
of (i) the aggregate consolidated principal amount of Debt of such Person then
outstanding to (ii) the aggregate consoli- dated paid-in capital of such Person
as of such date.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of the Company and its Subsidiaries for such period
increased by the sum of (i) Consolidated Interest Expense of the Company and its
Subsidiaries for such period, plus (ii) Consolidated Income Tax Expense of the
Company and its Subsidiaries for such period, plus (iii) the consolidated
depreciation and amortization expense included in the income statement of the
Company and its Subsidiaries for such period, plus (iv) any non-cash expense
related to the issuance to employees of the Company or any Subsidiary of the
Company of options to purchase Capital Stock of the Company or such Subsidiary,
plus (v) any charge related to any premium or penalty paid in connection with
redeeming or retiring any Indebtedness prior to its stated maturity; provided,
however, that there shall be excluded therefrom the Consolidated Cash Flow
Available for Fixed Charges (if positive) of any Subsidiary of the Company
(calculated separately for such Subsidiary in the same manner as provided above
for the Company) that is subject to a restriction which prevents the payment of
dividends or the making of distributions to the Company or another Subsidiary of
the Company to the extent of such restriction.
"Consolidated Income Tax Expense" for any period means the aggregate
amounts of the provi- sions for income taxes of the Company and its Subsidiaries
for such period calculated on a consolidated basis in accordance with generally
accepted accounting principles.
"Consolidated Interest Expense" means for any period the interest expense
included in a consol- idated income statement (excluding interest income) of the
Company and its Subsidiaries for such period in accordance with generally
accepted accounting principles, including without limitation or du- plication
(or, to the extent not so included, with the addition of), (i) the amortization
of Debt discounts; (ii) any payments or fees with respect to letters of credit,
bankers' acceptances or similar facilities; (iii) fees with respect to interest
rate swap or similar agreements or foreign currency hedge, exchange or similar
agreements; (iv) Preferred Stock dividends of the Company and its Subsidiaries
(other than dividends paid in shares of Preferred Stock that is not Disqualified
Stock) declared and paid or payable; (v) accrued Disqualified Stock dividends of
the Company and its Subsidiaries, whether or not declared or paid; (vi) interest
on Debt guaranteed by the Company and its Subsidiaries; and (vii) the portion of
any Capital Lease Obligation paid during such period that is allocable to
interest expense.
"Consolidated Net Income" for any period means the net income (or loss) of
the Company and its Subsidiaries for such period determined on a consolidated
basis in accordance with generally accepted accounting principles; provided that
there shall be excluded therefrom (a) the net income (or loss) of any Person
acquired by the Company or a Subsidiary of the Company in a pooling-of-interests
transaction for any period prior to the date of such transaction, (b) the net
income (or loss) of any Person that is not a Subsidiary of the Company except to
the extent of the amount of dividends or other distributions actually paid to
the Company or a Subsidiary of the Company by such Person during such period,
(c) gains or losses on Asset Dispositions by the Company or its Subsidiaries,
(d) all extraordinary gains and extraordinary losses, determined in accordance
with generally accepted accounting principles, (e) the cumulative effect of
changes in accounting principles, (f) non-cash gains or losses resulting from
fluctuations in currency exchange rates and (g) the tax effect of any of the
items described in clauses (a) through (f) above; provided, further, that for
purposes of any determination pursuant to the provisions described under
"Limitation on Restricted Payments," there shall further be excluded therefrom
the net income (but not net loss) of any Subsidiary of the Company that is
subject to a restriction which prevents the payment of dividends or the making
of distributions to the Company or another Subsidiary of the Company to the
extent of such restriction.
"Consolidated Net Worth" of any Person means the stockholders' equity of
such Person, determined on a consolidated basis in accordance with generally
accepted accounting principles, less amounts attributable to Disqualified Stock
of such Person; provided that, with respect to the Company, no effect shall be
given to adjustments following the date of the Indenture to the accounting books
and records of the Company in accordance with Accounting Principles Board
Opinions Nos. 16 and 17 (or successor opinions thereto) or otherwise resulting
from the acquisition of control of the Company by another Person.
"Consolidated Tangible Assets" of any Person means the total amount of
assets (less applicable reserves and other properly deductible items) which
under generally accepted accounting principles would be included on a
consolidated balance sheet of such Person and its Subsidiaries after deducting
therefrom all goodwill, trade names, trademarks, patents, unamortized debt
discount and expense and other like intangibles, which in each case under
generally accepted accounting principles would be included on such consolidated
balance sheet.
"Continuing Director" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors of the Company on the date of the Indenture, or (ii) was nominated for
election or elected to the Board of Directors of the Company with the
affirmative vote of a majority of the Continuing Directors who were members of
the Board of Directors of the Company at the time of such nomination or
election.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations Incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(including securities repurchase agreements but excluding trade accounts payable
or accrued liabilities arising in the ordinary course of business which are not
overdue or which are being contested in good faith), (v) every Capital Lease
Obligation of such Person, (vi) all Receivables Sales of such Person, together
with any obligation of such Person to pay any discount, interest, fees,
indemnities, penalties, recourse, expenses or other amounts in connection
therewith, (vii) all obligations to redeem Disqualified Stock issued by such
Person, (viii) every obligation under Interest Rate and Currency Protection
Agreements of such Person and (ix) every obligation of the type referred to in
clauses (i) through (viii) of another Person and all dividends of another Person
the payment of which, in either case, such Person has Guaranteed. The "amount"
or "principal amount" of Debt at any time of determination as used herein
represented by (a) any Debt issued at a price that is less than the principal
amount at maturity thereof, shall be the amount of the liability in respect
thereof determined in accordance with generally accepted accounting principles,
(b) any Receivables Sale shall be the amount of the unrecovered capital or
principal investment of the purchaser (other than the Company or a Wholly-Owned
Subsidiary of the Company) thereof, excluding amounts representative of yield or
interest earned on such investment or (c) any Disqualified Stock shall be the
maximum fixed redemption or repurchase price in respect thereof.
"Disqualified Stock" of any Person means any Capital Stock of such Person
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of such Person, any
Subsidiary of such Person or the holder thereof, in whole or in part, on or
prior to the final Stated Maturity of the Notes, provided, however, that any
Preferred Stock which would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require the Company to repurchase or
redeem such Preferred Stock upon the occurrence of a Change of Control occurring
prior to the final maturity of the Notes shall not constitute Disqualified Stock
if the change of control provisions applicable to such Preferred Stock are no
more favorable to the holders of such Preferred Stock than the provisions
applicable to the Notes contained in the covenant described under "Change of
Control" and such Preferred Stock specifically provides that the Company will
not repurchase or redeem any such stock pursuant to such provisions prior to the
Company's repurchase of such Notes as are required to be repurchased pursuant to
the covenant described under "Change of Control."
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated "A" (or higher) according to Standard &
Poor's or Moody's Investors Service, Inc. at the time as of which any investment
or rollover therein is made.
"Event of Default" has the meaning set forth under "Events of Default"
below.
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or
any successor act) and the rules and regulations thereunder.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged and
which have a remaining weighted average life to maturity of not less than one
year from the date of Investment therein.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other Person (the "primary obligor") in any manner, whether directly
or indirectly, and including, without limitation, any obligation of such Person,
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Debt or to purchase (or to advance or supply funds for the purchase of)
any security for the payment of such Debt, (ii) to purchase property, securities
or services for the purpose of assuring the holder of such Debt of the payment
of such Debt, or (iii) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Debt (and "Guaranteed", "Guaranteeing"
and "Guarantor" shall have meanings correlative to the foregoing); provided,
however, that the Guarantee by any Person shall not include endorsements by such
Person for collection or deposit, in either case, in the ordinary course of
business.
"Guarantor" means a Subsidiary of the Company that has unconditionally
guaranteed, by supplemental indenture in form satisfactory to the Trustee, the
payment in full of the principal of (and premium, if any) and interest on the
Notes.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
including by acquisition of Subsidiaries or the recording, as required pursuant
to generally accepted accounting principles or otherwise, of any such Debt or
other obligation on the balance sheet of such Person (and "Incurrence",
"Incurred", "Incurrable" and "Incurring" shall have meanings correlative to the
foregoing); provided, however, that a change in generally accepted accounting
principles that results in an obligation of such Person that exists at such time
becoming Debt shall not be deemed an Incurrence of such Debt.
"Interest Rate or Currency Protection Agreement" of any Person means any
forward contract, futures contract, swap, option or other financial agreement or
arrangement (including, without limitation, caps, floors, collars and similar
agreements) relating to, or the value of which is dependent upon, interest rates
or currency exchange rates or indices.
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other property to others or payments for property or services for the account
or use of others, or otherwise), to, or purchase or acquisition of Capital
Stock, bonds, notes, debentures or other securities or evidence of Debt issued
by, any other Person, including any payment on a Guarantee of any obligation of
such other Person, but excluding any loan, advance or extension of credit to an
employee of the Company or any of its Subsidiaries in the ordinary course of
business and commercially reasonable extensions of trade credit.
"Joint Venture" means a corporation, partnership or other entity engaged in
one or more Telecommunications Businesses in which the Company owns, directly or
indirectly, a 45% or greater interest, with the balance of the ownership
interests being held by one or more Strategic Investors.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, Receivables Sale, deposit
arrangement, security interest, lien, charge, easement (other than any easement
not materially impairing usefulness), encumbrance, preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever
on or with respect to such property or assets (including, without limitation,
any conditional sale or other title retention agreement having substantially the
same economic effect as any of the foregoing).
"Marketable Securities" means: (i) Government Securities; (ii) any
certificate of deposit maturing not more than 270 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution; (iii)
commercial paper maturing not more than 270 days after the date of acquisition
issued by a corporation (other than an Affiliate of the Company) with a rating,
at the time as of which any investment therein is made, of "A-1" (or higher)
according to Standard & Poor's or "P-1" (or higher) according to Moody's
Investor Service, Inc.; (iv) any banker's acceptances or money market deposit
accounts issued or offered by an Eligible Institution; and (v) any fund
investing exclusively in investments of the types described in clauses (i)
through (iv) above.
"Net Available Proceeds" from any Asset Disposition by any Person means
cash or readily marketable cash equivalents received (including amounts received
by way of sale or discounting of any note, installment receivable or other
receivable, but excluding any other consideration received in the form of
assumption by the acquiror of Debt or other obligations relating to such
properties or assets) therefrom by such Person, net of (i) all legal, title and
recording tax expenses, commissions and other fees and expenses Incurred and all
federal, state, provincial, foreign and local taxes required to be accrued as a
liability as a consequence of such Asset Disposition, (ii) all payments made by
such Person or its Subsidiaries on any Debt which is secured by such assets in
accordance with the terms of any Lien upon or with respect to such assets or
which must by the terms of such Lien, or in order to obtain a necessary consent
to such Asset Disposition or by applicable law, be repaid out of the pro- ceeds
from such Asset Disposition, (iii) all distributions and other payments made to
minority interest holders in Subsidiaries of such Person or Joint Ventures as a
result of such Asset Disposition and (iv) appropriate amounts to be provided by
such Person or any Subsidiary thereof, as the case may be, as a reserve in
accordance with generally accepted accounting principles against any liabilities
associated with such assets and retained by such Person or any Subsidiary
thereof, as the case may be, after such Asset Disposition, including, without
limitation, liabilities under any indemnification obligations and severance and
other employee termination costs associated with such Asset Disposition, in each
case as determined by the Board of Directors of such Person, in its reasonable
good faith judgment evi- denced by a resolution of the Board of Directors filed
with the Trustee; provided, however, that any reduction in such reserve within
twelve months following the consummation of such Asset Disposition will be
treated for all purposes of the Indenture and the Notes as a new Asset
Disposition at the time of such reduction with Net Available Proceeds equal to
the amount of such reduction.
"Offer to Purchase" means a written offer (the "Offer") sent by the Company
by first class mail, postage prepaid, to each holder of Notes at his address
appearing in the Note Register on the date of the Offer offering to purchase up
to the principal amount of Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture). Unless
otherwise required by applicable law, the Offer shall specify an expiration date
(the "Expiration Date") of the Offer to Purchase which shall be, subject to any
contrary requirements of applicable law, not less than 30 days or more than 60
days after the date of such Offer and a settlement date (the "Purchase Date")
for purchase of Notes within five Business Days after the Expiration Date. The
Company shall notify the Trustee at least 15 Business Days (or such shorter
period as is acceptable to the Trustee) prior to the mailing of the Offer of the
Company's obligation to make an Offer to Purchase, and the Offer shall be mailed
by the Company or, at the Company's request, by the Trustee in the name and at
the expense of the Company. The Offer shall contain information concerning the
business of the Company and its Subsidiaries which the Company in good faith
believes will enable such holders to make an informed decision with respect to
the Offer to Purchase (which at a minimum will include (i) the most recent
annual and quarterly financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in the
documents required to be filed with the Trustee pursuant to the Indenture (which
requirements may be satisfied by delivery of such documents together with the
Offer), (ii) a description of material developments in the Company's business
subsequent to the date of the latest of such financial statements referred to in
clause (i) (including a description of the events requiring the Company to make
the Offer to Purchase), (iii) if applicable, appropriate pro forma financial
information concerning the Offer to Purchase and the events requiring the
Company to make the Offer to Purchase and (iv) any other information required by
applicable law to be included therein). The Offer shall contain all instructions
and materials necessary to enable such holders to tender Notes pursuant to the
Offer to Purchase. The Offer shall also state:
a. the Section of the Indenture pursuant to which the Offer to
Purchase is being made;
b. the Expiration Date and the Purchase Date;
c. the aggregate principal amount of the outstanding Notes offered to
be purchased by the Company pursuant to the Offer to Purchase (including,
if less than 100%, the manner by which such has been determined pursuant to
the Section hereof requiring the Offer to Purchase) (the "Purchase
Amount");
d. the purchase price to be paid by the Company for each $1,000
aggregate principal amount of Notes accepted for payment (as specified
pursuant to the Indenture) (the "Purchase Price");
e. that the holder may tender all or any portion of the Notes
registered in the name of such holder and that any portion of a Note
tendered must be tendered in an integral multiple of $1,000 principal
amount;
f. the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
g. that interest on any Note not tendered or tendered but not
purchased by the Company pursuant to the Offer to Purchase will continue to
accrue;
h. that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
i. that each holder electing to tender a Note pursuant to the Offer to
Purchase will be required to surrender such Note at the place or places
specified in the Offer prior to the close of business on the Expiration
Date (such Note being, if the Company or the Trustee so requires, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the holder
thereof or his attorney duly authorized in writing);
j. that holders will be entitled to withdraw all or any portion of
Notes tendered if the Company (or their Paying Agent) receives, not later
than the close of business on the Expiration Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the holder, the
principal amount of the Note the holder tendered, the certificate number of
the Note the holder tendered and a statement that such holder is
withdrawing all or a portion of his tender;
k. that (a) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, the Company shall purchase all such Notes and (b)
if Notes in an aggregate principal amount in excess of the Purchase Amount
are tendered and not withdrawn pursuant to the Offer to Purchase, the
Company shall purchase Notes having an aggregate principal amount equal to
the Purchase Amount on a pro rata basis (with such adjustments as may be
deemed appropriate so that only Notes in denominations of $1,000 or
integral multiples thereof shall be purchased); and
l. that in the case of any holder whose Note is purchased only in
part, the Company shall execute, and the Trustee shall authenticate and
deliver to the holder of such Note without service charge, a new Note or
Notes, of any authorized denomination as requested by such holder, in an
aggregate principal amount equal to and in exchange for the unpurchased
portion of the Note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with
the Offer for such Offer to Purchase.
"Permitted Interest Rate or Currency Protection Agreement" of any Person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions in the ordinary course of business that is
designed to protect such Person against fluctuations in interest rates or
currency exchange rates with respect to Debt Incurred and which shall have a
notional amount no greater than the payments due with respect to the Debt being
hedged thereby and not for purposes of speculation.
"Permitted Investment" means (i) any Investment in a Joint Venture
(including the purchase or acquisition of any Capital Stock of a Joint Venture),
provided the aggregate amount of all Investments pursuant to this clause (i) in
Joint Ventures in which the Company owns, directly or indirectly, a less than
50% interest shall not exceed $25.0 million, (ii) any Investment in any Person
as a result of which such Person becomes an 80% or more owned Subsidiary of the
Company, and (iii) any Investment in Marketable Securities.
"Permitted Liens" means (a) Liens for taxes, assessments, governmental
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with generally accepted
accounting principles shall have been made therefor; (b) other Liens incidental
to the conduct of the Company's and its Subsidiaries' business or the ownership
of its property and assets not securing any Debt, and which do not in the
aggregate materially detract from the value of the Company's and its
Subsidiaries' property or assets when taken as a whole, or materially impair the
use thereof in the operation of its business; (c) Liens with respect to assets
of a Subsidiary granted by such Subsidiary to the Company to secure Debt owing
to the Company; (d) pledges and deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other types
of statutory obligations; (e) deposits made to secure the performance of
tenders, bids, leases, and other obligations of like nature incurred in the
ordinary course of business (exclusive of obligations for the payment of
borrowed money); (f) zoning restrictions, servitudes, easements, rights- of-way,
restrictions and other similar charges or encumbrances incurred in the ordinary
course of business which, in the aggregate, do not materially detract from the
value of the property subject thereto or interfere with the ordinary conduct of
the business of the Company or its Subsidiaries; (g) Liens arising out of
judgments or awards against the Company or any Subsidiary with respect to which
the Company or such Subsidiary is prosecuting an appeal or proceeding for review
and the Company or such Subsidiary is maintaining adequate reserves in
accordance with generally accepted accounting principles; and (h) any interest
or title of a lessor in the property subject to any lease other than a Capital
Lease.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization, government
or agency or political subdivision thereof or any other entity.
"Preferred Dividends" for any Person means for any period the quotient
determined by dividing the amount of dividends and distributions paid or accrued
(whether or not declared) on Preferred Stock of such Person during such period
calculated in accordance with generally accepted accounting princi- ples, by 1
minus the maximum statutory income tax rate then applicable to the Company
(expressed as a decimal).
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Purchase Money Debt" means Debt of the Company (including Acquired Debt
and Debt repre- sented by Capital Lease Obligations, mortgage financings and
purchase money obligations) Incurred for the purpose of financing all or any
part of the cost of construction, acquisition or improvement by the Company or
any Subsidiary of the Company or any Joint Venture of any Telecommunications
Assets of the Company, any Subsidiary of the Company or any Joint Venture, and
including any related notes, Guarantees, collateral documents, instruments and
agreements executed in connection therewith, as the same may be amended,
supplemented, modified or restated from time to time.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money.
"Receivables Sale" of any Person means any sale of Receivables of such
Person (pursuant to a purchase facility or otherwise), other than in connection
with a disposition of the business operations of such Person relating thereto or
a disposition of defaulted Receivables for purpose of collection and not as a
financing arrangement.
"Related Person" of any Person means any other Person directly or
indirectly owning (a) 5% or more of the outstanding Common Stock of such Person
(or, in the case of a Person that is not a corporation, 5% or more of the
outstanding equity interest in such Person) or (b) 5% or more of the combined
outstanding voting power of the Voting Stock of such Person, except that, for
purposes of the covenant entitled "Transactions with Affiliates and Related
Persons," Related Person means any other Person directly or indirectly owning
10% or more of the combined outstanding voting power of the Voting Stock of such
Person (or, in the case of a Person that is not a corporation, 10% or more of
the outstanding equity interest in such Person).
"Sale and Leaseback Transaction" of any Person means an arrangement with
any lender or investor or to which such lender or investor is a party providing
for the leasing by such Person of any property or asset of such Person which has
been or is being sold or transferred by such Person more than 365 days after the
acquisition thereof or the completion of construction or commencement of
operation thereof to such lender or investor or to any person to whom funds have
been or are to be advanced by such lender or investor on the security of such
property or asset. The stated maturity of such arrangement shall be the date of
the last payment of rent or any other amount due under such arrangement prior to
the first date on which such arrangement may be terminated by the lessee without
payment of a penalty.
"Secured Credit Facility" means Debt outstanding at the date of the
Indenture of Subsidiaries and Joint Ventures of the Company and other Debt
Incurred from time to time pursuant to secured credit agreements or similar
facilities made available from time to time to the Company and its Subsidiaries
and Joint Ventures (including, without limitation, the secured lines of credit
with AT&T Credit Corporation and Fleet National Bank), and including any related
notes, Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
"Strategic Equity Investment" means an equity investment made by a
Strategic Investor in the Company in an aggregate amount of not less than $25.0
million.
"Strategic Investor" means a corporation, partnership or other entity
engaged in one or more Telecommunications Businesses that has, or 80% or more of
the Voting Stock of which is owned by a Person that has, an equity market
capitalization, at the time of its initial Investment in the Company or in a
Joint Venture with the Company, in excess of $2.0 billion.
"Subordinated Debt" means Debt of the Company as to which the payment of
principal of (and premium, if any) and interest and other payment obligations in
respect of such Debt shall be subordi- nate to the prior payment in full of the
Notes to at least the following extent: (i) no payments of principal of (or
premium, if any) or interest on or otherwise due in respect of such Debt may be
permitted for so long as any default in the payment of principal (or premium, if
any) or interest on the Notes exists; (ii) in the event that any other default
that with the passing of time or the giving of notice, or both, would constitute
an event of default exists with respect to the Notes, upon notice by 25% or more
in principal amount of the Notes to the Trustee, the Trustee shall have the
right to give notice to the Company and the holders of such Debt (or trustees or
agents therefor) of a payment blockage, and thereafter no payments of principal
of (or premium, if any) or interest on or otherwise due in respect of such Debt
may be made for a period of 179 days from the date of such notice; and (iii)
such Debt may not (x) provide for payments of principal of such Debt at the
stated maturity thereof or by way of a sinking fund applicable thereto or by way
of any mandatory redemption, defeasance, retirement or repurchase thereof by the
Company (including any redemption, retirement or repurchase which is contingent
upon events or circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon an event of default thereunder), in each case
prior to the final Stated Maturity of the Notes or (y) permit redemption or
other retirement (including pursuant to an offer to purchase made by the
Company) of such other Debt at the option of the holder thereof prior to the
final Stated Maturity of the Notes, other than a redemption or other retirement
at the option of the holder of such Debt (including pursuant to an offer to
purchase made by the Company) which is conditioned upon a change of control of
the Company pursuant to provisions substantially similar to those described
under "Change of Control" (and which shall provide that such Debt will not be
repurchased pursuant to such provisions prior to the Company's repurchase of the
Notes required to be repurchased by the Company pursuant to the provisions
described under "Change of Control").
"Subsidiary" of any Person means (i) a corporation more than 50% of the
combined voting power of the outstanding Voting Stock of which is owned,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person or by such Person and one or more Subsidiaries thereof or (ii) any
other Person (other than a corporation) in which such Person, or one or more
other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority ownership
and power to direct the policies, management and affairs thereof. An 80% or more
owned Subsidiary of the Company is (i) a corporation 80% or more of the combined
voting power of the outstanding Voting Stock, and more than 80% of the Capital
Stock or other ownership interests, of which is owned, directly or indirectly,
by the Company or by one or more other Subsidiaries of the Company or by the
Company and one or more Subsidiaries thereof or (ii) any other Person (other
than a corporation) in which the Company, or one or more other Subsidiaries of
the Company or the Company and one or more other Subsidiaries of the Company,
directly or indirectly, has at least an 80% ownership interest and power to
direct the policies, management and affairs thereof.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities, (ii) creating, developing or marketing
communications related network equipment, software and other devices for use in
a Telecommunications Business or (iii) evaluating, participating or pursuing any
other activity or opportunity that is primarily related to those identified in
(i) or (ii) above; provided that the determination of what constitutes a
Telecommunications Business shall be made in good faith by the Board of
Directors of the Company.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly-Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Voting Stock or other ownership interests (other than
directors' qualifying shares) of which shall at the time be owned by such Person
or by one or more Wholly-Owned Subsidiaries of such Person or by such Person and
one or more Wholly-Owned Subsidiaries of such Person.
Events of Default
The following will be Events of Default under the Indenture: (a) failure to
pay principal of (or premium, if any, on) any Note when due; (b) failure to pay
any interest on any Note when due, contin- ued for 30 days; (c) default in the
payment of principal and interest on Notes required to be purchased pursuant to
an Offer to Purchase as described under "Change of Control" when due and
payable; (d) failure to perform or comply with the provisions described under
"Merger, Consolidation and Sales of Assets" and "Limitation on Certain Asset
Dispositions"; (e) failure to perform any other covenant or agreement of the
Company under the Indenture or the Notes continued for 60 days after written
notice to the Company by the Trustee or holders of at least 25% in aggregate
principal amount of outstanding Notes; (f) default under the terms of any
instrument evidencing or securing Debt of the Company or any Subsidiary having
an outstanding principal amount of $5.0 million individually or in the aggregate
which default results in the acceleration of the payment of such indebtedness or
constitutes the failure to pay such indebtedness when due; (g) the rendering of
a final judgment or judgments (not subject to appeal) against the Company or any
Subsidiary in an amount in excess of $5.0 million which remains undischarged or
unstayed for a period of 45 days after the date on which the right to appeal has
expired; and (h) certain events of bankruptcy, insolvency or reorganization
affecting the Company or any Subsidiary. (Section 501) Subject to the provisions
of the Indenture relating to the duties of the Trustee in case an Event of
Default (as defined) shall occur and be continuing, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the holders of Notes, unless such holders shall
have offered to the Trustee reasonable indemnity. (Section 603) Subject to such
provisions for the indemnification of the Trustee, the holders of a majority in
aggregate principal amount of the outstanding Notes will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee. (Section 512)
If an Event of Default (other than an Event of Default described in Clause
(h) above) shall occur and be continuing, either the Trustee or the holders of
at least 25% in aggregate principal amount of the outstanding Notes may
accelerate the maturity of all Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the holders
of a majority in aggregate principal amount of outstanding Notes may, under
certain circumstances, rescind and annul such acceleration if all Events of
Default, other than the non-payment of accelerated principal, have been cured or
waived as provided in the Indenture. If an Event of Default specified in Clause
(h) above occurs, the outstanding Notes will ipso facto become immediately due
and payable without any declaration or other act on the part of the Trustee or
any holder. (Section 502) For information as to waiver of defaults, see
"Modification and Waiver".
Notwithstanding the foregoing, upon an acceleration of the Notes or an
Event of Default specified in Clause (h) above, in each case prior to March 1,
2001, the holders of Notes will be entitled to receive only a default amount
equal to the Accreted Value of the Notes, which until 2001 will be less than the
face amount of such Notes.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default (as defined) and unless also the holders of at least 25% in aggregate
principal amount of the outstanding Notes shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee, and the Trustee shall not have received from the holders of a majority
in aggregate principal amount of the outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. (Section 507) However, such limitations do not apply to a suit instituted
by a holder of a Note for enforcement of payment of the principal of and
premium, if any, or interest on such Note on or after the respective due dates
expressed in such Note. (Section 508)
The Company will be required to furnish to the Trustee quarterly a
statement as to the performance by the Company of certain of its obligations
under the Indenture and as to any default in such performance. (Section 1018)
Satisfaction and Discharge of the Indenture
The Indenture will cease to be of further effect as to all outstanding
Notes (except as to (i) rights of registration of transfer and exchange and the
Company's right of optional redemption, (ii) substitution of apparently
mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of holders of
Notes to receive payment of principal of and premium, if any, and interest on
the Notes, (iv) rights, obligations and immunities of the Trustee under the
Indenture and (v) rights of the holders of the Notes as beneficiaries of the
Indenture with respect to any property deposited with the Trustee payable to all
or any of them), if (x) the Company will have paid or caused to be paid the
principal of and premium, if any, and interest on the Notes as and when the same
will have become due and payable or (y) all outstanding Notes (except lost,
stolen or destroyed Notes which have been replaced or paid) have been delivered
to the Trustee for cancellation.
Defeasance
The Indenture will provide that, at the option of the Company, (A) if
applicable, the Company will be discharged from any and all obligations in
respect of the outstanding Notes or (B) if applicable, the Company may omit to
comply with certain restrictive covenants, that such omission shall not be
deemed to be an Event of Default under the Indenture and the Notes, in either
case (A) or (B) upon irrevocable deposit with the Trustee, in trust, of money
and/or U.S. government obligations which will provide money in an amount
sufficient in the opinion of a nationally recognized firm of independent
certified public accountants to pay the principal of and premium, if any, and
each installment of interest, if any, on the outstanding Notes. With respect to
clause (B), the obligations under the Indenture other than with respect to such
covenants and the Events of Default other than the Events of Default relating to
such covenants above shall remain in full force and effect. Such trust may only
be established if, among other things (i) with respect to clause (A), the
Company has received from, or there has been published by, the Internal Revenue
Service a ruling or there has been a change in law, which in the Opinion of
Counsel provides that holders of the Notes will not recognize gain or loss for
Federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to Federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred; or, with respect to clause (B), the
Company has delivered to the Trustee an Opinion of Counsel to the effect that
the holders of the Notes will not recognize gain or loss for Federal income tax
purposes as a result of such deposit and defeasance and will be subject to
Federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such deposit and defeasance had not occurred;
(ii) no Event of Default or event that with the passing of time or the giving of
notice, or both, shall constitute an Event of Default shall have occurred or be
continuing; (iii) the Company has delivered to the Trustee an Opinion of Counsel
to the effect that such deposit shall not cause the Trustee or the trust so
created to be subject to the Investment Company Act of 1940; and (iv) certain
other customary conditions precedent are satisfied. (Section 1301)
Modification and Waiver
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the holders of a majority in aggregate
principal amount of the outstanding Notes; provided, however, that no such
modification or amendment may, without the consent of the holder of each
outstanding Note affected thereby, (a) change the due date of any installment of
principal or interest on any Note, (b) reduce the principal amount of, (or the
premium) or interest on, any Note, (c) change the currency of payment of
principal of, (or premium) or interest on, any Note, (d) impair the right to
institute suit for the enforcement of any payment on or with respect to any
Note, (e) reduce the above-stated percentage of outstanding Notes necessary to
modify or amend the Indenture, (f) reduce the percentage of aggregate principal
amount of outstanding Notes necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults, (g) modify any
provisions of the Indenture relating to the modification and amendment of the
Indenture or the waiver of past defaults or covenants, except as otherwise
specified, or (h) following the mailing of any Offer to Purchase, modify any
Offer to Purchase for the Notes required under the "Limitation on Asset
Dispositions" and the "Change of Control" covenants contained in the Indenture
in a manner materially adverse to the holders thereof. (Section 902)
The holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all holders of Notes, may waive compliance by the Company
with certain restrictive provisions of the Indenture. (Section 1019). Subject to
certain rights of the Trustee, as provided in the Indenture, the holders of a
majority in aggregate principal amount of the outstanding Notes, on behalf of
all holders of Notes, may waive any past default under the Indenture, except a
default in the payment of principal, premium or interest or a default arising
from failure to purchase any Note tendered pursuant to an Offer to Purchase.
(Section 513)
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture and the Notes:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(c) to provide for the assumption of the Company's obligations to
holders of the Notes in the case of a merger or consolidation;
(d) to make any change that would provide any additional rights or
benefits to the holders of the Notes or that does not adversely affect the
legal rights under the Indenture of any such holder; or
(e) to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture
Act. (Section 901)
Governing Law
The Indenture and the Notes will be governed by the laws of the State of
New York.
The Trustee
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise as a prudent person would exercise
under the circumstances in the conduct of such person's own affairs. (Section
601)
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claim as
security or otherwise. The Trustee is permitted to engage in other transactions
with the Company or any Affiliate, provided, however, that if it acquires any
conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign. (Sections 608, 613)
DESCRIPTION OF OTHER CREDIT FACILITIES
AT&T Credit Facility
The AT&T Credit Facility currently provides subsidiaries of the Company a
secured line of credit totalling $49.2 million (including $10.5 million borrowed
by a majority-owned joint venture) to provide financing for the acquisition and
construction of telecommunications networks and the purchase of equipment
related to the construction and operation of the Company's networks in cities
approved by AT&T Credit on a project basis. The terms of the AT&T Credit
Facility provide for two years of capitalized interest, one year of interest
only payments and a six-year principal and interest payout period thereafter. At
March 31, 1996, there was a total of $45.0 million of outstanding indebtedness
under the AT&T Credit Facility.
Indebtedness under the AT&T Credit Facility is secured by the assets of the
borrowers utilizing the facility and is guaranteed by intermediate subsidiaries
of the Company. The facility is further secured by the stock of the borrowers
and such guarantors. The Company is obligated to advance certain additional
funds to the borrowers, by means of capital contributions or subordinated loans,
in the event interest rates applicable to indebtedness under the AT&T Credit
Facility exceed certain levels and the financial performance of the borrowers is
below certain measures.
AT&T Credit has exercised its option under the AT&T Credit Facility to
purchase 6.5% of the total equity in each local operation of the Company which
it has financed (Springfield, Providence, Hartford, Sacramento, San Francisco,
San Jose, Sunnyvale, Santa Clara and Oklahoma City), resulting in equity
investments by AT&T Credit in subsidiaries of the Company totalling $1.2 million
as of March 31, 1996.
The AT&T Credit Facility contains certain covenants, including covenants
placing limitations on the ability of the borrowers and the guarantors to incur
indebtedness, create liens, guarantee indebtedness, make investments, make loans
or extensions of credit, make capital expenditures, declare or pay dividends,
engage in transactions with affiliates (except in the ordinary course of
business upon terms no less favorable to the borrowers than are obtainable from
an unaffiliated third party), engage in new businesses, dispose of assets, issue
additional capital stock, and affect mergers or consolidations. Upon the
occurrence of a change of control of any borrower or guarantor, AT&T Credit has
the option to require the prepayment of the indebtedness under the AT&T Credit
Facility.
The Company has agreed that AT&T Credit may exchange its equity investments
in subsidiaries of the Company for an aggregate of 234,260 shares of the
Company's Common Stock and AT&T Credit has agreed to convert the existing AT&T
Credit Facility to a $50 million corporate facility on substantially similar
terms.
Bank Credit Facility
The Bank Credit Facility provides the subsidiary operating the Company's
Tulsa, Oklahoma net- work the ability to borrow amounts up to $10 million from
time to time prior to June 30, 1997, with a final maturity of all loans no later
than June 30, 2002, with interest only payments through August 31, 1997 and a
4.5 year principal payout period thereafter. The Bank Credit Facility is secured
by the assets and stock of the subsidiary. The loan agreement contains certain
restrictive covenants, including limitations on the ability of the subsidiary to
declare and pay dividends to the Company, to incur additional indebtedness, to
make loans and advances and to engage in transactions with the Company (except
for reimbursement for services rendered on arms-length terms and repayment of up
to $10 million of subordinated debt prior to June 30, 1997 in the absence of a
default under the Bank Credit Facility). The Bank Credit Facility contains
financial covenants, including limitations on the ratios of the subsidiary's
annualized operating cash flow to its outstanding debt, interest expense and
debt service costs and requirements for the maintenance of a minimum amount of
annualized operating cash flow. At March 31, 1996, there was $100,000 of
outstanding indebtedness under this facility.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain federal income tax consequences
associated with the exchange of the Private Notes for Exchange Notes and with
the ownership of the Notes. Except where noted, it deals only with Notes held as
capital assets by a United States holder (generally, a citizen or resident of
the United States, a corporation, a partnership or other entity created or
organized in or under the laws of the United States or any political subdivision
thereof, or an estate or trust the income of which is subject to United States
federal income taxation regardless of its source) and does not deal with special
situations, such as those of dealers in securities, financial institutions, life
insurance companies, or United States holders whose "functional currency" is not
the U.S. dollar. Furthermore, the discussion below is based upon the provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), and regulations,
rulings and judicial decisions thereunder as of the date hereof, and, at any
time and without prior notice, such authorities may be repealed, revoked or
modified so as to result in federal income tax consequences different from those
discussed below.
