<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1996
REGISTRATION NO. 333-
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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)
<TABLE>
<S> <C> <C>
DELAWARE 4813 43-1656187
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
</TABLE>
------------------------
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
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
425 WOODS MILL ROAD SOUTH, SUITE 300
TOWN & COUNTRY, MISSOURI 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 NORTH BROADWAY, SUITE 3600
ST. LOUIS, MISSOURI 63102
(314) 259-2000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE 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. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
11 7/8% Senior Discount Notes
due November 1, 2006.......... $400,000,000 $63.6875 $254,750,000 $77,197
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f); the proposed maximum offering price is based on the
average of the high and low bid prices of the Notes on December 17, 1996.
------------------------
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.
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<PAGE> 2
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.
PROSPECTUS
SUBJECT TO COMPLETION, DATED DECEMBER 20, 1996
OFFER TO EXCHANGE
11 7/8% SENIOR NOTES DUE NOVEMBER 1, 2006
FOR ALL OUTSTANDING 11 7/8% SENIOR NOTES DUE NOVEMBER 1, 2006
LOGO
OF
BROOKS FIBER PROPERTIES, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON
, 1997 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 11 7/8% Senior Discount Notes due November 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 11 7/8% Senior Discount Notes due November
1, 2006 (the "Private Notes"), of which $400,000,000 in aggregate principal
amount was issued on November 7, 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 November 7, 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 November 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 November
1, 1999, up to a maximum of 33 1/3% of the aggregate principal amount of the
Notes originally issued will, at the option of the Company, be redeemable from
the net cash proceeds of such Strategic Equity Investment at a redemption price
equal to 111.875% 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 November 1, 2001 or 101% of their stated principal amount,
plus accrued and unpaid interest, if any, thereon to the date of purchase, after
November 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. The Notes will be effectively subordinated to all obligations,
including trade payables, of the Company's subsidiaries. As of September 30,
1996, on a pro forma basis after giving effect to the offering of the Private
Notes (the "Private Note Offering") and the issuance of $50 million aggregate
principal amount of secured indebtedness on November 12, 1996, (i) the total
amount of outstanding liabilities of the Company (parent only), including trade
payables, would have been approximately $546.8 million, of which $50 million
would have been secured obligations, and (ii) the total amount of outstanding
liabilities of the Company's subsidiaries, including trade payables, would have
been $14.1 million, of which $0.1 million would have 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 ,
1997, 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 18 TO 24 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
<PAGE> 3
MAP OMITTED
<PAGE> 4
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. 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.
<PAGE> 5
PROSPECTUS 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 local
exchange carrier ("CLEC"), in selected markets within the United States (see
"The Competitive Local Telecommunications Services Industry"). 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"), Internet Service Providers ("ISPs"), wireless carriers and
business, government and institutional end users with an alternative to the
incumbent local exchange companies (the "ILECs") for a broad array of high
quality voice, data, video transport and other telecommunications services.
The Company has completed the first year of its entry into the fully
competitive switched services or local exchange market. The initial performance
from the Company's entry into switched services has yielded results, both in
terms of lines connected and revenues received, that are substantially in excess
of the Company's expectations. As a result, the Company has revised its capital
deployment plans to allow for an increased level of demand-driven capital
spending necessary to take full advantage of the opportunities presented in the
switched services portion of the marketplace. The Company has revised its
network development plans to (i) increase the geographic reach and robustness of
its networks to allow the Company to serve a significantly higher percentage of
the market by extending its networks to serve most, if not all, of the ILECs'
central offices in its markets and (ii) more rapidly deploy switches with full
capabilities for local dial tone and switched access termination and origination
services. Through its equity and debt financings to date, the Company has raised
approximately $800 million to fund the Company's acquisition and development of
its initial 30 networks, including funds necessary for the expansion of such
networks in accordance with the Company's capital deployment plans described
above. The Company intends to use the net proceeds from the Depositary Shares
Offering (see "Financing Plan -- Equity Capital" below), along with additional
financing to be obtained in the future, to fund the Company's expansion from 30
to 40 networks by the end of 1997. See "Financing Plan" below.
The Company currently has systems in 30 cities, consisting of systems in
operation in 22 cities and under construction in eight cities. The Company's
networks under construction are all expected to become operational by the end of
the second quarter of 1997. 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 substantially all of the central offices of the ILECs
within their markets. In accordance with the pro-competitive provisions of the
Telecommunications Act of 1996, the Company has established interconnection
agreements with ILECs for 26 of its 30 networks. The Company is also certified
as a CLEC in 26 of its 30 networks. At November 30, 1996, the Company had a
total of 20 digital telephone switches installed in its networks. Switches have
been deployed to serve substantially all of the Company's operating networks.
The Company has increased the number of networks
3
<PAGE> 6
in operation or under construction from 11 at December 31, 1994 to 30 at
present. At November 30, 1996, the Company had a total of 931 route miles of
optical fiber cable installed, 454,815 voice grade equivalent (VGE) circuits in
service, 17,914 CLEC lines installed and 831 on-net and 1,273 off-net buildings
connected.
The Company plans to have systems in operation or under construction in a
total of 40 cities by the end of 1997 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.
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." See also "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
CLECs in second and third tier markets due to the combination of (i) continuing
pro-competitive regulatory changes that have increased the addressable market
for CLEC services and (ii) the competitive dynamics which, until 1994, focused
CLEC network development primarily in larger markets. See "Business of the
Company -- CLEC Market Potential," "The Competitive Local Telecommunications
Services Industry" and "Regulatory Overview."
The Company's current annualized revenues, based on September 1996
revenues, are $60.1 million, as compared with total revenues in 1995 of $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) and total revenues of $2.8 million in 1994, the Company's first full year
of operation. 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 ($9.9) million for the
nine months ended September 30, 1996. As of September 30, 1996, the Company had
an accumulated deficit of $40.4 million. As of September 30, 1996, on a pro
forma adjusted basis giving effect to (i) the receipt of $217.2 million pursuant
to the Company's Private Note Offering, (ii) the exchange of minority interests
in the Company's subsidiaries for an aggregate of 1,192,980 shares of Common
Stock since September 30, 1996 and (iii) the receipt of $7.7 million upon
exercises of warrants and options to purchase an aggregate of 1,427,269 shares
of Common Stock since September 30, 1996, the Company had cash, cash equivalents
and marketable securities of $554.5 million, total assets of $870.2 million,
long-term debt of $539.5 million and paid-in capital of $349.6 million. See
"Capitalization."
Initially, the Company's revenues were 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 ILEC switched access
transport. The Company is expanding 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, switched
access origination and termination services and desktop products. The Company is
also adding capabilities to provide other enhanced services, such as high speed
video conferencing, frame relay, ATM-based packet transport services and
Internet access products, in all of its operating networks by the end of 1997.
See "Business of the Company -- Current Products and Services" and "-- Planned
Products and Services."
The Company has assembled an experienced management, sales and operations
team with extensive experience and strong contacts within the telecommunications
industry. See "Management."
4
<PAGE> 7
CLEC MARKET POTENTIAL
Industry sources have estimated that the 1995 aggregate revenues of all
ILECs approximated $102 billion of which approximately $89 billion was derived
from switched services. Initially, CLECs 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 ILEC revenues in 1995). Accordingly,
the development of competitive 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 ILECs to allow CLECs to connect their
networks to the ILECs' networks (the "Interconnection Decisions"), CLECs 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 ILEC revenues in 1995). This has
enhanced the opportunities for the development of competitive networks in second
and third tier cities, which constitute a significant portion of the local
exchange market. In addition, most states have taken regulatory and legislative
action to open their markets to local exchange competition. The Company expects
that 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 access revenues from IXCs will increase as the IXCs move their access
business away from the ILECs (which are seeking the regulatory approvals
necessary to compete with the IXCs in providing long distance service) to
competitive providers of local telecommunications services. On October 15, 1996,
the United States Court of Appeals for the Eighth Circuit issued a partial stay,
pending a hearing on the merits, of FCC rules that had been scheduled to come
into effect on October 1, 1996 that set forth the amounts that ILECs can charge
CLECs and other telecommunications providers for access to the ILEC's networks.
However, in this ruling, which applies solely to pricing issues and the
so-called "pick and choose" rules, the Court did not stay the effectiveness of
the FCC rules requiring interconnection. As a result, the stay is not expected
to have any material effect on the Company's existing interconnection agreements
with ILECs or the pricing provisions thereof. See "Regulatory Overview --
Federal Regulation."
CORPORATE STRATEGY
The Company's goal is to become the primary full service provider of
competitive local telecommunications services to IXCs, ISPs, wireless carriers
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 ILECs. The principal elements of the Company's strategy include:
TARGET SECOND AND THIRD TIER MARKETS. The Company believes that
continuing pro-competitive regulatory changes and the broadening range of
services that can be offered by CLECs present attractive opportunities for
new CLEC entrants in second and third tier markets where there are
typically fewer CLEC competitors than in first tier markets and where the
ILECs 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 CLEC networks and
facilities (i.e., networks which are capable of reaching at least 70% to
80% of identified business end-users in the market and most, if not all, of
the ILEC's central offices) and establishing customer relationships with
IXCs, ISPs, wireless carriers 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.