Persons considering the exchange of the Private Notes for Exchange Notes
should consult their own tax advisors concerning the federal income tax
consequences and the tax consequences arising under the laws of any other taxing
jurisdiction of such an exchange.
The Exchange
The exchange of Private Notes for Exchange Notes should not be treated as a
taxable transaction for federal income tax purposes because the Exchange Notes
will not be considered to differ materially in kind or extent from the Private
Notes. Rather, the Exchange Notes received by a holder of Private Notes should
be treated as a continuation of the Private Notes in the hands of such holder.
As a result, there should be no material federal income tax consequences to
holders exchanging Private Notes for Exchange Notes.
Original Issue Discount
The issuance of the Private Notes resulted in original issue discount
("OID") in an amount equal to the excess of the stated redemption price at
maturity over the issue price of the Private Notes. The exchange of Private
Notes for Exchange Notes will not alter the application of the OID rules to
holders of the Private Notes.
The "issue price" of a Note is equal to the first price at which a
substantial number of Notes were sold for money, excluding sales to
underwriters, placement agents or wholesalers. The "stated redemption price at
maturity" is the sum of all payments to be made on the Notes other than
"qualified stated interest". The term "qualified stated interest" means,
generally, stated interest that is unconditionally payable in cash or in
property (other than debt instruments of the issuer) at least annually at a
single fixed rate or, subject to certain conditions, based on one or more
interest indices. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Holders of Notes who purchased such Notes in the Private Note Offering
must, in general, include in income OID calculated on a constant-yield method in
advance of the receipt of some or all of the related cash payments. The amount
of OID includible in income by an initial holder of Notes is the sum of the
"daily portions" of OID with respect to such Notes for each day during the
taxable year or portion of the taxable year in which such holder held such Notes
("Accrued OID"). The daily portion is determined by allocating to each day in
any "accrual period" a pro rata portion of the OID allocable to that accrual
period. The "accrual period" for the Notes may be of any length selected by the
holder and may vary in length over the term of the Notes, provided that each
accrual period is no longer than one year and each scheduled payment of
principal or interest occurs on the first day or the final day of an accrual
period. The amount of OID allocable to any accrual period is an amount equal to
the excess, if any, of (a) the product of the Note's adjusted issue price at the
beginning of such accrual period and the yield to maturity of the Note
(determined on the basis of compounding at the close of each accrual period and
properly adjusted for the length of the accrual period) over (b) the sum of any
qualified stated interest allocable to the accrual period. OID allocable to the
final accrual period is the difference between the amount payable at maturity of
the Note (other than a payment of qualified stated interest) and the Note's
adjusted issue price at the beginning of the final accrual period. Special rules
will apply for calculating OID for an initial short accrual period. The
"adjusted issue price" of a Note at the beginning of any accrual period is equal
to its original issue price ($588.04 per $1,000 principal amount of Notes)
increased by the Accrued OID for each prior accrual period (determined without
regard to the amortization of any acquisition or bond premium, as described
below) and reduced by any payments made on such Notes (other than qualified
stated interest) on or before the first day of the accrual period. Under these
rules, a holder will have to include in income increasingly greater amounts of
OID in successive accrual periods. The Company is required to provide
information returns stating the amount of OID accrued on Notes held of record by
persons other than corporations and other exempt holders.
Holders of any Notes may elect to treat all interest on the Notes as OID
and calculate the amount includible in gross income under the constant yield
method described above. For purposes of this election, interest includes stated
interest, acquisition discount, OID, de minimis OID, market discount, de minimis
market discount and unstated interest, as adjusted by any amortizable bond
premium or acquisition premium. The election is to be made for the taxable year
in which the holder acquired a Note, and may not be revoked without the consent
of the Internal Revenue Service (the "IRS"). Holders should consult with their
own tax advisors regarding this election. The exchange of Private Notes for
Exchange Notes will not extend or otherwise alter the period in which this
election may be made.
If a bankruptcy case is commenced by or against the Company under the U.S.
Bankruptcy Code after the issuance of the Notes, the claim of a holder of a Note
with respect to the principal amount thereof may be limited to an amount equal
to the sum of (i) the initial offering price and (ii) that portion of the
original issue discount that is not deemed to constitute "unmatured interest"
for purposes of the U.S. Bankruptcy Code. Any OID that was not amortized as of
any such bankruptcy filing would constitute "unmatured interest."
Market Discount
If a holder has purchased, or subsequently purchases, a Note for an amount
that is less than the "revised issue price" for such Note, the amount of the
difference will be treated as "market discount" for federal income tax purposes,
unless such difference is less than a specified de minimis amount. The Code
provides that, for these purposes, the "revised issue price" of a Note equals
the Note's original issue price ($588.04 per $1,000 principal amount of Notes)
increased by the amount of OID that has accrued on the Note. Under the market
discount rules, a holder will be required to treat any gain on the maturity,
sale, exchange, retirement or other disposition of, a Note as ordinary income to
the extent of the market discount which has not previously been included in
income and is treated as having accrued on such Note at the time of such payment
or disposition. In addition, a holder may be required to defer, until the
maturity of the Note or its earlier disposition in a taxable transaction, the
deduction of all or a portion of the interest expense on any indebtedness
incurred or continued to purchase or carry such Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Note, unless the holder
elects to accrue on a constant yield method. A holder of a Note may elect to
include market discount in income currently as it accrues (on either a ratable
or constant yield method), in which case the rule described above regarding
deferral of interest deductions will not apply. This election to include market
discount in income currently, once made, applies to all market discount
obligations acquired on or after the first taxable year to which the election
applies and may not be revoked without the consent of the IRS. Holders should
consult with their own tax advisors regarding this election. The exchange of
Private Notes for Exchange Notes should not be treated as a purchase of the
Exchange Notes for federal income tax purposes and will not cause any holder of
the Notes not currently subject to the market discount rules to become subject
to them. Any purchaser of the Private Notes that is subject to the market
discount rules will continue to be subject to the market discount rules to the
same extent as prior to the exchange.
Premium
A holder that has purchased, or subsequently purchases, a Note for an
amount that is greater than the adjusted issue price of the Note but equal to or
less than the sum of all amounts payable on the Note after the purchase date
other than payments of qualified stated interest will be considered to have
purchased such Note at an "acquisition premium." Under the acquisition premium
rules, the amount of OID which such holder must include in its gross income with
respect to such Note for any taxable year will be reduced by the portion of such
acquisition premium properly allocable to such year.
A holder that has purchased, or subsequently purchases, a Note for an
amount greater than the sum of all amounts payable on the Note after the
purchase date, other than payments of qualified stated interest, will be
considered to have purchased such Note with a "bond premium." The holder may
elect, subject to certain limitations, to deduct the allowable amortizable bond
premium when computing such holder's taxable income. Holders should consult with
their tax advisors regarding this election. The exchange of the Private Notes
for the Exchange Notes will not be treated as a purchase of the Notes creating
amortizable bond premium.
Sale, Exchange and Retirement of Notes
A holder's adjusted tax basis in a Note will, in general, be the holder's
cost therefor, increased by OID or market discount included in the holder's
income and reduced by any amortized premium and any cash payments on the Notes
other than qualified stated interest. Upon the sale, exchange or retirement of a
Note, a holder will recognize gain or loss equal to the difference between the
amount realized upon the sale, exchange or retirement (less any accrued
qualified stated interest, which will be taxable as such) and the adjusted tax
basis of the Note. Except with respect to market discount (see above), such gain
or loss will be capital gain or loss and will be long-term capital gain or loss
if at the time of sale, exchange or retirement the Note has been held for more
than one year. Under current law, net capital gains of individuals are, under
certain circumstances, taxed at lower rates than items of ordinary income. The
deductibility of capital losses is subject to limitations.
Backup Withholding and Information Reporting
In general, information reporting requirements will apply to certain
payments of principal, interest, and premium paid on Notes and to the proceeds
of sale of a Note made to United States holders other than certain exempt
recipients (such as corporations). A 31% backup withholding tax will apply to
such payments if the United States holder fails to provide a taxpayer
identification number or certification of foreign or other exempt status or
fails to report in full dividend and interest income.
PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of any Exchange Notes
received in exchange for Private Notes acquired by such broker-dealer as a
result of market-making or other trading activities. Each broker-dealer that
receives Exchange Notes for its own account in exchange for such Private Notes
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Company has
agreed that for a period of up to 90 days after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any such
broker-dealer that requests copies of this Prospectus in the Letter of
Transmittal for use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers or any other persons. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions or through the writing of options on the Exchange Notes,
or a combination of such methods of resale, at market prices prevailing at the
time of resale or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange
Notes that were received by it for its own account pursuant to the Exchange
Offer in exchange for Private Notes acquired by such broker-dealer as a result
of market-making or other trading activities and any broker- dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Private Notes (including any broker-dealers), and
certain parties related to such holders, against certain liabilities, including
liabilities under the Securities Act.
VALIDITY OF THE EXCHANGE NOTES
The validity of the Exchange Notes will be passed upon for the Company by
Bryan Cave LLP, St. Louis, Missouri. John P. Denneen, Esq., a member of Bryan
Cave LLP, is Secretary of the Company and its subsidiaries. Mr. Denneen and two
other members of Bryan Cave LLP own an aggregate of 35,022 shares of Common
Stock of the Company, warrants to purchase an aggregate of 23,280 shares of
Common Stock at $11.00 per share and an option to purchase 22,220 shares of
Common Stock at $11.35 per share.
INDEPENDENT AUDITORS
The consolidated financial statements of the Company as of December 31,
1995 and 1994 and for the period from November 10, 1993 to December 31, 1993 and
the years ended December 31, 1995 and 1994 included in this Prospectus have been
audited by KPMG Peat Marwick LLP, independent certified public accountants, as
stated in their report appearing herein.
The consolidated financial statements of Brooks Telecommunications
Corporation as of December 31, 1995 and for the year then ended included in this
Prospectus have been audited by KPMG Peat Marwick LLP, independent certified
public accountants, as stated in their report herein.
The consolidated financial statements of City Signal, Inc. as of December
31, 1995 and 1994 and for the years then ended included in this Prospectus have
been audited by BDO Seidman, LLP, independent certified public accountants, as
stated in their report included herein.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Exchange Notes offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus
omits certain information, exhibits and undertakings contained in the
Registration Statement. For further information with respect to the Company and
the Exchange Notes offered hereby, reference is made to the Registration
Statement, including the exhibits thereto. The Company is subject to the
informational requirements of the Exchange Act and in accordance therewith files
reports and other information with the Commission. The Registration Statement
(and the exhibits and schedules thereto), as well as the reports, proxy and
information statements and other information filed by the Company with the
Commission, may be inspected and copied at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Room 1400,
75 Park Place, New York, New York 10007 and Suite 1400, Citicorp Center, 500
West Madison Street, Chicago, Illinois 60601-2511. Copies of such materials may
be obtained from the Public Reference Section of the Commission, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and its public
reference facilities in New York, New York and Chicago, Illinois at the
prescribed rates. The Commission maintains a Web site (http://www.sec.gov.) that
contains reports, proxy and information statements and other information filed
electronically by the Company with the Commission through its Electronic Data
Gathering, Analysis and Retrieval (EDGAR) System. Shares of the Company's Voting
Common Stock, $0.01 par value per share, have been approved for quotation on the
Nasdaq National Market under the symbol "BFPT" and copies of the aforementioned
materials may be inspected at the office of the National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
This Prospectus contains summaries believed to be accurate of certain terms
of certain documents, but reference is made to the actual documents, including
the Indenture governing the Notes, copies of which will be provided without
charge to each person to whom this Prospectus is delivered, upon written or oral
request to David L. Solomon, Senior Vice President and Chief Financial Officer,
Brooks Fiber Properties, Inc., 425 Woods Mill Road South, Suite 300, Town &
Country, Missouri 63017, telephone (314) 878-1616. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or document filed or incorporated by reference as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
Pursuant to the Indenture, the Company has agreed to file with the Trustee
within 15 days after it files with the Commission copies of the annual and
quarterly reports and the information, documents and other reports that the
Company is required to file with the Commission pursuant to Section 13(c) or
15(d) of the Exchange Act ("SEC Reports"). In the event that the Company shall
cease to be required to file SEC Reports pursuant to the Exchange Act, the
Company shall nevertheless continue to file such reports with the Commission
(unless the Commission will not accept such a filing) and the Trustee. The
Company shall furnish copies of the SEC Reports to the holders of Notes at the
time the Company is required to file the same with the Trustee and will make
such information available to investors who request it in writing.
INDEX TO FINANCIAL STATEMENTS
Page
----
Unaudited Pro Forma Combined Consolidated Financial Information of
Brooks Fiber Properties, Inc.
(a) Pro Forma Combined Consolidated Statement of Operations for
the year ended December 31, 1995...................................
(b) Pro Forma Combined Consolidated Statement of Operations for
the three months ended March 31, 1996..............................
(c) Pro Forma Combined Consolidated Balance Sheet at March 31,
1996...............................................................
(d) Notes to Pro Forma Combined Consolidated Financial Statements......
Consolidated Unaudited Financial Statements of Brooks Fiber
Properties, Inc.
(a) Consolidated Balance Sheets at March 31, 1996 and
December 31, 1995..................................................
(b) Consolidated Statements of Operations for the three months
ended March 31, 1996 and 1995......................................
(c) Consolidated Statements of Changes in Shareholders' Equity
for the three months ended March 31, 1996 and 1995.................
(d) Consolidated Statements of Cash Flows for the three months
years ended March 31, 1996 and 1995................................
(e) Notes to Unaudited Consolidated Financial Statements...............
Consolidated Audited Financial Statements of Brooks Fiber
Properties, Inc.
(a) Independent Auditors' Report.......................................
(b) Consolidated Balance Sheets at December 31, 1995 and 1994..........
(c) Consolidated Statements of Operations for the years ended
December 31, 1995 and 1994 and the period from inception to
December 31, 1993..................................................
(d) Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1995 and 1994 and the period
from inception to December 31, 1993................................
(e) Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1994 and the period from inception to
December 31, 1993..................................................
(f) Notes to Consolidated Financial Statements.........................
Consolidated Financial Statements of City Signal, Inc.
(a) Independent Auditors' Report.......................................
(b) Consolidated Balance Sheets at December 31, 1995 and 1994..........
(c) Consolidated Statements of Operations for the years ended
December 31, 1995 and 1994.........................................
(d) Consolidated Statements of Shareholders' Equity (Deficit) for
the years ended December 31, 1995 and 1994.........................
(e) Consolidated Statements of Cash Flows for the years ended
December 31, 1995 and 1994.........................................
(f) Notes to Consolidated Financial Statements.........................
Consolidated Financial Statements of Brooks Telecommunications
Corporation
(a) Independent Auditors' Report.......................................
(b) Consolidated Balance Sheet at December 31, 1995....................
(c) Consolidated Statement of Operations for the year ended
December 31, 1995..................................................
(d) Consolidated Statement of Changes in Shareholders' Equity for
the year ended December 31, 1995...................................
(e) Consolidated Statement of Cash Flows for the year ended
December 31, 1995..................................................
(f) Notes to Consolidated Financial Statements.........................
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
OF BROOKS FIBER PROPERTIES, INC.
The following unaudited pro forma combined consolidated financial
information gives effect to the merger with BTC (which occurred on January 2,
1996), the City Signal Acquisition (which occurred on January 31, 1996) and the
IPO (which occurred on May 8, 1996). The merger with BTC and the City Signal
Acquisition are effected using the purchase method of accounting and assume
(i) for purposes of the pro forma statement of operations data for the year
ended December 31, 1995, that the BTC merger and the City Signal Acquisition
were consummated on January 1, 1995 and (ii) for purposes of the pro forma
statement of operations data for the three months ended March 31, 1996, that
the City Signal Acquisition was consummated on January 1, 1996. The pro forma
balance sheet data as of March 31, 1996 assumes the IPO was consummated on
March 31, 1996.
The unaudited pro forma combined consolidated financial information and
accompanying notes reflect the historical operations and balances of BTC and
City Signal, Inc, the application of the purchase method of accounting and the
issuance and sale by the Company of 7,385,331 shares of Common Stock in the
IPO.
The unaudited pro forma combined consolidated financial information is
intended for informational purposes only and is not necessarily indicative of
the future financial position or future results of operations of the combined
company after the merger with BTC, the City Signal Acquisition and the IPO; or
of the financial position or results of operations of the combined company that
would have actually occurred had the merger with BTC, the City Signal
Acquisition and the IPO been in effect as of the date or for the periods
presented.
The unaudited pro forma combined consolidated financial information and the
accompanying notes should be read in conjunction with and are qualified in
their entirety by the consolidated financial statements, including the
accompanying notes, of the Company, which are included herein as of March 31,
1996 and December 31, 1995, for the years ended December 31, 1995 and 1994, for
the period from inception to December 31, 1993, and for the three month periods
ended March 31, 1996 and 1995.
<TABLE>
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
Pro Forma Combined Consolidated Statement of Operations
Year Ended December 31, 1995
(Unaudited)
<CAPTION>
Pro Forma Adjustments
--------------------------------
BFP
Pro Forma
BTC Combined
BFP BTC City Signal and Other City Signal Consolidated
------------ ------------ ------------ --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............. $14,160,000 8,680,000 3,159,000 (1,449,000)<F1> -- 23,072,000
(1,478,000)<F2>
Expenses:
Operating expenses.. 7,177,000 7,123,000 2,543,000 (590,000)<F2> 997,000 <F9> 16,319,000
(931,000)<F1>
Selling, general and
administrative..... 11,405,000 4,222,000 1,840,000 (328,000)<F2> 107,000 <F4> 15,352,000
(1,894,000)<F1>
Depreciation and
amortization....... 4,118,000 800,000 1,329,000 179,000 <F3> 972,000 <F5> 8,018,000
(11,000)<F1> 631,000 <F6>
------------ ------------ ------------ --------------- --------------- -----------------
22,700,000 12,145,000 5,712,000 (3,575,000) 2,707,000 39,689,000
Loss from
operations........ (8,540,000) (3,465,000) (2,553,000) 648,000 (2,707,000) (16,617,000)
Other income (expense):
Other income
(expense), net..... -- -- 7,983,000 -- (7,876,000)<F7> 107,000
Interest income
(expense), net..... (2,096,000) (260,000) (904,000) 107,000 <F1> 904,000 <F8> (2,249,000)
------------ ------------ ------------ --------------- --------------- -----------------
(2,096,000) (260,000) 7,079,000 107,000 (6,972,000) (2,142,000)
------------ ------------ ------------ --------------- --------------- -----------------
Net loss before
minority interests.. (10,636,000) (3,725,000) 4,526,000 755,000 (9,679,000) (18,759,000)
Minority interests
in share of loss.... 1,085,000 673,000 -- (673,000)<F1> -- 1,085,000
------------ ------------ ------------ --------------- --------------- -----------------
Net loss........... $(9,551,000) (3,052,000) 4,526,000 82,000 (9,679,000) (17,674,000)
============ ============ ============ =============== =============== =================
Pro forma loss per
common and common
equivalent share.... $(.84)<F10>
=================
See accompanying notes to pro forma combined consolidated financial statements.
</TABLE>
<TABLE>
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
Pro Forma Combined Consolidated Statement of Operations
Three Months Ended March 31, 1996
(Unaudited)
<CAPTION>
Pro Forma BFP
Adjustments Pro Forma
--------------- Combined
BFP City Signal Consolidated
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues................................................. $ 6,795,000 $ 450,000 <F11> $ 7,245,000
Expenses:
Service costs........................................ 2,868,000 183,000 <F11> 3,051,000
Selling, general and administrative expenses......... 6,621,000 444,000 <F11> 7,065,000
Depreciation and amortization........................ 2,427,000 293,000 <F11> 2,720,000
--------------- --------------- ---------------
Loss from operations........................... 11,916,000 920,000 12,836,000
--------------- --------------- ---------------
(5,121,000) (470,000) (5,591,000)
Other income (expense):
Interest income...................................... 1,793,000 -- 1,793,000
Interest expense..................................... (3,835,000) (22,000)<F11> (3,857,000)
--------------- --------------- ---------------
Net loss before minority interests....................... (7,163,000) (492,000) (7,655,000)
Minority interests in share of loss...................... 523,000 -- 523,000
--------------- --------------- ---------------
Net loss....................................... $(6,640,000) $(492,000) $(7,132,000)
=============== =============== ===============
Pro forma loss per common and common equivalent share.... $ (.34) $ (.37)
=============== ===============
Pro forma weighted average number of shares outstanding.. 19,523,584 19,523,584
=============== ===============
See accompanying notes to pro forma combined consolidated financial statements.
</TABLE>
<TABLE>
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
Pro Forma Combined Consolidated Balance Sheet
March 31, 1996
(Unaudited)
<CAPTION>
Pro Forma
Adjustments BFP
-------------------------- Pro Forma
BFP IPO Consolidated
--------------- -------------------------- ---------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 253,796,000 $185,249,000 <F1> $439,045,000
Marketable securities............................. 25,159,000 25,159,000
Accounts receivable, net.......................... 3,867,000 3,867,000
Other current assets.............................. 3,822,000 3,822,000
--------------- -------------------------- ---------------
Total current assets.......................... 286,644,000 185,249,000 471,893,000
Networks and equipment................................ 97,777,000 97,777,000
Other assets, net..................................... 64,714,000 64,714,000
--------------- -------------------------- ---------------
$ 449,135,000 $185,249,000 $ 634,384,000
=============== ========================== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.......... $ 21,871,000 $ 21,871,000
--------------- ---------------
Total current liabilities..................... 21,871,000 21,871,000
--------------- ---------------
Long-term debt........................................ 298,529,000 298,529,000
Minority interests.................................... 3,470,000 3,470,000
Common stock, subject to redemption, $.01 par value,
2,240,000 shares (2,016,000 shares as adjusted)... 28,000,000 (2,800,000)<F2> 25,200,000
Shareholders' Equity:
Preferred stock, 1,040,012 shares authorized:
Convertible preferred stock, Series A-1, $.01
par value; 489,600 shares authorized;
389,650 (none as adjusted) shares issued
and outstanding........................... 38,965,000 (38,965,000)<F3> --
Convertible preferred stock, Series A-2, $.01
par value; 439,927 shares authorized;
419,704 (none as adjusted) shares issued
and outstanding........................... 65,593,000 (65,593,000)<F3> --
Convertible preferred stock, Series B-1, $.01
par value; 12,000 shares authorized;
12,000 (none as adjusted) shares issued
and outstanding........................... 1,200,000 (1,200,000)<F3> --
Convertible preferred stock, Series B-2, $.01
par value; 4,545 shares authorized; 4,545
(none as adjusted) shares issued and
outstanding............................... 711,000 (711,000)<F3> --
Common Stock, $.01 par value; 50,000,000 shares
authorized; 2,167,360 (26,304,611 as
adjusted) shares issued and outstanding... 22,000 241,000 <F1><F2><F3> 263,000
Additional paid-in capital........................ 11,079,000 294,277,000 <F1><F2><F3> 305,356,000
Accumulated deficit................................... (20,305,000) (20,305,000)
--------------- -------------------------- ---------------
Total shareholders' equity............................ 97,265,000 185,249,000 285,314,000
--------------- -------------------------- ---------------
$449,135,000 $185,249,000 $634,384,000
=============== ========================== ===============
See accompanying notes to pro forma combined consolidated financial statements.
</TABLE>
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
Notes to Pro Forma Combined Consolidated Financial Statements
(Unaudited)
Statement of Operations
The following notes to the pro forma combined consolidated financial statements
represent the explanations related to the pro forma adjustments to the
historical statements of operations of BFP, BTC and City Signal, Inc. (CSI), as
applicable.
1. Represents elimination of revenues and expenses of BTC's subsidiary, Brooks
Telecommunications International, Inc. (BTI), due to the distribution by
BTC to its shareholders, prior to the merger with the Company, of its BTI
subsidiary (the BTI Spin-off).
2. Represents the elimination of management and consulting fee revenue charged
by BTC to the Company associated with the development of networks and the
elimination of expenses recorded by the Company for payments made to BTC.
Certain costs were capitalized to the Company's networks at the time they
were incurred.
3. Amount represents the increase in annual amortization of the pro forma
excess of the costs over the fair value of the net assets acquired
(goodwill) in association with the BTC merger of approximately $6,550,000.
The amortization reflects the establishment of additional goodwill of
$4,470,000 in excess of the goodwill existing on the financial statements
of BTC of $2,080,000 at December 31, 1995. The additional amount of
$4,470,000 is amortized over a period of 25 years.
4. Represents the elimination of the management fee received by CSI from a
related entity which is not part of the City Signal Acquisition.
5. Amount represents the depreciation, over an average period of approximately
12.5 years, of assets which aggregated $7,792,000 and were acquired by the
Company from a related entity of CSI. Such assets represent buildings and
equipment and are included in fixed assets within the pro forma combined
consolidated balance sheet.
6. Amount represents the annual amortization, over a period of 25 years, of
the pro forma goodwill related to the CSI acquisition of approximately
$15,773,000.
7. The adjustment represents the elimination of the gain on the sale of CSI's
Las Vegas, Nevada and Memphis, Tennessee systems. This gain is reflected in
the statement of operations of CSI and is non-recurring in nature.
8. The adjustment represents the elimination of interest expense on
outstanding long-term debt of CSI. This interest is reflected in the
statement of operations of CSI and is eliminated as it is non-recurring in
nature due to the pro forma adjustment for the repayment of $8,804,000 of
outstanding debt, and the adjustment of $3,783,000 of debt payable to a
related party which was not assumed in the City Signal Acquisition.
9. The adjustment represents the net effects of salaries and benefits expense
for individuals who will become employees of the Company, additional
property taxes which will be assumed by CSI in conjunction with the
acquisition of certain properties from a related company of CSI, and the
elimination of building rent paid by a related company to CSI.
10. Pro forma loss per share has been computed using the absolute number of
shares of Common Stock and Common Stock equivalents outstanding
after giving effect to the shares issued in connection with the BTC merger
and the City Signal Acquisition. The number of shares used in computing pro
forma loss per share was 20,951,862. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, shares issued during 1995 at
prices below the initial public offering price of $27.00 per share and
stock options and warrants granted with exercise prices below the initial
public offering price during the twelve-month period preceding the date of
the initial filing of the Registration Statement have been included in the
calculation of common stock equivalent shares, using the treasury stock
method, as if such shares, options and warrants were outstanding for all of
1995.
11. Represents the revenues, expenses and interest expense for January 1996
related to the acquisition of City Signal, Inc.
Balance Sheet
The following notes to the pro forma combined consolidated financial statements
represent the explanations related to the pro forma adjustments to the balance
sheets of BFP.
1. Represents the net cash proceeds from the sale of 7,385,331 shares of
common stock in the Company's initial public offering in May 1996. Amounts
included in common stock and additional paid-in capital are $74,000 and
$185,175,000, respectively.
2. In conjunction with the Company's IPO, the holder of such shares subject to
redemption sold 10% of such shares. Accordingly, 224,000 shares are no
longer subject to redemption. The amounts reclassified to common stock and
additional paid-in capital are $2,000 and $2,798,000, respectively.
3. Represents the automatic conversion of all outstanding shares of Series A
preferred stock and Series B preferred stock into share of common stock
upon the Company's initial public offering. Amounts included in common
stock and additional paid-in capital are $165,000 and 106,304,000,
respectively.
<TABLE>
BROOKS FIBER PROPERTIES, INC.
Consolidated Balance Sheets
March 31, 1996 and December 31, 1995
<CAPTION>
March 31, December 31,
1996 1995
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $253,795,955 $59,912,554
Marketable securities 25,158,956 --
Accounts receivable, net 3,866,982 2,002,930
Other current assets 3,822,058 1,183,183
-------------- --------------
Total current assets 286,643,951 63,098,667
NETWORKS AND EQUIPMENT, net 97,777,465 50,042,235
OTHER ASSETS, net 64,713,475 33,469,017
-------------- --------------
$449,134,891 $146,609,919
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued liabilities 21,871,597 5,186,395
-------------- --------------
Total current liabilities 21,871,597 5,186,395
-------------- --------------
LONG-TERM DEBT 298,529,107 43,977,091
MINORITY INTERESTS 3,469,764 3,992,610
COMMON STOCK, subject to redemption, $.01 par value,
2,240,000 and 0 shares issued and outstanding 28,000,000 --
SHAREHOLDERS' EQUITY:
Preferred stock, 1,040,012 shares authorized:
Convertible preferred stock, Series A-1, $.01 par value;
489,600 shares authorized; 389,650 and 396,000 shares
issued and outstanding 38,965,000 39,600,000
Convertible preferred stock, Series A-2, $.01 par value;
439,927 shares authorized; 419,704 and 419,705 shares
issued and outstanding 65,592,647 65,596,092
Convertible preferred stock, Series B-1, $.01 par value;
12,000 shares authorized; 12,000 and 12,000 shares
issued and outstanding 1,200,000 1,200,000
Convertible preferred stock, Series B-2, $.01 par value;
4,545 shares authorized; 4,545 and 4,545 shares
issued and outstanding 711,029 711,029
Common stock, $.01 par value, 50,000,000 shares authorized,
2,167,360 and 1,162,800 shares issued and outstanding 11,100,693 11,378
Accumulated deficit (20,304,946) (13,664,676)
-------------- --------------
Total shareholders' equity 97,264,423 93,453,823
-------------- --------------
$449,134,891 $146,609,919
============== ==============
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
BROOKS FIBER PROPERTIES, INC.
Consolidated Statements of Operations
Three Months Ended March 31, 1996 and 1995
(Unaudited)
<CAPTION>
Three Months Ended
------------------------------
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
REVENUES $6,795,413 $3,022,854
EXPENSES:
Service costs 2,867,625 1,665,651
Selling, general and administrative expenses 6,620,822 2,256,340
Depreciation and amortization 2,427,534 745,226
-------------- --------------
11,915,981 4,667,217
-------------- --------------
Loss from operations (5,120,568) (1,644,363)
Other income (expense):
Interest income 1,792,610 107,329
Interest expense (3,835,157) (819,043)
-------------- --------------
Loss before minority interests (7,163,115) (2,356,077)
MINORITY INTERESTS IN SHARE OF LOSS 522,845 142,009
-------------- --------------
Net loss ($6,640,270) ($2,214,068)
============== ==============
Pro forma loss per common and common equivalent (0.34) (0.11)
============== ==============
Pro forma weighted average number of shares outstanding $19,523,584 $19,523,584
============== ==============
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three Months Ended March 31, 1996
(Unaudited)
<CAPTION>
Convertible Preferred Stock
------------------------------------------------------
Series A-1 Series A-2
-------------------------- --------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 396,000 $39,600,000 419,705 $65,596,092
Merger with BTC
-- issuance of common stock -- -- -- --
-- conversion of preferred stock to common stock (6,350) (635,000) (6,061) (1,000,065)
Issuance of Series A-2 Preferred Stock -- -- 6,060 996,620
Net Loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1996 389,650 $38,965,000 419,704 $65,592,647
============ ============ ============ ============
</TABLE>
<TABLE>
Convertible Preferred Stock
------------------------------------------------------
Series B-1 Series B-2
-------------------------- --------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 12,000 $1,200,000 4,545 $711,029
Merger with BTC
- issuance of common stock -- -- -- --
- conversion of preferred stock to common stock -- -- -- --
Issuance of Series A-2 Preferred Stock -- -- -- --
Net Loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1996 12,000 $1,200,000 4,545 $711,029
============ ============ ============ ============
</TABLE>
<TABLE>
Common Stock Total
-------------------------- Accumulated Shareholders'
Shares Amount Deficit Equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 1,162,800 $11,378 ($13,664,676) $93,453,823
Merger with BTC
- issuance of common stock 756,340 9,454,250 -- 9,454,250
- conversion of preferred stock to common stock 248,220 1,635,065 -- --
Issuance of Series A-2 Preferred Stock -- -- -- 996,620
Net Loss -- -- (6,640,270) (6,640,270)
------------ ------------ ------------ ------------
BALANCE, MARCH 31, 1996 2,167,360 $11,100,693 ($20,304,946) $97,264,423
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
<TABLE>
BROOKS FIBER PROPERTIES, INC.
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995
(Unaudited)
<CAPTION>
Three Months Ended
------------------------------
March 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($6,640,270) ($2,214,069)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,427,534 745,226
Non-cash interest expense 3,753,932 817,302
Minority interests (522,845) (142,009)
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable (381,983) (51,341)
Other, net (1,829,888) 46,978
Accounts payable and accrued expenses 1,253,052 (385,973)
-------------- --------------
Net cash from operating activities (1,940,468) (1,183,886)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of networks and equipment (15,577,086) (4,219,095)
Purchase of marketable securities (25,152,206) --
Increase in other assets (2,159,236) (140,112)
Payment for acquisitions, net of cash acquired 1,284,813 (13,940,819)
-------------- --------------
Net cash used in investing activities (41,603,715) (18,300,026)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of preferred stock and subscriptions receivable
payments, net 996,620 17,800,030
Proceeds from long-term debt, net 249,917,000 2,322,590
Repayment of long-term debt and capital leases (3,233,131) --
Other financing activities (10,252,905) (1,298,338)
-------------- --------------
Net cash provided by financing activities 237,427,584 18,824,282
-------------- --------------
Net increase in cash 193,883,401 (659,630)
CASH, BEGINNING OF PERIOD 59,912,554 8,794,566
-------------- --------------
CASH, END OF PERIOD $253,795,955 $8,134,936
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR INTEREST $58,333 $129,096
============== ==============
See notes to consolidated financial statements
</TABLE>
BROOKS FIBER PROPERTIES, INC.
Notes to Consolidated Financial Statements
1. Basis of Presentation
---------------------
The consolidated balance sheet of Brooks Fiber Properties, Inc. ("BFP" or
the "Company") at December 31, 1995 was obtained from the Company's audited
balance sheet as of that date. All other financial statements contained
herein are unaudited and, in the opinion of management, contain all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation. Operating results for the three months ended
March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. The Company's accounting
policies and certain other disclosures are set forth in the notes to the
Company's audited consolidated financial statements as of and for the year
ended December 31, 1995 included in the Company's Prospectus dated May 2,
1996 (File No. 333-1924) .
2. Marketable Securities
---------------------
Marketable securities consist of treasury bills, commercial paper, and
repurchase agreements which are stated at cost, adjusted for discount
accretion and premium amortization. The securities in the Company's
portfolio are short-term in nature and are classified as "held to
maturity", as management has the intent and ability to hold those
securities to maturity.
3. Acquisitions
------------
Pursuant to an Agreement and Plan of Merger between Brooks
Telecommunications Corporation (BTC) and the Company, BTC was merged into
the Company on January 2, 1996, and the securities of the Company held by
BTC were cancelled. Following the merger, the former holders of BTC's
common stock, preferred stock, convertible notes, options and warrants
received shares of the Company's common stock, options, and warrants.
After the consideration of the shares and warrants of BFP held by BTC at
the time of acquisition, the Company issued an additional 756,340 shares of
common stock valued at $12.50 per share and certain options and warrants
(see Note 7). Intangible assets of approximately $6.1 million were
recorded as a result of this acquisition.
On January 31, 1996, the Company signed a definitive agreement with an
unrelated party to acquire City Signal, Inc., a provider of competitive
access and local exchange services in Michigan and Ohio, and certain assets
of a related entity. In connection with the acquisition, the Company
agreed to issue approximately 2.2 million shares of common stock and to
assume certain specified liabilities. In addition, the Company has
provided the seller with the option to require the Company to repurchase
any or all shares at a price of $12.50 per share on or before February 1,
1998. Intangible assets of approximately $13.1 million were recorded as a
result of this acquisition.
The above acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of operations of the acquired
companies have been included in the Company's consolidated financial
statements since the effective dates of acquisition. The aggregate
purchase price for these acquisitions was allocated based on fair values as
follows:
Fair value of tangible assets acquired $ 36,968,631
Fair value of intangible assets acquired 19,212,314
Liabilities assumed (20,011,507)
--------------
Purchase price, net of cash acquired $ 36,169,438
==============
The following unaudited condensed pro forma information presents the
results of operations of the Company for the three months ended March 3,
1996 and the year ended December 31, 1995, as if the above transactions had
occurred January 1, 1995:
Quarter Ended Year Ended
March 31, 1996 December 31, 1995
-------------- -----------------
Revenues $7,245,000 $23,072,000
Loss before minority interests ($7,655,000) ($18,759,000)
The unaudited pro forma information is provided for informational purposes
only and is not necessarily indicative of the results of operations that
would have occurred had the purchases been made on January 1, 1995, or of
the future anticipated results of operations of the combined companies.
4. Networks and Equipment, Net
---------------------------
Networks and equipment consist of the following:
March 31 December 31
1996 1995
------------ ------------
Telecommunications networks $41,516,678 $30,158,000
Electronic and related equipment 42,573,261 20,174,000
Land and Buildings 4,480,049 ---
Leasehold improvements 1,565,086 232,000
Furniture and office equipment 12,303,078 2,435,000
Motor vehicles 320,040 173,000
------------ ------------
102,758,192 53,172,000
Less accumulated depreciation 4,980,727 3,130,000
------------ ------------
$97,777,465 $50,042,000
============ ============
As of March 31, 1996 and December 31, 1995, networks and equipment include
$6,541,063 and $4,469,000 of networks in progress that are not in service
and, accordingly, have not been depreciated.
5. Other Assets, Net
-----------------
Other assets consist of the following:
March 31 December 31
1996 1995
------------ ------------
Goodwill $ 48,370,603 $ 29,129,000
Debt issuance costs 11,758,557 1,559,000
Organization, development, and pre-
operating costs 4,008,831 2,341,000
Interest rate cap arrangements 1,511,000 1,511,000
Rights-of-way 303,646 283,000
Other 1,055,462 298,000
------------ ------------
67,008,099 35,121,000
Less accumulated amortization 2,294,624 1,652,000
------------ ------------
$ 64,713,475 $ 33,469,000
============ ============
6. Shareholder's Equity:
---------------------
On January 2, 1996, the Company's Board of Directors authorized a 20-for-1
split for each share of common stock and adjusted all outstanding common
stock options and warrants accordingly. All share data presented within
the consolidated financial statements have been revised to effect for the
stock split.
7. Stock Options and Warrants
--------------------------
The Company's 1993 Stock Option Plan (the Plan) authorizes the granting of
options and stock appreciation rights covering up to 3,400,000 shares of
common stock. The options generally vest over a period of three years from
the date of grant.
Stock option activity for the Plan for the three months ended March 31,
1996 is as follows:
Price
Number per Share
------------ ------------
Balance, December 31, 1995 1,651,660 $4.00- $6.60
Granted 702,000 $12.50
Cancelled (52,000) $ 6.60
------------ ------------
Balance, March 31, 1996 2,301,660 $4.00-$12.50
============ ============
Also, in connection with the Agreement and Plan of Merger between the
Company and BTC, the Company issued options and warrants to certain of the
shareholders and employees of BTC for the purchase of 1,134,840 shares of
the Company's Common Stock at prices of $11.35 to $31.04 per share. The
warrants expire at various dates from March 31, 1997 to December 21, 1999.
The options generally vest over a three year period from the dates of
original grant.
8. Long-Term Debt:
---------------
On February 26, 1996, the Company completed the issuance and sale of $425.0
million aggregate principal amount of 10 7/8% Senior Discount Notes due
March 1, 2006, for which gross proceeds of approximately $250.0 million
were received. No cash payments of interest are required prior to
September 1, 2001. Commencing at such time, the Company will be required
to make semi-annual interest payments on the Senior Discount Notes,
totaling approximately $46.2 million annually.
9. Pro Forma Loss Per Share:
-------------------------
Pro forma loss per share has been computed using the number of shares of
Common Stock and Common Stock equivalents outstanding. The number of
shares used in computing pro forma loss per share was 19,532,584. Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 83,
shares issued and stock options and warrants granted at prices below the
initial public offering price of $27.00 per share during the twelve-month
period preceding the date of the Company's initial filing of the
Registration Statement related to such initial public offering have been
included in the calculation of common stock equivalent shares, using the
treasury stock method, as if they were outstanding for all of 1995 and for
the first quarter of 1996.
10. Commitments and Contingencies:
------------------------------
During September 1995, GST Tucson Lightwave, Inc. (Lightwave) was permitted
to intervene in litigation originally filed by Brooks Fiber Communications
of Tucson, Inc. a wholly-owned subsidiary of BFP (BFC Tucson). Lightwave
filed a counterclaim against BFC Tucson, BFP, and Tucson Electric Power
Company (TEP) charging BFC Tucson, BFP, and TEP with violations of
antitrust laws, all of which stem from an agreement between BFC Tucson and
TEP that allowed BFC Tucson exclusive rights, for one year, to utilize
certain of TEP's rights-of-way. The original causes of the action have
been settled, however, the counterclaim by Lightwave is currently still
pending. The Company believes the claim to be without merit and intends to
vigorously defend against this action. The Company believes that
resolution of the matter will not have a material adverse effect on the
financial condition or results of operations of the Company.
11. Subsequent Event:
-----------------
On May 2, 1996, the Company completed the sale of 7,385,331 shares of
Common Stock at a price of $27.00 per share in an initial public offering,
for gross proceeds of approximately $199.4 million and proceeds net of
underwriting discounts and advisory fees of approximately $186.4 million.
Independent Auditors' Report
The Board of Directors
Brooks Fiber Properties, Inc.:
We have audited the accompanying consolidated balance sheets of Brooks Fiber
Properties, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of operations, changes
in shareholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 1995 and the period from November 10, 1993 (date of
inception) to December 31, 1993. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Brooks Fiber
Properties, Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1995 and the period from November 10, 1993
(date of inception) to December 31, 1993, in conformity with generally accepted
accounting principles.
/S/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
St. Louis, Missouri
January 26, 1996
<TABLE>
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
<CAPTION>
1995 1994
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................................... $ 59,913,000 8,795,000
Accounts receivable, net..................................................... 2,003,000 1,116,000
Other current assets......................................................... 1,183,000 135,000
Subscriptions receivable..................................................... -- 10,050,000
------------ ------------
Total current assets....................................................... 63,099,000 20,096,000
Subscriptions receivable -- restricted......................................... -- 7,750,000
Networks and equipment, net of accumulated depreciation........................ 50,042,000 20,720,000
Other assets, net.............................................................. 33,469,000 22,759,000
------------- ------------
$146,610,000 71,325,000
============= ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable............................................................. 4,397,000 3,545,000
Accrued expenses............................................................. 789,000 689,000
------------- ------------
Total current liabilities.................................................. 5,186,000 4,234,000
------------- ------------
Long-term debt................................................................. 43,977,000 29,403,000
Minority interests............................................................. 3,992,000 989,000
Shareholders' equity:
Preferred stock, 1,040,012 shares authorized:
Convertible preferred stock, Series A-1, $.01 par value; 489,600 shares
authorized, 396,000 and 223,234 shares issued and outstanding............ 39,600,000 39,600,000
Convertible preferred stock, Series A-2, $.01 par value; 433,867 shares
authorized, 419,705 and 0 shares issued and outstanding.................. 65,596,000 --
Convertible preferred stock, Series B-1, $.01 par value; 12,000 shares
authorized, 12,000 and 6,766 shares issued and outstanding............... 1,200,000 1,200,000
Convertible preferred stock, Series B-2, $.01 par value; 4,545 shares
authorized, 4,545 and 0 shares issued and outstanding.................... 711,000 --
Common stock, $.01 par value; 50,000,000 shares authorized, 1,162,800 shares
issued and outstanding..................................................... 12,000 12,000
Accumulated deficit.......................................................... (13,664,000) (4,113,000)
------------- ------------
Total shareholders' equity................................................. 93,455,000 36,699,000
------------- ------------
$146,610,000 71,325,000
============= ============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995 and 1994 and the
period from inception to December 31, 1993
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Revenues.......................................................... $14,160,000 2,809,000 2,000
------------ ------------ ------------
Expenses:
Operating expenses.............................................. 7,177,000 1,557,000 --
Selling, general and administrative expenses.................... 11,405,000 3,966,000 206,000
Depreciation and amortization................................... 4,118,000 663,000 3,000
------------ ------------ ------------
22,700,000 6,186,000 209,000
------------ ------------ ------------
Loss from operations.......................................... (8,540,000) (3,377,000) (207,000)
Other income (expense):
Interest income................................................. 1,608,000 95,000 2,000
Interest expense................................................ (3,704,000) (693,000) --
------------ ------------ ------------
Loss before minority interest................................. (10,636,000) (3,975,000) (205,000)
Minority interests in share of loss............................... 1,085,000 78,000 --
------------ ------------ ------------
Net loss...................................................... $(9,551,000) (3,897,000) (205,000)
============ ============ ============
Pro forma loss per common and common equivalent share............. $ (.49)
============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1995 and 1994 and the
period from inception to December 31, 1993
<CAPTION>
Convertible preferred stock Convertible preferred stock
------------------------------------------- ------------------------------------------
Series A-1 Series A-2 Series B-1 Series B-2
--------------------- -------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------- ------------ ------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock,
November 10, 1993........ -- $ -- -- $ -- -- $ -- -- $ --
Issuance and subscription
of Series A preferred
stock.................... 396,000 39,600,000 -- -- -- -- -- --
Issuance and subscription
of Series B preferred
stock.................... -- -- -- -- 12,000 1,200,000 -- --
Subscriptions receivable,
payments and
reclassifications........ -- -- -- -- -- -- -- --
Net loss................... -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------- ----------- ------- -----------
Balance, December 31,
1993..................... 396,000 39,600,000 -- -- 12,000 1,200,000 -- --
Subscriptions receivable,
payments and
reclassifications........ -- -- -- -- -- -- -- --
Net loss................... -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------- ----------- ------- -----------
Balance, December 31,
1994..................... 396,000 39,600,000 -- -- 12,000 1,200,000 -- --
Issuance of Series A-2
preferred stock.......... -- -- 419,705 65,596,000 -- -- -- --
Issuance of Series B-2
preferred stock.......... -- -- -- -- -- -- 4,545 711,000
Net loss................... -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------- ----------- ------- -----------
Balance, December 31,
1995..................... 396,000 $39,600,000 419,705 $65,596,000 12,000 $1,200,000 4,545 $711,000
======= =========== ======= =========== ======= =========== ======= ===========
<CAPTION>
Common Stock Total
---------------------- Subscriptions Accumulated Shareholders'
Shares Amount Receivable Deficit Equity
---------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock,
November 10, 1993............................. 1,162,800 $12,000 -- (11,000) 1,000
Issuance and subscription of
Series A preferred stock...................... -- -- (39,018,000) -- 582,000
Issuance and subscription of
Series B preferred stock...................... -- -- (1,182,000) -- 18,000
Subscriptions receivable,
payments and reclassifications................ -- -- 4,450,000 -- 4,450,000
Net loss........................................ -- -- -- (205,000) (205,000)
---------- ---------- ------------ ------------ ------------
Balance, December 31, 1993...................... 1,162,800 12,000 (35,750,000) (216,000) 4,846,000
Subscriptions receivable,
payments and reclassifications................ -- -- 35,750,000 -- 35,750,000
Net loss........................................ -- -- -- (3,897,000) (3,897,000)
---------- ---------- ------------ ------------ ------------
Balance, December 31, 1994...................... 1,162,800 12,000 -- (4,113,000) 36,699,000
Issuance of Series A-2 preferred stock.......... -- -- -- -- 65,596,000
Issuance of Series B-2 preferred stock.......... -- -- -- -- 711,000
Net loss........................................ -- -- -- (9,551,000) (9,551,000)
---------- ---------- ------------ ------------ ------------
Balance, December 31, 1995...................... 1,162,800 $12,000 -- (13,664,000) 93,455,000
========== ========== ============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995 and 1994 and the
period from inception to December 31, 1993
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $(9,551,000) (3,897,000) (205,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization....................................... 4,117,000 663,000 3,000
Non-cash interest expense........................................... 3,814,000 135,000 --
Minority interests.................................................. (1,085,000) (78,000) --
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable............................................... (593,000) (576,000) (2,000)
Other current assets.............................................. 115,000 (133,000) (91,000)
Accounts payable and accrued expenses............................. 623,000 3,955,000 154,000
------------ ------------ ------------
Net cash provided by (used in) operating activities............... (2,560,000) 69,000 (141,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of networks and equipment.................................... (27,577,000) (6,693,000) --
Increase in other assets.............................................. (2,026,000) (769,000) --
Payment for acquisitions, net of cash acquired........................ (13,941,000) (35,669,000) --
------------ ------------ ------------
Net cash used in investing activities........................... (43,544,000) (43,131,000) --
------------ ------------ ------------
Cash flows from financing activities:
Issuance of preferred stock and subscriptions receivable payments..... 84,107,000 21,781,000 1,219,000
Proceeds from minority interests...................................... 4,088,000 1,067,000 --
Proceeds from long-term debt.......................................... 10,760,000 29,268,000 --
Other financing activities............................................ (1,733,000) (1,337,000) --
------------ ------------ ------------
Net cash provided by financing activities....................... 97,222,000 50,779,000 1,219,000
------------ ------------ ------------
Net increase in cash............................................ 51,118,000 7,717,000 1,078,000
Cash, beginning of period............................................... 8,795,000 1,078,000 --
------------ ------------ ------------
Cash, end of year....................................................... $59,913,000 8,795,000 1,078,000
============ ============ ============
Supplemental disclosure of cash flow information
-- cash paid during the year for interest............................. $ 132,000 408,000 --
============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
The consolidated financial statements include the accounts of Brooks
Fiber Properties, Inc. (BFP) and its majority-owned subsidiaries (the
Company). The Company, through its subsidiaries, is a leading provider
of competitive local telecommunications services in selected markets
in the United States.
The Company was founded on November 10, 1993 by Brooks
Telecommunications Corporation (BTC) and a group of venture capital
investors who, along with BTC and management of the Company, provided
initial equity capital of $40.8 million. As the Company's founding
shareholder, BTC received 1,162,800 founder's shares of the Company's
common stock and founder's warrants to purchase an additional 81,600
shares of the Company's preferred stock (convertible into 1,632,000
shares of common stock).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of all
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents.
(c) Concentration of Credit Risk
For purposes of segment reporting, management believes the Company
operates in the telecommunications industry. The Company's primary
customers are long distance carriers and businesses within the
Company's markets. The Company has no significant credit risk
concentration. One long distance carrier accounted for 24% of total
revenues for the year ended December 31, 1995.
(d) Networks and Equipment
Networks and equipment are stated at cost. Costs of construction are
capitalized, including direct interest costs related to construction.
Leasehold improvements are amortized using the straight-line method
over their useful life or lease term, whichever is shorter.
Depreciation is provided using the straight-line method over the
estimated useful lives of the assets as follows:
Years
-----
Telecommunications networks............. 8-25
Electronic and related equipment........ 8
Furniture and office equipment.......... 7
Motor vehicles.......................... 3
(e) Other Assets
Goodwill is being amortized using the straight-line method over 25
years from the dates of acquisition. The Company reviews the carrying
amount of goodwill periodically to determine whether any impairment
has occurred in the value of such assets. Based upon the anticipated
future income and cash flows from operating activities, in the opinion
of management no impairment has occurred as of December 31, 1995.
Direct incremental costs incurred in the organization and development
of new networks, including the costs associated with negotiating
rights-of-way, obtaining legal/regulatory authorizations, and
developing network design, are deferred and amortized over five years.
Preoperating costs represent substantially all direct incremental
nondevelopment costs incurred during the preoperating phase of a newly
constructed network and are amortized over five-year periods
commencing with the start of operations.
Costs of the Company's interest rate cap arrangements purchased under
the terms of debt facilities are deferred and amortized over the
contractual period of the underlying interest rate cap arrangements.
Costs incurred in connection with securing the Company's debt
facilities, including commitment, legal, and other such costs, are
deferred and amortized over the term of the financing.
(f) Revenue Recognition
The Company recognizes revenue on local competitive access services in
the month such services are provided. Revenues and associated costs of
facilities management services are recognized as services are
provided.
(g) Income Taxes
The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS)
No.109, Accounting for Income Taxes. SFAS No.109 utilizes the
asset/liability method and deferred taxes are determined based on the
estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities given the provisions
of the enacted tax laws.
(h) Reclassifications
Certain 1994 amounts have been reclassified to conform with the 1995
presentation.
(i) Fair Value of Financial Instruments
The Company discloses estimated fair values for its financial
instruments. A financial instrument is defined as cash or a contract
that both imposes on one entity a contractual obligation to deliver
cash or another financial instrument to a second entity and conveys to
that second entity a contractual right to receive cash or another
financial instrument from the first entity.
(j) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities in the
preparation of financial statements. Actual results could differ from
these estimates.
(k) Effect of New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed of," which will require the
Company to review for the impairment of long-lived assets and certain
identifiable intangibles to be held and used by the Company whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Adoption of SFAS No. 121 is
required in fiscal year 1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes a fair value based method
for financial accounting and reporting for stock-based employee
compensation plans. However, the new standard allows compensation to
continue to be measured by using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," but requires expanded
disclosures. SFAS No. 123 is effective in fiscal year 1996.
While the Company does not know precisely the impact that will result
from adopting SFAS No. 121 and SFAS No. 123, the Company does not
expect the adoption of SFAS No. 121 or SFAS No. 123 to have a material
effect on the Company's consolidated financial position or results of
operations.
(l) Pro Forma Loss Per Share
Pro forma loss per share has been computed using the number of shares
of Common Stock and Common Stock equivalents outstanding. The number
of shares used in computing pro forma loss per share was 19,532,584.
Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, shares issued and stock options and warrants granted
at prices below the initial public offering price of $27.00 per share
during the twelve-month period preceding the date of the initial
filing of the Registration Statement have been included in the
calculation of common stock equivalent shares, using the treasury
stock method, as if they were outstanding for all of 1995.
(3) ACQUISITIONS AND JOINT VENTURES
On January 31, 1994, the Company acquired certain assets from an
unrelated party that included a telecommunications network in
Massachusetts and rights-of-way for development of networks in
Connecticut and Rhode Island.
On October 14, 1994, the Company acquired from an unrelated party 100%
of certain related companies (Phoenix) that included
telecommunications networks in California, a telemanagement services
business, and a reseller of long distance telecommunications services.
The Company issued short-term notes of $24.5 million to the seller
backed by a letter of credit. As of December 31, 1994, the notes were
repaid using the proceeds from long-term debt.
On March 15, 1995, the Company acquired from an unrelated party 100%
of the assets of a 105-mile competitive access network in Tulsa,
Oklahoma.
The above acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of operations of the acquired
companies have been included in the Company's consolidated financial
statements since the effective dates of acquisition. The aggregate
purchase price for the acquisitions occurring in 1995 and 1994 were
allocated based on fair values as follows:
1995 1994
------------ ------------
Fair value of tangible assets acquired.... $ 5,958,000 15,037,000
Fair value of intangible assets acquired.. 8,323,000 20,757,000
Liabilities assumed ...................... (340,000) (125,000)
------------ ------------
Purchase price, net of cash acquired.. $13,941,000 35,669,000
============ ============
The following unaudited condensed pro forma information presents the
results of operations of the Company for the years ended December 31,
1995 and 1994 as if the above transactions had occurred on January 1,
1994:
1995 1994
------------ ------------
Revenue................................... $14,536,000 12,803,000
Loss before minority interest............. (10,722,000) (6,352,000)
============ ============
The unaudited pro forma information is provided for informational
purposes only and is not necessarily indicative of the results of
operations that would have occurred had the purchases been made on
January 1, 1994, or of the future anticipated results of operations of
the combined companies.
In September 1995, the Company and MCI/Metro Access Transmission
Services, Inc. (MCI/Metro), a wholly-owned subsidiary of MCI
Communications Corp. (MCI), entered into agreements for the formation
of a joint venture company, which is majority owned by a subsidiary of
the Company, to operate and significantly expand the Company's
existing CAP networks in San Jose, California, and its environs. The
Company transferred the net assets of its network in San Jose to the
joint venture.
During 1995 and 1994, a third-party investor acquired a 6.5% interest
in certain subsidiaries of the Company. In connection with MCI/Metro's
investment in the Company's San Jose network and investments by the
third-party investor, minority investments in the Company's
subsidiaries totaling $4.1 million and $1.1 million were made during
the years ended December 31, 1995 and 1994, respectively.
(4) NETWORKS AND EQUIPMENT, NET
Networks and equipment consist of the following:
1995 1994
------------ ------------
Telecommunications networks............... $30,158,000 12,726,000
Electronic and related equipment.......... 20,174,000 7,448,000
Leasehold improvements.................... 232,000 116,000
Furniture and office equipment............ 2,435,000 732,000
Motor vehicles............................ 173,000 71,000
------------ ------------
53,172,000 21,093,000
Less accumulated depreciation............. 3,130,000 373,000
------------ ------------
$50,042,000 20,720,000
============ ============
As of December 31, 1995 and 1994, networks and equipment include
$4,469,000 and $601,000 of networks in progress that were not in
service and, accordingly, have not been depreciated.
(5) OTHER ASSETS, NET
Other assets consist of the following:
1995 1994
------------ ------------
Goodwill.................................. $29,129,000 20,757,000
Organization, development, and
preoperating costs.................... 2,341,000 614,000
Interest rate cap arrangements............ 1,511,000 567,000
Debt issuance costs....................... 1,559,000 770,000
Rights-of-way............................. 283,000 193,000
Other..................................... 298,000 151,000
------------ ------------
35,121,000 23,052,000
Less accumulated amortization............. 1,652,000 293,000
------------ ------------
$33,469,000 22,759,000
============ ============
Amortization charged to expense for the years ended December 31, 1995
and 1994 and for the period ended December 31, 1993 was $1,356,000,
$289,000, and $3,000, respectively.
The terms of the Company's Loan and Security Agreements (the
Agreements) with AT&T Credit Corporation entered into during 1995 and
1994 require the purchase of interest rate cap arrangements under
which, if the 90-day commercial paper rate rises above 7.5%, the
Company will receive payments to offset the higher interest rates on
long-term debt. These payments, if any, will be recorded as reductions
of interest expense. The contract period and notional amounts of the
interest rate caps as of December 31, 1995 are as follows:
Contract Period Notional Amount
----------------------------------------------------- ---------------
October 1996 through October 2001.................... $ 4,752,000
January 1997 through January 2002.................... 30,551,000
===============
Notional amounts decrease during the contract period.
As of December 31, 1995, the carrying value and fair value of the
interest rate cap arrangements approximated $1,511,000 and $444,250,
respectively.
(6) LONG-TERM DEBT
During 1995 and 1994, the Company entered into Agreements with AT&T
Credit Corporation to provide financing for the acquisition and
construction of telecommunications networks, the purchase of equipment
related to the construction and operation of the networks, and working
capital. As of December 31, 1995, borrowings under the Agreements have
a maximum capacity of $49.2 million, with outstanding indebtedness of
$43.9 million. The notes bear interest at the 90-day commercial paper
rate plus 4.5% per annum (10.12% at December 31, 1995), payable
quarterly beginning two years after the initial borrowing. Interest
not paid during the two-year period will be added to the principal
balance of the notes, not to exceed the maximum borrowing capacity.
The Company is required to pay a commitment fee at the rate of .5% per
annum on the average unused portion of the maximum borrowing capacity
of the Agreements. The fee is payable quarterly and commences six
months after the initial borrowing. Borrowings are secured by the
assets and stock of certain of the Company's subsidiaries. Principal
payments begin three years after the initial borrowing.
In August 1995, the Company entered into a credit agreement with Fleet
National Bank, N.A. (the Bank Credit Agreement) that provides a
wholly-owned subsidiary of the Company the ability to borrow amounts
up to $10 million from time to time prior to June 30, 1997 at an
interest rate of 2% over the prime rate of the bank. Terms of the Bank
Credit Agreement further provide for final maturity of all loans no
later than June 30, 2002, interest-only payments through August 31,
1997, and a 4.5-year principal payout period thereafter. As of
December 31, 1995, borrowings under this facility totaled $100,000 at
a rate of 10.25%.
The aforementioned credit agreements contain certain restrictive and
financial covenants, including limitations on the ability of the
subsidiaries to declare and pay dividends, to incur additional
indebtedness, to make loans and advances, and the maintenance of
certain financial ratios and minimum annualized operating cash flow.
Maturities of long-term debt at December 31, 1995 are as follows:
1996................................. $ --
1997................................. 115,000
1998................................. 2,315,000
1999................................. 4,513,000
2000................................. 6,714,000
Thereafter........................... 30,320,000
--------------
$ 43,977,000
==============
As of December 31, 1995, the fair value of long-term debt approximated
carrying value.
(7) PREFERRED STOCK
The Company's authorized preferred stock consists of 1,040,012 shares,
of which 489,600 shares are designated as Series A-1 Voting
Convertible Preferred Stock (Series A-1), 433,867 shares are
designated as Series A-2 Non-Voting Convertible Preferred Stock
(Series A-2), 12,000 shares are designated as Series B-1 Voting
Convertible Preferred Stock (Series B-1), and 4,545 shares are
designated as Series B-2 Non-Voting Convertible Preferred Stock
(Series B-2). The Company has not designated approximately 100,000
shares of preferred stock.
On November 10, 1993, the Company received stock subscriptions for
396,000 shares of Series A-1 and 12,000 shares of Series B-1 preferred
stock for an aggregate committed purchase price of $100 per share. The
Company recorded $40.8 million of preferred stock and a subscriptions
receivable (as a component of shareholders' equity) of $40.2 million,
net of $600,000 of cash received for the initial issuance of 6,000
shares of preferred stock. In December 1993, additional funds of
$619,000 were received for the issuance of preferred shares. During
1995 and 1994, the remaining funds under the subscriptions receivable
were requested and received by the Company. Accordingly, the
subscriptions receivable of $17.8 million as of December 31, 1994 was
reclassified as an asset of the Company, of which $7.75 million was
designated to make an acquisition of long-term assets and was
classified as a noncurrent asset.
In August 1995, the Company completed a private placement of 419,705
shares of Series A-2 and 4,545 shares of Series B-2 preferred stock.
Gross proceeds from the offering totaled $70,001,000.
Each share of preferred stock may be converted into 20 shares of
common stock at the option of the holder. In addition, Series B
preferred stock may be converted into shares of Series A preferred
stock on a share-for-share basis. The preferred shares automatically
convert into common stock upon consummation of a public offering of
the Company's stock of at least $40.0 million and $15.00 per share.
The holders of shares of the Series A and Series B preferred stock are
not entitled to receive cash dividends. No cash dividends may be
declared and paid to the holders of common stock as long as Series A
or Series B preferred stock is outstanding.
(8) STOCK OPTIONS AND WARRANTS
The Company's 1993 Stock Option Plan (the Plan) authorizes the
granting of options and stock appreciation rights covering up to
3,400,000 shares of common stock. The options generally vest over a
period of three years from the date of grant.
Stock option activity for the years ended December 31, 1995 and 1994
is as follows:
Number Price per share
---------- ---------------
Balance, January 1, 1994.................. 580,000 $4.00
Granted................................... 460,000 4.00
Cancelled................................. (120,000) 4.00
----------
Balance, December 31, 1994................ 920,000 4.00
Granted................................... 875,000 4.00-6.60
Cancelled................................. (143,340) 4.00-6.60
----------
Balance, December 31, 1995................ 1,651,660 4.00-6.60
========== ===============
In connection with the stock subscriptions received by the Company on
November 10, 1993, the Company granted a warrant to BTC to purchase up
to 81,600 shares of Series A-1 preferred stock (convertible into
1,632,000 shares of common stock) at a price of $220 per share if
exercised prior to November 10, 1996; $290 per share thereafter to
November 10, 1997; and $380 per share after November 10, 1997. The
warrant expires on November 10, 1998.
In connection with the August 1995 placement of Series A-2 preferred
stock, the Company granted its financial advisor for the offering
9,617 warrants for the purchase of Series A-2 shares (convertible into
192,340 shares of common stock) at $165 per share. The warrants expire
August 8, 2000.
(9) RELATED-PARTY TRANSACTIONS
During November 1993, the Company entered into a management agreement
with BTC pursuant to which BTC agreed to provide certain services to
the Company. The management agreement commenced upon the Company's
first acquisition (January 31, 1994). The management agreement
provides for payment by the Company to BTC of a fee equal to $250,000
per year adjusted annually in 1996 and subsequent years for inflation,
plus the Company's proportionate share of rent and support services.
Furthermore, BTC charges BFP for consulting services and certain
expenses as incurred, plus the Company's proportionate share of rent
and support services. Aggregate expenses related to services provided
by BTC totaled $1,478,000 and $458,000 in 1995 and 1994, respectively.
As of December 31, 1995 and 1994, the Company has recorded a payable
to BTC of $152,000 and $66,000, respectively. See note 12 for further
discussion of related-party transactions.
(10) INCOME TAXES
The Company accounts for income taxes in accordance with the
provisions of SFAS No. 109. No provision for income taxes was recorded
for 1995, 1994, or for the period ended December 31, 1993. A valuation
allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company
has established a valuation allowance for the entire portion of the
net deferred income tax asset. The valuation allowance increased by
$4,407,000 and $1,535,000 for 1995 and 1994, respectively.
As of December 31, 1995 and 1994, temporary differences and
carryforwards that give rise to deferred income tax assets and
liabilities are as follows:
1995 1994
------------ ------------
Deferred income tax assets:
Tax loss carryforwards................ $ 6,358,000 1,754,000
Valuation allowance................... (6,011,000) (1,604,000)
Other................................. 52,000 32,000
------------ ------------
Net deferred income tax asset..... 399,000 182,000
------------ ------------
Deferred income tax liabilities:
Networks and equipment................ (399,000) (159,000)
Intangible assets..................... -- (23,000)
------------ ------------
Net deferred income tax
liabilities....................... (399,000) (182,000)
------------ ------------
Net deferred income taxes......... $ -- --
============ ============
As of December 31, 1995, net operating loss carryforwards totaling
$15.9 million expire in years 2008-2011 if not utilized in future
income tax returns.
(11) COMMITMENTS AND CONTINGENCIES
The Company leases office space at various locations. Rent expense
totaled $688,000 and $245,000 for 1995 and 1994, respectively. Future
minimum rental payments under noncancellable operating leases at
December 31, 1995 were as follows:
1996................................ $1,169,000
1997................................ 1,181,000
1998................................ 850,000
1999................................ 667,000
2000................................ 532,000
Thereafter.......................... 1,455,000
----------
$5,854,000
==========
During September 1995, GST Tucson Lightwave, Inc. (Lightwave) was
permitted to intervene in litigation originally filed by Brooks Fiber
Communications of Tucson, Inc., a wholly-owned subsidiary of BFP (BFC
Tucson). Lightwave filed a counterclaim against BFC Tucson, BFP, and
Tucson Electric Power Company (TEP) charging BFC Tucson, BFP, and TEP
with violations of antitrust laws, all of which stem from an agreement
between BFC Tucson and TEP that allowed BFC Tucson exclusive rights,
for one year, to utilize certain of TEP's rights-of-way. The original
causes of the action have been settled; however, the counterclaim by
Lightwave is currently still pending. The Company believes the claim
to be without merit and intends to vigorously defend against this
action. The Company believes that resolution of the matter will not
have a material adverse effect on the financial condition or results
of operations of the Company.
(12) SUBSEQUENT EVENTS
Pursuant to an Agreement and Plan of Merger between BTC and the
Company, BTC was merged into the Company on January 2, 1996, and the
securities of the Company held by BTC were cancelled. Following the
merger, the former holders of BTC's common stock, preferred stock,
convertible notes, and options and warrants received shares of the
Company's common stock, options, and warrants. After the consideration
of the shares of BFP held by BTC at the time of the acquisition, the
Company issued an additional 756,340 shares of Common Stock valued at
$12.50 per share. Intangible assets of approximately $7 million are
expected to be recorded as a result of this acquisition. The
Management Agreement between the Company and BTC was cancelled.
Also on January 2, 1996, the Company's Board of Directors authorized a
20-for-1 stock split for each share of common stock and adjusted all
outstanding common stock options and warrants accordingly. All share
data presented within the December 31, 1995 consolidated financial
statements have been revised to effect for the stock split.
On January 17, 1996, the Company signed a definitive agreement with an
unrelated party to acquire City Signal, Inc., a provider of
competitive access and local exchange services in Michigan and Ohio,
and certain assets of a related entity. In connection with the
acquisition, the Company has agreed to issue approximately 2.2 million
shares of common stock (subject to post-closing adjustment) and to
assume approximately $13.3 million of liabilities. In addition, the
Company has provided the seller with the option to require the Company
to purchase from the seller all or any part of the shares issued in
connection with the acquisition at a price of $12.50 per share on or
prior to the earlier of the first anniversary of the closing or the
closing of an initial public offering of the Company's common stock.
The transaction is scheduled to close into escrow on January 31, 1996.
Intangible assets of approximately $15.8 million are expected to be
recorded as a result of this acquisition.