AGGRESSIVELY PURSUE SWITCHED SERVICES OPPORTUNITY. The
Telecommunications Act of 1996 mandates that ILECs throughout the U.S.
enter into arrangements with competitors such as the Company for central
office collocation and unbundling of local services. The Company believes
5
<PAGE> 8
that implementation of these and other pro-competitive policies creates
favorable opportunities to pursue more aggressively the provision of local
switched services. The Company has a total of 20 digital telephone switches
installed in its operating networks and plans to leverage its networks and
customer relationships by offering local dial tone, switched access
termination and origination services, centrex and desktop products. The
Company currently offers such services and products in substantially all of
its operating networks and expects to offer such services and products in
all of its operating networks by the end of the second quarter of 1997. The
Company has increased the number of CLEC lines in service from 3,187 at
December 31, 1995 (on a pro forma basis giving effect to the City Signal
Acquisition) to 17,914 at November 30, 1996, with annualized CLEC revenues
increasing from $2.5 million based on December 1995 revenues to $10.2
million based on September 1996 revenues. See "Business of the Company --
Current Products and Services."
EXPAND ENHANCED SERVICE OFFERINGS. Consistent with its strategy of
aggressively pursuing switched services opportunities, the Company is
expanding its capabilities to provide flexible, enhanced services that
complement its switch-based services. Such enhanced services include, among
others, high speed video conferencing, frame relay and ATM-based packet
transport services and Internet access products. The Company is currently
offering such services in certain markets and expects to offer such
services in all of its operating networks by the end of 1997. The Company
also plans to continue to upgrade and add to its systems and services as
technology and regulations permit. See "Business of the Company -- Planned
Products and Services."
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 and expanding
its systems as opposed to funding initial operating losses. As a result of
favorable regulatory developments and the Company's initial favorable
experiences with the provision of local switched services, the Company has
determined to more rapidly develop and expand its systems. Its plans
include increasing the number of cities served, expansion of its existing
networks and accelerating the deployment of switches and ILEC central
office collocations. The Company believes that its access to significant
capital and technical resources and its ongoing efforts to develop close
working relationships with its IXC customers (see "--Build on 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.
CONTINUE TO INCREASE THE NUMBER OF CITIES SERVED. The Company recently
achieved its long-held strategic objective of having systems in operation
or under construction in a total of 30 cities by the end of 1996. The
Company plans to have systems in operation or under construction in a total
of 40 cities by the end of 1997 and a total of 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 its operating costs.
BUILD ON STRATEGIC RELATIONSHIPS. In order to capitalize on the
competitive dynamics of the changing IXC/ILEC relationships, the Company
has established close 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. ("MCImetro"), a wholly-owned subsidiary of MCI
Communications Corporation ("MCI"), formed a joint venture company to
operate and expand the Company's existing networks in San Jose, California
and its environs, and in May and June 1996, the Company and MCImetro
entered into agreements which provide that, until September 30, 2001, the
Company will be MCImetro's preferred provider of certain local access
services in a number of the Company's
6
<PAGE> 9
markets and pursuant to which MCImetro acquired a minority investment in
the Company's Sacramento, California network, and made an additional
investment in the San Jose joint venture company (see "Recent Developments"
below), 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
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 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, position it
well to develop and maintain these strategic relationships. See "Business
of the Company -- Strategic Relationships."
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
for the Company's CLEC business.
RECENT DEVELOPMENTS
The Company has recently completed two acquisitions of long distance
service providers for small and medium-sized business customers in California to
complement its existing long distance and facilities management resale
businesses. Effective July 1, 1996, the Company acquired the stock of ALD
Communications, Inc. ("ALD"), a switchless reseller of long distance services
and a shared tenant service provider of telecommunications services primarily to
customers in the San Francisco, California area with aggregate annualized
revenues of approximately $6.4 million, based on August 1996 results. Effective
September 1, 1996, the Company also acquired Bittel Telecommunications
Corporation ("Bittel"), a switch-based long distance reseller serving the San
Francisco and Los Angeles markets with annualized revenues of approximately $9
million, based on July 1996 results. By acquiring ALD and Bittel, the Company
not only added businesses that complement its own long distance and facilities
management resale businesses but was also able to increase its end user sales
force.
The Company believes that Internet and Intranet products and services
complement the Company's existing telecommunications services and present the
Company with potential revenue opportunities, through both the retention of
existing customers and the addition of new customers. To pursue such
opportunities, on June 25, 1996, the Company formed a strategic alliance with
World-Net Access, Inc. ("World-Net"), a privately-held development stage company
founded to form a national ISP network. The Company has invested a total of $20
million for a 25.5% fully-diluted interest in World-Net and it is possible that
the Company may commit additional funds in furtherance of this strategic
alliance. The Company intends that both companies will seek ways to work
together to provide customer oriented Internet and Intranet communications
solutions. The Company plans to develop and offer a wide range of
Internet-related services to users of World-Net's national ISP network,
including various dial-up and dedicated Internet access options.
In accordance with the provisions of the agreements between the Company and
MCImetro (see "Corporate Strategy -- Build on strategic relationships" above),
on October 10, 1996, MCImetro
7
<PAGE> 10
exchanged the agreed value of its investments in subsidiaries of the Company for
958,720 shares of the Company's Common Stock.
On October 24, 1996, the Company and MaineCom Services, Inc. ("MaineCom"),
a subsidiary of Central Maine Power Company, entered into a letter of intent to
form a joint venture company, to be owned 60% by the Company and 40% by
MaineCom, for the purposes of constructing, owning, operating and developing
networks initially in Portland, Maine, and Nashua and Manchester, New Hampshire,
and other markets in Maine and New Hampshire as may be agreed upon by the
Company and MaineCom in the future. The proposal is subject to the negotiation
of definitive agreements approved by the respective Boards of Directors of the
Company and MaineCom.
On November 7, 1996, the Company raised net proceeds of approximately
$217.2 million through the sale of $400.0 million aggregate principal amount of
the Private Notes. See "Financing Plan -- Debt Financing," below.
On November 12, 1996, AT&T Credit Corporation ("AT&T Credit") exchanged the
agreed value of its investments in certain subsidiaries of the Company made in
connection with certain loans to the Company (see "Financing Plan -- Debt
Financing" below) for an aggregate of 234,260 shares of the Company's Common
Stock.
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. Through its May 1996 initial public offering (the
"IPO") and two previous rounds of private equity financing, the Company
raised approximately $292.3 million. Total pro forma contributed capital as
of September 30, 1996 of $349.6 million reflects such public and private
financing as well as equity capital received in connection with the City
Signal Acquisition and the merger with BTC, and the issuance of 1,192,980
shares in exchange for minority investments in the Company's subsidiaries
and 1,569,599 shares upon exercise of warrants and options. On November 20,
1996, the Company filed a Registration Statement on Form S-1 to register
4,500,000 (assuming no exercise of any over-allotment options) of the
Company's Depositary Shares, and the shares of preferred stock and common
stock related thereto, to be offered to the public in a firm commitment
underwritten public offering. See "Business of the Company -- Strategic
Relationships," "Capitalization," "Certain Relationships and Related
Transactions," and "Unaudited Pro Forma Combined Consolidated Financial
Information."
DEBT FINANCING. On November 7, 1996, the Company completed the
issuance and sale of the Private Notes, for which the Company received
proceeds net of underwriting discounts of approximately $217.2 million. 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 (the "10 7/8% Senior Discount Notes" and, together with the
Private Notes, the "Senior Discount Notes"), for which the Company received
proceeds net of underwriting discounts of approximately $241.0 million. The
Company has also obtained secured financing under a line of credit from
AT&T Credit, which totals $50.0 million (the "AT&T Credit Facility"), and a
$10 million secured revolving line of credit for a subsidiary from Fleet
National Bank (the "Bank Credit Facility"). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
Historically, the Company has funded in advance its expected capital needs
for network construction and acquisition, as well as its needs for the
development and expansion of its networks. Following initial market entry, the
Company's capital deployment plans for the development and expansion of its
networks have been largely demand driven, including capital spending
8
<PAGE> 11
necessary to take full advantage of the opportunities presented in the switched
services portion of the marketplace. The Company recently revised its network
development plans to provide for the Company to (i) increase the geographic
reach and robustness of its networks to allow the Company to serve a
significantly higher percentage of the market by extending its networks to serve
most, if not all, of the ILEC's central offices in its markets and (ii) more
rapidly deploy switches with full capabilities for local dial tone and switched
access termination and origination services. The Company's previous estimate of
capital spending during 1996 and 1997 to fund the development and expansion of
the Company's initial 30 networks was $290 million, of which $134.3 million was
spent through September 30, 1996. The Company now estimates that it will invest
an additional $200 million associated with its initial 30 networks to fund these
capital needs during 1997 and 1998. The Company currently intends to use the net
proceeds from the Depositary Shares Offering (see "Financing Plan -- Equity
Capital" above), along with additional financing to be obtained in the future,
to fund the Company's expansion from 30 to 40 networks by the end of 1997.
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 other strategic initiatives, 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 its additional
capital needs with the proceeds from the sale of additional equity securities,
additional borrowings under existing and future credit facilities 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
40 cities by the end of 1997 and 50 cities by the end of 1998 and its
expectations for the deployment of switches serving all of its operating
networks by the end of the second quarter of 1997, 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
electronics, 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.
9
<PAGE> 12
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
$400,000,000 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
November 7, 1996 to Goldman, Sachs & Co. and Salomon Brothers
10
<PAGE> 13
Inc (collectively, the "Initial Purchasers")
pursuant to a Purchase Agreement, dated
November 1, 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
November 7, 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 , 1997,
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."
11
<PAGE> 14
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.
12
<PAGE> 15
THE NOTES
The Exchange Offer applies to $400,000,000 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 the
exchange will have been registered under the Securities Act, and, therefore, the
Exchange Notes will not bear legends restricting the transfer thereof and
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. 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......................... $400,000,000 principal amount of 11 7/8% Senior
Discount Notes due November 1, 2006.
MATURITY DATE................. November 1, 2006.