The following unaudited condensed pro forma information presents the
results of operations of the Company for the year ended December 31,
1995 as if the above transactions had occurred on January 1, 1995:
Revenue.......................... $ 23,072,000
Loss before minority interest.... (17,861,000)
=============
The unaudited pro forma information is provided for informational
purposes only and is not necessarily indicative of the results of
operations that would have occurred had the purchases been made on
January 1, 1995, or of the future anticipated results of operations of
the combined companies.
Independent Auditors' Report
City Signal, Inc.
Grand Rapids, Michigan
We have audited the accompanying consolidated balance sheets of City Signal,
Inc. as of December 31, 1995 and 1994, and the related consolidated statements
of operations, shareholder's equity (deficit) and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of City Signal, Inc.
as of December 31, 1995 and 1994, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
Grand Rapids, Michigan
February 29, 1996
<TABLE>
City Signal, Inc.
Consolidated Balance Sheets
<CAPTION>
December 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Assets
Current Assets
Cash.......................................................................... $ 92,424 $ 337,109
Accounts receivable:
Trade, net of allowance for possible losses of $30,000 and $18,000.......... 664,018 1,294,796
Other....................................................................... 367,631 406,919
Current maturities of note receivable......................................... 15,226 13,794
Prepaid expenses.............................................................. 327,965 218,881
------------ ------------
Total Current Assets............................................................ 1,467,264 2,271,499
------------ ------------
Property and Equipment (Notes 2, 4 and 6)
Network equipment............................................................. 10,080,406 7,448,618
Fiber optic cable............................................................. 4,676,128 8,527,556
Leasehold improvements........................................................ 314,246 257,432
Office furniture and equipment................................................ 135,694 105,160
Vehicles...................................................................... 92,073 215,860
Uninstalled equipment and construction in progress............................ 4,336,875 1,727,264
------------ ------------
19,635,422 18,281,890
Less accumulated depreciation and amortization.................................. 4,456,814 4,326,697
------------ ------------
Net Property and Equipment...................................................... 15,178,608 13,955,193
------------ ------------
Other Assets
Investment in limited partnership (Note 6).................................... 410,000 --
Collocation costs, net of amortization........................................ 152,225 972,053
Note receivable, net of current maturities.................................... 37,614 45,773
Deposits...................................................................... 18,333 32,134
Miscellaneous................................................................. -- 1,336
------------ ------------
Total Other..................................................................... 618,172 1,051,296
------------ ------------
$17,264,044 $17,277,988
============ ============
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable:
Trade....................................................................... $ 2,428,799 $ 772,655
Related parties (Note 6).................................................... 1,140,677 --
Customer advance deposits and billings........................................ -- 385,695
Accrued expenses:
Taxes, other than income.................................................... 84,319 210,194
Interest.................................................................... 337,904 --
Compensation................................................................ 71,857 202,622
Other....................................................................... 463,951 354,138
Current maturities of obligations under capital leases (Note 2)............... 372,120 --
Current maturities of long-term debt (Note 4)................................. 735,021 146,614
------------ ------------
Total Current Liabilities...................................................... 5,634,648 2,071,918
Obligations Under Capital Leases, less current maturities (Note 2)............. 369,387 --
Note Payable to Related Party (Note 3)......................................... 2,010,242 15,924,108
Long-Term Debt, less current maturities (Note 4)............................... 9,100,341 3,658,477
------------ ------------
Total Liabilities.............................................................. 17,114,618 21,654,503
------------ ------------
Commitments and Contingencies (Notes 2, 5, 7 and 9)
Shareholder's Equity (Deficit)(Note 5)
Common stock, $1 par -- 50,000 shares authorized; 1,754 shares issued and
outstanding................................................................ 1,754 1,754
Additional paid-in capital................................................... 1,724,713 1,724,713
Deficit...................................................................... (1,577,041) (6,102,982)
------------ ------------
Total Shareholder's Equity (Deficit)......................................... 149,426 (4,376,515)
------------ ------------
$17,264,044 $17,277,988
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
City Signal, Inc.
Consolidated Statements of Operations
<CAPTION>
Year Ended December 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Net Revenue (Note 3)............................................................ $ 3,159,518 $ 4,571,962
------------ ------------
Expenses
Cost of services.............................................................. 495,824 1,162,736
Selling, general and administrative (Note 3).................................. 3,887,944 3,845,264
Depreciation and amortization................................................. 1,329,163 1,642,584
------------ ------------
Total expenses.................................................................. 5,712,931 6,650,584
------------ ------------
Loss from operations............................................................ (2,553,413) (2,078,622)
------------ ------------
Other Income (Expenses)
Interest expense (Notes 3 and 4).............................................. (1,097,737) (1,349,378)
Interest income............................................................... 194,055 5,751
Gain on sale of equipment (Note 6)............................................ 7,093,656 2,746,175
Gain on sale of consolidated entity (Note 6).................................. 803,289 --
Miscellaneous................................................................. 86,091 92,705
------------ ------------
Net other income................................................................ 7,079,354 1,495,253
------------ ------------
Net Income (Loss)............................................................... $ 4,525,941 $ (583,369)
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
City Signal, Inc.
Consolidated Statements of Shareholder's Equity (Deficit)
<CAPTION>
Additional
Common Paid-in
Stock Capital Deficit Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance January 1, 1994............................. $1,754 $ 365,040 $(5,519,613) $(5,152,819)
Additional capital contributions................. -- 1,359,673 -- 1,359,673
Net loss for the year............................. -- -- (583,369) (583,369)
------------ ------------ ------------ ------------
Balance, December 31, 1994 ......................... 1,754 1,724,713 (6,102,982) (4,376,515)
Net income for the year........................... -- -- 4,525,941 4,525,941
------------ ------------ ------------ ------------
Balance, December 31, 1995 ......................... $1,754 $1,724,713 $(1,577,041) $ 149,426
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
City Signal, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
Year Ended December 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Operating Activities
Net income (loss)........................................................... $ 4,525,941 $ (583,369)
Adjustments to reconcile net income (loss) to net cash for
operating activities:
Depreciation and amortization............................................. 1,329,163 1,642,584
Provision for losses on accounts receivable............................... 12,000 6,000
Gain on sale of property and equipment.................................... (7,093,656) (2,746,175)
Gain on sale of consolidated entity....................................... (803,289) --
Changes in operating assets and liabilities, excluding
effects of sale of consolidated entity:
Accounts receivable..................................................... 437,848 (1,606,082)
Prepaid expenses........................................................ (117,116) 414,749
Checks issued against future deposits................................... -- (381,280)
Accounts payable........................................................ (1,270,060) 144,101
Customer advance deposits and billings.................................. (320,149) 322,022
Accrued expenses........................................................ 287,894 498,598
------------- -------------
Net cash for operating activities............................................. (3,011,424) (2,288,852)
------------- -------------
Investing Activities
Capital expenditures........................................................ (6,292,004) (7,879,694)
Proceeds from sale of property and equipment................................ 11,391,531 5,589,824
Proceeds from sale of consolidated entity................................... 2,991,394 --
Decrease in deposits........................................................ 4,776 31,155
Payments received on notes receivable....................................... 6,727 12,497
------------- -------------
Net cash from (for) investing activities...................................... 8,102,424 (2,246,218)
------------- -------------
Financing Activities
Net change in note payable to related party................................. $(10,068,633) $ 5,409,494
Proceeds from long-term debt................................................ 5,222,007 --
Reduction in note payable to shareholder.................................... -- (1,636,523)
Repayment of long-term debt................................................. (342,074) (272,704)
Principal payments on capital lease obligations............................. (146,985) --
Capital contributions....................................................... -- 1,359,673
------------- -------------
Net cash from (for) financing activities...................................... (5,335,685) 4,859,940
------------- -------------
Net Increase (Decrease) in Cash............................................... (244,685) 324,870
Cash, beginning of year....................................................... 337,109 12,239
------------- -------------
Cash, end of year............................................................. $ 92,424 $ 337,109
============= =============
See accompanying notes to consolidated financial statements.
</TABLE>
City Signal, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies Description of Business
City Signal, Inc, (Company) is a provider of local access telecommunication
services. Its activities include construction of fiber optic networks for
sale or lease. Revenue is derived from commercial customers and
governmental units primarily within the state of Michigan for 1995 and the
states of Michigan and Tennessee for 1994.
Principles of Consolidation
The consolidated financial statements include the accounts of all
majority-owned entities. All significant intercompany accounts and
transactions have been eliminated in consolidation. The financial
statements as of and for the year ended December 31, 1994, have been
restated and reflect the consolidation of a limited partnership investment
which had previously been accounted for under the equity method. This
accounting change did not affect the reported net assets or net loss for
1994.
Investment in Limited Partnership
The Company's five percent investment in a limited partnership is accounted
for using the cost method.
Property and Equipment
Property and equipment are stated at cost. The cost of property and
equipment is depreciated using the straight-line method over the estimated
useful lives of the assets as follows:
Years
-----
Network equipment.................. 7
Fiber optic cable.................. 15
Furniture and office equipment..... 5-7
Vehicles........................... 5
Leasehold improvements are amortized using the straight-line method over
their useful life or lease term, whichever is shorter. Uninstalled
equipment is not depreciated until placed into service.
Collocation Costs
Collocation costs, which primarily represent costs associated with
negotiating rights-of-way, are amortized over five years on a straightline
basis. Accumulated amortization at December 31, 1995 and 1994, was $67,881
and $71,553, respectively.
Revenue Recognition
The Company recognizes revenue on its local access services in the month
such services are provided. Revenues associated with the construction of
fiber optic networks are recognized on the percentage of completion method.
Income Taxes
The Company, with the consent of its shareholder, has elected to be treated
as an S corporation, resulting in the Company's income being included in
the shareholder's personal income for federal income tax purposes.
Use of Estimates
The preparation of consolidated financial statements includes estimates and
assumptions made by management relating to the reporting of assets and
liabilities. Actual results could differ from those estimates.
Fair Value of Financial Instruments
In 1995, the Company adopted SFAS No. 107, Disclosures About Fair Value of
Financial Instruments, which requires disclosure of fair value information
about certain financial instruments. The carrying amounts of the Company's
financial instruments, which consist of cash, accounts receivable, notes
receivable, accounts payable and long term obligations approximate their
fair values.
Reclassifications
Certain 1994 amounts have been reclassified to conform with the 1995
presentation.
2. Building and Equipment Leases
The Company leases certain network equipment under lease agreements that
have been classified as capital leases for financial reporting purposes.
The Company also leases office space and equipment under operating leases
that expire at various dates through 2000.
Property and equipment include the following amounts for equipment under
capital leases:
December 31,
--------------------------
1995 1994
------------ ------------
Network equipment.............................. $1,085,088 $1,518,460
Less accumulated depreciation.................. 118,541 241,685
------------ ------------
$ 966,547 $1,276,775
============ ============
Future minimum payments under capital leases and noncancelable operating
leases with initial or remaining terms of one or more years consist of the
following:
Operating
--------------------------
Real
Year ending December 31, Capital Estate Equipment
--------------------------------- ------------ ------------ ------------
1996............................. $414,711 $217,519 $52,378
1997............................. 253,636 212,225 33,658
1998............................. 140,639 182,225 4,581
1999............................. 6,527 182,225 --
2000............................. 4,645 30,615 --
------------ ------------ ------------
820,158 $824,809 $90,617
============ ============
Less amounts representing
interest; rates ranging from
6.8% to 17.4%.................... 78,651
------------
741,507
Less current maturities.......... 372,120
------------
Long-term obligations, less
current maturities............... $369,387
============
Rental expense under operating leases approximated $357,000 and $259,000
for the years ended December 31, 1995 and 1994, respectively,
3. Note Payable and Transactions With Affiliated Companies
* The Company has an unsecured $12,000,000 revolving line of credit,
bearing interest at prime (9.0% and 8.5% at December 31, 1995 and
1994, respectively), with an affiliated company controlled by the
Company's shareholder, of which $2,010,242 and $10,624,744, including
interest, were outstanding at December 31, 1995 and 1994,
respectively. Amounts on this line are advanced to the Company
regularly and payments on advances outstanding were made at least
monthly. Interest expense was $411,241 and $457,977 for the years
ended December 31, 1995 and 1994, respectively.
During 1994, the Company assigned certain long-term debt obligations
to the same affiliated company in exchange for a note payable. The
outstanding balance was $5,299,364 at December 31, 1994. Interest was
paid equal to that incurred on the assigned debt instruments. During
1995, the remaining obligations on those same debt instruments were
reassigned to the Company and are reported as capital lease
obligations (see Note 2) and long-term debt (see Note 4).
The related party has not demanded repayment and the outstanding
indebtedness will be contributed to capital in connection with the
sale of the Company described in Note 9.
* The Company sold $1,299,353 and $1,425,648 of telecommunication
services to the affiliated company during the years ended December 31,
1995 and 1994, respectively. The Company paid $118,200 for office
space rental and $141,000 of management fees to the same affiliated
company in each of the years ended December 31, 1995 and 1994.
* The Company was billed $312,760 during 1995 for fiber installation
services to a company owned by one of its officers, The Company also
subleases warehouse space to the same affiliated company and
recognized $30,825 of rental income for 1995.
4. Long-Term Debt
Long-term debt consists of:
December 31,
--------------------------
1995 1994
------------ ------------
Note payable to finance company with interest at
3.5% over the 90-day commercial paper rate
(9.29% at December 31, 1995), principal payments
due in 60 monthly installments ranging from
1.25% to 2.0833% of the borrowed amount
beginning one year following the borrowing,
secured by specific equipment................... $4,732,203 $ --
Notes payable to suppliers due in monthly
installments of $43,783 with interest ranging
from 6% to 1% over prime (9.5% at December 31,
1995), secured by specific equipment............ 1,260,846 --
Note payable to lessor due in monthly
installments of $4,841 with interest at 12%..... 183,836 --
Unsecured note payable to shareholder with
interest at 9% and 8.5% for 1995 and 1994,
respectively, due on December 31, 1998.......... 3,658,477 3,658,477
Note payable to investment bank, repaid in
1995............................................ -- 146,614
------------ ------------
9,835,362 3,805,091
Less current maturities......................... 735,021 146,614
------------ ------------
Long-term debt, less current maturities......... $9,100,341 $3,658,477
============ ============
The note payable to finance company was repaid on January 31, 1996, by an
affiliated company with a corresponding increase to the note payable to
that company. The note payable to shareholder was converted to equity at
the same date. Both of these transactions were in connection with the sale
of the Company discussed in Note 9.
Maturities of long-term debt at December 31, 1995, excluding the
obligations noted in the above paragraph, are as follows:
Year Ending December 31,
------------------------
1996.................... $400,778
1997.................... 425,279
1998.................... 444,672
1999.................... 54,487
Interest expense on the shareholder note was $329,263 and $242,104 for the
years ended December 31, 1995 and 1994, respectively,
5. Commitments and Contingencies
The Company adopted both an Employee and an Executive Growth Sharing Plan
on July 1, 1994. Growth sharing units (units) are awarded to eligible
participants based on job classification and the discretion of the
employer. Participants in the Employee Plan vest in the units at a rate of
25% a year until fully vested at four years. Participants in the Executive
Plan are vested at 33-1/3 % a year until fully vested at three years. If a
triggering event (as defined in the plan) occurs, eligible employees will
receive a distribution equivalent to the number of units held times the
increase in per unit value from the date of issuance to the date of the
event (as determined by a market valuation of the Company).
A triggering event occurred on January 31, 1996, in connection with the
sale of the Company and a related entity. No liability is yet determinable
under the plan since the combined fair values of the Company and the
affiliated company cannot be computed due to an earn-out provision
associated with the sale of the affiliated company. Any potential liability
is not expected to be material.
6. Sale of Assets
* In January 1994, the Company sold customer contracts relating to its
Detroit, Michigan fiber optic network and the related equipment and
fiber optic cable comprising the network. A gain on the sale of
approximately $1,552,000 is reflected in other income.
* In October 1994, the Company sold substantially all of the assets
comprising its Indianapolis, Indiana fiber optic network. A gain on
the sale of approximately $1,243,000 is reflected in other income.
* Effective January 31, 1995, the Company sold substantially all of its
operating assets and related liabilities of its fiber optic networks
located in Memphis and Nashville, Tennessee for $15,063,925. In
addition, the Company received a 5% interest in the acquiring limited
partnership in exchange for the remaining 5% of the net operating
assets which had a net book value of $410,000. A gain on the sale of
approximately $7,093,000 is reported in other income and represents
the excess of the sale price over the net book value of assets sold
less the $410,000 limited partnership interest.
In connection with the sale, the Company provided billing, collecting
and administrative services to the limited partnership under a
management services agreement. The liability of $1,140,677 at
December 31, 1995 represents the excess of collections on customer
accounts over expenses paid to vendors made by the Company on behalf
of the limited partnership and management fees of $124,306 for the
year 1995. The billing and collecting services are not reflected in
the consolidated statement of operations.
* In April 1995, the Company entered into an agreement to sell an
irrevocable purchase option for its interest in a limited partnership
(which was previously consolidated in the financial statements) for
$2,992,114. A gain of approximately $803,000 has been recognized in
other income, reflecting the amount received in excess of the net
assets sold.
7. Retirement Plan
The Company has an investment plan under section 401(k) of the Internal
Revenue Code covering substantially all employees. The Company contributed
$21,833 and $16,209 to the plan during 1995 and 1994, respectively. In
connection with the sale of the Company described in Note 9, the Company
has terminated the plan effective February 1, 1996.
8. Supplemental Disclosures of Cash Flow Information
Cash paid during 1995 and 1994 for interest was $759,833 and $1,472,992,
respectively,
Non-cash investing and financing activities for 1995 and 1994 consisted of
the following:
Year Ended December 31,
--------------------------
1995 1994
------------ ------------
Liability accrued in connection with purchase
of equipment................................. $ 848,408 $ --
Liability assumed in the purchase of equipment
from a related party......................... 3,251,705 --
Note payable increase relating to purchase of
equipment from related party................. 719,086 --
Property purchased with capital leases......... 1,148,659 1,110,683
Liabilities assigned in sale of network
assets....................................... 3,674,148
Vendor debt assumed (assigned) in conjunction
with reduction (increase) of note payable to
a related party.............................. 1,384,128 (5,299,354)
============ ============
The Company sold its interest in a consolidated entity for $2,992,114. In
connection with the sale, liabilities were relieved as follows:
Year Ended December 31,
-----------------------
1995
-----------------------
Fair value of assets sold......................... $3,183,298
Cash received..................................... 2,992,114
-----------------------
Liabilities relieved ............................. $ 191,184
=======================
9. Subsequent Events
On January 17, 1996, the Company and its shareholder signed a definitive
agreement to be acquired by Brooks Fiber Properties, Inc. (Brooks). In
connection with the sale, the shareholder will receive 2,240,000 shares of
common stock of Brooks, subject to post-closing adjustment, in exchange for
all of the Company's outstanding shares of common stock. In addition, the
Company's shareholder has received an option to require Brooks to
repurchase all or any part of the shares issued in connection with the sale
at a price of $12.50 per share on or prior to the earlier of the first
anniversary of the closing or the closing of an initial public offering of
Brooks' common stock.
Independent Auditors' Report
The Board of Directors
Brooks Telecommunications Corporation:
We have audited the accompanying consolidated balance sheet of Brooks
Telecommunications Corporation and subsidiaries as of December 31, 1995, and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Brooks
Telecommunications Corporation and subsidiaries as of December 31, 1995, and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/S/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
February 16, 1996
St. Louis, Missouri
BROOKS TELECOMMUNICATIONS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1995
Assets
Current assets:
Cash and cash equivalents.................................... $ 3,121,066
Accounts receivable, net..................................... 1,305,947
Receivable from affiliate.................................... 96,649
Prepaid and other current assets............................. 71,053
------------
Total current assets.................................... 4,594,715
Furniture, fixtures and equipment, net of accumulated
depreciation................................................... 4,741,837
Investments in and loans to ventures............................. 7,985,065
Other assets, net................................................ 5,145,100
------------
$22,466,717
============
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of long-term debt........................ 256,478
Accounts payable............................................ 416,678
Accrued liabilities......................................... 644,554
Deferred revenue............................................ 217,255
------------
Total current liabilities.............................. 1,534,965
------------
Long-term debt, less current maturities......................... 3,231,536
Minority interests.............................................. 2,854,513
Shareholders' equity:
Convertible preferred stock, $.01 par value; 1,000,000
shares authorized, 486,269 shares issued and outstanding.. 16,899,100
Common stock, $.01 par value; 1,750,000 shares authorized,
701,177 shares issued, and 688,492 shares outstanding..... 7,017
Paid-in capital............................................. 7,484,090
Accumulated deficit......................................... (9,424,109)
------------
14,966,098
Less 12,685 of common stock held in treasury, at cost....... (120,395)
------------
Total shareholders' equity ............................ 14,845,703
------------
$22,466,717
============
See accompanying notes to consolidated financial statements.
BROOKS TELECOMMUNICATIONS CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Operations
Year ended December 31, 1995
Revenues -- consulting and management fees....................... $ 8,679,916
Expenses:
Operating expenses........................................... 7,123,154
Selling, general and administrative.......................... 4,222,008
Depreciation and amortization................................ 800,453
------------
12,145,615
------------
Loss from operations.................................... (3,465,699)
Interest expense, net............................................ (259,596)
------------
Loss before minority interests.......................... (3,725,295)
Minority interests in net loss................................... 673,376
------------
Net loss................................................ $(3,051,919)
============
See accompanying notes to consolidated financial statements.
<TABLE>
BROOKS TELECOMMUNICATIONS CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity
Year ended December 31, 1995
<CAPTION>
Convertible Preferred Stock
----------------------------------------------------------
Series A-1 Series A-2 Series B-1 Series B-2 Series B-3
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994..................... $1,400,000 500,000 3,000,006 2,000,000 500,000
Issuance of stock.............................. -- -- -- -- --
Net loss....................................... -- -- -- -- --
Purchase of treasury stock..................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 1995..................... $1,400,000 500,000 3,000,006 2,000,000 500,000
========== ========== ========== ========== ==========
<CAPTION>
Convertible Preferred Stock
----------------------------------------------
Series C Series D Series E Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994.................... 2,500,000 -- -- 9,900,006
Issuance of stock............................. -- 1,999,094 5,000,000 6,999,094
Net loss...................................... -- -- -- --
Purchase of treasury stock.................... -- -- -- --
---------- ---------- ---------- ----------
Balance, December 31, 1995.................... 2,500,000 1,999,094 5,000,000 16,899,100
========== ========== ========== ==========
<CAPTION>
Total
Common Paid-in Accumulated Treasury Shareholders'
stock capital deficit stock equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994........... 6,211 4,433,035 (6,372,190) (12,700) 7,954,362
Issuance of stock.................... 806 3,051,055 -- -- 10,050,955
Net loss............................. -- -- (3,051,919) -- (3,051,919)
Purchase of treasury stock........... -- -- -- (107,695) (107,695)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995........... 7,017 7,484,090 (9,424,109) (120,395) 14,845,703
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
BROOKS TELECOMMUNICATIONS CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Year ended December 31, 1995
Cash flows from operating activities:
Net loss .................................................... $(3,051,919)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 800,453
Minority interests in losses............................ (673,376)
Changes in assets and liabilities:
Accounts receivable................................. (280,930)
Prepaid and other assets............................ (105,260)
Accounts payable and accrued liabilities............ (2,065)
Other............................................... (149,255)
------------
Net cash used in operating activities........... (3,462,352)
------------
Cash flows from investing activities:
Capital expenditures......................................... (1,073,269)
Advances to affiliates....................................... 332,066
Acquisition of GDS, net of cash received of $3,693........... (304,307)
Investment in and loans to ventures.......................... (1,363,512)
------------
Cash flows used in investing activities......... (2,409,022)
------------
Cash flows from financing activities:
Proceeds from issuance of stock.............................. 8,051,861
Purchases of treasury stock.................................. (107,695)
Repayment of long-term debt.................................. (245,657)
------------
Net cash provided by financing activities....... 7,698,509
------------
Net increase in cash and cash equivalents....... 1,827,135
Cash and cash equivalents, beginning of year..................... 1,293,931
------------
Cash and cash equivalents, end of year........................... $ 3,121,066
============
Supplemental disclosure -- cash paid for interest................ $ 473,395
============
See accompanying notes to consolidated financial statements.
BROOKS TELECOMMUNICATIONS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
The consolidated financial statements include the accounts of Brooks
Telecommunications Corporation (BTC) and its majority-owned subsidiaries
(the Company). All intercompany balances and transactions have been
eliminated in consolidation. The Company provides consulting services to
the telecommunications and cable industries and is engaged in the
management and development of telecommunications networks in the U.S. and
China.
The Company's investment in Brooks Fiber Properties, Inc. (BFP) represents
a 14% interest and is carried at cost in the consolidated financial
statements.
The Company's investment in SCM Brooks Telecommunications, L.P. (SBP) in
which BTC had a controlling interest, has been consolidated in the
financial statements of the Company.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(b) Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consist of office furnishings,
leasehold improvements, equipment, and a corporate aircraft which are
recorded at cost. Depreciation of property and equipment is recorded
using the straight-line method over estimated useful lives of the
assets ranging from 5 to 15 years. Leasehold improvements are
amortized using the straight-line method over their estimated useful
lives or lease term whichever is shorter.
(c) Other Assets
Goodwill is being amortized using the straight-line method over 25
years from the dates of acquisition. The Company reviews the carrying
amount of goodwill periodically to determine whether any impairment
has occurred in the value of such assets. Based upon the anticipated
future income and cash flows from operating activities, in the opinion
of management no impairment has occurred as of December 31, 1995.
(d) Income Taxes
The Company accounts for income taxes in accordance with the
asset/liability method whereby deferred taxes are determined based on
the estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities given the provisions
of the enacted tax laws.
(e) Deferred Revenue
Deferred revenue consists of advance billings for consulting services
to be performed by the Company.
(f) Fair value of Financial Instruments
The Company discloses estimated fair value for its financial
instruments. A financial instrument is defined as cash or a contract
that both imposes on one entity a contractual obligation to deliver
cash or another financial instrument to a second entity and conveys to
that second entity a contractual right to receive cash or another
financial instrument from the first entity.
(g) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities in the
preparation of financial statements. Actual results could differ from
these estimates.
(h) Effect of New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed of," which will require the
Company to review for the impairment of long-lived assets and certain
identifiable intangibles to be held and used by the Company whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Adoption of SFAS No. 121 is
required in fiscal year 1996.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which establishes a fair value based method
for financial accounting and reporting for stock-based employee
compensation plans. However, the new standard allows compensation to
continue to be measured by using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," but requires expanded
disclosures. SFAS No. 123 is effective in fiscal year 1996.
While the Company does not know precisely the impact that will result
from adopting SFAS No. 121 and SFAS No. 123, the Company does not
expect the adoption of SFAS No. 121 or SFAS No. 123 to have a material
effect on the Company's consolidated financial position or results of
operations.
(3) ACQUISITION
On January 1, 1995, the Company acquired the stock of GDS, a
telecommunications consulting firm. The Company issued 49,977 shares of the
Company's Series D convertible preferred stock at a value of $1,999,094 and
$308,000 in cash in exchange for all of the stock in GDS. The acquisition
was accounted for using the purchase method of accounting and, accordingly,
the results of operations of GDS have been included in the Company's
consolidated financial statements since the date of acquisition. The fair
value of net assets acquired was $213,000 resulting in $2,094,000 of
goodwill being recorded at the date of acquisition.
(4) INVESTMENTS IN AND LOANS TO VENTURES
Investments in and loans to ventures consist of the following:
Investment in Brooks Fiber Properties, Inc. (BFP).............. $1,635,065
Investment in Guangzhou HauMei Communications Limited.......... 6,350,000
----------
Total..................................................... $7,985,065
==========
Condensed financial information of the Company's majority-owned venture,
SBP, is as follows:
Balance Sheet
Current assets................................................ $ 140,504
Investment in Guangzhou HauMei Communications Limited......... 6,350,000
Other assets.................................................. 4,039
------------
$ 6,494,543
============
Current liabilities........................................... 34,519
Partners' capital............................................. 6,460,024
------------
$ 6,494,543
============
Statement of Operations
Revenues...................................................... $ 418,528
Operations and other expenses................................. 1,851,243
------------
Net loss................................................. $(1,432,715)
============
SBP was formed on February 10, 1993 to work with the Chinese government to
coordinate existing telecommunications systems and to design, install, and
operate advanced telecommunications networks in China. The general partner
is SCM Brooks Telecommunications, Inc. (SCM Brooks), which is owned by SCM
and the Company.
On April 17, 1993, SBP entered into a joint venture agreement with Galaxy
New Technology Company (Galaxy) to design, develop, construct, promote,
market, install, and participate in the ownership and profits of a
telecommunications system as a prototype in Guangzhou, China. In connection
with this joint venture, SBP and Galaxy have formed Guangzhou HauMei
Communications Limited (the HauMei Interest). The operations of the HauMei
Interest through December 31, 1994 consisted principally of organizational
and financing activities, and construction of the prototype
telecommunications network in Guangzhou, China. SBP's investment in the
HauMei Interest represents a 50% interest and is accounted for by the
equity method.
On December 19, 1994, the Company purchased 30 shares of SCM Brooks, 294
Class A limited partnership shares, and 120 Class B limited partnership
shares in SBP from SCM for $2,850,000, which was recorded as goodwill at
the date of purchase. As a result, the Company has a 53% equity interest in
SCM Brooks, 53% ownership of Class A limited partner shares, and 21%
ownership of Class B limited partner shares of SBP. Also, in conjunction
with this transaction, the Company purchased $150,000 of SCM's promissory
notes receivable in SBP.
The profits and losses of the HauMei Interest will be shared equally by SBP
and Galaxy. As of December 31, 1995, SBP had invested $6,350,000 in the
HauMei Interest.
(5) FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following:
Furniture and office equipment ................................ $1,898,707
Leasehold improvements ........................................ 130,351
Transportation equipment ...................................... 3,589,717
----------
5,618,775
Less accumulated depreciation ............................ 876,938
----------
$4,741,837
==========
(6) OTHER ASSETS, NET
Other assets consist of the following:
Goodwill ...................................................... $4,943,482
Organization costs ............................................ 153,536
Other ......................................................... 125,193
----------
5,222,211
Less accumulated amortization ................................. 77,111
----------
$5,145,100
==========
(7) LONG-TERM DEBT
Long-term debt consists of the following:
Convertible subordinated notes, 8% due August 31, 1998.... $ 500,000
Equipment loan, due June 1, 1996, interest at 8.5%........ 12,062
Note payable to bank, due January 1, 2000, interest at
prime plus .5% ......................................... 2,975,952
----------
3,488,014
Less current maturities .................................. 256,478
----------
$3,231,536
==========
On August 13, 1993, the Company entered into two 8% convertible
subordinated notes due August 31, 1998, with two shareholders of the
Company. Terms of the notes provide interest payments semiannually in
arrears. The holders of the notes may, at any time, convert the principal
amount of the notes into common stock. The conversion price per share is
$18.00 and may be adjusted from time to time as provided for in the
agreement. In connection with each note, the Company issued warrants
expiring in October 1994 to purchase 27,777 shares of common stock of the
Company at a purchase price of $40 per share, and warrants expiring in
October 1995 to purchase 27,777 shares of common stock of the Company at a
purchase price of $50 per share.
On December 21, 1994, one of the shareholders converted $500,000 of debt to
8,333 shares of common stock at a price of $60 per share. In connection
with the conversion, the Company issued the shareholder a warrant expiring
in December 1998 to purchase 30,000 shares of common stock at $40 per
share.
During May 1993, the Company financed the purchase of certain equipment by
obtaining a bank loan of $66,892, secured by such equipment. Monthly
payments of $2,117 are due through June 1, 1996.
In connection with the Company's purchase of an aircraft, the Company
obtained financing for $3,200,000 of the purchase price. Terms of the
financing provide for monthly payments of $20,368 plus interest at the
prime rate plus .5% (8.5% as of December 31, 1995) through January 1, 2000.
The financing is secured by the assets of the Company.
As of December 31, 1995, maturities of long-term debt are as follows:
1997........................... $ 256,478
1998........................... 244,416
1999........................... 744,416
2000........................... 244,416
Thereafter..................... 1,998,288
----------
$3,488,014
==========
(8) LINE OF CREDIT
The Company has a $750,000 line of credit from a bank, secured by assets
of the Company. Interest on any borrowings under the line of credit
accrues at prime plus 1% and is payable monthly. The line of credit
expires on September 1, 1996. No amounts were advanced under the line of
credit during the year ended December 31, 1995.
(9) INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109. No provision for income taxes has been made due to the
Company's net operating losses. A valuation allowance is provided when it
is more likely than not some portion of the deferred tax asset will not be
realized. The Company has established a valuation allowance for the entire
portion of the net deferred income tax asset. The valuation allowance
increased by $631,000 during the year ended December 31, 1995.
The actual income tax expense (benefit) differs from the "expected" income
tax expense (benefit), computed by applying the Statutory U.S. Federal
corporate income tax rate of 34% to earnings before income tax expense.
The difference results primarily from the nondeductibility of goodwill and
a portion of meals and entertainment expenses, and the increase in the
valuation allowance.
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows:
Deferred income tax assets:
Net operating loss carryforwards..................... $ 3,190,000
Valuation allowance.................................. (2,875,000)
------------
Net deferred income tax asset.................... 315,000
------------
Deferred income tax liabilities:
Networks and equipment............................... 168,000
Net liabilities under the cash method for federal
income taxes....................................... 140,000
Intangible assets.................................... 7,000
------------
Deferred income tax liabilities................. 315,000
------------
Net deferred taxes.............................. $ --
============
As of December 31, 1995, net operating loss carryforwards totaling
$7,974,000 expire in years 2006-2010 if not utilized in future income tax
returns.
(10) OPERATING LEASES
The Company leases office space and certain office equipment under
operating leases. Rent expense totaled $379,780 for 1995. Future minimum
rental payments under noncancellable operating leases were as follows at
December 31, 1995:
1996................................ $365,935
1997................................ 377,486
1998................................ 110,832
--------
$854,253
========
(11) STOCK OPTIONS AND WARRANTS
The Board of Directors of the Company approved the 1993 Stock Option Plan
(the Plan) authorizing the granting of options and stock appreciation
rights to certain officers, directors, and employees. Terms of the Plan
provide for the options to vest over a period of three years and expire
ten years from the date of issuance.
Stock option activity for the year ended December 31, 1995 follows:
Price
Number per share
------------ -------------
Balance, December 31, 1994................... 144,000 $25.60
Granted.................................. 32,000 25.60-40.00
Cancelled ............................... (3,000) 25.60-40.00
------------
Balance, December 31, 1995................... 173,000 25.60-40.00
============ =============
The Company has granted warrants for the purchase of shares of the
Company's common stock. Terms of the warrants granted provide for a price
range of $40-70 per common share. All warrants at December 31, 1995 were
exercisable.
During 1995, warrants for the purchase of 200,000 shares of the Company's
common stock were granted. Terms of the warrants granted during 1995
provide for a price of $50 per common share.
Warrant activity for the year ended December 31, 1995 follows:
Exercise
price
Number range
------------ ------------
Balance at December 31, 1994................. 459,591 $40-70.00
Warrants granted......................... 200,000 50.00
Warrants extended........................ 8,333 60.00
Warrants expired......................... (227,887) 40.00
------------
Balance at December 31, 1995................. 440,037 40-70.00
============ ============
The warrants outstanding at December 31, 1995 are exercisable on the
following basis:
Exercise
Outstanding price
Expiration during the year ended warrants range
--------------------------------------------- ------------ -------------
1996......................................... 201,704 $50-70.00
1997......................................... 208,333 50-60.00
1998......................................... 30,000 40.00
------------ =============
440,037
============
(12) PREFERRED STOCK
Preferred stock transactions during 1995 are summarized as follows:
Preferred stock
----------------------------
Shares Amount
------------- -------------
Outstanding at December 31, 1994............ 336,292 $9,900,006
Series D issued......................... 49,977 1,999,094
Series E issued......................... 100,000 5,000,000
------------- -------------
Outstanding at December 31, 1995............ 486,269 $16,899,100
============= =============
At the option of the holder, the preferred stock is convertible into
shares of common stock. The preferred shares automatically convert into
common stock upon consummation of a public offering of the Company's
common stock, as defined in the Preferred Stock Purchase Agreement (the
Agreement).
If the Company declares or pays any dividend on its common stock, the
holders of the preferred stock are entitled to receive an equivalent
dividend based upon the conversion of the preferred stock into common
stock.
The holders of the preferred stock have voting rights equal to the number
of common shares issuable upon conversion and vote as a single class with
the holders of the Company's common stock. The Agreement contains various
covenants and restrictions on the Company, including certain restrictions
of the issuance of additional equity securities by the Company.
The Company, at its option, had certain redemption rights on outstanding
preferred stock. In conjunction with the Agreement and Plan of Merger
entered into on January 2, 1996 (see note 14), the preferred shares were
converted to common stock and the redemption rights were eliminated.
(13) RELATED-PARTY TRANSACTIONS
During October 1993, the Company entered into a management agreement with
BFP (the Management Agreement). As part of the Management Agreement, the
Company provides certain services to BFP. The Management Agreement has a
fee equal to $250,000 per year adjusted in 1996 and subsequent years for
inflation. Furthermore, certain expenses are reimbursed to the Company as
incurred. Receivables from BFP totaled $152,000 as of December 31,1995. No
management fees were due from BFP as of December 31,1995.
BTC provides consulting services to the HauMei Interest in connection with
the joint venture with Galaxy New Technology Company (see note 2). SBP has
agreed to pay for the services rendered by the Company's employees or
consultants. SBP also has agreed to pay for all reasonable out-of-pocket
costs incurred by the Company in the performance of the services. All such
services performed and expenses incurred by the Company during 1995 have
been recorded as consulting fee revenues in the accompanying
consolidated statements of operations and totaled $1,080,000 for 1995.
Consulting fee revenues charged to SBP generally are billable to the
HauMei Interest by SBP in accordance with agreements among the parties.
On January 1, 1995, the Company entered into a one-year consulting
arrangement with BFP. The arrangement is automatically extended for an
additional year if approved by the Board of Directors of BFP. Services
under the arrangement provide for competitive access studies, network
design, engineering, and project management. Consulting fees are based
upon an hourly rate fee schedule. The Company recorded $1,017,000 in
revenue related to this arrangement for 1995.
(14) SUBSEQUENT EVENT
Pursuant to an Agreement and Plan of Merger between BFP and the Company,
BTC was merged into BFP on January 2, 1996, and the securities of BFP held
by the Company were cancelled. Following the merger, the former holders of
the Company's common stock, preferred stock, convertible notes, and
options and warrants received shares of BFP's common stock, options, and
warrants. After the consideration of the shares of BFP held by the Company
at the time of acquisition, BFP issued an additional 756,340 shares of
common stock valued at $12.50 per share. The Management Agreement between
BFP and the Company was cancelled.
On January 1, 1996, all of the outstanding Common Stock of Brooks
Telecommunications International, Inc. (BTI), a wholly-owned subsidiary of
the Company, was distributed to the shareholders. Prior to the
distribution to the shareholders, the Company transferred its interest in
its investment in SBP to BTI. In addition, a pro rata portion of the
Company's cash and cash equivalents was transferred to BTI prior to the
distribution.
ANNEX A
GLOSSARY
Access Charges -- The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on their local networks.
AIN (Advanced Intelligent Network) -- A term indicating a network architecture
concept with three basic elements: (i) Signal Control Points (SCPs)-computers
that hold data bases in which customer-specific information is used by the
network to route calls stored; (ii) Signal Switching Points (SSPs) digital
telephone switches which can communicate with SCPs and ask them for
customer-specific instructions as to how the call should be completed; and (iii)
Signal Transfer Points (STPs)-packet switches that shuttle messages between SSPs
and SCPs.
ATM (Asynchronous Transfer Mode) -- A recently commercialized switching and
transmission technology that is one of a general class of packet technologies
that relay traffic by way of an address contained within the first five bits of
a standard fifty-three bit-long packet or cell. ATM-based packet transport was
specifically developed to allow switching and transmission of mixed voice, data
and video (sometimes referred to as "multi-media" information) at varying rates.
The ATM format can be used by many different information systems, including
LANs.
Broadband -- Broadband communications systems can transmit large quantities of
voice, data and video by way of digital or analog signals. Examples of broadband
communication systems include DS-3 fiber optic systems, which can transmit 672
simultaneous voice conversations, or a broadcast television station signal that
transmits high resolution audio and video signals into the home. Broadband
connectivity is also an essential element for interactive multimedia
applications.
CAP (Competitive Access Provider) -- A company that provides its customers with
an alternative to the local telephone company for local transport of private
line, special access and interstate transport of switched access
telecommunications services. CAPs are also referred to in the industry as
alternative local telecommunications service providers (ALTs) and metropolitan
area network providers (MANs) and were formerly referred to as alternative
access vendors (AAVs).
Central Offices -- The switching centers or central switching facilities of the
LECs.
Centrex -- Centrex is a service that offers features similar to those of a
Private Branch Exchange (PBX), except the equipment is located at the carrier's
premises and not at the premises of the customer. These features include direct
dialing within a given phone system, direct dialing of incoming calls, and
automatic identification of outbound calls. This is a value-added service that
carriers can provide to a wide range of customers who don't have the size or the
funds to support their own on-site PBX.
CLEC (Competitive Local Exchange Carrier) -- A CAP that also provides Switched
Local Services, such as local dial tone and Centrex.
Co-carrier status -- A relationship between a CLEC and an incumbent LEC that
affords each entity the same access to and right on the other's network, and
that provides access and services on an equal basis.
Collocation -- The ability of a CAP such as the company to connect its network
to the LEC's central offices. Physical collocation occurs when a CAP places its
network connection equipment inside the LEC's central offices. Virtual
collocation is an alternative to physical collocation pursuant to which the LEC
permits a CAP to connect its network to the LEC's central offices on comparable
terms, even though the CAP's network connection equipment is not physically
located inside the central offices.
Dedicated lines -- Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the LEC's public switched network).
Desk top products -- Desk top products are the various types of
telecommunications equipment located in the offices of end user customers for
individual access to voice, data and video telecommunications services.
Digital -- A method of storing, processing and transmitting information through
the use of distinct electronic or optical pulses that represent the binary code
digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. Digital transmission and switching technologies offer a
significant improvement in speed and capacity over analog techniques, allowing
much more efficient and cost-effective transmission of voice, video, and data.
Dialing Parity -- Dialing Parity is among the many issues related to the
telecommunications industry that are being debated for federal legislation.
Essentially, customers should be able to have 1+ and O+ service no matter which
local or long distance carrier they choose. For example, when MCI first got into
the long distance business, customers had to dial a ten digit prefix before the
number they were calling. This was considered unacceptable to many in the
industry who favor "dialing parity."
Diverse Routing -- A telecommunications network configuration in which signals
are transported simultaneously along two different paths so that if one cable is
cut, traffic can continue in the other direction without interruption to its
destination. The Company's networks generally provide diverse routing.
Dominant Carrier -- A carrier found by the FCC to have market power - i.e., the
power to control prices for its services.
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 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.
Facilities Management -- Management, operation, maintenance, staffing and
support of telecommunications networks or systems.
FCC -- Federal Communications Commission
FDDI (Fiber Distributed Data Interface) -- Based on fiber optics, FDDI is a 100
megabit per second local area network technology used to connect computers,
printers, and workstations at very high speeds. FDDI is also used as backbone
technology to interconnect other LANs.
Fiber Mile -- The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route miles" below.
Fiber Optics -- Fiber optic cable is the medium of choice for the
telecommunications and cable industries. Fiber is immune to electrical
interference and environmental factors that affect copper wiring and satellite
transmission. Fiber optic technology involves sending laser light pulses across
glass strands in order to transmit digital information. A strand of fiber optic
cable is as thick as a human hair yet is said to have more bandwidth capacity
than copper cable the size of a telephone pole.
Fiber Optic Ring Network -- Most CAPs have built their networks in ring
configurations in order to ensure that, if one segment of a network is damaged
or cut, the traffic is simply re-routed and sent to its destination in the
opposite direction. The Company uses a "self- healing" optical fiber ring
architecture known as SONET.
Frame Relay -- Frame Relay is a high speed data packet switching service used to
transmit data between computers. Frame Relay supports data units of variable
lengths at access speeds ranging from 56kbs to 1.5 mbs. This service is ideal
for connecting LANS, but is not appropriate for voice and video applications due
to the variable delays which can occur. Frame Relay was designed to operate at
higher speeds on modern fiber optic networks.
Hubs -- Collection centers located centrally in an area where telecommunications
traffic can be aggregated at a central point for transport and distribution.
ISDN (Integrated Services Digital Network) -- A complex networking concept
designed to provide a variety of voice, data and digital interface standards.
Incorporated into ISDN are many new enhanced services, such as high speed data
file transfer, desk top videoconferencing, telepublishing, telecommuting,
telepresence learning (distance learning), remote collaboration (screened
sharing), data network linking and home information services.
Interconnection Decisions -- Rulings by the FCC announced in September 1992 and
August 1993, which require the RBOCs and most other LECs to provide
interconnection in LEC central offices to any CAP, long distance carrier or end
user seeking such interconnection for the provision of interstate special access
and switched access transport services.
Inter-LATA Long Distance -- Inter-LATA long distance calls are calls that pass
from one LATA to another. Typically, these calls are simply referred to as "long
distance" calls. At present, the RBOCs are prohibited from providing Inter-LATA
long distance service within their service areas.
Intra-LATA Long Distance -- lntra-LATA long distance calls, also known as short
haul calls, are those calls that originate and terminate within the same LATA.
Although most states allow some form of Intra-LATA competition, dialing parity
still does not exist, and very little LEC intra-LATA revenue has been won by
competitors.
IXC -- Inter-Exchange Carriers, usually referred to as long distance providers.
There are many facilities-based IXCs including AT&T, MCI, WorldCom, Sprint and
Frontier, as well as a select few CAPs that are authorized for IXC service.
Kilobit -- One thousand bits of information. The information-carrying capacity
(i.e., bandwidth of a circuit may be measured in "kilobits per second").
LANs -- (Local Area Networks) -- The interconnection of computers for the
purpose of sharing files, programs and various devices such as work stations,
printers and high-speed modems. LANs may include dedicated computers or file
servers that provide a centralized source of shared files and programs.
LATAs -- The geographically defined Local Access and Transport Areas in which
LECs are authorized by the MFJ to provide local exchange services. These LATAs
roughly reflect the population density of their respective states (California
has 11 LATAs while Wyoming has only one). There are 164 LATAs in the United
States.
LECs -- (Local Exchange Carrier) -- A company providing Local Exchange Services.
Local Exchange Areas -- A geographic area determined by the appropriate state
regulatory authority in which local calls generally are transmitted without toll
charges to the calling or called party.
Local Exchange Services -- Local Exchange Services generally refers to all
services provided by a LEC or CLEC including local dial tone, Centrex and Long
Distance Access Services. Sometimes also referred to as Local Telephone Services
and Local Telecommunications Services.
Local Competition -- The term "local competition" describes the events which are
presently in an embryonic state in the local arena to afford true "co-carrier"
status to CAPs. Specifically, the LECs, who once had a monopoly on local
exchange telephone service, are beginning to experience competition at the local
level from CAPs and other providers of local exchange services. Critical issues
such as number portability, dialing parity, reciprocal compensation
arrangements, and number assignments must be negotiated in order to ensure that
true co-carrier status is achieved for CAPs.
Local Telecommunications or Local Telephone Services -- See Local
Exchange Services.
Long Distance Access Services -- Long Distance Access Services are the services
provided by a LEC or CLEC to a long distance company that connect the IXC POP to
end users, including Special Access Services and Switched Access Services.
Long distance carriers or IXCs (interexchange carriers) -- Long distance
carriers provide services between local exchanges on an interstate or intrastate
basis. A long distance carrier may offer services over its own or another
carrier's facilities. Major long distance carriers include AT&T, MCI, Sprint,
WorldCom and Frontier, but may also include resellers of long distance capacity.
Megabit -- One million bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "megabits
per second."
MFJ (Modified Final Judgment) -- The MFJ was an agreement made in 1982 between
AT&T and the Department of Justice which forced the breakup of the old Bell
System. This judgment, also known as the Divestiture of AT&T, established seven
separate Regional Bell Operating Companies (RBOCs) and created two distinct
segments of telecommunications service: local and long distance. This laid the
groundwork for intense competition in the long distance industry, but
essentially created seven separate regionally-based local exchange service
monopolies. The MFJ has been superseded by The Telecommunications Act of 1996.
Multiplexing -- An electronic or optical process that combines a number of lower
speed transmission lines into one high-speed line by splitting the total
available bandwidth into narrower bands (frequency division) or by allotting a
common channel to several different transmitting devices one at a time in
sequence (time division). This is essentially a high-tech solution to a shortage
of capacity.
Network Systems Integration -- Involves the creation of a turnkey
telecommunications network including (i) route and site selection and obtaining
rights of way and legal authorizations to install the network; (ii) design and
engineering of the system, including technology and vendor assessment and
selection, determining fiber optic circuit capacity, and establishing
reliability/flexibility standards; and (iii) project and construction
management, including contract negotiations, purchasing and logistics,
installation as well as testing and construction management.
Node -- An individual point of origination and termination of data on the
network transported using frame relay or similar technology.
Number portability -- The ability of an end user to change local exchange
carriers while retaining the same telephone number. If number portability does
not exist, customers will have to change phone numbers when they change local
exchange carriers. This is considered to be anti-competitive because customers
are reluctant to change numbers, since they may lose business or confuse those
people trying to call them. It is currently being ascertained whether or not
number portability is technologically and economically feasible, and over what
time frame it can be implemented.
Off-net -- a customer that is not physically connected to one of the Company's
networks but who is accessed through interconnection with a LEC network.
On-net -- a customer that is physically connected to one of the Company's
networks.
PCS -- Personal communications service. A type of wireless telephone system that
uses light, inexpensive handheld sets and communicates via low power antennas.
PBX -- A Private Branch Exchange is a switching system within an office building
which allows calls from outside to be routed directly to the individual instead
of through a central number. This PBX also allows for calling within an office
by way of four digit extensions. Centrex is a service which can simulate this
service from an outside switching source, thereby eliminating the need for a
large capital expenditure on a PBX.
Physical Collocation -- Physical Collocation occurs when a CAP places its own
network connection equipment inside the LEC central office. A recent Court of
Appeals decision found that, while LECs must allow CAPs to interconnect with
their facilities, LECs are not required by law to allow CAPs to place their own
equipment inside the LEC central office. See Virtual Collocation.
POPs (Points of Presence) -- Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PUC (Public Utility Commission) -- A state regulatory body, established in most
states, which regulates utilities, including telephone companies providing
intrastate services.
Private Line -- A private, dedicated telecommunications line connecting
different end user locations.
Public Switched Network -- That portion of a LEC's network available to all
users generally on a shared basis (i.e. not dedicated to a particular user).
Traffic along the public switched network is switched at the LEC's central
offices.
RBOCs -- Regional Bell Operating Companies. The seven local telephone companies
established by the MFJ. These RBOCs are prohibited from providing inter-LATA
services within their service areas and from manufacturing telecommunications
equipment.
Reciprocal compensation -- The same compensation of a CAP for termination of a
local call on the CAP network, as the CAP pays the LEC for termination of local
calls on the LEC network.
Redundant Electronics -- A telecommunications facility using two separate
electronic devices to transmit a telecommunications signal so that if one device
malfunctions, the signal may continue without interruption.
Robust Network -- High capacity networks which are capable of reaching a
significant portion of the identified business end users in the market.
Route Miles -- The number of miles of the telecommunications path in which fiber
optic cables are installed as it would appear on a network map.
Second and Third Tier Markets -- Metropolitan markets in the United States with
population bases ranging from 250,000 to two million.
Special Access Services -- The lease of private, dedicated telecommunications
lines or "circuits" along the network of a LEC or a CAP (such as the Company),
which lines or circuits run to or from the long distance carrier POPs. Examples
of special access services are telecommunications lines running between POPs of
a single long distance carrier, from one long distance carrier POP to the POP of
another long distance carrier or from an end user to its long distance carrier
POP. Special access services do not require the use of switches.
SONET -- Synchronous Optical Network. SONET is the electronics and network
architecture which enables transmission of voice, video and data (multimedia) at
very high speeds. This state-of-the-art self-healing ring network offers
advantages over older linear networks in that a cut line or equipment failure
can be overcome by rerouting calls within the network. If the line is cut, the
traffic is simply reversed and sent to its destination around the other side of
the ring.
Switch -- A sophisticated computer that accepts instructions from a caller in
the form of a telephone number. Like an address on an envelope, the numbers tell
the switch where to route the call. The switch 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. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
Switched Access Services -- Switched Access Services are the services provided
by a LEC or CLEC to a long distance company that use one or more Switches, in
addition to Switched Access Transport, to connect the IXC POP to end users.
Switched Access Origination -- Switched Access Origination is that portion of
Switched Access Services relating to a long distance call originated by an end
user and carried over a LEC or CLEC network to an IXC POP using a Switch.
Switched Access Termination -- Switched Access Termination is that portion of
Switched Access Services relating to a long distance call coming into an end
user over a LEC or CLEC network from an IXC POP using a Switch.
Switched Access Transport Services -- Transportation of switched traffic along
dedicated lines between the LEC central offices and long distance carrier POPs.
Switched Local Services -- Switched Local Services are services provided by a
LEC or CLEC using a Switch, including local dial tone and Centrex, but not
including Intra-LATA Long Distance or Long Distance Access Services.
Switched Traffic -- Telecommunications traffic along a switched network of a
LEC, CLEC or IXC.
Virtual Collocation -- Virtual Collocation is an alternative to Physical
Collocation in which the CAPs connect their equipment to the LECs facilities
from a remote location and request that the LEC install the necessary
electronics in its central office which is then leased by the LEC to the CAP for
charges which are generally higher than the charges for physical collocation.
However, the CAP avoids payment of the initial capital costs for the leased
facilities which the CAP must incur under physical collocation.
Voice Grade Equivalent Circuit (VGE) -- One DS-0. One voice grade equivalent
circuit is equal to 64 kilobits of bandwidth per second.
================================================================================
No person has been authorized in connection with the Exchange Offer to give
any information or to make any representation not contained in this Prospectus,
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Company. Neither the making of the
Exchange Offer pursuant to this Prospectus nor the acceptance of Private Notes
for surrender for exchange pursuant thereto shall under any circumstances create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is correct as of
any time subsequent to the date hereof.
Table of Contents
Page
Notice to Investors........................................................
Summary....................................................................
Risk Factors...............................................................
No Cash Proceeds to the Company............................................
Price Range of the Private Notes...........................................
Capitalization.............................................................
The Exchange Offer.........................................................
Selected Historical and Pro Forma Financial and Other Operating Data.......
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................
Business of the Company....................................................
The Competitive Access Industry............................................
Competition................................................................
Regulatory Overview........................................................
Management.................................................................
Principal Stockholders.....................................................
Certain Relationships and Related Transactions.............................
Description of the Notes...................................................
Description of Other Credit Facilities.....................................
Certain United States Federal Income Tax Considerations....................
Plan of Distribution.......................................................
Validity of the Exchange Notes.............................................
Independent Auditors.......................................................
Additional Information.....................................................
Index to Consolidated Financial Statements.................................
Glossary...................................................................
Brooks Fiber Properties, Inc.
OFFER TO EXCHANGE
10-7/8% Senior Discount Notes
due March 1, 2006
for
all
outstanding 10-7/8% Senior Discount Notes
due March 1, 2006
[CORPORATE LOGO]
____________________, 1996
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
The following is a summary of Section 145 of the General Corporation Law
of the State of Delaware.
Subject to restrictions contained in the statute, a corporation may
indemnify any person, who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding 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, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection therewith if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, in connection with any criminal action or
proceeding, had no reasonable cause to believe that such person's conduct was
unlawful. A person who is successful on the merits or otherwise in any suit or
matter covered by the indemnification statute, shall be indemnified and
indemnification is otherwise authorized upon a determination that the person to
be indemnified has met the applicable standard of conduct required. Such
determination shall be made by a majority vote of the board of directors who
were not parties to such action, suit or proceeding, even though less than a
quorum, or if there are no such directors, or if such directors so direct, by
special independent counsel in a written opinion, or by the shareholders.
Expenses incurred in defense may be paid in advance upon receipt by the
corporation of written undertaking by or on behalf of the recipient to repay
such amount if it is ultimately determined that the recipient is not entitled to
indemnification under the statute. The indemnification provided by statute is
not exclusive of any other rights to which those seeking indemnification may be
entitled under any by-law, agreement, vote of shareholders or disinterested
directors or otherwise, and shall inure to the benefit of the heirs, executors
and administrators of such person. Insurance may be purchased on behalf of any
person entitled to indemnification by the corporation against any liability
asserted against him or her and incurred in an official capacity regardless of
whether the person could be indemnified under the statute. References to the
corporation include all constituent corporations absorbed in a consolidation or
merger as well as the resulting corporation and anyone seeking indemnification
by virtue of acting in some capacity with a constituent corporation would stand
in the same position as if such person had served the resulting or surviving
corporation in the same capacity.
The Restated Certificate of Incorporation and By-Laws of the Company
provide for indemnification of directors and officers of the Company to the
maximum extent permitted by the General Corporation Law of the State of
Delaware.
The directors and officers of the Company are insured under a policy of
directors' and officers' liability insurance.
Item 21. Exhibits and Financial Statement Schedules
See Index to Exhibits.
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933 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 Act and is,
therefore, unenforceable. In the event that a claim of 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, officer 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 Act and will be governed by the final adjudication of
such issue.
(b) The undersigned Registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment to this registration statement to be
signed on its behalf by the undersigned thereunto duly authorized, in the City
of Town & Country, State of Missouri, on June 24, 1996.
BROOKS FIBER PROPERTIES, INC.
By: /s/ David L. Solomon
-------------------------------------------------
David L. Solomon
Senior Vice President and Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James C. Allen and David L. Solomon, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this registration statement and any other documents and
instruments incidental thereto, and any registration statement filed pursuant to
Rule 462 under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys- in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as full to all intents and purposes as he might or could do in person, hereby
ratifying and confirming that each of said attorneys-in-fact and agents and/or
either of them, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has be signed by the following persons in the capacities
indicated on June 24, 1996.
Signature Title
- -------------------------------------- ----------------------------------------
/s/ Robert A. Brooks Director (Chairman of the Board)
- --------------------------------------
Robert A. Brooks
/s/ James C. Allen Vice Chairman and Director
- -------------------------------------- (Chief Executive Officer)
James C. Allen
/s/ D. Craig Young President and Director
- -------------------------------------- (Chief Operating Officer)
D. Craig Young
/s/ David L. Solomon Senior Vice President and
- -------------------------------------- Chief Financial Officer
David L. Solomon (Principal Financial and
Accounting Officer)
/s/ William J. Bresnan Director
- --------------------------------------
William J. Bresnan
/s/ Robert F. Benbow Director
- --------------------------------------
Robert F. Benbow
/s/ Jonathan M. Nelson Director
- --------------------------------------
Jonathan M. Nelson
/s/ G. Jackson Tankersley, Jr. Director
- --------------------------------------
G. Jackson Tankersley, Jr.
Director
- --------------------------------------
Ronald H. Vander Pol
INDEX TO EXHIBITS
Exhibit Number Description
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2.1 Agreement and Plan of Merger dated December 19, 1995
between the Company and Brooks Telecommunications
Corporation (incorporated by reference to Exhibit
2.1 to the Company's Registration Statement on Form
S-1 (File No. 333-1924) filed with the Commission on
March 4, 1996)
2.2 Agreement and Plan of Merger dated January 17, 1996
between the Company, Brooks Fiber Communications of
Michigan, Inc., City Signal, Inc. and Ronald H.
Vander Pol (incorporated by reference to Exhibit 2.2
to the Company's Registration Statement on Form S-1
(File No. 333-1924) filed with the Commission on
March 4, 1996)
3.1(a) Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1(a) to the
Company's Registration Statement on Form S-1 (File
No. 333-1924) filed with the Commission on March 4,
1996)
3.1(b) Certificate of Designation of 6,060 Additional
Shares of $0.01 Par Value Series A-2 Voting
Convertible Preferred Stock (incorporated by
reference to Exhibit 3.1(b) to the Company's
Registration Statement on Form S-1 (File No. 333-
1924) filed with the Commission on March 4, 1996)
3.1(c) Certificate of Designation of Series C Junior
Participating Preferred Stock (incorporated by
reference to Exhibit 3.1(c) to Amendment No. 2 to
the Company's Registration Statement on Form S-1 (File
No. 333-1924) filed with the Commission on April 11,
1996)
3.2 By-laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Report on Form 10-Q for
the Period Ended March 31, 1996 (File No. 0-28036)
filed with the Commission on May 15, 1996)
4.1 Form of Exchange Note (included in Exhibit 4.4)
4.2 Purchase Agreement dated February 16, 1996 between
the Company and the Initial Purchasers named therein
4.3 Exchange and Registration Rights Agreement dated as
of February 26, 1996 between the Company and the
Initial Purchasers named therein (incorporated by
reference to Exhibit 4.5 to the Company's
Registration Statement on Form S-1 (File No.
333-1924) filed with the Commission on March 4, 1996)
4.4 Indenture dated as of February 26, 1996 between the
Company and The Bank of New York, as Trustee
(incorporated by reference to Exhibit 4.6 to the
Company's Registration Statement on Form S-1 (File
No. 333-1924) filed with the Commission on March 4,
1996)
4.5 Loan and Security Agreement dated as of November 18,
1994 among AT&T Credit Corporation and certain
subsidiaries of the Company (incorporated by
reference to Exhibit 4.7 to the Company's
Registration Statement on Form S-1 (File No.
333-1924) filed with the Commission on March 4, 1996)
4.6 The Company has not filed certain instruments with
respect to long-term debt since the total amount of
securities authorized thereunder does not exceed 10%
of the total assets of the Company and its
subsidiaries on a consolidated basis. The Company
agrees to furnish a copy of any such agreement to
the Commission upon request.
5.1 Opinion of Bryan Cave LLP regarding the validity of
the Exchange Notes
8.1 Tax Opinion of Bryan Cave LLP (included in Exhibit
5.1)
10.1 1993 Stock Option Plan of the Company (incorporated
by reference to Exhibit 10.1 to Amendment No. 3 to
the Company's Registration Statement on Form S-1
(File No. 333-1924) filed with the Commission on
April 26, 1996)
10.2 Form of Non-Qualified Stock Option Agreement under
the Company's 1993 Stock Option Plan (incorporated
by reference to Exhibit 10.2 to Amendment No. 3 to
the Company's Registration Statement on Form S-1
(File No. 333- 1924) filed with the Commission on
April 26, 1996)
10.3 1996 Employee Stock Purchase Plan of the Company
(incorporated by reference to Exhibit 10.3 to
Amendment No. 2 to the Company's Registration
Statement on Form S-1 (File No. 333-1924) filed with
the Commission on April 11, 1996)
10.4 1993 Stock Option Plan of Brooks Telecommunications
Corporation ("BTC") (incorporated by reference to
Exhibit 10.4 to Amendment No. 3 to the Company's
Registration Statement on Form S-1 (File No.
333-1924) filed with the Commission on April 26, 1996)
10.5 Form of Substituted Non-Qualified Stock Option
Agreement under BTC's 1993 Stock Option Plan
(incorporated by reference to Exhibit 10.5 to
Amendment No. 3 to the Company's Registration
Statement on Form S-1 (File No. 333- 1924) filed with
the Commission on April 26, 1996)
10.6 Option Agreement dated as of January 31, 1996
between the Company and Ronald H. Vander Pol
(incorporated by reference to Exhibit 10.6 to
Amendment No. 3 to the Company's Registration
Statement on Form S-1 (File No. 333- 1924) filed with
the Commission on April 26, 1996)
11.1 Statement Re Computation of Per Share Earnings
12.1 Statement Re Computation of Ratio of Deficiency of
Earnings to Fixed Charges
21.1 Subsidiaries of the Company
23.1 Consent of Bryan Cave LLP (included in Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of BDO Seidman, LLP
24.1 Power of Attorney (included on signature page)
25.1 Statement of Eligibility of The Bank of New York, as
Trustee
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Exchange Agent Agreement
EXHIBIT 4.2
Brooks Fiber Properties, Inc.
10-7/8% Senior Discount Notes due March 1, 2006
Purchase Agreement
February 16, 1996
Goldman, Sachs & Co.
Bear, Stearns & Co. Inc.
Salomon Brothers Inc.
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
Brooks Fiber Properties, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Purchasers named in Schedule I hereto (the "Purchasers") an aggregate of
$425,000,000 principal amount of the Notes specified above (the "Securities").
1. The Company represents and warrants to, and agrees
with, each of the Purchasers that:
(a) A preliminary offering memorandum, dated February 1, 1996
(the "Preliminary Offering Memorandum") has been prepared and an
offering memorandum in final form, dated February 16, 1996 (the
"Offering Memorandum"), will be prepared promptly after the execution of
this Agreement in connection with the offering of the Securities. Any
reference to the Preliminary Offering Memorandum or the Offering
Memorandum shall be deemed to refer to and include any Additional Issuer
Information (as defined in Section 5(f)) furnished by the Company prior
to the completion (as notified to the Company by Goldman, Sachs & Co.)