INTEREST...................... The Notes accrete from November 7, 1996 at a
rate of 11 7/8% compounded semi-annually, to an
aggregate principal amount of $400,000,000 by
November 1, 2001. No interest will be payable
on the Notes prior to May 1, 2002. The Notes
will accrue cash interest at the rate of
11 7/8% per annum from November 1, 2001,
payable semi-annually in arrears on November 1
and May 1, commencing May 1, 2002.
YIELD......................... 11 7/8% per annum, computed on a semi-annual
bond-equivalent basis and calculated from
November 7, 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
(including obligations under the AT&T Credit
Facility) 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
Bank Credit Facility). As of September 30,
1996, on a pro forma basis after giving effect
to the Private Note Offering and the issuance
of $50 million aggregate principal amount of
secured indebtedness on November 12, 1996, (i)
the total amount of outstanding liabilities of
the Company (parent only), including trade
payables, would have been approximately $546.8
million, of which $50 million would have been
secured obligations, and (ii) the total amount
of outstanding liabilities of the Company's
subsidiaries, including trade payables, would
have been $14.1 million, of which $0.1 million
would have represented secured obligations. See
"--Covenants" below and "Description of Other
Credit Facilities."
OPTIONAL REDEMPTION........... The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or
after November 1, 2001 at
13
<PAGE> 16
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 November 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 111.875% 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 November 1, 2001 or 101%
of the stated principal amount thereof, plus
accrued and unpaid interest, if any, thereon to
the date of purchase, after November 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
November 1, 2001, and there will be no periodic
payments of interest on the Notes prior to May
1, 2002, 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 November 7, 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 Facilities).
REPORTED PRICE RANGE.......... The Private Notes were designated for trading
in the PORTAL market of the NASD effective
November 7, 1996. During the period ended
December 17, 1996, the range of reported high
and low bid quotations for the Private Notes in
the PORTAL market was $64.25 to $59.75,
respectively. Such reported quotations may not
reflect actual transactions. See "Price Range
of the Private Notes."
BOOK-ENTRY, DELIVERY AND
FORMS......................... 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
14
<PAGE> 17
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 Exchange 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 18 through 24.
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.
15
<PAGE> 18
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 and nine months ended September
30, 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 nine months ended September 30, 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. 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>
PERIOD FROM THREE NINE
NOVEMBER 10, YEAR ENDED DECEMBER 31, MONTHS MONTHS
1993(1) TO ---------------------------------- ENDED ENDED
DECEMBER 31, PRO FORMA SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1995 1996 1996
------------ ------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA AND RATIOS)
STATEMENT OF OPERATIONS DATA:
Telecommunications service revenue.............. $ 2 $ 2,809 $ 14,160 $ 23,072 $ 12,943 $ 28,147
Costs and expenses:
Service costs.................................. -- 1,557 7,177 16,319 6,125 12,585
Selling, general and administrative expenses... 206 3,966 11,405 15,352 10,158 25,504
Depreciation and amortization.................. 3 663 4,118 8,018 4,265 9,859
------ ------- ---------- ---------- ----------- -----------
209 6,186 22,700 39,689 20,548 47,948
Loss from operations............................ (207) (3,377) (8,540) (16,617 ) (7,605) (19,801)
Interest and other income (expense), net........ 2 (598) (2,096) (2,142 ) (2,837) (8,176)
------ ------- ---------- ---------- ----------- -----------
Net loss before minority interests............. (205) (3,975) (10,636) (18,759 ) (10,442) (27,977)
------ ------- ---------- ---------- ----------- -----------
Minority interests(2).......................... -- 78 1,085 1,085 451 1,590
------ ------- ---------- ---------- ----------- -----------
Net loss....................................... $ (205) $(3,897) $ (9,551) $ (17,674 ) $ (9,991) $ (26,387)
====== ======= ========== ========== =========== ===========
Pro forma net loss per share(3)................. -- -- $ (.49) $ (.84 ) $ (.35) $ (1.10)
====== ======= ========== ========== =========== ===========
Pro forma weighted average number of shares
outstanding(3)................................. -- -- 19,523,584 20,951,862 28,368,352 24,071,672
====== ======= ========== ========== =========== ===========
OTHER DATA:
EBITDA(4)...................................... $ (204) $(2,714) $ (4,422) $ (8,492 ) $ (3,340) $ (9,942)
Capital expenditures, including acquisitions of
businesses, net of cash...................... -- 42,362 41,518 48,883 75,118 137,053
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF AS OF AS OF PRO FORMA
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, AS OF
1994 1995 1996 1996 1996 SEPTEMBER 30,
------- -------- ----------- ----------- ------------- 1996(5)
-------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT RATIOS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 8,795 $ 59,913 $ 253,796 $ 256,224 $ 203,034 $ 427,880
Marketable securities........................... -- -- 25,159 150,178 126,634 126,634
Working capital................................. 15,862 57,913 264,772 402,920 325,266 550,112
Total assets.................................... 71,325 146,610 449,135 633,825 637,350 870,176
Long-term debt, less current portion............ 29,403 43,977 298,529 306,391 314,440 539,548
Paid-in capital................................. -- -- 145,569(6) 330,963(6) 331,179(6) 349,658(6)
Total stockholders' equity(7)................... 36,699 93,455 125,264 300,535 290,759 309,238
Ratio of total debt to paid-in capital.......... -- -- 2.05 .93 .95 1.66
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF AS OF AS OF AS OF
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, NOVEMBER 30,
1994 1995 1996 1996 1996 1996
------- -------- ----------- ----------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NETWORK DATA:
Cities in operation.............................. 5 11 13 18 22 22
Cities under construction........................ 6 10 12 8 8 8
On-net buildings connected....................... 62 216 495 644 734 831
Route miles...................................... 107 262 506 705 787 931
Fiber miles...................................... 6,437 17,111 26,659 43,152 50,572 61,323
VGE circuits(8).................................. 59,208 122,617 165,122 243,171 358,640 454,815
Switches installed............................... -- 1 3 9 17 20
CLEC lines in service............................ -- 3,187(9) 5,802 9,226 13,107 17,914
Employees........................................ 89 165 456 571 711 776
</TABLE>
- ---------------
(1) The Company was organized on November 10, 1993.
(2) Minority interests represent the ownership interests of minority investors
in certain of the Company's subsidiaries. Since September 30, 1996, the
Company has issued an aggregate of 1,192,980 shares of Common Stock in
exchange for all of the Company's then-existing minority interests.
(3) 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 May 1996 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 Company's Registration
Statement relating to the IPO have been included in the calculation of
Common Stock equivalent shares for the nine months ended September 30,
1996, using the treasury stock method, as if such shares, options and
warrants were outstanding for all of 1995 and for the entire six-month
period ended June 30, 1996. For the three months ended September 30, 1996,
the weighted average number of shares was based on Common Stock outstanding
and does not include common stock equivalents as their inclusion would be
anti-dilutive.
(4) 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.
(5) On a pro forma basis giving effect to (i) the sale of the Private Notes on
November 7, 1996 and, (ii) the exchange of minority interests for shares of
Common Stock and the exercise of warrants and options since September 30,
1996. See "Capitalization."
(6) Amount represents the total of Common Stock, additional paid-in capital,
and Common Stock subject to redemption.
(7) Amount represents paid-in capital less accumulated deficit. See note (6)
above.
(8) Voice grade equivalent circuits.
(9) On a pro forma basis giving effect to the City Signal Acquisition.
17
<PAGE> 20
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. At January 1, 1996, only three of
the Company's networks that the Company acquired had 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 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. Such
capital expenditures are expected to increase as the Company decides to pursue
opportunities created by the accelerated pace of regulatory changes designed to
open local exchange markets to CLEC competition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business of the Company -- CLEC Market Potential." 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 ($9.9) million for the nine months ended September 30, 1996. As of
September 30, 1996, the Company had an accumulated deficit of approximately
$40.4 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 ($10.1) million on a pro forma basis for the nine months ended
September 30, 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 40 cities
by the end of 1997 and 50 cities by the end of 1998. The Company has deployed
switches serving substantially all of the Company's operating networks. The
Company is also adding capabilities to provide enhanced services such as high
speed video conferencing, frame relay and ATM-based packet transport services
and Internet access products and expects to offer such services in all of its
operating networks by the end of 1997. The Company currently intends to fund its
expansion from its initial 30 networks to 40 networks and the deployment of
switches in all of
18
<PAGE> 21
such networks with full capabilities for local dial tone and switched access
termination and origination services, with the net proceeds from the Depositary
Shares Offering, together with additional financing to be obtained in the
future. The Company's growth into 50 cities and additional funds to support
other strategic initiatives 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 such
additional capital needs with additional borrowings under existing and future
credit facilities, proceeds from the sale 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.
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.
As of September 30, 1996, on a pro forma basis after giving effect to the
Private Note Offering and the conversion of $50 million aggregate principal
amount of subsidiary secured indebtedness to parent company secured indebtedness
on November 12, 1996, (i) the total amount of outstanding liabilities of the
Company (parent only), including trade payables, would have been approximately
$546.8 million, of which $50 million would have been secured obligations, and
(ii) the total amount of outstanding liabilities of the Company's subsidiaries,
including trade payables, would have been $14.1 million, of which $0.1 million
would have represented secured obligations. The Company expects to fund at least
a portion of its capital needs through additional borrowings, and there can be
no assurance as to the Company's ability to service its existing or future
indebtedness. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
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.
However, the Company does not believe that such restrictions will have a
material impact on the Company's ability to meet its cash obligations. See
"-- No Dividends," "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and "Description
of Other Credit Facilities."