of the distribution of the Securities. The Preliminary Offering
Memorandum or the Offering Memorandum and any amendments or supplements
thereto did not and will not, as of their respective dates, contain an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by a Purchaser through
Goldman, Sachs & Co. expressly for use therein;
(b) Neither the Company nor any of its subsidiaries (which term
is used herein as defined in the Indenture referred to in Section 1(f)
below) has sustained since the date of the latest audited financial
statements included in the Offering Memorandum any material loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute
or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Offering Memorandum; and, since the
respective dates as of which information is given in the Offering
Memorandum, there has not been any decrease or material increase in the
capital stock of the Company or its subsidiaries or any change in total
consolidated debt (in excess of $2,000,000) or decrease in total
consolidated assets (in excess of $5,000,000) or working capital (in
excess of $25,000,000) of the Company and its subsidiaries or any
material adverse change, or any development that may reasonably be
expected to result in a material adverse change, in or affecting the
general affairs, management, financial position, stockholders' equity or
results of operations of the Company and its subsidiaries on a
consolidated basis, otherwise than as set forth or contemplated in the
Offering Memorandum (including the forma financial information contained
therein);
(c) The Company and its subsidiaries own no real property other
than a 42,000 square foot office building in Grand Rapids, Michigan,
and, to the best of the Company's knowledge, have good and marketable
title in fee simple to such property; the Company and its subsidiaries
have good and marketable title to all material items of personal
property owned by them, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Offering
Memorandum or such as do not materially affect the value of such
property and do not materially interfere with the use made and proposed
to be made of such property by the Company and its subsidiaries; and any
real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid and subsisting leases
enforceable by the Company and its subsidiaries with such exceptions as
are not material and do not materially interfere with the use made and
proposed to be made of such property and buildings by the Company and
its subsidiaries;
(d) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Offering
Memorandum, and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of the
States of Missouri and California, the only jurisdictions in which its
ownership or leasing of properties or its conduct of any business
requires such qualification; and each subsidiary of the Company has been
duly incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation;
(e) The Company has an authorized capitalization as set forth in
the Offering Memorandum, and all of the issued shares of capital stock
of the Company have been duly and validly authorized and issued and are
fully paid and non-assessable; and all of the issued shares of capital
stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and (except for
directors' qualifying shares and except as otherwise set forth in the
Offering Memorandum in respect of the minority interests described
therein) are owned directly or indirectly by the Company, free and clear
of all liens, encumbrances, equities or claims;
(f) The Securities have been duly authorized and, when issued and
delivered pursuant to this Agreement and authenticated and delivered by
the Trustee in accordance with the indenture to be dated as of February
26, 1996 (the "Indenture") between the Company and The Bank of New York,
as Trustee (the "Trustee"), will have been duly executed, authenticated,
issued and delivered and will constitute valid and legally binding
obligations of the Company entitled to the benefits provided by the
Indenture under which they are to be issued, which will be substantially
in the form previously delivered to you; the Indenture has been duly
authorized and, when executed and delivered by the Company (and assuming
due authorization, execution and delivery by the Trustee), the Indenture
will constitute a valid and legally binding instrument, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general equity
principles; and the Securities and the Indenture will conform in all
material respects to the descriptions thereof in the Offering Memorandum
and will be in substantially the form previously delivered to you;
(g) None of the transactions contemplated by this Agreement
(including, without limitation, the use of the proceeds by the Company
from the sale of the Securities) will result in a violation by the
Company of Section 7 of the United States Securities Exchange Act of
1934, as amended (the "Exchange Act") or any regulation promulgated
thereunder, including, without limitation, Regulations G, T, U, and X of
the Board of Governors of the Federal Reserve System;
(h) The issue and sale of the Securities and the compliance by
the Company with all of the provisions of the Securities, the Indenture,
this Agreement and the Registration Rights Agreement (as hereinafter
defined in Section 1(r) hereof) and the consummation of the transactions
herein and therein contemplated will not result in a breach or violation
of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument (including without limitation, any license, franchise,
permit, consent or similar authorization granted to the Company or any
subsidiary of the Company by any franchising or other governmental body)
to which the Company or any of its subsidiaries is a party or by which
the Company or any of its subsidiaries is bound or to which any of the
property or assets of the Company or any of its subsidiaries is subject,
nor will such action result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company or any statute or
any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or
any of their properties; and no consent, approval, authorization, order,
registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Securities in
the manner contemplated by the Offering Memorandum or the consummation
by the Company of the transactions contemplated by this Agreement, the
Indenture, and the Registration Rights Agreement except for the filing
of a registration statement by the Company with the Securities and
Exchange Commission (the "Commission") pursuant to the United States
Securities Act of 1933, as amended (the "Act") pursuant to Section 5(l)
hereof, and such consents, approvals, authorizations, registrations or
qualifications as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Securities
by the Purchasers;
(i) Neither the Company nor any of its subsidiaries is in
violation of its Certificate or Articles of Incorporation or By-laws or
in default in the performance or observance of any obligation, covenant
or condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument (including without
limitation, any license, franchise, permit, consent or similar
authorization granted to the Company or any subsidiary by any
franchising or other governmental body) to which it is a party or by
which it or any of its properties may be bound, except for any such
violation or default that individually or in the aggregate would not
have a material adverse effect on (i) the general affairs, management,
financial position, stockholders' equity or results of operation of the
Company and its subsidiaries or (ii) the rights of the holders of the
Securities;
(j) The statements set forth in the Offering Memorandum under the
caption "Description of the Notes", insofar as they purport to
constitute a summary of the terms of the Securities, and under the
captions "Summary -- Recent Developments", "Risk Factors", "Business",
"Description of Existing Debt", "Regulatory Overview", and "Certain
United States Federal Income Tax Consequences", insofar as they purport
to describe the provisions of the laws, legal proceedings, and documents
referred to therein, are accurate and fair summaries of such terms and
provisions, respectively, and are complete in all material respects;
(k) Other than as set forth in the Offering Memorandum, there are
no legal or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property of the Company
or any of its subsidiaries is the subject which, if determined adversely
to the Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the current or future
consolidated financial position, stockholders' equity or results of
operations of the Company and its subsidiaries; and, to the best of the
Company's knowledge, no such proceedings are threatened or contemplated
by governmental authorities or threatened by others;
(l) When the Securities are issued and delivered pursuant to this
Agreement, the Securities will not be of the same class (within the
meaning of Rule 144A under the Securities Act) as securities which are
listed on a national securities exchange registered under Section 6 of
the Exchange Act or quoted in a U.S. automated interdealer quotation
system;
(m) The Company is not, and after giving effect to the offering
and sale of the Securities will not be, an "investment company", or an
entity "controlled" by an "investment company", as such terms are
defined in the United States Investment Company Act of 1940, as amended
(the "Investment Company Act");
(n) Neither the Company, nor any person acting on its behalf, has
offered or sold the Securities by means of any general solicitation or
general advertising within the meaning of Rule 502(c) under the Act;
(o) Within the preceding six months, neither the Company nor any
other person acting on behalf of the Company has offered or sold to any
person any Securities, or any securities of the same or a similar class
as the Securities, other than Securities offered or sold to the
Purchasers hereunder. The Company will take reasonable precautions
designed to insure that any offer or sale, direct or indirect, in the
United States or to any U.S. person (as defined in Rule 902 under the
Act) of any Securities or any substantially similar security issued by
the Company, within six months subsequent to the date on which the
distribution of the Securities has been completed (as notified to the
Company by Goldman, Sachs & Co.), is made under restrictions and other
circumstances reasonably designed not to affect the status of the offer
and sale of the Securities in the United States and to U.S. persons
contemplated by this Agreement as transactions exempt from the
registration provisions of the Securities Act (the foregoing will not
prevent offers and sales made pursuant to an exchange offer or shelf
registration statement in accordance with the Registration Rights
Agreement);
(p) Neither the Company nor any of its affiliates does business
with the government of Cuba or with any person or affiliate located in
Cuba within the meaning of Section 517.075, Florida Statutes;
(q) KPMG Peat Marwick LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder;
(r) The Exchange and Registration Rights Agreement between the
Company and the Purchasers to be dated as of February 26, 1996 (the
"Registration Rights Agreement") has been duly authorized, and, when
executed and delivered by the Company (assuming due authorization,
execution and delivery by the Purchasers), will constitute a valid and
legally binding agreement of the Company enforceable in accordance with
its terms, subject, as to enforcement, to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or
affecting creditors' rights, to general equity principles and, as to
enforcement of rights to indemnity and contribution thereunder, to
limitations under applicable securities laws or public policy; and the
Registration Rights Agreement will conform in all material respects to
the description thereof in the Offering Memorandum;
(s) This Agreement has been duly authorized, executed
and delivered by the Company;
(t) No holder of any security of the Company has or will have any
right to require the registration of such security by virtue of any
transactions contemplated by this Agreement or the Registration Rights
Agreement other than any such right that has been expressly waived in
writing;
(u) Except as set forth in or contemplated by the Offering
Memorandum with respect to systems under development, each of the
Company and its subsidiaries has all material certificates, consents,
exemptions, orders, permits, licenses, authorizations, franchises or
other material approvals (each, an "Authorization") of and from, and has
made all material declarations and filings with, all Federal, state,
local and other governmental authorities, all self-regulatory
organizations and all courts and other tribunals, necessary or
appropriate for the Company and its subsidiaries to own, lease, license,
use and construct its properties and assets and to conduct its business
in the manner described in the Offering Memorandum, except to the extent
that the failure to obtain any such Authorizations or make any such
declaration or filing would not, singularly or in the aggregate,
reasonably be expected to have a material adverse effect on the current
or future consolidated financial position, stockholders' equity or
results of operations of the Company and its subsidiaries. All such
Authorizations are in full force and effect with respect to the Company
and its subsidiaries; to the best knowledge of the Company, no event has
occurred that permits, or after notice or lapse of time could permit,
the revocation, termination or modification of any such Authorization;
the Company and its subsidiaries are in compliance in all material
respects with the terms and conditions of all such Authorizations and
with the rules and regulations of the regulatory authorities and
governing bodies having jurisdiction with respect thereto; and, except
as set forth in the Offering Memorandum, the Company has no knowledge
that any person is contesting or intends to contest the granting of any
material Authorization; and
(v) Neither the execution and delivery of this Agreement, the
Indenture or the Registration Rights Agreement, nor the consummation of
the transactions contemplated hereby or thereby nor compliance with the
terms, conditions and provisions thereof by the Company will cause any
suspension, revocation, impairment, forfeiture, nonrenewal or
termination of any Authorization.
2. Subject to the terms and conditions herein set forth, the Company
agrees to issue and sell to each of the Purchasers, and each of the Purchasers
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of 56.745% of the principal amount thereof, plus accrued original issue
discount, if any, from February 26, 1996 to the Time of Delivery hereunder, the
principal amount of Securities set forth opposite the name of such Purchaser in
Schedule I hereto.
3. Upon the authorization by you of the release of the Securities, the
several Purchasers propose to offer the Securities for sale upon the terms and
conditions set forth in this Agreement and the Offering Memorandum and each
Purchaser hereby represents and warrants to, and agrees with the Company that:
(a) It will offer and sell the Securities only to: (i) persons who it
reasonably believes are "qualified institutional buyers" ("QIBs") within the
meaning of Rule 144A under the Act in transactions meeting the requirements of
Rule 144A, or (ii) institutions which it reasonably believes are "accredited
investors" ("Institutional Accredited Investors") within the meaning of Rule 501
under the Act, provided that in no event shall the total number of Institutional
Accredited Investors that are sold Securities by the Purchasers pursuant to this
Section 3 exceed 20;
(b) It is an Institutional Accredited Investor; and
(c) It will not offer or sell the Securities by any form of general
solicitation or general advertising, including but not limited to the methods
described in Rule 502(c) under the Act.
4. (a) Except as set forth in the next paragraph, the Securities to be
purchased by each Purchaser hereunder will be represented by one or more
definitive global Securities in book-entry form which will be deposited by or on
behalf of the Company with The Depository Trust Company ("DTC") or its
designated custodian. The Company will deliver the Securities to Goldman, Sachs
& Co., for the account of each Purchaser, against payment by or on behalf of
such Purchaser of the purchase price therefor by electronic transfer to the
order of the Company in Federal (same day) funds, by causing DTC to credit the
Securities to the account of Goldman, Sachs & Co. at DTC. The Company will cause
the certificates representing the Securities to be made available to Goldman,
Sachs & Co. for checking at least twenty-four hours prior to the Time of
Delivery (as defined below) at the office of DTC or its designated custodian
(the "Designated Office"). The time and date of such delivery and payment shall
be 9:30 a.m., New York City time, on February 26, 1996 or such other time and
date as Goldman, Sachs & Co. and the Company may agree upon in writing. Such
time and date are herein called the "Time of Delivery".
Such Securities, if any, as Goldman, Sachs & Co. may request upon at
least forty-eight hours' prior notice to the Company (such request to include
the authorized denominations and the names in which they are to be registered),
shall be delivered in definitive certificated form, by or on behalf of the
Company to Goldman, Sachs & Co. for the account of certain of the Purchasers,
against payment by or on behalf of such Purchaser of the purchase price therefor
by electronic transfer to the order of the Company in Federal (same day) funds.
The Company will cause the certificates representing the Securities to be made
available for checking and packaging at least twenty-four hours prior to the
Time of Delivery at the office of Goldman, Sachs & Co., 85 Broad Street, New
York, New York 10004.
(b) The documents to be delivered at the Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the
cross-receipt for the Securities and any additional documents requested by the
Purchasers pursuant to Section 7(i) hereof, will be delivered at such time and
date at the offices of Sullivan & Cromwell, 125 Broad Street, New York, New York
10004 (the "Closing Location"), and the Securities will be delivered at the
Designated Office, all at the Time of Delivery. A meeting will be held at the
Closing Location at 2:00 p.m., New York City time, on the New York Business Day
next preceding the Time of Delivery, at which meeting the final drafts of the
documents to be delivered pursuant to the preceding sentence will be available
for review by the parties hereto. For the purposes of this Section 4, "New York
Business Day" shall mean each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York are generally
authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Purchasers:
(a) To prepare the Offering Memorandum in a form approved by you; to
make no amendment or any supplement to the Offering Memorandum which shall be
disapproved by you promptly after reasonable notice thereof; and to furnish you
with copies thereof;
(b) Promptly from time to time to take such action as you may reasonably
request to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as you may request and to comply with such laws so as
to permit the continuance of sales and dealings therein in such jurisdictions
for as long as may be necessary to complete the distribution of the Securities,
provided that in connection therewith the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to furnish
the Purchasers with four copies of the Offering Memorandum in New York City and
each amendment or supplement thereto signed by an authorized officer of the
Company with the independent accountants' report(s) in the Offering Memorandum,
and any amendment or supplement containing amendments to the financial
statements covered by such report(s), signed by the accountants, and additional
copies thereof in such quantities as you may reasonably request, and if, at any
time prior to the completion of the distribution of the Securities (as notified
to the Company by Goldman, Sachs & Co.), any event shall have occurred as a
result of which the Offering Memorandum as then amended or supplemented would
include an untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Offering Memorandum is
delivered, not misleading, or, if for any other reason it shall be necessary or
desirable during such same period to amend or supplement the Offering
Memorandum, to notify you and upon your request to prepare and furnish without
charge to each Purchaser and to any dealer in the Securities as many copies as
you may from time to time reasonably request of an amended Offering Memorandum
or a supplement to the Offering Memorandum which will correct such statement or
omission or effect such compliance;
(d) During the period beginning from the date hereof and continuing
until the date 90 days after the Time of Delivery, not to offer, sell, contract
to sell or otherwise dispose of, except as provided hereunder any securities of
the Company that are substantially similar to the Securities (other than as
contemplated by the Registration Rights Agreement) or any securities of the
Company convertible or exchangeable for securities of the Company that are
substantially similar to the Securities without the prior written consent of
Goldman, Sachs & Co.;
(e) Not to be or become, at any time prior to the expiration of three
years after the Time of Delivery, an open-end investment company, unit
investment trust, closed-end investment company or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act;
(f) At any time when the Company is not subject to Section 13 or 15(d)
of the Exchange Act, for the benefit of holders from time to time of Securities,
to furnish at its expense, upon request, to holders of Securities and
prospective purchasers of securities information (the "Additional Issuer
Information") satisfying the requirements of subsection (d)(4)(i) of Rule 144A
under the Act;
(g) If reasonably requested by you at any time when any of the
Securities are (i) restricted securities, as defined in Rule 144(a)(3) under the
Act or (ii) securities that can only be sold pursuant to Regulation S under the
Act, Rule 144A under the Act or Rule 144 under the Act or in a transaction
exempt from the registration requirements under the Act pursuant to Section 4 of
the Act and not involving a public offering, to use its reasonable best efforts
to cause such Securities to be eligible for the PORTAL trading system of the
National Association of Securities Dealers, Inc.;
(h) To file with the Commission, not later than 15 days after the Time
of Delivery, five copies of a notice on Form D under the Act (one of which will
be manually signed by a person duly authorized by the Company); to otherwise
comply with the requirements of Rule 503 under the Act; and to furnish promptly
to you evidence of each such required timely filing (including a copy thereof);
(i) To furnish to the holders of the Securities as soon as practicable
after the end of each fiscal year an annual report (including a consolidated
balance sheet and consolidated statements of income, stockholders' equity and
cash flows of the Company and its consolidated subsidiaries certified by
independent public accountants) and, as soon as practicable after the end of
each of the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the date of the Offering Memorandum), consolidated summary
financial information of the Company and its subsidiaries for such quarter in
reasonable detail;
(j) During a period of five years from the date of the Offering
Memorandum, to furnish to you copies of all reports or other communications
(financial or other) furnished to stockholders of the Company, and to deliver to
you (i) as soon as they are available, copies of any reports and financial
statements furnished to or filed with the Commission or any securities exchange
on which any class of securities of the Company is listed; and (ii) such
additional information concerning the business and financial condition of the
Company as you may from time to time reasonably request (such financial
statements to be on a consolidated basis to the extent the accounts of the
Company and its subsidiaries are consolidated in reports furnished to its
stockholders generally or to the Commission);
(k) During the period of three years after the Time of Delivery, until
such time as the exchange offer closes or the resale registration becomes
effective, the Company will not, and will not permit any of its "affiliates" (as
defined in Rule 144 under the Act) to, resell any of the Securities which
constitute "restricted securities" under Rule 144 that have been reacquired by
any of them except pursuant to an effective registration statement under the Act
or any exemption therefrom;
(l) Pursuant to the Registration Rights Agreement, the Company shall
file and use its reasonable best efforts to cause to be declared or become
effective under the Securities Act, on or prior to 165 days after the Time of
Delivery, a registration statement on Form S-4 providing for the registration of
(i) another series of debt securities of the Company, with terms substantially
identical to the Securities (the "Exchange Securities"), and the exchange of the
Securities for the Exchange Securities, all in a manner which will permit
persons who acquire the Exchange Securities to resell the Exchange Securities
pursuant to Section 4(1) of the Securities Act or (ii) in the event that such
exchange offer has not been consummated within 200 days following the Time of
Delivery, and in lieu thereof, file and use its reasonable best efforts to cause
to be declared or become effective under the Securities Act a registration
statement relating to the shelf registration of the Securities; and
(m) To use the net proceeds received by it from the sale of the
Securities pursuant to this Agreement in the manner specified in the Offering
Memorandum under the caption "Use of Proceeds".
6. The Company covenants and agrees with the several Purchasers that the
Company will pay or cause to be paid the following: (i) the fees, disbursements
and expenses of the Company's counsel and accountants in connection with the
issue of the Securities and all other expenses of the Company in connection with
the preparation and printing of the Preliminary Offering Memorandum and the
Offering Memorandum and any amendments and supplements thereto and the mailing
and delivering of copies thereof to the Purchasers and dealers; (ii) the cost of
printing or producing any Agreement among Purchasers, this Agreement, the
Indenture, the Blue Sky and Legal Investment Memoranda, closing documents
(including any compilations thereof) and any other documents in connection with
the offering, purchase, sale and delivery of the Securities; (iii) all
reasonable expenses in connection with the qualification of the Securities for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Purchasers in
connection with such qualification and in connection with the Blue Sky and legal
investment surveys; (iv) any fees charged by securities rating services for
rating the Securities; (v) the cost of preparing the Securities; (vi) the fees
and expenses of the Trustee and any agent of the Trustee and the fees and
disbursements of counsel for the Trustee in connection with the Indenture and
the Securities; (vii) any cost incurred in connection with the designation of
the Securities for trading as a PORTAL security and (viii) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section. It is understood, however,
that, except as provided in this Section, and Sections 8 and 11 hereof, the
Purchasers will pay all of their own costs and expenses, including the fees of
their counsel, transfer taxes on resale of any of the Securities by them, and
any advertising expenses connected with any offers they may make.
7. The obligations of the Purchasers hereunder shall be subject, in
their discretion, to the condition that all representations and warranties and
other statements of the Company herein are, at and as of the Time of Delivery,
true and correct, the condition that the Company shall have performed all of its
obligations hereunder theretofore to be performed, and the following additional
conditions:
(a) Sullivan & Cromwell, counsel for the Purchasers, shall have
furnished to you such opinion or opinions, dated the Time of Delivery, with
respect to the incorporation of the Company, the validity of the Indenture, the
Securities and the Registration Rights Agreement, the Offering Memorandum, and
other related matters as you may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to enable
them to pass upon such matters;
(b) Bryan Cave LLP, counsel for the Company, shall have furnished to you
their written opinion, dated the Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own its properties
and conduct its business as described in the Offering Memorandum;
(ii) The Company has an authorized capitalization as set forth
in the Offering Memorandum, and all of the issued shares of capital
stock of the Company have been duly and validly authorized and issued
and are fully paid and non-assessable;
(iii) Each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation, provided that with
respect to subsidiaries incorporated under the laws of the State of
Michigan or Nevada subsidiaries, such counsel need only state that each
such subsidiary is a corporation validly existing in good standing under
the laws of its jurisdiction of incorporation; and all of the issued
shares of capital stock of each such subsidiary have been duly and
validly authorized and issued, are fully paid and non- assessable, and
(except for directors' qualifying shares and except as otherwise set
forth in the Offering Memorandum in respect of the minority interests
described therein) are owned of record by the Company directly or
indirectly through one or more subsidiaries of the Company, free and
clear of any pledge noted on the stock records of such subsidiary
(except for pledges securing the indebtedness described in the Offering
Memorandum under the caption "Description of Existing Debt") (such
counsel being entitled to rely in respect of the opinion in this clause
upon opinions of local counsel, provided that such counsel shall state
that they believe that both you and they are justified in relying upon
such opinions);
(iv) This Agreement has been duly authorized, executed and
delivered by the Company;
(v) The Securities have been duly authorized and executed by
the Company and when duly authenticated by the Trustee and delivered to
the Purchasers upon payment therefor by the Purchasers, will be duly
issued and delivered and will constitute valid and legally binding
obligations of the Company entitled to the benefits provided by the
Indenture: and the Securities and the Indenture conform in all material
respects to the summaries thereof in the Offering Memorandum:
(vi) The Registration Rights Agreement has been duly
authorized, executed and delivered by the Company and, assuming due
authorization, execution and delivery by the Purchasers, constitutes a
valid and legally binding obligation of the Company enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general equity
principles and, as to enforcement of rights to indemnity and
contribution thereunder, to limitations under applicable securities laws
or public policy; and the Registration Rights Agreement conforms in all
material respects to the summary thereof in the Offering Memorandum;
(vii) The Indenture has been duly authorized, executed and
delivered by the Company and, assuming due authorization, execution and
delivery by the Trustee, constitutes a valid and legally binding
obligation of the Company, enforceable in accordance with its terms,
subject, as to enforcement, to bankruptcy, insolvency, reorganization
and other laws of general applicability relating to or affecting
creditors' rights and to general equity principles;
(viii) The issuance and sale of the Securities by the Company
to the Purchasers pursuant to this Agreement and the compliance by the
Company with all of the provisions of the Securities, the Indenture, the
Registration Rights Agreement and this Agreement and the consummation by
the Company of the transactions herein and therein contemplated will not
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument known to such counsel to
which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries is bound or to which any of the
property or assets of the Company or any of its subsidiaries is subject,
nor will such actions result in any violation of the provisions of the
Certificate of Incorporation or By-laws of the Company or any statute,
rule or regulation, or any order known to such counsel, of any court or
governmental agency or body having jurisdiction over the Company or any
of its subsidiaries or any of their properties;
(ix) No consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or
body is required for the issuance and sale of the Securities as
contemplated by this Agreement and the Offering Memorandum or the
consummation by the Company of the other transactions contemplated by
this Agreement, the Indenture or the Registration Rights Agreement,
except such consents, approvals, authorizations, orders, registrations
or qualifications as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Securities
by the Purchasers, and such consents, approvals, authorizations, orders,
registrations and qualifications as may be required under the Act, the
United States Trust Indenture Act of 1939 (the "Trust Indenture Act")
and state or foreign securities or Blue Sky laws in connection with the
filing of a registration statement by the Company with the Commission
pursuant to the Act in accordance with Section 5(l) hereof and the
exchange offer or resale registration contemplated by the Registration
Rights Agreement described in the Offering Memorandum;
(x) The statements set forth in the Offering Memorandum under
the caption "Description of the Notes", insofar as they purport to
constitute a summary of the terms of the Securities, and under the
captions "Description of Existing Debt" and "Certain United States
Federal Income Tax Consequences", insofar as they purport to describe
the provisions of the laws, legal proceedings and documents referred to
therein, are accurate summaries of such terms and provisions in all
material respects;
(xi) Assuming the accuracy of the representations of the
Purchasers set forth in Section 3 of this Agreement, no registration of
the Securities under the Act, and no qualification of an indenture under
the United States Trust Indenture Act with respect thereto, is required
for the offer, sale and initial resale of the Securities by the
Purchasers in the manner contemplated by this Agreement; and
(xii) The Company is not, nor will it be upon issuance of the
Securities and the application of the proceeds therefrom as set forth in
the first paragraph under the caption "Use of Proceeds" in the Offering
Memorandum, an "investment company" or an entity "controlled" by an
"investment company", as such terms are defined in the Investment
Company Act.
Such counsel shall also state that, during the course of the preparation
by the Company of the Offering Memorandum, such counsel has participated in
conferences with your representatives and counsel and with officers and
representatives of the Company, at which conferences the contents of the
Offering Memorandum were discussed, reviewed and revised, and, although such
counsel is not passing upon, and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements made in the Offering
Memorandum and has not made any independent investigation thereof, on the basis
of the information that was developed during the course thereof, considered in
the light of such counsel's understanding of applicable law and the experience
it has gained through its practice thereunder, that such counsel has no reason
to believe that the Offering Memorandum and any amendments or supplements
thereto, as of the respective dates thereof, contained or, as of the Time of
Delivery, contains any untrue statement of a material fact or omitted or, as of
the Time of Delivery, omits to state any material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, that such counsel need not express an opinion or
belief as to the financial statements and related notes, or any other financial
data contained in the Offering Memorandum.
(c) John C. Shapleigh, Esq., Executive Vice President-Regulatory, Legal
and Corporate Development of the Company, shall have furnished to you his
written opinion, dated the Time of Delivery, in form and substance satisfactory
to you, to the effect that:
(i) To the best of such counsel's knowledge and other than as
set forth in the Offering Memorandum, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is a
party or of which any property of the Company or any of its subsidiaries
is the subject which, if determined adversely to the Company or any of
its subsidiaries, would individually or in the aggregate have a material
adverse effect on the consolidated financial position, stockholders'
equity, results of operations or general affairs of the Company and its
subsidiaries; and, to the best of such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental authorities
or threatened by others;
(ii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of the States of Missouri and California;
(iii) To the best knowledge of such counsel and except as set
forth in or contemplated by the Offering Memorandum with respect to
systems under development, (a) each of the Company and its subsidiaries
has all Authorizations of and from, and has made all declarations and
filings with, all Federal, state, local and other governmental
authorities, all self-regulatory organizations and all courts and other
tribunals, which are necessary or appropriate for the Company and its
subsidiaries to own, lease, license, use and construct its properties
and assets and to conduct its business in the manner described in the
Offering Memorandum, except to the extent that the failure to obtain any
such Authorizations or make any such declaration or filing would not,
singularly or in the aggregate, reasonably be expected to have a
material adverse effect on the consolidated financial position,
stockholders' equity, results of operations or general affairs of the
Company and its subsidiaries, (b) all such Authorizations are in full
force and effect with respect to the Company and its subsidiaries, (c)
no event has occurred that permits, or after notice or lapse of time
could permit, the revocation, termination or modification of any such
Authorization and (d) the Company and its subsidiaries are in compliance
in all material respects with the terms and conditions of all such
Authorizations and with the rules and regulations of the regulatory
authorities and governing bodies having jurisdiction with respect
thereto;
(iv) To the best knowledge of such counsel, neither the
execution and delivery of this Agreement, the Indenture or the
Registration Rights Agreement, the issuance and sale of the Securities
by the Company to the Purchasers, nor the consummation by the Company of
the transactions contemplated hereby or thereby nor compliance with the
terms, conditions and provisions thereof by the Company will cause any
suspension, revocation, impairment, forfeiture, nonrenewal or
termination of any Authorization; and
(v) The statements set forth in the Offering Memorandum under
the captions "Summary-Recent Developments" and "Regulatory Overview",
insofar as they purport to describe certain of the provisions of the
laws, legal proceedings and documents referred to therein, are accurate
summaries of such provisions in all material respects.
(d) On the date of the Offering Memorandum prior to the execution of
this Agreement and also at the Time of Delivery, (i) KPMG Peat Marwick LLP shall
have furnished to you a letter or letters, dated the respective dates of
delivery thereof, in form and substance satisfactory to you, to the effect set
forth in Annex I hereto and BDO Seidman LLP shall have furnished to you a letter
or letters, dated the respective dates of delivery thereof, in the form set
forth in Annex II;
(e) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Offering Memorandum any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Offering Memorandum, and (ii) since the
respective dates as of which information is given in the Offering Memorandum
there shall not have been any decrease or material increase in the capital stock
of the Company or any of its subsidiaries or any change in total consolidated
debt (in excess of $2,000,000) or decrease in total consolidated assets (in
excess of $5,000,000) or working capital (in excess of $25,000,000) of the
Company and its subsidiaries or any change, or any development that may
reasonably be expected to result in a change, in or affecting the general
affairs, management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, otherwise than as set forth or
contemplated in the Offering Memorandum (including the pro forma financial
information contained therein), the effect of which, in any such case described
in Clause (i) or (ii), is in the judgment of the Purchasers so material and
adverse as to make it impracticable or inadvisable to proceed with the offering
or the delivery of the Securities on the terms and in the manner contemplated in
this Agreement and in the Offering Memorandum;
(f) On or after the date hereof (i) no downgrading shall have occurred
in the rating accorded the Company's debt securities by any "nationally
recognized statistical rating organization", as that term is defined by the
Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such
organization shall have publicly announced that it has under surveillance or
review, with possible negative implications, its rating of any of the Company's
debt securities;
(g) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange; (ii) a general moratorium on
commercial banking activities declared by either Federal or New York State
authorities; (iii) the outbreak or escalation of hostilities involving the
United States or the declaration by the United States of a national emergency or
war, if the effect of any such event specified in this clause (iv) in the
judgment of the Purchasers makes it impracticable or inadvisable to proceed with
the offering or the delivery of the Securities on the terms and in the manner
contemplated in the Offering Memorandum; or (v) the occurrence of any material
adverse change in the existing, financial, political or economic conditions in
the United States or elsewhere which, in the judgment of the Purchasers, would
materially and adversely affect the financial markets for the Securities and
other debt securities;
(h) The Securities have been designated for trading on
PORTAL;
(i) The Registration Rights Agreement shall have been duly
authorized, executed and delivered by the Company;
(j) The Company shall have furnished or caused to be furnished to you at
the Time of Delivery certificates of officers of the Company satisfactory to you
as to the accuracy of the representations and warranties of the Company herein
at and as of such Time of Delivery, as to the performance by the Company of all
of its obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a) and (e) of this Section
and as to such other matters as you may reasonably request; and
(k) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of copies of the Offering Memorandum on
the New York Business Day next succeeding the date of this Agreement.
8. (a) The Company will indemnify and hold harmless each Purchaser
against any losses, claims, damages or liabilities, joint or several, to which
such Purchaser may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Offering Memorandum or the Offering
Memorandum, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact necessary
to make the statements therein not misleading, and will reimburse each Purchaser
for any legal or other expenses reasonably incurred by such Purchaser in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any Preliminary Offering Memorandum or
the Offering Memorandum or any such amendment or supplement in reliance upon and
in conformity with written information furnished to the Company by any Purchaser
through Goldman, Sachs & Co. expressly for use therein.
(b) Each Purchaser will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Offering Memorandum or the Offering Memorandum, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in any Preliminary Offering Memorandum or the Offering
Memorandum or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such Purchaser
through Goldman, Sachs & Co. expressly for use therein; and will reimburse the
Company for any legal or other expenses reasonably incurred by the Company in
connection with investigating or defending any such action or claim as such
expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to,
or an admission of, fault, culpability or a failure to act, by or on behalf of
any indemnified party. No indemnifying party shall be liable for the cost of any
settlement effected by an indemnified party without the written consent of such
indemnifying party, which consent shall not be unreasonably withheld. In no
event shall any indemnifying party be liable for the fees and expenses of more
than one firm or counsel (except to the extent that local counsel, in addition
to such firm or counsel, is required for effective representation) to represent
all indemnified parties with respect to a single action or separate but
substantially similar actions in the same jurisdiction arising out of the same
general allegations, which firm or counsel shall be designated in writing by
Goldman, Sachs & Co., on behalf of any Purchasers and controlling persons, and
by the Company, on behalf of itself and any-of its officers, directors or
controlling persons.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Purchasers on the other from the offering
of the Securities. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Purchasers on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Purchasers on the other
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Purchasers, in each case
as set forth in the Offering Memorandum. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
the Purchasers on the other and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company and the Purchasers agree that it would not be just and equitable if
contribution pursuant to this subsection (d) were determined by pro rata
allocation (even if the Purchasers were treated as one entity for such purpose)
or by any other method of allocation which does not take account of the
equitable considerations referred to above in this subsection (d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or defending
any such action or claim. Notwithstanding the provisions of this subsection (d),
no Purchaser shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to investors were offered to investors exceeds the amount of any
damages which such Purchaser has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. The
Purchasers' obligations in this subsection (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Purchaser within the meaning of the Act; and the obligations of the Purchasers
under this Section 8 shall be in addition to any liability which the respective
Purchasers may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company and to each person, if
any, who controls the Company within the meaning of the Act.
9. (a) If any Purchaser shall default in its obligation to purchase the
Securities which it has agreed to purchase hereunder, you may in your discretion
arrange for you or another party or other parties to purchase such Securities on
the terms contained herein. If within thirty-six hours after such default by any
Purchaser you do not arrange for the purchase of such Securities, then the
Company shall be entitled to a further period of thirty-six hours within which
to procure another party or other parties satisfactory to you to purchase such
Securities on such terms. In the event that, within the respective prescribed
periods, you notify the Company that you have so arranged for the purchase of
such Securities, or the Company notifies you that it has so arranged for the
purchase of such Securities, you or the Company shall have the right to postpone
the Time of Delivery for a period of not more than seven days, in order to
effect whatever changes may thereby be made necessary in the Offering
Memorandum, or in any other documents or arrangements, and the Company agrees to
prepare promptly any amendments to the Offering Memorandum which in your opinion
may thereby be made necessary. The term "Purchaser" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Securities.
(b) If, after giving effect to any arrangements for the purchase of the
Securities of a defaulting Purchaser or Purchasers by you and the Company as
provided in subsection (a) above, the aggregate principal amount of such
Securities which remains unpurchased does not exceed one-eleventh of the
aggregate principal amount of all the Securities, then the Company shall have
the right to require each non-defaulting Purchaser to purchase the principal
amount of Securities which such Purchaser agreed to purchase hereunder and, in
addition, to require each non-defaulting Purchaser to purchase its pro rata
share (based on the principal amount of Securities which such Purchaser agreed
to purchase hereunder) of the Securities of such defaulting Purchaser or
Purchasers for which such arrangements have not been made; but nothing herein
shall relieve a defaulting Purchaser from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Securities of a defaulting Purchaser or Purchasers by you and the Company as
provided in subsection (a) above, the aggregate principal amount of Securities
which remains unpurchased exceeds one- eleventh of the aggregate
principal amount of all the Securities, or if the Company shall not exercise the
right described in subsection (b) above to require non-defaulting Purchasers to
purchase Securities of a defaulting Purchaser or Purchasers, then this Agreement
shall thereupon terminate, without liability on the part of any non-defaulting
Purchaser or the Company, except for the expenses to be borne by the Company and
the Purchasers as provided in Section 6 hereof and the indemnity and
contribution agreements in Section 8 hereof; but nothing herein shall relieve a
defaulting Purchaser from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Purchasers, as set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Purchaser or any controlling person of any Purchaser, or the Company, or
any officer or director or controlling person of the Company, and shall survive
delivery of and payment for the Securities.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Purchaser except, in
the case of the non-defaulting Purchaser or Purchasers only, as provided in
Sections 6 and 8 hereof; but, if for any other reason, the Securities are not
delivered by or on behalf of the Company as provided herein, the Company will
reimburse the Purchasers through you for all out-of-pocket expenses approved in
writing by you, including fees and disbursements of counsel, reasonably incurred
by the Purchasers in making preparations for the purchase, sale and delivery of
the Securities, but the Company shall then be under no further liability to any
Purchaser except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, the parties hereto shall be entitled to
act and rely upon any statement, request, notice or agreement on behalf of any
Purchaser made or given by you jointly or by Goldman, Sachs & Co. on behalf of
you as the representative.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Purchasers shall be delivered or sent by mail, telex or
facsimile transmission ((212) 902-3000) to you in care of Goldman, Sachs & Co.,
85 Broad Street, New York, New York 10004, Attention: Registration Department;
and if to the Company shall be delivered or sent by mail, telex or facsimile
transmission ((314) 579-4654) to the address of the Company set forth in the
Offering Memorandum, Attention: Vice Chairman; provided, however, that any
notice to a Purchaser pursuant to Section 8(c) hereof shall also be delivered or
sent by mail, telex or facsimile transmission to such Purchaser at any address
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the
benefit of, the Purchasers, the Company and, to the extent provided in Sections
8 and 10 hereof, the officers and directors of the Company and each person who
controls the Company or any Purchaser, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Securities from any Purchaser shall be deemed a successor or assign by reason
merely of such purchase.
14. Time shall be of the essence of this Agreement.
15. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such respective counterparts shall together constitute one and
the same instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Purchasers, this letter and such acceptance hereof shall
constitute a binding agreement between each of the Purchasers and the Company.
It is understood that your acceptance of this letter on behalf of each of the
Purchasers is pursuant to the authority set forth in a form of Agreement among
Purchasers, the form of which shall be submitted to the Company for examination
upon request, but without warranty on your part as to the authority of the
signers thereof.
Very truly yours,
Brooks Fiber Properties, Inc.
By: /s/ David L. Solomon
------------------------------------
Name: David L. Solomon
Title: Senior Vice President &
Chief Financial Officer
Accepted as of the date hereof:
Goldman, Sachs & Co.
Bear, Stearns & Co., Inc.
Salomon Brothers Inc
By: /s/ Goldman, Sachs & Co.
--------------------------------
(Goldman, Sachs & Co.)