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<PAGE> 22
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, to negotiate acceptable
terms for their acquisition 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 ILEC
serving that area. ILECs 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 CLECs such as the Company, they also provide
the ILECs with increased pricing flexibility for their services and other
regulatory relief, which could also have a material adverse effect on CLECs,
including the Company. If the ILECs are allowed by regulators to lower their
rates for their services, engage in substantial volume and term discount pricing
practices for their customers, or seek to charge CLECs substantial fees for
interconnection to the ILECs' networks, the income of 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 CLECs, AT&T, MCI,
Sprint Corporation ("Sprint"), WorldCom, Inc. ("WorldCom") 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 MCImetro 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. The recently announced
acquisition of MCI by British Telecommunications could increase the resources
available to MCI for the above purposes. AT&T has also indicated its
20
<PAGE> 23
intention to offer local telecommunications services in certain U.S. markets,
either directly or in conjunction with CLECs or cable operators, and WorldCom
and MFS Communications Company, Inc. ("MFS Communications"), a major CLEC, have
recently announced a merger. A continuing trend toward combinations and
strategic alliances in the telecommunications industry, including potential
consolidation among RBOCs, or among CLECs in second and third tier cities, or
transactions between telephone companies and cable companies outside of the
telephone company's service area, or between IXCs and CLECs, 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 ILECs, 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 ILECs may be authorized to provide long distance
services under provisions of the Telecommunications Act of 1996 more quickly
than had earlier been anticipated. When ILECs 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 September 30, 1996, approximately 21% of the
Company's consolidated revenues were attributable to access services provided to
IXCs. Approximately 12% 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 will open to 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
21
<PAGE> 24
pricing flexibility and other regulatory relief granted to ILECs under the
Telecommunications Act of 1996. The partial stay of recent FCC rules that set
forth the amounts that ILECs can charge CLECs for access to the ILEC's networks
may slow the pace of open competition initiatives and result in individual
states having a more prominent role in the opening of local exchange markets to
competition. However, the Company believes that the partial stay will not have
any material adverse effect on the Company because the Company has in effect (or
expects to have in effect after state PUC arbitrations expected to be completed
by early 1997) interconnection agreements with the ILECs in all of its markets.
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 ILECs 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 ILECs and electric companies, afford 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 cancelled, or will not be renewed, as needed,
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 relatively small number of senior
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 key person 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
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<PAGE> 25
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
November 1, 2001, and there will be no periodic payments of cash interest on the
Exchange Notes prior to May 1, 2002, 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 November 7, 1996 and will be includible
as interest income periodically (including for periods ending prior to November
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
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<PAGE> 26
discount that was not amortized as of any such bankruptcy filing would
constitute "unmatured interest."
See "Certain United States Federal Income Tax Consequences" 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 November 7, 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:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Quarter Ending December 31, 1996 (beginning November 7, 1996 and
through December 17, 1996)................................................ $64.25 $59.75
</TABLE>
Such reported quotations may not reflect actual transactions. On December
17, 1996, the closing bid quotation for the Private Notes was $63.25
(representing approximately 111% of Accreted Value). As of December , 1996,
there were record holders of the Private Notes and approximately
participants in the Global Note deposited with the Depository.
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<PAGE> 27
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 and as adjusted to reflect (i) the sale of the Private Notes
on November 7, 1996 and (ii) the exchange of minority interests for shares of
Common Stock and the exercise of warrants and options since September 30, 1996:
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS..................................... $203,034,000 $427,880,000
MARKETABLE SECURITIES......................................... $126,634,000 $126,634,000
------------ ------------
TOTAL CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES..... $329,668,000 $554,514,000
============= =============
LONG-TERM DEBT
11 7/8% Senior Discount Notes due 2006...................... -- $225,108,000
10 7/8% Senior Discount Notes due 2006...................... 266,205,000 266,205,000
Other long-term debt........................................ 48,235,000 48,235,000
------------ ------------
Total.................................................... $314,440,000 $539,548,000
MINORITY INTERESTS(1)......................................... 10,761,000 --
------------ ------------
COMMON STOCK, SUBJECT TO REDEMPTION OPTION, 2,016,000
SHARES(2)................................................... 25,200,000 25,200,000
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value, 50,000,000 shares authorized,
26,445,890 issued and outstanding, actual; 29,066,139
issued and outstanding, as adjusted(1)(3)................ 264,000 290,000
Series C Junior Participating Preferred Stock, $0.01 par
value, 50,000 authorized, none issued or
outstanding(4)........................................... -- --
Series D Conversion Preferred Stock, $0.01 par value,
authorized, issued and outstanding as adjusted.... --
Additional paid-in capital(1)(3)(5)......................... 305,715,000 324,168,000
Accumulated deficit......................................... (40,420,000) (40,420,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY(6)................................. $290,759,000 $309,238,000
------------ ------------
TOTAL CAPITALIZATION.......................................... $615,960,000 $848,786,000
============= =============
</TABLE>
- ---------------
(1) Minority interests represented cash investments in certain of the Company's
subsidiaries from minority investors totaling approximately $13.2 million
through September 30, 1996 less the minority investors' interests in such
subsidiaries' respective operating losses. On October 10, 1996 and November
12, 1996, the Company issued 958,720 shares and 234,260 shares,
respectively, of Common Stock in exchange for such minority interests.
Common Stock outstanding, actual, does not include such shares.
(2) 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.
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."
(3) Common Stock outstanding, actual, excludes 5,267,028 shares of Common Stock
issuable upon exercise of stock options and warrants outstanding at
September 30, 1996, of which 3,409,785 shares were subject to warrants and
options exercisable within 60 days. Common Stock outstanding, as adjusted,
includes 1,427,269 shares of Common Stock issued upon exercise of warrants
and options at a weighted average exercise price of $5.41 per share since
September 30, 1996, and excludes 3,393,366 shares subject to warrants and
options outstanding as of the date of this Prospectus. See
"Management -- Executive Compensation -- Stock Option Plan," "Certain
Relationships and Related Transactions" and "Description of Capital Stock."
(4) Reserved for issuance upon the exercise of the Company's Preferred Stock
Purchase Rights pursuant to the terms set forth in the Company's Rights
Agreement dated as of February 29, 1996.
(5) Additional paid-in capital represents the amount of capital in excess of par
value.
(6) Total stockholders' equity includes Common Stock subject to redemption.
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<PAGE> 28
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on November 7, 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 November 7, 1996. Pursuant to the
Registration Rights Agreement, the Company agreed that it would (i) use its best
efforts to file with the Commission within 60 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 90 days after the
Closing Date. The Company agreed to issue and 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 and (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. 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, $400,000,000 in aggregate principal
amount of the Private Notes is outstanding, all of which is registered in the
name of Cede & Co., as nominee for The Depository Trust Company (the
"Depository"). 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
December 20, 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 the
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.
26
<PAGE> 29
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
, 1997, 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 November 7, 1996 at a
rate equal to 11 7/8% compounded semi-annually to an aggregate principal amount
of $400,000,000 by November 1, 2001. No interest will be payable on the Notes
prior to May 1, 2002. The Notes will accrue cash interest at the rate of 11 7/8%
per annum from November 1, 2001, payable semi-annually in arrears on May 1 and
November 1 of each year, commencing May 1, 2002.
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
27
<PAGE> 30
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.
28
<PAGE> 31
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 NASD, 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 Private Notes pursuant to the Exchange Offer, 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
29
<PAGE> 32
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
30
<PAGE> 33
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:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Hand/Overnight Delivery:
The Bank of New York The Bank of New York
One Wall Street - 27 One Wall Street - 27
New York, New York 10286 Corporate Trust & Agency 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
</TABLE>
The Bank of New York also serves as Trustee under the Indenture.
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<PAGE> 34
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
$125,000. 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.
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<PAGE> 35
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 September 30, 1996 and
the nine months ended September 30, 1995 and 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
nine months ended September 30, 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. 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>
YEAR ENDED DECEMBER 31, THREE MONTHS
PERIOD FROM ---------------------------------- ENDED
NOVEMBER 10, PRO FORMA SEPTEMBER 30,
1993(1) TO 1995 1996
DECEMBER 31, ----------- -------------
1993 1994 1995
------------ ------- ---------- (UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA AND RATIOS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications service
revenue......................... $ 2 $ 2,809 $ 14,160 $ 23,072 $ 12,943 $ 10,309 $ 28,147
Costs and expenses:
Service costs................... -- 1,557 7,177 16,319 6,125 5,248 12,585
Selling, general and
administrative
expenses...................... 206 3,966 11,405 15,352 10,158 7,818 25,504
Depreciation and amortization... 3 663 4,118 8,018 4,265 2,873 9,859
----- ------- -------- -------- ------- ------- --------
209 6,186 22,700 39,689 20,548 15,939 47,948
Loss from operations............. (207) (3,377) (8,540) (16,617 ) (7,605) (5,630) (19,801)
Interest and other income
(expense), net.................. 2 (598) (2,096) (2,142 ) (2,837) (1,933) (8,176)
----- ------- -------- -------- ------- ------- --------
Net loss before minority
interests..................... (205) (3,975) (10,636) (18,759 ) (10,442) (7,563) (27,977)
Minority interests(2)........... -- 78 1,085 1,085 451 589 1,590
----- ------- -------- -------- ------- ------- --------
Net loss........................ $ (205) $(3,897) $ (9,551) $ (17,674 ) $ (9,991) $ (6,974) $ (26,387)
===== ======= ======== ======== ======= ======= ========
Pro forma net loss per
share(3)........................ -- -- $ (.49) $ (.84 ) $ (.35) $ (.36) $ (1.10)
===== ======= ======== ======== ======= ======= ========
Pro forma weighted average number
of shares outstanding(3)........ -- -- 19,523,584 20,951,862 28,368,352 19,523,584 24,071,672
===== ======= ======== ======== ======= ======= ========
OTHER DATA:
EBITDA(4)....................... $ (204) $(2,714) $ (4,422) $ (8,492 ) $ (3,340) $ (2,757) $ (9,942)
Capital expenditures, including
acquisitions of businesses,
net of cash................... -- 42,362 41,518 48,883 75,118 29,181 137,053
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF AS OF AS OF PRO FORMA
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, AS OF
1994 1995 1996 1996 1996 SEPTEMBER 30,
------- -------- ----------- ----------- ------------- 1996(5)
-------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT RATIOS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 8,795 $ 59,913 $ 253,796 $ 256,224 $ 203,034 $ 427,880
Marketable securities........................... -- -- 25,159 150,178 126,634 126,634
Working capital................................. 15,862 57,913 264,772 402,920 325,266 550,112
Total assets.................................... 71,325 146,610 449,135 633,825 637,350 870,176
Long-term debt, less current portion............ 29,403 43,977 298,529 306,391 314,440 539,548
Paid-in capital................................. -- -- 145,569(6) 330,963(6) 331,179(6) 349,658(6)
Total stockholders' equity(7)................... 36,699 93,455 125,264 300,535 290,759 309,238
Ratio of total debt to paid-in capital.......... -- -- 2.05 .93 .95 1.66
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF AS OF AS OF AS OF
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, NOVEMBER 30,
1994 1995 1996 1996 1996 1996
------- -------- ----------- ----------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NETWORK DATA:
Cities in operation.............................. 5 11 13 18 22 22
Cities under construction........................ 6 10 12 8 8 8
On-net buildings connected....................... 62 216 495 644 734 831
Route miles...................................... 107 262 506 705 787 931
Fiber miles...................................... 6,437 17,111 26,659 43,152 50,572 61,323
VGE circuits(8).................................. 59,208 122,617 165,122 243,171 358,640 454,815
Switches installed............................... -- 1 3 9 17 20
CLEC lines in service............................ -- 3,187(9) 5,802 9,226 13,107 17,914
Employees........................................ 89 165 456 571 711 776
</TABLE>
- ---------------
(1) The Company was organized on November 10, 1993.
(2) Minority interests represent the ownership interests of minority investors
in certain of the Company's subsidiaries.
(3) 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 May 1996 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 Company's Registration
Statement relating to the IPO have been included in the calculation of
Common Stock equivalent shares for the nine months ended September 30,
1996, using the treasury stock method, as if such shares, options and
warrants were outstanding for all of 1995 and for the entire six-month
period ended June 30, 1996. For the three months ended September 30, 1996,
the weighted average number of shares was based on Common Stock outstanding
and does not include common stock equivalents as their inclusion would be
anti-dilutive.
(4) 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.
(5) On a pro forma basis giving effect to (i) the sale of the Private Notes on
November 7, 1996 and (ii) the exchange of minority interests for shares of
Common Stock, and the exercise of warrants and options since September 30,
1996. See "Capitalization."
(6) Amount represents the total of Common Stock, additional paid-in capital,
and Common Stock subject to redemption.
(7) Amount represents paid-in capital less accumulated deficit. See note (6)
above.
(8) Voice grade equivalent circuits.
(9) On a pro forma basis giving effect to the City Signal Acquisition.
34
<PAGE> 37
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, ISPs,
wireless carriers and business, government and institutional end-users with an
alternative to the ILECs for a broad array of high quality voice, data, video
transport and other telecommunications services.
The Company's goal is to become the primary full service provider of
competitive local telecommunications services to IXCs, ISPs, wireless carriers
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 ILECs. The Company currently has systems in 30 cities, consisting
of systems in operation in 22 cities and under construction in eight cities. The
Company plans to expand its network operations to have systems in operation or
under construction in a total of 50 cities by the end of 1998. The Company has a
total of 20 digital telephone switches installed in its networks. The Company
has deployed switches to offer local dial tone, switched access termination and
origination services, centrex, and desktop products in substantially all of its
operating networks, and expects to have switches installed in all of its
operating networks by the end of the second quarter of 1997. The Company is also
adding capabilities to provide enhanced services such as high speed video
conferencing, frame relay and ATM-based packet transport services and Internet
access products and expects to offer all of such services in all of its
operating networks by the end of 1997.
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. GLA, a wholly owned subsidiary of the Company, 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."
35
<PAGE> 38
The following table provides selected statistical and financial data for
the Company as of the dates indicated:
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
---------------------- PERCENTAGE
1995 1996 CHANGE
-------- -------- ----------
<S> <C> <C> <C>
Cities in operation................................ 11 22 100
Cities under construction.......................... 9 8 (11)
Buildings connected-off net........................ 31 913 NM
Buildings connected-on net......................... 190 734 286
Route miles........................................ 234 787 236
Fiber miles........................................ 14,414 50,572 251
Switches installed................................. -- 17 NM
CLEC lines in service.............................. -- 13,107 NM
VGE circuits....................................... 108,841 358,640 230
Number of employees................................ 136 711 423
Total Assets (dollars in thousands)................ $143,210 $637,350 345
======= ======== ===
</TABLE>
- ---------------
NM -- Not meaningful
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
REVENUES
The Company's revenues increased to $12.9 million for the three months
ended September 30, 1996 from $3.8 million for the three months ended September
30, 1995, an increase of 241%. Network capacity as reflected in VGEs in service
increased to 358,640 VGEs as of September 30, 1996 as compared with 108,841 VGEs
as of September 30, 1995. These increases reflect the impact of the Company's
acquisition and development activities, including an increase in the number of
networks in operation to 22 from 11 in the third quarter of 1995, 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 third quarter of 1996 relates to the
Company's entry into local exchange services in Grand Rapids, Michigan.
Annualized monthly local exchange services revenues increased from $6.4 million
based on June 1996 revenues to $10.2 million based on September 1996 revenues,
as a result of rapidly growing revenues in Grand Rapids. Local exchange services
revenues for the quarter ended September 30, 1996, totaled $2.2 million as
compared to $1.4 million for the quarter ended June 30, 1996.
COSTS AND EXPENSES
Service costs increased to $6.1 million for the three months ended
September 30, 1996 from $1.8 million for the three months ended September 30,
1995. The increase was due primarily to the increasing costs associated with the
Company's rapidly growing local exchange services in Grand Rapids and its
expanding resale operations. 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 local
and long distance service costs, technical salaries and benefits, and
rights-of-way fees.
The Company's selling, general and administrative ("SG&A") expenses for the
three months ended September 30, 1996 were $10.2 million, as compared with SG&A
expenses of $3.0 million for the three months ended September 30, 1995. The
increase was principally due to the increasing number and continued expansion of
the Company's competitive access networks, including added personnel costs and
marketing activities related to the introduction of switched services. 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
36
<PAGE> 39
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 $4.3 million for the
three months ended September 30, 1996, from $1.1 million for the three months
ended September 30, 1995 as a result of the Company's acquisitions and the
continued expansion of the Company's networks.
INTEREST INCOME (EXPENSE)
Interest expense totaling $7.7 million was recorded during the three months
ended September 30, 1996, as compared to interest expense of $965,000 for the
three months ended September 30, 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 expense totaling $6.4 million attributable
to accretion of the 10 7/8% Senior Discount Notes (see "Liquidity and Capital
Resources") issued by the Company on February 26, 1996. In addition, capitalized
interest of $802,000 was recorded for the quarter ended September 30, 1996,
related to network construction projects. For the quarters ended September 30,
1996 and 1995, interest income totaling $4.8 million and $569,000, 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 $10.4 million for the quarter ended September 30, 1996,
from $2.6 million for the quarter ended September 30, 1995. Minority interests
in net losses, representing minority investors' interests in certain of the
Company's subsidiaries, totaled $451,000 and $271,000 for the quarters ended
September 30, 1996 and 1995, respectively. As a result, the Company's net loss
for the quarter ended September 30, 1996 was $10.0 million as compared to a net
loss of $2.3 million for the quarter ended September 30, 1995.
EBITDA
EBITDA decreased to ($3.3) million for the three months ended September 30,
1996, from ($1.1) million for the three months ended September 30, 1995, a
decrease of $2.2 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 in order to pursue the opportunities
provided by offering a full array of local exchange services. EBITDA is a
measure commonly used in the telecommunications industry and 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.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
REVENUES
The Company's revenues increased to $28.1 million for the nine months ended
September 30, 1996 from $10.3 million for the nine months ended September 30,
1995, an increase of 173%. 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 nine months ended September 30, 1996 relates to the Company's
entry into local exchange services in Grand Rapids, Michigan as a result of the
City Signal Acquisition. Local exchange services revenues for the nine months
ended September 30, 1996, totaled $4.4 million.
37
<PAGE> 40
COSTS AND EXPENSES
Service costs increased to $12.6 million for the nine months ended
September 30, 1996 from $5.2 million for the nine months ended September 30,
1995. Service costs as a percentage of telecommunications services revenues
declined to approximately 45% for the nine months ended September 30, 1996 as
compared to approximately 51% for the nine months ended September 30, 1995.
The Company's SG&A expenses for the nine months ended September 30, 1996
were $25.5 million, as compared with SG&A expenses of $7.8 million for the nine
months ended September 30, 1995. The increase was principally due to the
increasing number and continued expansion of the Company's competitive access
networks, including added personnel costs and marketing activities related to
the introduction of switched services.
Depreciation and amortization expense increased to $9.9 million for the
nine months ended September 30, 1996, from $2.9 million for the nine months
ended September 30, 1995, as a result of the Company's acquisitions and the
continued expansion of the Company's networks.
INTEREST INCOME (EXPENSE)
Interest expense totaling $19.3 million was recorded during the nine months
ended September 30, 1996, as compared to interest expense of $2.8 million for
the nine months ended September 30, 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 expense totaling $15.6 million attributable
to accretion of the 10 7/8% Senior Discount Notes. In addition, capitalized
interest of $1.3 million was recorded for the nine months ended September 30,
1996 related to network construction projects. For the nine months ended
September 30, 1996 and 1995, interest income totaling $11.1 million and
$746,000, 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 $28.0 million for the nine months ended September 30,
1996, from $7.6 million for the nine months ended September 30, 1995. Minority
interests in net losses, representing minority investors' interests in certain
of the Company's subsidiaries, totaled $1.6 million and $589,000 for the nine
months ended September 30, 1996 and 1995, respectively. As a result, the
Company's net loss for the nine months ended September 30, 1996 was $26.4
million as compared to a net loss of $7.0 million for the nine months ended
September 30, 1995.
EBITDA
EBITDA decreased to ($9.9) million for the nine months ended September 30,
1996 from ($2.8) million for the nine months ended September 30, 1995, a
decrease of $7.1 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 in order to pursue the opportunities
provided by offering the full array of local exchange services.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUE
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
38
<PAGE> 41
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 SG&A expenses 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 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. 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 and is presented
39
<PAGE> 42
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased from $146.6 million as of December 31,
1995 to $637.4 million at September 30, 1996. The Company's current assets of
$346.7 million at September 30, 1996, including cash and cash equivalents and
marketable securities of $329.7 million, exceeded current liabilities of $21.4
million, providing working capital of $325.3 million. Network and equipment
totaled $222.0 million at September 30, 1996 as compared to $53.2 million at
December 31, 1995. Other assets, principally goodwill, net of accumulated
amortization, increased to $74.8 million at September 30, 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 10 7/8% Senior Discount Note Offering.
In connection with the City Signal Acquisition, the seller 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 on or before February 1, 1998. In conjunction with the
Company's IPO (see below), ten percent (10%) of such shares were sold.
Accordingly, shares subject to redemption totalled 2,016,000 shares at September
30, 1996.
On February 26, 1996, the Company sold $425.0 million aggregate principal
amount of its 10 7/8% Senior Discount 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
10 7/8% Senior Discount Notes until September 1, 2001.
On May 2, 1996, the Company sold 7,385,331 shares of the Company's Common
Stock in its IPO at a price of $27.00 per share. Gross proceeds from this
offering totaled approximately $199.4 million and proceeds net of underwriting
discounts and advisory fees and expenses totalled approximately $185.2 million.
In June 1996, the Company and MCImetro entered into an agreement pursuant
to which MCImetro has acquired a minority interest in the Company's Sacramento,
California network and has made an additional investment in the San Jose joint
venture company. In connection with these agreements, MCImetro has made
additional cash investments totaling $8.0 million. In accordance with the
provisions of the agreements between the Company and MCImetro, on October 10,
1996 MCImetro exchanged the agreed value of its investments in subsidiaries of
the Company for 958,720 shares of the Company's Common Stock.
The Company has formed a strategic alliance with World-Net and has invested
a total of $20 million for a 25.5% fully-diluted interest in World-Net, and it
is possible that the Company may commit additional funds in furtherance of this
strategic alliance. World-Net is a privately-held development stage company
founded to form a national ISP network. The Company intends for both companies
to seek ways to work together and provide customer-oriented Internet and
Intranet communications solutions.
Effective in July 1996, the Company acquired 100% of the stock of 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.
40
<PAGE> 43
Effective in September 1996, the Company acquired 100% of the stock of
Bittel, a switch-based reseller of long distance services, with such services
provided primarily to customers in the San Francisco and Los Angeles, California
areas.
On October 24, 1996, the Company and MaineCom, a subsidiary of Central
Maine Power Company, entered into a letter of intent to form a joint venture
company, to be owned 60% by the Company and 40% by MaineCom, for the purposes of
constructing, owning, operating and developing networks initially in Portland,
Maine and Nashua and Manchester, New Hampshire, and other markets in Maine and
New Hampshire as may be agreed upon by the Company and MaineCom in the future.
The proposal is subject to the negotiation of definitive agreements approved by
the respective Boards of Directors of the Company and MaineCom.
On November 12, 1996, AT&T Credit exchanged the agreed value of its
investments in certain subsidiaries of the Company made in connection with
certain loans to the Company for an aggregate of 234,260 shares of the Company's
Common Stock.
On November 7, 1996, the Company completed the issuance and sale of $400.0
million aggregate principal amount of the Private Notes, for which the Company
received proceeds net of underwriting discounts of approximately $217.2 million.
The Private Notes rank pari passu with the 10 7/8% Senior Discount Notes and
contain certain covenants substantially the same as the covenants in the 10 7/8%
Senior Discount Notes.
As of September 30, 1996, on a pro forma basis after giving effect to the
Private Note Offering and the conversion of $50 million aggregate principal a
mount of subsidiary secured indebtedness to parent company secured indebtedness
on November 12, 1996, (i) the total amount of outstanding liabilities of the
Company (parent only), including trade payables, would have been approximately
$546.8 million, of which $50 million would have been secured obligations, and
(ii) the total amount of outstanding liabilities of the Company's subsidiaries,
including trade payables, would have been $14.1 million, of which $0.1 million
would have represented secured obligations.
The AT&T Credit Facility currently provides the Company a secured line of
credit totalling $50.0 million which has been used 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.
Indebtedness under the AT&T Credit Facility is secured by the assets of certain
subsidiaries of the Company and is guaranteed by intermediate subsidiaries of
the Company. The facility is further secured by the stock of such subsidiaries
and such guarantors. The AT&T Credit Facility contains covenants substantially
the same as the covenants in the Senior Discount Notes and also contains
covenants applicable to such subsidiaries and such guarantors which place
certain additional limitations on the ability of such entities to incur
indebtedness, create liens, engage in new businesses, dispose of assets, issue
additional capital stock, and effect mergers and consolidations.
The Bank Credit Facility provides the subsidiary operating the Company's
Tulsa, Oklahoma network 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 payment 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
41
<PAGE> 44
minimum amount of annualized operating cash flow. At September 30, 1996, there
was $100,000 of outstanding indebtedness under the Bank Credit Facility.
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 nine months ended September 30, 1996 and 1995, the Company made expenditures
for the acquisition, design, construction and development of systems totaling
$137.1 million and $29.2 million, respectively.
In response to the demand initially encountered for its services, the
Company will continue aggressive capital deployment plans for the development
and expansion of its networks to allow for an increased level of demand-driven
capital spending necessary to take full advantage of the opportunities presented
by offering a full array of local exchange services. The Company's revised
network development plans provide for the Company to (i) increase the geographic
reach and robustness of its networks to allow the Company to serve a
significantly higher percentage of the market by extending its networks to serve
most, if not all, of the ILEC's central offices in its markets and (ii) more
rapidly deploy switches with full capabilities for local dial tone and switched
access termination and origination services. The Company's previous estimate of
capital spending during 1996 and 1997 to fund the development and expansion of
the Company's initial 30 networks was $290 million, of which $134.3 million was
spent through September 30, 1996. The Company now estimates that it will invest
an additional $200 million associated with its initial 30 networks to fund these
capital needs during 1997 and 1998. The Company currently intends to use the net
proceeds from the Depositary Shares Offering, together with additional financing
to be obtained in the future, to fund the expansion from 30 to 40 networks by
the end of 1997 as well as to cover the related initial operating losses.
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 development of new networks. The Company will continue to
evaluate additional revenue opportunities in its existing markets and, as such
opportunities may develop, the Company plans 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 specific 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 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.
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.
42
<PAGE> 45
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. As of the adoption
date of January 1, 1996, the Company had no long-lived assets considered
impaired and no identifiable intangibles or goodwill related to assets to be
disposed of.
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. The Company
has elected to continue to use the intrinsic value based method of accounting.
Accordingly, there will be no effect on the Company's consolidated financial
statements.
INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
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<PAGE> 46
BUSINESS OF THE COMPANY
OVERVIEW OF THE COMPANY
The Company, founded in November 1993, is a leading full service provider
of competitive local telecommunications services to IXCs, ISPs, wireless
carriers 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,
ISPs, wireless carriers and business, government and institutional end users
with an alternative source for a broad array of high quality voice, data and
other telecommunications services. Certain of the Company's subsidiaries located
in California 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 believes that its
strategic alliance with World-Net Access, Inc., a company founded to form a
national Internet Service Provider network, will enable the Company to provide
its customers with solutions to their needs for Internet and Intranet
communications services.
The Company's networks are organized to take advantage of ongoing
technological, competitive and regulatory changes. The Company sells its
services primarily to IXCs, ISPs, wireless carriers 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 ILECs
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 ILECs, 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, ISPs, wireless carriers
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 ILECs. The principal elements of the Company's strategy include:
TARGET SECOND AND THIRD TIER MARKETS. The Company believes that
continuing pro-competitive regulatory changes and the broadening range of
services that can be offered by CLECs present attractive opportunities for
new CLEC entrants in second and third tier cities where there are typically
fewer CLEC competitors than in first tier markets and where the ILECs
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 CLEC networks and facilities (i.e.,
networks which are capable of reaching at least 70% to 80% of identified
business end users in the market and
44
<PAGE> 47
most, if not all, of the ILEC's central offices) and establishing customer
relationships with IXCs, ISPs, wireless carriers 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.