SCHEDULE I
Principal
Amount of
Securities
to be
Purchaser Purchased
- ------------------------------------------------------------------ ------------
Goldman, Sachs & Co. ...............................................$223,125,000
Bear, Stearns & Co. Inc............................................. 127,500,000
Salomon Brothers Inc................................................ 74,375,000
------------
Total.......................................................$425,000,000
============
ANNEX I
Pursuant to Section 7(e) of the Purchase Agreement, the accountants
shall furnish letters to the Purchasers to the effect that:
(i) They are independent certified public accountants with respect to
the Company and its subsidiaries under rule 101 of the American Institute of
Certified Public Accountants' Code of Professional Conduct, and its
interpretations and rulings;
(ii) In their opinion, the consolidated financial statements and
financial statement schedules audited by them and included in the Offering
Memorandum comply as to form in all material respects with generally accepted
accounting principles;
(iii) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company for the
two most recent fiscal years included in the Offering Memorandum agrees with the
corresponding amounts (after restatements where applicable) in the audited
consolidated financial statements for such two fiscal years;
(iv) On the basis of limited procedures not constituting an audit in
accordance with generally accepted auditing standards, consisting of a reading
of the unaudited financial statements and other information referred to below, a
reading of the latest available interim financial statements of the Company and
its subsidiaries, inspection of the minute books of the Company and its
subsidiaries since the date of the latest audited financial statements included
in the Offering Memorandum, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters and such other
inquiries and procedures as may be specified in such letter, nothing came to
their attention that caused them to believe that:
(A) the unaudited consolidated statements of operations,
consolidated balance sheets, consolidated statements of cash flows and
consolidated statements of changes in shareholders' equity included in
the Offering Memorandum are not in conformity with generally accepted
accounting principles applied on the basis substantially consistent with
the basis for the audited consolidated statements of operations,
consolidated balance sheets, consolidated statements of cash flows and
consolidated statements of changes in shareholders' equity included in
the Offering Memorandum;
(B) any other unaudited income statement data and balance sheet
items included in the Offering Memorandum do not agree with the
corresponding items in the unaudited consolidated financial statements
from which such data and items were derived, and any such unaudited data
and items were not determined on a basis substantially consistent with
the basis for the corresponding amounts in the audited consolidated
financial statements included in the Offering Memorandum;
(C) the unaudited financial statements which were not included in
the Offering Memorandum but from which were derived any unaudited
condensed financial statements referred to in Clause (A) and any
unaudited income statement data and balance sheet items included in the
Offering Memorandum and referred to in Clause (B) were not determined on
a basis substantially consistent with the basis for the audited
consolidated financial statements included in the Offering Memorandum;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Offering Memorandum do not comply as to form
in all material respects with the applicable accounting requirements or
the pro forma adjustments have not been properly applied to the
historical amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the consolidated
capital stock (other than issuances of capital stock upon exercise of
options and stock appreciation rights, upon earn-outs of performance
shares and upon conversions of convertible securities, in each case
which were outstanding on the date of the latest financial statements
included in the Offering Memorandum) or any increase in the consolidated
long-term debt of the Company and its subsidiaries, or any decreases in
consolidated net current assets or stockholders' equity or other items
specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with amounts
shown in the latest balance sheet included in the Offering Memorandum
except in each case for changes, increases or decreases which the
Offering Memorandum discloses have occurred or may occur or which are
described in such letter, and
(F) for the period from the date of the latest financial
statements included in the Offering Memorandum to the specified date
referred to in Clause (E) there were any decreases in consolidated net
revenues or operating profit (loss) or the total amounts of consolidated
net income (loss) or other items specified by the Representatives, or
any increases in any items specified by the Representatives, in each
case as compared with the comparable period of the preceding year and
with any other period of corresponding length specified by the
Representatives, except in each case for decreases or increases which
the Offering Memorandum discloses have occurred or may occur or which
are described in such letter; and
(v) In addition to the examination referred to in their report(s)
included in the Offering Memorandum and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraphs (iii) and
(iv) above, they have carried out certain specified procedures, not constituting
an audit in accordance with generally accepted auditing standards, with respect
to certain amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records of the
Company and its subsidiaries, which appear in the Offering Memorandum, and have
compared certain of such amounts, percentages and financial information with the
accounting records of the Company and its subsidiaries and have found them to be
in agreement.
EXHIBIT 5.1
BRYAN CAVE LLP
ONE METROPOLITAN SQUARE
211 NORTH BROADWAY, SUITE 3600
ST. LOUIS, MISSOURI 63102-2750
(314) 259-2000
FACSIMILE: (314) 259-2020
June 25, 1996
Board of Directors
Brooks Fiber Properties, Inc.
425 Woods Mill Road South, Suite 300
Town & Country, Missouri 63017
Gentlemen:
We are acting as special counsel for Brooks Fiber Properties, Inc., a
Delaware corporation (the "Company"), in connection with various legal matters
relating to the filing with the Securities and Exchange Commission of a
Registration Statement on Form S-4 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Act"), covering an offer to exchange
(the "Exchange Offer") $1,000 principal amount of the Company's 10-7/8% Senior
Discount Notes due March 1, 2006 (the "Exchange Notes") for each $1,000
principal amount of its outstanding 10-7/8% Senior Discount Notes due March 1,
2006 (the "Private Notes"), of which $425,000,000 aggregate principal amount is
outstanding on the date hereof. The Exchange Notes are to be issued pursuant to
an Indenture, dated as of February 26, 1996 (the "Indenture"), between the
Company and The Bank of New York, as Trustee, which is filed as an exhibit to
the Registration Statement.
In connection herewith, we have examined and relied without independent
investigation as to matters of fact upon such certificates of public officials,
such statements and certificates of officers of the Company and originals or
copies certified to our satisfaction of the Registration Statement, the
Indenture, the Exchange and Registration Rights Agreement, dated as of February
26, 1996, between the Company and Goldman, Sachs & Co., Bear, Stearns & Co.,
Inc. and Salomon Brothers Inc, the Restated Certificate of Incorporation and
By-laws of the Company, proceedings of the Board of Directors of the Company and
such other corporate records, documents, certificates and instruments as we have
deemed necessary or appropriate in order to enable us to render the opinions
expressed below. In rendering this opinion, we have assumed the genuineness of
all signatures on all documents examined by us, the authenticity of all
documents submitted to us as originals and the conformity to authentic originals
of all documents submitted to us as certified or photostatted copies.
We express no opinion as to the applicability or effect of (i) any
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, or (ii) general principles
of equity, including, without limitation, concepts of reasonableness,
materiality, good faith and fair dealing and the possible unavailability of
specific performance, injunctive relief or other equitable remedies, regardless
of whether enforceability is considered in a proceeding in equity or at law.
Based upon the foregoing and in reliance thereon and subject to the
qualifications and limitations stated herein, we are of the opinion that:
(1) The Company is a corporation validly existing in good standing under
the laws of the State of Delaware;
(2) When,
(i) the Registration Statement, including any amendments thereto,
shall have become effective under the Act;
(ii) the Indenture has been duly qualified under the Trust Indenture
Act of 1939, as amended; and
(iii) the Exchange Notes shall have been duly executed and
authenticated in accordance with the provisions of the Indenture
and duly delivered to the holders thereof in exchange for the
Private Notes;
then the Exchange Notes will be valid and binding obligations of
the Company.
(3) The material federal income tax consequences of the Exchange Offer are
accurately set forth under the heading "Certain Federal Income Tax
Considerations" in the Preliminary Prospectus dated June 25, 1996
included in the Registration Statement.
In rendering the opinion expressed in clause (3) above, we have relied upon
the facts as set forth in the Registration Statement. Any variation or
difference in the facts from those set forth in the Registration Statement could
affect our opinion. Such opinion is also based on various statutory provisions,
regulations promulgated thereunder and interpretations thereof by the Internal
Revenue Service and the courts having jurisdiction over such matters, all of
which are subject to change either prospectively or retroactively.
This opinion is not rendered with respect to any laws other than the
General Corporation Law of the State of Delaware and the federal laws of the
United States.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Validity of the Exchange Notes" in the Prospectus included as a part thereof.
We also consent to your filing copies of this opinion as an exhibit to the
Registration Statement with agencies of such states as you deem necessary in the
course of complying with the laws of such states regarding the Exchange Offer.
In giving this consent, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Act or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Bryan Cave LLP
Bryan Cave LLP
EXHIBIT 11.1
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
Statement Regarding Computation of Earnings Per Share
For the Year Ended December 31, 1995 and the Three Months Ended March 31, 1996
Shares outstanding - January 1, 1995............................... 1,162,800
Weighted average number of common and common equivalent
shares issued (1)................................................ 18,360,784
Weighted average number of common and common equivalent shares
outstanding - December 31, 1995.................................. 19,523,584
Net loss for the year ended December 31, 1995...................... $(9,551,000)
Pro forma loss per common and common equivalent share
for the year ended December 31, 1995............................. $ (.49)
Weighted average number of common and common equivalent shares
outstanding - March 31, 1996(1).................................. 19,523,584
Net loss for the three months ended March 31, 1996................. $(6,640,000)
Pro forma loss per common and common equivalent share
for the three months ended March 31, 1996........................ $ (.34)
- ---------------
(1) Common and common equivalent shares issued consist of certain effects of
shares issued, stock options, warrants, and Preferred Stock. Common
equivalent shares from convertible Preferred Stock (using the if converted
method) and stock options and warrants (using the treasury stock method)
have been included in the computation. Pursuant to the Securities and
Exchange Commission rules, convertible Preferred Stock which will be
automatically converted at the date of issuance is included even though
inclusion may be antidilutive. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, shares issued and stock options
and warrants granted at prices below the initial public offering price of
$27.00 per share during the twelve-month period preceding the date of the
Company's initial filing of the Registration Statement related to such
initial public offering have been included in the calculation of common
stock equivalent shares, using the treasury stock method, as if they were
outstanding for all of 1995 and for the first quarter of 1996.
EXHIBIT 12.1
<TABLE>
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
Computation of Ratio of Deficiency of Earnings to Fixed Charges
<CAPTION>
Period
from Pro Forma <F1>
November 10, ------------------------------
1993 to Three Months
December Year Ended December 31, Three Months Year Ended Ended
December 31, --------------------------------- March 31, December 31, March 31,
1993 1994 1995 1996 1995 1996
---------------- ---------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Earnings: Loss before income
tax and minority interests.... $ (205,000) $ (3,975,000) $(10,636,000) $ (7,163,000) $(18,759,000) $ (7,655,000)
Add: Fixed charges ........... 0 693,000 3,820,000 3,875,000 4,161,000 3,897,000
Earnings ..................... (205,000) (3,282,000) (6,816,000) (3,288,000) (14,598,000) (3,758,000)
Fixed charges:
Interest expense........... 0 693,000 3,704,000 3,835,000 4,045,000 3,857,000
Amortization of debt
expense ................. 0 0 116,000 40,000 116,000 40,000
----------------------------------------------------------------------------------------------------
Fixed charges.............. 0 693,000 3,820,000 3,875,000 4,161,000 3,897,000
Ratio of earnings
to fixed charges ............. -- -- -- -- -- --
Deficiency of earnings
available to cover
fixed charges ................ (205,000) (3,975,000) (10,636,000) (7,163,000) (18,759,000) (7,655,000)
- ---------------
<FN>
<F1> Pro forma data gives effect to the merger with BTC (which occurred on
January 2, 1996) and the City Signal Acquisition (which occurred on January
31, 1996). See the Unaudited Pro Forma Combined Consolidated Statements of
Operations included on pages F- 3 and F-4 of the Prospectus.
</FN>
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES
OF
BROOKS FIBER PROPERTIES, INC.
Name of Corporation Domestic
- ---------------------------------------------------------------- --------------
B.T.C. Real Estate Investments, Inc. Missouri
BTC Transportation, Inc. Delaware
Fibercom of Missouri, Inc. Missouri
GLA International, Inc. Missouri
J.B. Telecom, Inc. Missouri
Brooks Fiber Properties, Inc. Delaware
BFC Communications, Inc. Nevada
Brooks Fiber Communications-LD, Inc. Nevada
Brooks Fiber Communications-Midwest, Inc. Delaware
Brooks Fiber Communications-Northeast, Inc. Delaware
Brooks Fiber Communications of Arkansas, Inc. Delaware
Brooks Fiber Communications of Bakersfield, Inc. Delaware
Brooks Fiber Communications of California, Inc. Delaware
Brooks Fiber Communications of Connecticut, Inc. Delaware
Brooks Fiber Communications of El Paso, Inc. Delaware
Brooks Fiber Communications of Fresno, Inc. Delaware
Brooks Fiber Communications of Kansas City, Inc. Delaware
Brooks Fiber Communications of Louisiana, Inc. Delaware
Brooks Fiber Communications of Massachusetts, Inc. Delaware
Brooks Fiber Communications of Michigan, Inc. Michigan
Brooks Fiber Communications of Mississippi, Inc. Delaware
Brooks Fiber Communications of Nevada, Inc. Delaware
Brooks Fiber Communications of New Mexico, Inc. Delaware
Brooks Fiber Communications of Ohio, Inc. Delaware
Brooks Fiber Communications of Oklahoma, Inc. Delaware
Brooks Fiber Communications of Rhode Island, Inc. Delaware
Brooks Fiber Communications of Sacramento, Inc. Nevada
Brooks Fiber Communications of San Jose, Inc. Nevada
Brooks Fiber Communications of Stockton, Inc. Delaware
Brooks Fiber Communications of Tennessee, Inc. Delaware
Brooks Fiber Communications of Tucson, Inc. Delaware
Brooks Fiber Communications of Tulsa, Inc. Delaware
Silicon Valley Fiber, L.L.C. Delaware
EXHIBIT 23.2
Independent Auditors' Consent
The Board of Directors
Brooks Fiber Properties, Inc.:
We consent to the use of our reports on Brooks Fiber Properties, Inc. and Brooks
Telecommunications Corporation herein in the Registration Statement on Form S-4.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
St. Louis, Missouri
June 20, 1996
EXHIBIT 23.3
Consent of Independent Certified Public Accountants
City Signal, Inc.
Grand Rapids, Michigan
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of Brooks Fiber Properties, Inc. of our report dated
February 29, 1996, relating to the consolidated financial statements of City
Signal, Inc.
/s/ BDO Seidman, LLP
Grand Rapids, Michigan
June 25, 1996
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST
INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2) ___
------------------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(Jurisdiction of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, New York 10286
(Address of principal executive offices) (Zip Code)
BROOKS FIBER PROPERTIES, INC.
(Exact name of obligor as specified in its charter)
Delaware 43-1656187
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
425 Woods Mill Road South, Suite 300
Town & Country, Missouri 63017
(Address of principal executive offices) (Zip Code)
------------------------------
10.875% Senior Discount Notes Due March 1, 2006
(Title of the indenture securities)
GENERAL
ITEM 1. General Information.
Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Superintendent of Banks 2 Rector Street,
of the State of New York New York, N.Y. 10006
and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza,
New York, N.Y. 10045-001
Federal Deposit Insurance Corporation Washington, D.C. 20549
New York Clearing House Association 100 Broad Street
New York, N.Y. 10004
(b) Whether it is authorized to exercise corporate trust powers:
Yes.
ITEM 2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None. (See Note on page 3.)
------------------------------
ITEM 16. List of Exhibits.
Exhibits identified in parentheses below, on file with the Commission, are
incorporated herein by reference as an exhibit hereto, pursuant to Rule 7a-29
under the Trust Indenture Act of 1939 (the "Act") and Rule 24 of the
Commission's Rules of Practice.
99.1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains the
authority to commence business and a grant of powers to exercise
corporate trust powers. (See Exhibit 1 to Amendment No. 1 to Form T-1
filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to
Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1
to Form T-1 filed with Registration Statement No. 33-29637.)
99.4. A copy of the existing By-laws of the Trustee. (See Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
99.6. The consent of the Trustee required by Section 321(b) of the Act.
(See Exhibit 6 to Form T-1, Registration Statement No. 33-44051.)
99.7. A copy of the latest report of condition of the Trustee published
pursuant to law or to the requirements of its supervising or examining
authority.
NOTE
Inasmuch as this Form T-1 is filed prior to the ascertainment by the
Trustee of all facts on which to base a responsive answer to Item 2, the answer
to said Item is based on incomplete information.
Item 2 may, however, be considered as correct unless amended by an
amendment to this Form T-1.
------------------------------
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New York, a
corporation organized and existing under the laws of the State of New York, has
duly caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of New York, and State
of New York, on the 6th day of June, 1996.
The Bank of New York
By: /s/ Nancy Gill
-------------------------------------
Name: Nancy Gill
Title: Assistant Treasurer
EXHIBIT INDEX
Description Number
- ----------------------------------------------------------------------- ------
Latest report of condition of the Trustee published pursuant to law or 99.7
to the requirements of its supervising or examining authority.
EXHIBIT 99.7
<TABLE>
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business December 31, 1995,
published in accordance with a call made by the Federal Reserve Bank of this District
pursuant to the provisions of the Federal Reserve Act.
<CAPTION>
Dollar Amounts
in Thousands
--------------
<S> <C>
ASSETS
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin...................................... $4,500,312
Interest-bearing balances............................................................... 643,938
Securities:
Held-to-maturity securities............................................................. 806,221
Available-for-sale securities........................................................... 2,036,768
Federal funds sold in domestic offices of the bank.......................................... 4,166,720
Securities purchased under agreements to resell............................................. 50,413
Loans and lease financing receivables:
Loans and leases, net of unearned income.................................... 27,068,535
Less Allowance for loan and lease losses.................................... 520,024
Less allocated transfer risk reserve........................................ 1,000
Loans and leases, net of unearned income, allowance, and reserve........................ 26,547,511
Assets held in trading accounts............................................................. 758,462
Premises and fixed assets (including capitalized leases).................................... 615,330
Other real estate owned..................................................................... 63,769
Investments in unconsolidated subsidiaries and associated companies......................... 223,174
Customers' liability to this bank on acceptances outstanding................................ 900,795
Intangible assets........................................................................... 212,220
Other assets................................................................................ 1,186,274
Total assets................................................................................ $42,711,907
============
LIABILITIES
Deposits
In domestic offices..................................................................... $21,248,127
Noninterest-bearing........................................................ 9,172,079
Interest-bearing........................................................... 12,076,048
In foreign offices, Edge and Agreement subsidiaries, and IBFs........................... 9,535,088
Noninterest-bearing........................................................ 64,417
Interest-bearing........................................................... 9,470,671
Federal funds purchased and securities sold under agreements to repurchase in domestic
offices of the bank and of its Edge and Agreement subsidiaries, and in IBFs:
Federal funds purchased................................................................. 2,095,668
Securities sold under agreements to repurchase.......................................... 69,212
Demand notes issued to the U.S. Treasury.................................................... 107,340
Trading Liabilities......................................................................... 615,718
Other borrowed money:
With original maturity of one year or less.............................................. 1,638,744
With original maturity of more than one year............................................ 120,863
Bank's liability on acceptances executed and outstanding.................................... 909,527
Subordinated notes and debentures........................................................... 1,047,860
Other liabilities........................................................................... 1,836,573
Total liabilities........................................................................... 39,224,720
============
EQUITY CAPITAL
Common stock................................................................................ 942,284
Surplus..................................................................................... 525,666
Undivided profits and capital reserves...................................................... 1,995,316
Net unrealized holding gains (losses) on available-for-sale securities...................... 29,668
Cumulative foreign currency translation adjustments......................................... (5,747)
Total equity capital........................................................................ 3,487,187
------------
Total liabilities and equity capital........................................................ $42,711,907
============
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the above-
named bank do hereby declare that this Report of Condition has been prepared in
conformance with the instructions issued by the Board of Governors of the
Federal Reserve System and is true to the best of my knowledge and belief.
Robert E. Keilman
We, the undersigned directors attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
J. Carter Bacot )
Thomas A. Renyi ) Directors
Alan R. Griffith )
EXHIBIT 99.1
LETTER OF TRANSMITTAL
BROOKS FIBER PROPERTIES, INC.
Offer to Exchange Its 10-7/8 Senior Discount Notes
Due March 1, 2006 ("Exchange Notes") for All Of Its Outstanding
10-7/8% Senior Discount Notes Due March 1, 2006, ("Private Notes")
Pursuant to Its Prospectus, Dated ____________________, 1996
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON [DAY],
[DATE], 1996, UNLESS EXTENDED BY THE COMPANY (THE "EXPIRATION DATE"). TENDERS
MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
Delivery To: The Bank of New York, Exchange Agent
By Mail:
The Bank of New York
101 Barclay Street -- (7 East)
New York, New York 10286
Attention: Reorganization Section
By Overnight Courier or Hand:
The Bank of New York
101 Barclay Street -- (7 East)
Corporate Trust Services Window
New York, New York 10286
Attention: Reorganization Section
By Facsimile in New York:
(212) 571-3080
Confirm by Telephone:
(212) 815-2742
List below the Private Notes to which this Letter of Transmittal
relates. If the space provided below is inadequate, the certificate numbers and
principal amount of Private Notes should be listed on a separate signed schedule
affixed hereto.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF PRIVATE NOTES 1 2 3
- ----------------------------------------------------------------------------------------------------------------------
Aggregate
Principal Principal
Name(s) and Address(es) of Registered Holder(s) Certificate Amount Amount
(Please fill in, if blank) Number(s)* of Tendered**
Private
Note(s)
- ----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
-------------------------------------------------
Total
- ----------------------------------------------------------------------------------------------------------------------
<FN>
* Need not be completed if Private Notes are being tendered by
book-entry transfer.
** Unless otherwise indicated in this column, a holder will be deemed to
have tendered ALL of the Private Notes represented by the Private Notes
indicated in column 2. See Instruction 2. Private Notes tendered hereby
must be in denominations of principal amount of $1,000 and any integral
multiple thereof. See Instruction 1.
- ----------------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>
| | CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT
WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution __________________________________________
Account Number _________________________________________________________
Transaction Code Number_________________________________________________
| | CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED PURSUANT TO
A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT
AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s) ________________________________________
Widow Ticket Number (if any) ___________________________________________
Date of Execution of Notice of Guaranteed Delivery _____________________
Name of Institution which guaranteed delivery __________________________
If Delivered by Book-Entry Transfer, Complete the Following:
Account Number _________________________________________________________
Transaction Code Number ________________________________________________
| | CHECK HERE IF YOU ARE A BROKER-DEALER WHO HOLDS PRIVATE NOTES ACQUIRED
FOR YOUR OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING
ACTIVITIES AND WISH TO RECEIVE COPIES OF THE PROSPECTUS AND COPIES OF
ANY AMENDMENTS OR SUPPLEMENTS THERETO FOR USE IN CONNECTION WITH RESALES
OF EXCHANGE NOTES RECEIVED FOR YOUR OWN ACCOUNT IN EXCHANGE FOR SUCH
PRIVATE NOTES.
Name:___________________________________________________________________
Address: _______________________________________________________________
_______________________________________________________________
Aggregate Principal Amount of Private Notes so held: $__________________
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET
FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
The Company reserves the right, at any time or from time to time, to
extend the Exchange Offer at its sole discretion, in which event the term
"Expiration Date" shall mean the latest time and date to which the Exchange
Offer is extended. The Company shall notify the holders of the Private Notes of
any extension by means of a press release or other public announcement prior to
9:00 A.M., New York City time, on the next business day after the previously
scheduled Expiration Date.
This Letter of Transmittal is to be completed by a holder of Private
Notes either if certificates are to be forwarded herewith or if a tender of
certificates for Private Notes, if available, is to be made by book-entry
transfer to the account maintained by the Exchange Agent at The Depository Trust
Company (the "Book-Entry Transfer Facility") pursuant to the procedures set
forth in "The Exchange Offer--Book-Entry Transfer" section of the Prospectus.
Holders of Private Notes whose certificates are not immediately available, or
who are unable to deliver their certificates or confirmation of the book-entry
tender of their Private Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other
documents required by this Letter to the Exchange Agent on or prior to the
Expiration Date, must tender their Private Notes according to the guaranteed
delivery procedures set forth in "The Exchange Offer --Guaranteed Delivery
Procedures" section of the Prospectus. See Instruction 1. Delivery of documents
to the Book-Entry Transfer Facility does not constitute delivery to the Exchange
Agent.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to Brooks Fiber Properties, Inc., a
Delaware corporation (the "Company"), the aggregate principal amount of Private
Notes indicated in this Letter of Transmittal, upon the terms and subject to the
conditions set forth in the Company's Prospectus dated ____________________,
1996 (the "Prospectus"), receipt of which is hereby acknowledged, and in this
Letter of Transmittal, which together constitute the Company's offer (the
"Exchange Offer") to exchange $1,000 principal amount of its 10-7/8% Senior
Discount Notes due March 1, 2006, which have been registered under the
Securities Act of 1933, as amended (the "Exchange Notes"), for each $1,000
principal amount of its issued and outstanding 10-7/8% Senior Discount Notes due
March 1, 2006, of which $425,000,000 aggregate principal amount was outstanding
on the date of the Prospectus (the "Private Notes" and, together with the
Exchange Notes, the "Notes"). The capitalized terms which are not defined herein
are used herein as defined in the Prospectus.
Subject to, and effective upon, the acceptance for exchange of the
Private Notes tendered hereby, the undersigned hereby sells, assigns and
transfers to, or upon the order of, the Company all right, title and interest in
and to such Private Notes as are being tendered hereby and hereby irrevocably
constitutes and appoints the Exchange Agent as attorney-in-fact of the
undersigned with respect to such Private Notes, with full power of substitution
(such power of attorney being an irrevocable power coupled with an interest),
to:
(a) deliver such Private Notes in registered certificated form, or
transfer ownership of such Private Notes through book- entry transfer at
the Book-Entry Transfer Facility, to or upon the order of the Company,
upon receipt by the Exchange Agent, as the undersigned's agent, of the
same aggregate principal amount of Exchange Notes; and
(b) receive, for the account of the Company, all benefits and otherwise
exercise, for the account of the Company, all rights of beneficial
ownership of the Private Notes tendered hereby in accordance with the
terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Private Notes
tendered hereby and that the Company will acquire good, marketable and
unencumbered title thereto, free and clear of all security interests, liens,
restrictions, charges, encumbrances, conditional sale agreements or other
obligations relating to their sale or transfer, and not subject to any adverse
claim when the same are accepted by the Company. The undersigned hereby further
represents that any Exchange Notes acquired in exchange for Private Notes
tendered hereby will have been acquired in the ordinary course of business of
the person receiving such Exchange Notes, whether or not such person is the
undersigned, that neither the holder of such Private Notes nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such Exchange Notes and that neither the holder of such Private
Notes nor any such other person is an "affiliate", as defined in Rule 405 under
the Securities Act of 1933, as amended (the "Securities Act"), of the Company.
The undersigned also acknowledges that this Exchange Offer is being made
in reliance on interpretations by the staff of the Securities and Exchange
Commission (the "SEC"), as set forth in no-action letters issued to third
parties, that the Exchange Notes issued in exchange for the Private Notes
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such Exchange
Notes. However, the Company does not intend to request the SEC to consider, and
the SEC has not considered, the Exchange Offer in the context of a no-action
letter, and there can be no assurance that the staff of the SEC would make a
similar determination with respect to the Exchange Offer as in other
circumstances. If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes and has no arrangement or understanding to
participate in a distribution of Exchange Notes. If any holder is an affiliate
of the Company, is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer, such holder (i) could not rely on the
applicable interpretations of the staff of the SEC and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. If the undersigned is a broker-dealer
that will receive Exchange Notes for its own account in exchange for Private
Notes acquired as a result of market-making or other trading activities (a
"Participating Broker-Dealer"), it represents that the Private Notes to be
exchanged for the Exchange Notes were acquired by it as a result of
market-making or other trading activities and acknowledges that it will deliver
a prospectus in connection with any resale of such Exchange Notes; however, by
so acknowledging and by delivering a prospectus, such Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The Company has agreed that, subject to the provisions of the
Registration Rights Agreement, the Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of Exchange Notes received in exchange for Private Notes
which were acquired by such Participating Broker-Dealer for its own account as a
result of market-making or other trading activities, for a period ending 90 days
after the Expiration Date or, if earlier, when all such Exchange Notes have been
disposed of by such Participating Broker-Dealer. In that regard, each
Participating Broker-Dealer by tendering such Private Notes and executing this
Letter of Transmittal, agrees that, upon receipt of notice from the Company of
the occurrence of any event or the discovery of any fact which makes any
statement contained or incorporated by reference in the Prospectus untrue in any
material respect or which causes the Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
therein, in light of the circumstances under which they were made, not
misleading, such Participating Broker-Dealer will suspend the sale of Exchange
Notes pursuant to the Prospectus until the Company has amended or supplemented
the Prospectus to correct such misstatement or omission and has furnished copies
of the amended or supplemented Prospectus to the Participating Broker-Dealer or
the Company has given notice that the sale of the Exchange Notes may be resumed,
as the case may be. If the Company gives such notice to suspend the sale of the
Exchange Notes, it shall extend the 90-day period referred to above during which
Participating Broker- Dealers are entitled to use the Prospectus in connection
with the resale of Exchange Notes by the number of days during the period from
and including the date of the giving of such notice to and including the date
when Participating Broker-Dealers shall have received copies of the supplemented
or amended Prospectus necessary to permit resales of the Exchange Notes or to
and including the date on which the Company has given notice that the sale of
Exchange Notes may be resumed, as the case may be.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Private Notes tendered hereby. All
authority conferred or agreed to be conferred in this Letter of Transmittal and
every obligation of the undersigned hereunder shall be binding upon the
successors, assigns, heirs, executors, administrators, trustees in bankruptcy
and legal representatives of the undersigned and shall not be affected by, and
shall survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in "The Exchange
Offer--Withdrawal of Tenders" section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the Exchange Notes (and, if applicable,
substitute certificates representing Private Notes for any Private Notes not
exchanged) in the name of the undersigned or, in the case of a book-entry
delivery of Private Notes, please credit the account indicated above maintained
at the Book-Entry Transfer Facility. Similarly, unless otherwise indicated under
the box entitled "Special Delivery Instructions" below, please send the Exchange
Notes (and, if applicable, substitute certificates representing Private Notes
for any Private Notes not exchanged) to the undersigned at the address shown
above in the box entitled "Description of Private Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF PRIVATE
NOTES" ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE
TENDERED THE PRIVATE NOTES AS SET FORTH IN SUCH BOX ABOVE.
<TABLE>
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- ------------------------------------------------------ -------------------------------------------------------
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 3 and 4) (See Instructions 3 and 4)
<C> <C>
To be completed ONLY if To be completed ONLY if
certificates for Private Notes not certificates for Private Notes not
exchanged and/or Exchange Notes are exchanged and/or Exchange Notes
to be issued in the name of and are to be sent to someone other
sent to someone other than the than the person or persons whose
person or persons whose signature(s) appear(s) below on
signature(s) appear(s) below on this Letter of Transmittal or to
this Letter of Transmittal, or if such person or persons at an
Private Notes delivered by address other than shown above in
book-entry transfer which are not the box entitled "Description of
accepted for exchange are to be Private Notes" on this Letter of
returned by credit to an account Transmittal.
maintained at the Book-Entry
Transfer Facility other than the Mail: Exchange Notes and/or
account indicated above. Private Notes to:
Issue: Exchange Notes and/or
Private Notes to: Name(s) ...........................................
Name(s) ............................................ (Please Type or Print)
(Please Type or Print)
.................................................... ...................................................
(Please Type or Print) (Please Type or Print)
Address ............................................
....................................................
(Zip Code) Address ...........................................
| | Credit unexchanged Private Notes delivered by ...................................................
book entry transfer to the Book-Entry Transfer (Zip Code)
Facility account set forth
below.
.................................................
(Book-Entry Transfer Facility
Account Number, if applicable)
- ------------------------------------------------------ -------------------------------------------------------
</TABLE>
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH THE
CERTIFICATES FOR PRIVATE NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER
REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE
EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
<TABLE>
<CAPTION>
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETION.
- --------------------------------------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(Complete Accompanying Substitute Form W-9 on reverse side)
<C> <C>
................................................... ................................................, 1996
................................................... ................................................, 1996
................................................... ................................................, 1996
Signature(s) of Owner Date
Area Code and Telephone Number ............................................
If a holder is tendering any Private Notes, this Letter of Transmittal must be signed by the registered
holder(s) as the name(s) appear(s) on the certificate(s) for the Private Notes or on a securities position
listing or by any person(s) authorized to become registered holder(s) by endorsements and documents
transmitted herewith. If signature is by a trustee, executor, administrator, guardian, officer or other person
acting in a fiduciary or representative capacity, please set forth full title. See Instruction 3.
Name(s): ..................................................................................................
............................................................................................................
(Please Type or Print)
Capacity: .................................................................................................
Address: ..................................................................................................
............................................................................................................
(Including Zip Code)
SIGNATURE GUARANTEE
(If required by Instruction 3)
Signature(s) Guaranteed by
an Eligible Institution: ..................................................................................
(Authorized Signature)
............................................................................................................
(Title)
............................................................................................................
(Name and Firm)
Dated: .............................................................................................., 1996
- --------------------------------------------------------------------------------------------------------------
</TABLE>
INSTRUCTIONS
Forming Part of the Terms and Conditions of the offer of
Brooks Fiber Properties, Inc.
to Exchange its 10-7/8% Senior Discount Notes due March 1, 2006 for
All of its Outstanding
10-7/8% Senior Discount Notes due March 1, 2006
1. Delivery of this Letter of Transmittal and Notes; Guaranteed Delivery
Procedures.
This Letter of Transmittal is to be completed by holders of Private
Notes either if certificates are to be forwarded herewith or if tenders are to
be made pursuant to the procedures for delivery by book-entry transfer set forth
in "The Exchange Offer--Book-Entry Transfer" section of the Prospectus.
Certificates for all physically tendered Private Notes, or Book-Entry
Confirmation, as the case may be, as well as a properly completed and duly
executed Letter of Transmittal (or manually signed facsimile hereof) and any
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent at the address set forth herein on or prior to the Expiration
Date, or the tendering holder must comply with the guaranteed delivery
procedures set forth below. Private Notes tendered hereby must be in
denominations of principal amount of $1,000 and any integral multiple thereof.
Holders of Private Notes whose certificates for Private Notes are not
immediately available or who cannot deliver their certificates and all other
required documents to the Exchange Agent on or prior to the Expiration Date, or
who cannot complete the procedure for book-entry transfer on a timely basis, may
tender their Private Notes pursuant to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the
Prospectus. Pursuant to such procedures, (i) such tender must be made through an
Eligible Institution (as defined below), (ii) prior to the Expiration Date, the
Exchange Agent must receive from such Eligible Institution a properly completed
and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of
Guaranteed Delivery, substantially in the form provided by the Company (by
telegram, telex, facsimile transmission, mail or hand delivery), setting forth
the name and address of the holder of Private Notes and the amount of Private
Notes tendered, stating that the tender is being made thereby and guaranteeing
that within five New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Private Notes, or a Book-Entry Confirmation, and any other
documents required by this Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) the certificates for all
physically tendered Private Notes, in proper form for transfer, or Book-Entry
Confirmation, as the case may be, and all other documents required by this
Letter of Transmittal, are received by the Exchange Agent within five NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
The method of delivery of this Letter of Transmittal, the Private Notes
and all other required documents is at the election and risk of the tendering
holders, but the delivery will be deemed made only when actually received or
confirmed by the Exchange Agent. Instead of delivery by mail, it is recommended
that holders use an overnight or hand delivery service, properly insured. In all
cases, sufficient time should be allowed to assure delivery to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. Do not
send this Letter of Transmittal or any Private Notes to the Company.