AGGRESSIVELY PURSUE SWITCHED SERVICES OPPORTUNITY. The
Telecommunications Act of 1996 mandates that ILECs throughout the U.S.
enter into arrangements with competitors such as the Company for central
office collocation and unbundling of local services. The Company believes
that implementation of these and other pro-competitive policies creates
favorable opportunities to pursue more aggressively the provision of local
switched services. The Company has a total of 20 digital telephone switches
installed in its operating networks and plans to leverage its networks and
customer relationships by offering local dial tone, switched access
termination and origination services, centrex and desktop products. The
Company currently offers such services and products in substantially all of
its operating networks and expects to offer such services and products in
all of its operating networks by the end of the second quarter of 1997. See
"-- Current Products and Services."
EXPAND ENHANCED SERVICE OFFERINGS. Consistent with its strategy of
aggressively pursuing switched services opportunities, the Company is
expanding its capabilities to provide enhanced services that complement its
switch-based services. Such enhanced services include, among others, high
speed video conferencing, frame relay and ATM-based packet transport
services and Internet access products. The Company is currently offering
such services in certain markets and expects to offer such services in all
of its operating networks by the end of 1997. The Company also plans to
continue to upgrade and add to its systems and services as technology and
regulations permit. See "-- Planned Products and Services."
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 and expanding
its systems as opposed to funding initial operating losses. As a result of
favorable regulatory developments and the Company's initial favorable
experiences with the provision of local switched services, the Company has
determined to more rapidly develop and expand its systems. Its plans
include increasing the number of cities served, expansion of its existing
networks and accelerating the deployment of switches and ILEC central
office collocations. The Company believes that its access to significant
capital and technical resources and its ongoing efforts to develop close
working relationships with its IXC customers (see "-- Build on 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.
CONTINUE TO INCREASE THE NUMBER OF CITIES SERVED. The Company recently
achieved its long-stated goal of having systems in operation or under
construction in a total of 30 cities by the end of 1996. The Company plans
to have systems in operation or under construction in a total of 40 cities
by the end of 1997 and a total of 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 its
operating costs.
BUILD ON STRATEGIC RELATIONSHIPS. In order to capitalize on the
competitive dynamics of the changing IXC/ILEC relationships, the Company
has established close 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 formed a joint
venture company to operate and expand the Company's existing networks in
San Jose, California and its environs, and in May and June 1996, the
Company and MCImetro entered into agreements
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<PAGE> 48
which provide that, until September 30, 2001, the Company will be
MCImetro's preferred provider of certain local access services in a number
of the Company's markets and pursuant to which MCImetro acquired a 15%
interest in the Company's Sacramento, California network for $4.5 million,
and MCImetro invested an additional $3.5 million in the San Jose joint
venture company (see "-- Strategic Relationships" below), and (2) in
December 1995, the Company concluded a national preferred vendor agreement
with AT&T Communications, 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 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 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, position it well to develop and maintain these strategic
relationships. See "-- Strategic Relationships."
LEVERAGE UPON GLA'S SIGNIFICANT TELECOMMUNICATIONS INFRASTRUCTURE
CAPABILITIES. 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
for the Company's CLEC business.
CLEC MARKET POTENTIAL
DEVELOPMENT OF LOCAL EXCHANGE SERVICES. The first CAPs, which were the
predecessors of today's CLECs, were established in the mid-1980's to serve the
increasing demand for telecommunication services by the IXCs and business,
finance, government, education and healthcare entities by providing competitive
alternatives to the ILECs 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
the 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 ILECs in many of the
local exchange markets. In particular, the IXCs, which 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 ILEC
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.
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<PAGE> 49
The pace of regulatory change in the telecommunications industry has
continued to accelerate with the adoption of the Telecommunications Act of 1996
which provides, among other things, for a national template under which, when
implemented, CLECs will be able to provide competitive services on a more equal
basis with the ILECs by further opening local exchange markets to competition
and pre-empting anti-competitive state laws. The Company believes the following
attributes of the Telecommunications Act of 1996 will have certain positive
effects on the Company's operations:
- Market access. Opening all U.S. markets to local competition.
- Network interconnections. Enabling the Company to more fully interconnect
its networks with ILECs and other carriers to allow the Company to reach
customers not physically connected to its own networks in a more cost
effective manner.
- Number portability. Enabling customers to retain their existing phone
numbers in the event they choose to switch local service providers. The
Company considers number portability to be a significant factor which can
positively influence a customer's decision to purchase service from the
Company.
- Reciprocal compensation. Ensuring fair and reciprocal rates under which
other carriers and the Company compensate one another for calls made to
their customers or, in the alternative, not charge one another for calls
made by customers from one network to the other. The Company expects such
reciprocal compensation arrangements to improve its operating margins over
time.
ENTRY INTO SWITCHED SERVICES. The Company believes that the CLEC business
is positioned for dramatic growth. Of the $32 billion of access fees paid by
IXCs to the ILECs in 1994, CLECs accounted for only $294 million or less than
1%. The Company expects that the entry of the ILECs into the long distance
business will increase these penetration rates as IXCs may seek alternatives to
the ILECs as sources of access to their customers. Most states have taken
regulatory and legislative action to open local communications markets to 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 CLECs to introduce additional services, expand
their networks and address a larger customer base. These changes permit CLECs to
offer local dial tone, centrex, desk top and other enhanced services. The
Company believes that these changes afford 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 CLECs.
Until recently, the Company's capital expenditure programs were directed
primarily toward the construction and acquisition of new networks and the
purchase of related equipment. While the Company intends to continue these
activities, it is also accelerating the expansion of its existing networks,
including more rapid deployment of switches and ILEC central office
interconnections, in order to take advantage of its developing demand-based
opportunities in those networks. Accordingly, the Company has increased the
number of CLEC lines in service from 3,187 at December 31, 1995 (on a pro forma
basis giving effect to the City Signal Acquisition) to 17,914 at November 30,
1996, with annualized CLEC revenues increasing from $2.5 million based on
December 1995 revenues to $10.2 million based on September 1996 revenues.
See "The Competitive Local Telecommunications Industry," "Competition" and
"Regulatory Overview" below.
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
47
<PAGE> 50
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:
- 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.
- End-User/IXC Special Access -- Telecommunications lines between an end
user, such as a large business, and the local POP of its selected IXC.
- Private Line -- Telecommunications lines connecting various locations of
one or more customers' 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 ILECs' networks. These services include:
- Collocated Special Access -- A dedicated line carrying switched
transmissions from the IXC POP, through the ILEC's central office to the
end user.
- Collocated POP-to-ILEC Switched Access Transport -- A dedicated line
carrying switched transmissions from the ILEC'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.
- 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.
- 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.
- 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.
SWITCH-BASED SERVICES. The Company has added and is continuing to add
capabilities to provide local dial tone and switched access termination and
origination services to its networks. The Company has installed 20 advanced,
state-of-the-art switches. In addition, pursuant to the City Signal Acquisition
and its acquisition of Bittel, the Company acquired three installed
state-of-the-art switches.
Most 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 has established interconnection arrangements with
ILECs for 26 of its 30 networks. The Company expects that 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 and expand the
Company's networks to address a
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<PAGE> 51
larger customer base. See "-- CLEC Market Potential," "-- Planned Products and
Services" and "Regulatory Overview."
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 ILEC 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 ILEC 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. The Company's acquisitions of ALD, TNS and Bittel in
1996 have complemented its long-distance resale services directed to such
customers.
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 expanding its capabilities to provide enhanced services,
such as high speed video conferencing, Internet access, frame relay and
ATM-based packet transport services. The Company is currently offering such
services in certain markets and expects to have such capabilities in all of its
operating networks by the end of 1997. These capabilities will enable the
Company to offer a variety of enhanced services where the transport function is
combined with a specific
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<PAGE> 52
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.
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 MCImetro to operate and significantly expand
the Company's existing network in San Jose, California and its environs. The
joint venture company operates the network and provides the Company and MCImetro
with the network services needed for their respective customers.
On May 30, 1996, the Company and MCImetro entered into an amendment to the
Company's master service agreement with MCImetro which provides that, until
September 30, 2001, the Company will be MCImetro's preferred provider of certain
local access services in a number of the Company's markets at a discount to
prevailing optimized ILEC rates for comparable circuits. Under the amended
master service agreement, MCImetro has agreed to purchase from the Company, with
certain provisos, all of MCImetro's required local access in specified markets
for new end-user services (and, at MCImetro'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 MCImetro
in such markets. The Company and MCImetro also entered into a subscription
agreement on June 24, 1996 pursuant to which MCImetro has acquired a 15%
interest in the Company's Sacramento, California network for $4.5 million and
MCImetro has invested an additional $3.5 million in the San Jose joint venture
company. In accordance with the provisions of the agreements between the Company
and MCImetro, on October 10, 1996 MCImetro (i) exchanged the agreed value of its
September 1995 investment in the San Jose network and (ii) exchanged the agreed
value of its June 1996 investments in both networks for an aggregate of 958,720
shares of the Company's Common Stock.
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 ILEC
rates. The Company is currently providing certain services under the agreement
in 11 markets 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 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."
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The Company believes that Internet and Intranet products and services
complement the Company's existing telecommunications services and present the
Company with potential revenue opportunities, through both the retention of
existing customers and the addition of new customers. To pursue such
opportunities, on June 25, 1996, the Company formed a strategic alliance with
World-Net, a privately-held development stage company founded to form a national
Internet Service Provider network. The Company has invested a total of $20
million for a 25.5% fully-diluted interest in World-Net, and it is possible that
the Company will decide to commit additional funds in furtherance of this
strategic alliance. The Company intends that both companies will seek ways to
work together to provide customer-oriented Internet and Intranet communications
solutions. The Company plans to develop and offer a wide range of
Internet-related services to users of World-Net's national ISP network,
including various dial-up and dedicated Internet access options.
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 been constructed by the Company and are 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. Also during 1995, the Company 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 now operational.
Effective January 31, 1996, the Company acquired the business of City
Signal, a 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. Also during 1996, the Company commenced the
construction of networks in White Plains, New York, Stamford, Connecticut,
Kansas City, Missouri, Springfield, Missouri and San Mateo, California, all of
which are expected to be operational by the end of the second quarter of 1997.
Subsidiaries of the Company currently have systems in operation or under
construction in the following cities:
<TABLE>
<CAPTION>
OTHER CLEC
NETWORKS OF THE COMPANY NETWORKS IN CITY
---------------------------------------------------- ----------------------
CITY SERVED CURRENT ANNOUNCED
---------------------------------------------------- ------- ---------
<S> <C> <C>
EASTERN REGION
Springfield, Massachusetts........................ 0 0
Providence, Rhode Island.......................... 1 0
Hartford, Connecticut............................. 3 0
Grand Rapids, Michigan............................ 0 0
Lansing, Michigan................................. 0 1
Traverse City, Michigan(1)........................ 0 0
</TABLE>
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<TABLE>
<CAPTION>
OTHER CLEC
NETWORKS OF THE COMPANY NETWORKS IN CITY
---------------------------------------------------- ----------------------
CITY SERVED CURRENT ANNOUNCED
---------------------------------------------------- ------- ---------
Toledo, Ohio(1)................................... 0 1
<S> <C> <C>
White Plains, New York(1)......................... 1 0
Stamford, Connecticut(1).......................... 1 0
CENTRAL REGION
Oklahoma City, Oklahoma........................... 2 0
Tulsa, Oklahoma................................... 0 1
Little Rock, Arkansas............................. 1 1
Tucson, Arizona................................... 2 0
Albuquerque, New Mexico........................... 2 0
Knoxville, Tennessee.............................. 0 2
Jackson, Mississippi.............................. 1 1
Kansas City, Missouri(1).......................... 1 1
Springfield, Missouri(1).......................... 0 1
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.............................. 2 0
Palo Alto, California............................. 2 0
San Mateo, California(1).......................... 2 0
Reno, Nevada(1)................................... 0 1
San Francisco, California(2)...................... N/A N/A
</TABLE>
- ---------------
(1) Networks under construction.
(2) Facilities management operations serving the San Francisco Bay area.
On October 24, 1996, the Company and MaineCom, a subsidiary of Central
Maine Power Company, entered into a letter of intent to form a joint venture
company, to be owned 60% by the Company and 40% by MaineCom, for the purposes of
constructing, operating and developing networks initially in Portland, Maine and
Nashua and Manchester, New Hampshire and other markets in Maine and New
Hampshire as may be agreed upon in the future. The proposal is subject to the
negotiation of definitive agreements approved by the respective Boards of
Directors of the Company and MaineCom.
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 demand and actual and potential 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.
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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 ILEC'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 certain
enhanced products and services, which the Company plans to offer in all of its
operating networks by the end of 1997; see "-- Planned Products and Services").
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 authorizations. 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 ILECs 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 ILECs and electric companies, to afford 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 ILEC 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
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<PAGE> 56
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
September 30, 1996, it has accepted delivery of 14 state-of-the-art 5ESS(@)-2000
switches.
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 service providers and ISPs. Retail customers are
composed primarily of businesses, government and institutional
telecommunications users that have high volume dedicated telecommunications
requirements and, to a lesser extent, include residential customers for switched
services. 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,
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<PAGE> 57
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 ILECs 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 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 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 September 30, 1996, approximately 21% of the
Company's consolidated revenues were attributable to access services provided to
IXCs pursuant to numerous individual service orders. Approximately 12% 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 MCImetro which provides that,
until September 30, 2001, the Company will be MCImetro'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 sometimes 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, dedicated high-speed Internet access, local
dial tone and switched access termination and origination services. The Company
is currently introducing frame relay and ATM-based packet transport capabilities
and 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 provide customers with cost
effective data transmission and access to services such as the Internet.
ATM-based packet
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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, institutional and other 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 ILECs. 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 ILECs
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 ILEC 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
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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 nine months ended September 30, 1996, rental expense for such
locations and offices totaled $1.5 million. At September 30, 1996, minimum
future rental payments under noncancelable leases covering the Company's
locations and offices totaled $17.1 million. The Company owns a 23 acre parcel
of land in Town & Country, Missouri on which it is constructing its new
corporate headquarters building. 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 November 30, 1996, the Company had approximately 776 full-time
employees. None of the Company's employees is 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.
From time to time the Company or a subsidiary of the Company is named as a
defendant in routine lawsuits incidental to its business. Based on the
information currently available, the Company believes that none of such current
proceedings, individually or in the aggregate, will have a material adverse
effect on the Company.
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THE COMPETITIVE LOCAL TELECOMMUNICATIONS 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 ILECs 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 ILECs
as the result of regulatory policy. ILECs 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 ILEC revenues approximated $102 billion
nationally, including Local Exchange Services. In general, the ILECs connect end
users within a LATA and also provide the local portion of most long distance
calls. The ILECs 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 ILECs 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 ILECs' 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 CLEC network
and an IXC long distance network.
LOGO
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LOGO
COMPETITIVE PROVIDERS OF LOCAL EXCHANGE SERVICES
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 ILECs 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 ILECs. 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 ILECs.
Initially, 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
ILECs (those having in excess of $100 million in gross annual revenues) to
provide interconnection in the ILECs' central offices to any competitive access
provider seeking such interconnection for the provision of interstate special
access services. The FCC also ordered the ILECs to file interconnection tariffs
by February 1993; these tariffs became effective in June 1993. This decision
granted CLECs the right to interconnect their private networks to the networks
of the ILECs, thereby enabling the CLECs 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 ILEC central office at one end and carries traffic to an IXC POP that has been
switched by the ILEC at the central office. This represents a $4.3 billion
portion of the local exchange market. The FCC ordered the larger ILECs to file
new tariffs reflecting interconnection by CLECs 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
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in September 1992, in which the FCC ordered the larger ILECs to allow CLECs
interconnection with ILECs for special access. The FCC also reaffirmed its
"Fresh Look" policy which allows certain customers who have entered into
long-term contracts with ILECs 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 the competitive provider
with minimal transfer costs.
The FCC also granted ILECs 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 CLECs 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 mandate
local and long distance telecommunications services competition, was enacted
into law on February 8, 1996 (see "Regulatory Overview"). The FCC has issued and
will issue further orders under the Telecommunications Act of 1996, many of
which, if not all, will likely be appealed by one or more affected parties to
the U.S. Court of Appeals and U.S. Supreme Court. In addition, the
Telecommunications Act of 1996 may be amended in 1997 or subsequent years.
Therefore, the Company is unable to determine the final form and impact of
existing and future legislation, and the regulatory and judicial actions under
such legislation.
In addition to the federal initiatives and rulings, most states have now
taken regulatory and legislative action to open local telecommunications markets
to local exchange competition and co-carrier status. The Company is deploying
switches on its networks as rapidly as possible and plans to have switches
serving all of its operating networks by the end of the second quarter 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 $102 billion total U.S. market may be
open to competition as CLECs deploy switches capable of providing the full array
of local exchange services and as state public utility commissions ("PUCs")
authorize CLECs to provide full local telecommunications services.
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The following chart illustrates the potential CLEC revenue opportunities,
based on the total 1995 local exchange revenues, both before and after a CLEC
deploys a switch in its local network.
CLEC POTENTIAL REVENUE OPPORTUNITIES*
<TABLE>
<CAPTION>
TOTAL 1995 U.S. LOCAL
EXCHANGE MARKET
($ BILLIONS)
---------------------
<S> <C> <C>
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
Switched Services
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
======
</TABLE>
- ---------------
* Source: Paradigm Resources, Inc. Includes data for Tier 1, Tier 2, Tier 3 and
all other markets.
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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. Most state regulatory authorities have followed the
FCC's lead by requiring co-carrier status for CLECs and ILEC open network
scenarios. In addition, the Company believes that the recently enacted
Telecommunications Act of 1996 and regulatory and court orders at the federal
level may further accelerate the open competition process.
ILECS
In each city served by its networks, the Company faces, and expects to
continue to face, significant competition from the ILECs, 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, ISPs, wireless carriers 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 ILECs 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 ILECs have
long-standing relationships with their customers and provide those customers
with various transmission and switching services that the Company, in some
cases, is not currently allowed by regulators to offer. The Company has sought,
and will continue to seek, to achieve parity with the ILECs in order to become
able to provide a full range of local telecommunications services. The CLEC
industry continues to challenge, before federal and state regulators, many
advantages which exist because of the ILECs' historical status, but there can be
no assurance that the 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, special access and local exchange
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 ILEC 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 ILEC competitors. The Company also
believes it will be able to successfully compete with the ILECs in the cities
served by its networks because the Company believes the ILECs 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 ILECs generally are subject to greater pricing and regulatory
constraints than CLECs, ILECs are achieving increased pricing flexibility for
their services as a result of, among other things, the Interconnection
Decisions. The Telecommunications Act of 1996 also provides further regulatory
flexibility for ILECs to allow them to respond to competition. If the ILECs
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 rates which the Company charges, which pressure could adversely affect
the Company's profitability. If regulatory decisions permit the ILECs to charge
CLECs substantial fees for interconnection to the ILECs' networks or afford
ILECs other
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regulatory relief, such decisions could also have a material adverse effect on
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 