See "The Exchange Offer" section of the Prospectus.
2. Partial Tenders (not applicable to holders of Private Notes who
tender by book-entry transfer); Withdrawal Rights
Tenders of Private Notes will be accepted only in the principal amount
of $1,000 and integral multiples thereof. If less than all of the Private Notes
evidenced by a submitted certificate are to be tendered, the tendering holder(s)
should fill in the aggregate principal amount of Private Notes to be tendered in
the box above entitled "Description of Private Notes--Principal Amount
Tendered." A reissued certificate representing the balance of nontendered
Private Notes will be sent to such tendering holder, unless otherwise provided
in the appropriate box on this Letter of Transmittal, promptly after the
Expiration Date. All of the Private Notes delivered to the Exchange Agent will
be deemed to have been tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective on or prior to that time, a written, telegraphic,
telex or facsimile transmission of such notice of withdrawal must be timely
received by the Exchange Agent at one of its addresses set forth above on or
prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Private Notes to be withdrawn, the aggregate
principal amount of Private Notes to be withdrawn and (if certificates for such
Private Notes have been tendered) the name of the registered holder of the
Private Notes as set forth on the certificate for the Private Notes, if
different from that of the person who tendered such Private Notes. If
certificates for the Private Notes have been delivered or otherwise identified
to the Exchange Agent, then prior to the physical release of such certificates
for the Private Notes, the tendering holder must submit the serial numbers shown
on the particular certificates for the Private Notes to be withdrawn and the
signature on the notice of withdrawal must be guaranteed by an Eligible
Institution, except in the case of Private Notes tendered for the account of an
Eligible Institution. If Private Notes have been tendered pursuant to the
procedures for book-entry transfer set forth in "The Exchange Offer--Book-Entry
Transfer" section of the Prospectus, the notice of withdrawal must specify the
name and number of the account at the Book-Entry Transfer Facility to be
credited with the withdrawal of Private Notes, in which case a notice of
withdrawal will be effective if delivered to the Exchange Agent by written,
telegraphic, telex or facsimile transmission. Withdrawals of tenders of Private
Notes may not be rescinded. Private Notes properly withdrawn will not be deemed
to have been validly tendered for purposes of the Exchange Offer, and no
Exchange Notes will be issued with respect thereto unless the Private Notes so
withdrawn are validly retendered. Properly withdrawn Private Notes may be
retendered at any subsequent time on or prior to the Expiration Date by
following the procedures described in the Prospectus under "The Exchange
Offer--Procedures for Tendering."
All questions as to the validity, form and eligibility (including time
of receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any employees, agents, affiliates or assigns of the
Company, the Exchange Agent nor any other person shall be under any duty to give
any notification of any irregularities in any notice of withdrawal or incur any
liability for failure to give such notification. Any Private Notes which have
been tendered but which are withdrawn will be returned to the holder thereof
without cost to such holder as promptly as practicable after withdrawal.
3. Signatures on this Letter of Transmittal; Bond Powers and
Endorsements; Guarantee of Signatures
If this Letter of Transmittal is signed by the registered holder of the
Private Notes tendered hereby, the signature must correspond exactly with the
name as written on the face of the certificates or on a securities position
listing without any change whatsoever.
If any tendered Private Notes are owned of record by two or more joint
owners, all of such owners must sign this Letter of Transmittal.
If any tendered Private Notes are registered in different names on
several certificates or securities positions listings, it will be necessary to
complete, sign and submit as many separate copies of this Letter as there are
different registrations.
When this Letter of Transmittal is signed by the registered holder or
holders of the Private Notes specified herein and tendered hereby, no
endorsements of certificates or separate bond powers are required. If, however,
the Exchange Notes are to be issued, or any untendered Private Notes are to be
reissued, to a person other than the registered holder, then endorsements of any
certificates transmitted hereby or separate bond powers are required. Signatures
on such certificate(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of any certificate(s) specified herein, such
certificate(s) must be endorsed or accompanied by appropriate bond powers, in
either case signed exactly as the name or names of the registered holder or
holders appear(s) on the certificate(s), and the signatures on such
certificate(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any certificates or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
Endorsements on certificates for Private Notes or signatures on bond
powers required by this Instruction 3 must be guaranteed by a firm which is a
member of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (an "Eligible
Institution").
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution, provided the Private Notes are tendered: (i) by a
registered holder of Private Notes (which term, for purposes of the Exchange
Offer, includes any participant in the Book-Entry Transfer Facility system whose
name appears on a security position listing as the holders of such Private
Notes) who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on this Letter or (ii) for the account of an
Eligible Institution.
4. Special Issuance and Delivery Instructions.
Tendering holders of Private Notes should indicate in the applicable box
the name and address to which Exchange Notes issued pursuant to the Exchange
Offer and/or substitute certificates evidencing Private Notes not exchanged are
to be issued or sent, if different from the name or address of the person
signing this Letter of Transmittal. In the case of issuance in a different name,
the employer identification or social security number of the person named must
also be indicated. A holder of Private Notes tendering Private Notes by
book-entry transfer may request that Private Notes not exchanged be credited to
such account maintained at the Book-Entry Transfer Facility as such holder may
designate hereon. If no such instructions are given, such Private Notes not
exchanged will be returned to the name or address of the person signing this
Letter of Transmittal.
5. Tax Identification Number.
Federal income tax law generally requires that a tendering holder whose
Private Notes are accepted for exchange must provide the Company (as payor) with
such holder's correct Taxpayer Identification Number ("TIN") on Substitute Form
W-9 below, which, in the case of a tendering holder who is an individual, is his
or her social security number. If the Company is not provided with the current
TIN or an adequate basis for an exemption, such tendering holder may be subject
to a $50 penalty imposed by the Internal Revenue Service. In addition, delivery
to such tendering holder of Exchange Notes may be subject to backup withholding
in an amount equal to 31% of all reportable payments made after the exchange. If
withholding results in an overpayment of taxes, a refund may be obtained.
Exempt holders of Private Notes (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. See the enclosed Guidelines of
Certification of Taxpayer Identification Number on Substitute Form W-9 (the "W-9
Guidelines") for additional instructions.
To prevent backup withholding, each tendering holder of Private Notes
must provide its correct TIN by completing the Substitute Form W-9 set forth
below, certifying that the TIN provided is correct (or that such holder is
awaiting a TIN) and that (i) the holder is exempt from backup withholding, (ii)
the holder has not been notified by the Internal Revenue Service that such
holder is subject to backup withholding as a result of a failure to report all
interest or dividends or (iii) the Internal Revenue Service has notified the
holder that such holder is no longer subject to backup withholding. If the
tendering holder of Private Notes is a nonresident alien or foreign entity not
subject to backup withholding, such holder must give the Company a completed
Form W-8, Certificate of Foreign Status. These forms may be obtained from the
Exchange Agent. If the Private Notes are in more than one name or are not in the
name of the actual owner, such holder should consult the W-9 Guidelines for
information on which TIN to report. If such holder does not have a TIN, such
holder should consult the W-9 Guidelines for instructions on applying for a TIN,
check the box in Part 2 of the Substitute Form W-9 and write "applied for" in
lieu of its TIN. Note: Checking this box and writing "applied for" on the form
means that such holder has already applied for a TIN or that such holder intends
to apply for one in the near future. If such holder does not provide its TIN to
the Company within 60 days, backup withholding will begin and continue until
such holder furnishes its TIN to the Company.
6. Transfer Taxes.
The Company will pay all transfer taxes, if any, applicable to the
transfer of Private Notes to it or its order pursuant to the Exchange Offer. If,
however, Exchange Notes and/or substitute Private Notes not exchanged are to be
delivered to, or are to be registered or issued in the name of, any person other
than the registered holder of the Private Notes tendered hereby, or if tendered
Private Notes are registered in the name of any person other than the person
signing this Letter of Transmittal, or if a transfer tax is imposed for any
reason other than the transfer of Private Notes to the Company or its order
pursuant to the Exchange Offer, the amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted herewith, the amount of such transfer taxes will be
billed directly to such tendering holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Private Notes specified in this Letter
of Transmittal.
7. Determination of Validity.
The Company will determine, in its sole discretion, all questions as to
the form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Private Notes, which determination
shall be final and binding on all parties. The Company reserves the absolute
right to reject any and all tenders determined by it not to be in proper form or
the acceptance of which, or exchange for which, may, in the view of counsel to
the Company, be unlawful. The Company also reserves the absolute right, subject
to applicable law, to waive any of the conditions of the Exchange Offer set
forth in the Prospectus under the caption "The Exchange Offer" or any conditions
or irregularity in any tender of Private Notes of any particular holder whether
or not similar conditions or irregularities are waived in the case of other
holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will be
final and binding. No tender of Private Notes will be deemed to have been
validly made until all irregularities with respect to such tender have been
cured or waived. Although the Company intends to notify holders of defects or
irregularities with respect to tenders of Private Notes, neither the Company,
any employees, agents, affiliates or assigns of the Company, the Exchange Agent,
nor any other person shall be under any duty to give notification of any
irregularities in tenders or incur any liability for failure to give such
notification.
8. No Conditional Tenders.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Private Notes, by execution of this Letter of
Transmittal, shall waive any right to receive notice of the acceptance of their
Private Notes for exchange.
9. Mutilated, Lost, Stolen or Destroyed Private Notes.
Any holder whose Private Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
10. Requests for Assistance or Additional Copies.
Questions relating to the procedure for tendering, as well as requests
for additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent, at the address and telephone number indicated
above.
<TABLE>
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TO BE COMPLETED BY ALL TENDERING HOLDERS
(See Instruction 5)
PAYOR'S NAME: THE BANK OF NEW YORK
====================================================================================================================
<C> <C> <C>
SUBSTITUTE Part 1-PLEASE PROVIDE YOUR TIN:___________________________________
TIN IN THE BOX AT RIGHT Social Security Number or
Form W-9 AND CERTIFY BY SIGNING AND Employer Identification Number
Department of the Treasury DATING BELOW
Internal Revenue Service ----------------------------------------------------------------------------------
Part 2--TIN Applied For [ ]
Payor's Request for
Taxpayer
Identification Number
("TIN") and
Certification ----------------------------------------------------------------------------------
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
(1) the number shown on this form is my correct Taxpayer Identification
Number (or I am waiting for a number to be issued to me).
(2) I am not subject to backup withholding either because: (a) I am exempt
from backup withholding, or (b) I have not been notified by the Internal
Revenue Service (the "IRS") that I am subject to backup withholding as a
result of a failure to report all interest or dividends, or (c) the IRS
has notified me that I am no longer subject to backup withholding, and
(3) any other information provided on this form is true and correct.
SIGNATURE_______________________________________________________ DATE___________
- --------------------------------------------------------------------------------------------------------------------
You must cross out item (2) of the above certification if you have been notified by the IRS that you are subject to
backup withholding because of underreporting of interest or dividends on your tax return and you have not been
notified by the IRS that you are no longer subject to backup withholding.
====================================================================================================================
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
====================================================================================================================
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either
(a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an
application in the near future. I understand that if I do not provide a taxpayer identification number by the time
of the exchange, 31 percent of all reportable payments made to me thereafter will be withheld until I provide a
number.
- ----------------------------------------------------------------------------------------- ---------------------
Signature Date
===================================================================================================================
</TABLE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY FOR
TENDER OF 10-7/8% SENIOR DISCOUNT NOTES
DUE MARCH 1, 2006 OF BROOKS FIBER PROPERTIES, INC.
This form or one substantially equivalent hereto must be used to accept the
Exchange Offer of Brooks Fiber Properties, Inc., a Delaware corporation (the
"Company"), made pursuant to the Prospectus, dated ________________, 1996 (the
"Prospectus"), if certificates for the outstanding 10-7/8% Senior Discount Notes
due March 1, 2006 of the Company (the "Private Notes") are not immediately
available or if the procedure for book-entry transfer cannot be completed on a
timely basis or time will not permit all required documents to reach The Bank of
New York (the "Exchange Agent") on or prior to 5:00 p.m., New York City time, on
the Expiration Date of the Exchange Offer. This Notice of Guaranteed Delivery
may be delivered or transmitted by telegram, telex, facsimile transmission, mail
or hand delivery to the Exchange Agent as set forth below. See "The Exchange
Offer--Procedures for Tendering" in the Prospectus. In addition, in order to
utilize the guaranteed delivery procedure to tender Private Notes pursuant to
the Exchange Offer, a completed, signed and dated Letter of Transmittal (or a
manually signed facsimile thereof) must also be received by the Exchange Agent
on or prior to 5:00 p.m., New York City time, on the Expiration Date.
Capitalized terms used herein but not defined herein have the respective
meanings given to them in the Prospectus.
Delivery To:
The Bank of New York, Exchange Agent
By Mail:
The Bank of New York
101 Barclay Street--(7 East)
New York, New York 10286
Attention: Reorganization Section
By Overnight Courier or Hand:
The Bank of New York
101 Barclay Street--(7 East)
Corporate Trust Services Window
New York, New York 10286
Attention: Reorganization Section
By Facsimile:
(212) 571-3080
Confirm by Telephone:
(212) 815-2742
Delivery of this Notice of Guaranteed Delivery to an address other than as
set forth above or transmission of this Notice of Guaranteed Delivery via
facsimile other then as set forth above will not constitute a valid delivery.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an "Eligible Institution" under the instructions thereto, such
signature guarantee must appear in the applicable space provided in the
signature box on the Letter of Transmittal.
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the related
Letter of Transmittal, the undersigned hereby tenders to the Company the
principal amount of Private Notes set forth below, pursuant to the guaranteed
delivery procedures described in the Prospectus under the caption "The Exchange
Offer-- Guaranteed Delivery Procedures."
Principal Amount of Private Notes Tendered:*
$-----------------------------------------
Certificate Nos. (if available)
- ------------------------------------------
If Private Notes will be delivered
by book-entry transfer to The
Depository Trust Company, provide
account number.
Total Principal Amount Represented by
Private Notes Certificate(s):
$ Account Number
----------------------------------------- --------------------
*Must be in denominations of principal amount of $1,000 and any
integral multiple thereof.
- --------------------------------------------------------------------------------
An authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned, and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned.
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
X____________________________________ _______________
X____________________________________ _______________
Signature(s) of Owner(s) Date
or Authorized Signatory
Area Code and Telephone Number:_____________________________________
Must be signed by the holder(s) of Private Notes as their name(s) appear(s)
on certificates for Private Notes or on a security position listing, or by
person(s) authorized to become registered holder(s) by endorsement and documents
transmitted with this Notice of Guaranteed Delivery. If signature is by trustee,
executor, administrator, guardian, attorney-in-fact, officer or other person
acting in a fiduciary or representative capacity, such person must set forth his
or her full title below.
Please print name(s) and address(es)
Name(s):
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Capacity:
- -------------------------------------------------------------------------------
Address(es):
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
GUARANTEE
The undersigned, a member of a registered national securities exchange, or
a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the United
States, hereby guarantees that the certificates representing the principal
amount of Private Notes tendered hereby in proper form for transfer, or timely
confirmation of the book-entry transfer of such Private Notes into the Exchange
Agent's account at The Depository Trust Company pursuant to the procedures set
forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the
Prospectus, together with one or more properly completed and duly executed
Letter(s) of Transmittal (or a manually signed facsimile thereof) with any
required signature guarantee and any other documents required by the Letter of
Transmittal, will be received by the Exchange Agent at the address set forth
above, no later than five New York Stock Exchange trading days after the date of
execution hereof.
- --------------------------------------- ---------------------------------------
Name of Firm Authorized Signature
- --------------------------------------- ---------------------------------------
Address Title
Name:
- --------------------------------------- ---------------------------------
Zip Code (Please Type or Print)
Area Code and Tel.No. Dated:
----------------- --------------------------------
NOTE: DO NOT SEND CERTIFICATES FOR PRIVATE NOTES WITH THIS NOTICE OF GUARANTEED
DELIVERY. ACTUAL SURRENDER OF PRIVATE NOTES MUST BE MADE PURSUANT TO, AND
BE ACCOMPANIED BY, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF
TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
EXHIBIT 99.3
________________, 1996
EXCHANGE AGENT AGREEMENT
The Bank of New York
Corporate Trust Trustee Administration
101 Barclay Street - 21st Floor
New York, New York 10286
Ladies and Gentlemen:
Brooks Fiber Properties, Inc., a Delaware corporation (the "Company"),
proposes to make an offer (the "Exchange Offer") to exchange up to $425,000,000
aggregate principal amount of its 10-7/8% Senior Discount Notes due March 1,
2006 (the "Private Notes"), for a like principal amount of its 10-7/8% Senior
Discount Notes due March 1, 2006 (the "Exchange Notes"). The terms and
conditions of the Exchange Offer are set forth in a prospectus (the
"Prospectus") included in the Company's registration statement on Form S-4 (File
No. _______________ ), as amended (the "Registration Statement"), filed with the
Securities and Exchange Commission (the "SEC"), proposed to be distributed to
all record holders of the Private Notes. The Private Notes and the Exchange
Notes are collectively referred to herein as the "Notes." Capitalized terms used
herein and not defined shall have the respective meanings ascribed to them in
the Prospectus.
The Company hereby appoints The Bank of New York to act as exchange agent
(the "Exchange Agent") in connection with the Exchange Offer. References
hereinafter to "you" shall refer to The Bank of New York.
The Exchange Offer is expected to be commenced by the Company on or about
________________________________ , 1996. The Letter of Transmittal accompanying
the Prospectus is to be used by the holders of the Private Notes to accept the
Exchange Offer and contains instructions with respect to the delivery of
certificates for Private Notes tendered.
The Exchange Offer shall expire at 5:00 P.M., New York City time, on
_______________________ , 1996, or on such later date or time to which the
Company may extend the Exchange Offer (the "Expiration Date"). Subject to the
terms and conditions set forth in the Prospectus, the Company expressly reserves
the right to extend the Exchange Offer from time to time and may extend the
Exchange Offer by giving oral (confirmed in writing) or written notice to you
before 9:00 A.M., New York City time, on the business day following the
previously scheduled Expiration Date.
The Company expressly reserves the right, in its sole discretion, to amend
or terminate the Exchange Offer, and not to accept for exchange any Private
Notes not theretofore accepted for exchange. The Company will give oral
(confirmed in writing) or written notice of any amendment, termination or
nonacceptance to you as promptly as practicable.
In carrying out your duties as Exchange Agent, you are to act in accordance
with the following instructions:
1. You will perform such duties and only such duties as are specifically
set forth in the section of the Prospectus captioned "The Exchange Offer" or as
specifically set forth herein; provided, however, that in no way will your
general duty to act in good faith and without gross negligence or willful
misconduct be limited by the foregoing.
2. You will establish an account with respect to the Private Notes at The
Depository Trust Company (the "Book-Entry Transfer Facility") for purposes of
the Exchange Offer within two business days after the date of the Prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of the Private Notes by causing
the Book-Entry Transfer Facility to transfer such Private Notes into your
account in accordance with the Book-Entry Transfer Facility's procedures for
such transfer.
3. You are to examine each of the Letters of Transmittal and certificates
for Private Notes (and confirmation of book-entry transfers of Private Notes
into your account at the Book-Entry Transfer Facility) and any other documents
delivered or mailed to you by or for holders of the Private Notes, to ascertain
whether: (i) the Letters of Transmittal, certificates and any such other
documents are duly executed and properly completed in accordance with
instructions set forth therein and that such book-entry confirmations are in due
and proper form and contain the information required to be set forth therein,
and (ii) the Private Notes have otherwise been properly tendered. In each case
where the Letter of Transmittal or any other document has been improperly
completed or executed, or where book-entry confirmations are not in due and
proper form or omit certain information, or any of the certificates for Private
Notes are not in proper form for transfer or some other irregularity in
connection with the acceptance of the Exchange Offer exists, you will endeavor
to inform the presenters of the need for fulfillment of all requirements and to
take any other action as may be necessary or advisable to cause such
irregularity to be corrected.
4. With the approval of the Vice Chairman and Chief Executive Officer or
the Senior Vice President and Chief Financial Officer of the Company (such
approval, if given orally, to be confirmed in writing) or any other party
designated by such an officer in writing, you are authorized to waive any
irregularities in connection with any tender of Private Notes pursuant to the
Exchange Offer.
5. Tenders of Private Notes may be made only as set forth in the Letter of
Transmittal and in the section of the Prospectus captioned "The Exchange
Offer--Procedures for Tendering", and Private Notes shall be considered properly
tendered to you only when tendered in accordance with the procedures set forth
therein. Notwithstanding the provisions of this paragraph 5, Private Notes which
the Vice Chairman and Chief Executive Officer or the Senior Vice President and
Chief Financial Officer or any other designated officer of the Company shall
approve as having been properly tendered shall be considered to be properly
tendered (such approval, if given orally, shall be confirmed in writing).
6. You shall advise the Company with respect to any Private Notes received
subsequent to the Expiration Date and accept its instructions with respect to
disposition of such Private Notes.
7. You shall accept tenders:
(a) in cases where the Private Notes are registered in two or more
names only if signed by all named holders;
(b) in cases where the signing person (as indicated on the Letter of
Transmittal) is acting in a fiduciary or a representative capacity only when
proper evidence of his or her authority so to act is submitted; and
(c) from persons other than the registered holder of Private Notes
provided that customary transfer requirements, including any applicable transfer
taxes, are fulfilled.
You shall accept partial tenders of Private Notes when so indicated and as
permitted in the Letter of Transmittal and deliver certificates for Private
Notes to the transfer agent for split-up and return any untendered Private Notes
to the holder (or such other person as may be designated in the Letter of
Transmittal) as promptly as practicable after expiration or termination of the
Exchange Offer.
8. Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Company will notify you (such notice if given orally, to be confirmed
in writing) of its acceptance, promptly after the Expiration Date, of all
Private Notes properly tendered and you, on behalf of the Company, will exchange
such Private Notes for Exchange Notes and cause such Private Notes to be
cancelled. Delivery of Exchange Notes will be made on behalf of the Company by
you at the rate of $1,000 principal amount of Exchange Notes for each $1,000
principal amount of the Private Notes tendered promptly after notice (such
notice if given orally, to be confirmed in writing) of acceptance of said
Private Notes by the Company; provided, however, that in all cases, Private
Notes tendered pursuant to the Exchange Offer will be exchanged only after
timely receipt by you of certificates for such Private Notes (or confirmation of
book-entry transfer into your account at the Book-Entry Transfer Facility), a
properly completed and, except as described in the section of the Prospectus
captioned "The Exchange Offer--Procedures for Tendering", duly executed Letter
of Transmittal (or facsimile thereof) with any required signature guarantees and
any other required documents. Unless otherwise instructed by the Company, you
shall issue Exchange Notes only in denominations of $1000 or any integral
multiple thereof.
9. Tenders, pursuant to the Exchange Offer are irrevocable, except that,
subject to the terms and upon the conditions set forth in the Prospectus and the
Letter of Transmittal, Private Notes tendered pursuant to the Exchange Offer may
be withdrawn at any time on or prior to the Expiration Date in accordance with
the terms of the Exchange Offer.
10. The Company shall not be required to exchange any Private Notes
tendered if any of the conditions set forth in the Exchange Offer are not met.
Notice of any decision by the Company not to exchange any Private Notes tendered
shall be given (and confirmed in writing) by the Company to you.
11. If, pursuant to the Exchange Offer, the Company does not accept for
exchange all or part of the Private Notes tendered because of an invalid tender,
the occurrence of certain other events set forth in the Prospectus or otherwise,
you shall as soon as practicable after the expiration or termination of the
Exchange Offer return those certificates for unaccepted Private Notes (or effect
appropriate book-entry transfer), together with any related required documents
and the Letters of Transmittal relating thereto that are in your possession, to
the persons who deposited them (or effected such book-entry transfer).
12. All certificates for reissued Private Notes, unaccepted Private Notes
or for Exchange Notes (other than those effected by book-entry transfer) shall
be forwarded by (a) first-class certified mail, return receipt requested, under
a blanket surety bond obtained by you protecting you and the Company from loss
or liability arising out of the nonreceipt or nondelivery of such certificates
or (b) by registered mail insured by you separately for the replacement value of
each of such certificates.
13. You are not authorized to pay or offer to pay any concessions,
commissions or other solicitation fees to any broker, dealer, commercial bank,
trust company or other nominee or to engage or use any person to solicit
tenders.
14. As Exchange Agent hereunder, you:
(a) shall have no duties or obligations other than those specifically
set forth in the Prospectus, the Letter of Transmittal or herein or as may be
subsequently agreed to in writing by you and the Company;
(b) will be regarded as making no representations and having no
responsibilities as to the validity, sufficiency, value or genuineness of any of
the certificates for the Private Notes deposited with you pursuant to the
Exchange Offer, and will not be required to and will make no representation as
to the validity, value or genuineness of the Exchange Offer;
(c) shall not be obligated to take any legal action hereunder which
might in your reasonable judgment involve any expense or liability, unless you
shall have been furnished with reasonable indemnity;
(d) may reasonably rely on and shall be protected in acting in
reliance upon any certificate, instrument, opinion, notice, letter, telegram or
other document or security delivered to you and reasonably believed by you to be
genuine and to have been signed by the proper party or parties;
(e) may reasonably act upon any tender, statement, request, comment,
agreement or other instrument whatsoever not only as to its due execution and
validity and effectiveness of its provisions, but also as to the truth and
accuracy of any information contained therein, which you shall in good faith
believe to be genuine or to have been signed or represented by a proper person
or persons;
(f) may rely on and shall be protected in acting upon written or oral
instructions from any officer of the Company;
(g) may consult with your counsel with respect to any questions
relating to your duties and responsibilities, and the written opinion of such
counsel shall be full and complete authorization and protection in respect of
any action taken, suffered or omitted to be taken by you hereunder in good faith
and in accordance with the written opinion of such counsel; and
(h) shall not advise any person tendering Private Notes pursuant to
the Exchange Offer as to whether to tender or refrain from tendering all or any
portion of Private Notes or as to the market value, decline or appreciation in
market value of any Private Notes that may or not occur as a result of the
Exchange Offer or as to the market value of the Exchange Notes;
provided, however, that in no way will your general duty to act in good faith
and without gross negligence or willful misconduct be limited by the foregoing.
15. You shall take such action as may from time to time be requested by the
Company or its counsel (and such other action as you may reasonably deem
appropriate) to furnish copies of the Prospectus, Letter of Transmittal and the
Notice of Guaranteed Delivery (as defined in the Prospectus) or such other forms
as may be approved from time to time by the Company, to all persons requesting
such documents and to accept and comply with telephone requests for information
relating to the Exchange Offer, provided such information shall relate only to
the procedures for accepting (or withdrawing from) the Exchange Offer. The
Company will furnish you with copies of such documents at your request.
16. You shall advise by facsimile transmission or telephone, and promptly
thereafter confirm in writing to David L. Solomon, Senior Vice President and
Chief Financial Officer of the Company and such other person or persons as the
Company may request, daily (and more frequently during the week immediately
preceding the Expiration Date and if otherwise requested) up to and including
the Expiration Date, as to the aggregate principal amount of Private Notes which
have been duly tendered pursuant to the Exchange Offer and the items received by
you pursuant to the Exchange Offer and this Agreement, separately reporting and
giving cumulative totals as to items properly received and items improperly
received. In addition, you will also inform, and cooperate in making available
to, the Company or any such other person or persons upon oral request made from
time to time prior to the Expiration Date of such other information as it or he
or she reasonably requests. Such cooperation shall include, without limitation,
the granting by you to the Company and such person as the Company may request of
access to those persons on your staff who are responsible for receiving tenders,
in order to ensure that immediately prior to the Expiration Date the Company
shall have received information in sufficient detail to enable it to decide
whether to extend the Exchange Offer. You shall prepare a final list of all
persons whose tenders were accepted, the aggregate principal amount of Private
Notes tendered, the aggregate principal amount of Private Notes accepted and the
identity of any Participating Broker-Dealers and the aggregate principal amount
of Exchange Notes delivered to each, and deliver said list to the Company.
17. Letters of Transmittal, book-entry confirmations and Notices of
Guaranteed Delivery shall be stamped by you as to the date and the time of
receipt thereof and shall be preserved by you for a period of time at least
equal to the period of time you preserve other records pertaining to the
transfer of securities, or one year, whichever is longer, and thereafter shall
be delivered by you to the Company. You shall dispose of unused Letters of
Transmittal and other surplus materials as instructed by the Company.
18. You hereby expressly waive any lien, encumbrance or right of set-off
whatsoever that you may have with respect to funds deposited with you for the
payment of transfer taxes by reasons of amounts, if any, borrowed by the
Company, or any of its subsidiaries or affiliates pursuant to any loan or credit
agreement with you or for compensation owed to you hereunder or for any other
matter.
19. For services rendered as Exchange Agent hereunder, you shall be
entitled to such compensation as set forth on Schedule I attached hereto.
20. You hereby acknowledge receipt of the Prospectus and the Letter of
Transmittal and further acknowledge that you have examined each of them. Any
inconsistency between this Agreement, on the one hand, and the Prospectus and
the Letter of Transmittal (as they may be amended from time to time), on the
other hand, shall be resolved in favor of the latter two documents, except with
respect to the duties, liabilities and indemnification of you as Exchange Agent,
which shall be controlled by this Agreement.
21. The Company covenants and agrees to indemnify and hold you harmless in
your capacity as Exchange Agent hereunder against any loss, liability, cost or
expense, including attorneys' fees and expenses arising out of or in connection
with any act, omission, delay or refusal made by you in reliance upon any
signature, endorsement, assignment, certificate, order, request, notice,
instruction or other instrument or document reasonably believed by you to be
valid, genuine and sufficient and in accepting any tender or effecting any
transfer of Private Notes reasonably believed by you in good faith to be
authorized, and in delaying or refusing in good faith to accept any tenders or
effect any transfer of Private Notes; provided, however, that anything in this
Agreement to the contrary notwithstanding, the Company shall not be liable for
indemnification or otherwise for any loss, liability, cost or expense to the
extent arising out of your gross negligence or willful misconduct. In no case
shall the Company be liable under this indemnity with respect to any claim
against you unless the Company shall be notified by you, by letter or cable or
by facsimile confirmed by letter, of the written assertion of a claim against
you or of any other action commenced against you, promptly after you shall have
received any such written assertion or notice of commencement of action. The
Company shall be entitled to participate, at its own expense, in the defense of
any such claim or other action, and, if the Company so elects, the Company may
assume the defense of any pending or threatened action against you in respect of
which indemnification may be sought hereunder, in which case the Company shall
not thereafter be responsible for the subsequently-incurred fees and
disbursements of legal counsel for you under this paragraph; provided, that the
Company shall not be entitled to assume the defense of any such action if the
named parties to such action include both you and the Company and representation
of both parties by the same legal counsel would, in the written opinion of your
counsel, be inappropriate due to actual or potential conflicting interests
between you and the Company. You understand and agree that the Company shall not
be liable under this paragraph for the fees and expenses of more than one legal
counsel for you. In the event that the Company shall assume the defense of any
such suit, the Company shall not therewith be liable for the
subsequently-incurred fees and expenses of any additional counsel thereafter
retained by you.
22. You shall arrange to comply with all requirements under the tax laws of
the United States, including those relating to missing Tax Identification
Numbers, and shall file any appropriate reports with the Internal Revenue
Service. The Company understands that you are required, in certain instances, to
deduct thirty-one percent (31%) with respect to interest paid on the Exchange
Notes and proceeds from the sale, exchange, redemption or retirement of the
Exchange Notes from holders who have not supplied their correct Taxpayer
Identification Number or required certification. Such funds will be turned over
to the Internal Revenue Service in accordance with applicable regulations.
23. You shall notify the Company of the amount of any transfer taxes
payable in respect of the exchange of Private Notes and, upon receipt of a
written approval from the Company, shall deliver or cause to be delivered, in a
timely manner to each governmental authority to which any transfer taxes are
payable in respect of the exchange of Private Notes, your check in the amount of
all transfer taxes so payable, and the Company shall reimburse you for the
amount of any and all transfer taxes payable in respect of the exchange of
Private Notes; provided, however, that you shall reimburse the Company for
amounts refunded to you in respect of your payment of any such transfer taxes,
at such time as such refund is received by you.
24. This Agreement and your appointment as Exchange Agent hereunder shall
be construed and enforced in accordance with the laws of the State of New York
applicable to agreements made and to be performed entirely within such state,
and without regard to conflicts of law principles.
25. This Agreement shall be binding upon and inure solely to the benefit of
each party hereto and nothing in this Agreement, express or implied, is intended
to or shall confer upon any other person any right, benefit or remedy of any
nature whatsoever under or by reason of this Agreement. Without limitation of
the foregoing, the parties hereto expressly agree that no holder of Private
Notes or Exchange Notes shall have any right, benefit or remedy of any nature
whatsoever under, or by reason of, this Agreement.
26. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, and all of which taken together shall
constitute one and the same agreement.
27. In case any provision of this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
28. This Agreement shall not be deemed or construed to be modified,
amended, rescinded, cancelled or waived, in whole or in part, except by a
written instrument signed by a duly authorized representative of the party to be
charged. This Agreement may not be modified orally.
29. Unless otherwise provided herein, all notices, requests and other
communications to any party hereunder shall be in writing (including facsimile
or similar writing) and shall be given to such party, addressed to it, at its
address or telecopy number set forth below:
If to the Company:
Brooks Fiber Properties, Inc.
425 Woods Mills Road South, Suite 300
Town & Country, Missouri 63017
Facsimile: (314) 579-4654
Attention: David L. Solomon, Senior Vice President and
Chief Financial Officer
With a copy to:
Bryan Cave, LLP
211 N. Broadway, Suite 3600
St. Louis, Missouri 63102-2750
Facsimile: (314) 259-2020
Attention: John P. Denneen, Esq.
If to the Exchange Agent:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Facsimile: (212) 815-5915
Attention: Corporate Trust Trustee Administration
30. Unless terminated earlier by the parties hereto, this Agreement shall
terminate 90 days following the Expiration Date. Notwithstanding the foregoing,
paragraphs 17, 19, 21 and 23 shall survive the termination of this Agreement.
Upon any termination of this Agreement, you shall promptly deliver to the
Company any certificates for Notes, funds or property then held by you as
Exchange Agent under this Agreement.
31. This Agreement shall be binding and effective as of the date hereof.
Please acknowledge receipt of this Agreement and confirm the arrangements
herein provided by signing and returning the enclosed copy.
BROOKS FIBER PROPERTIES, INC.
By:
----------------------------------------
Name: David L. Solomon
Title: Senior Vice President and
Chief Financial Officer
Accepted as the date first above written:
THE BANK OF NEW YORK, as
Exchange Agent
By:
-------------------------------------
Name:
Title:
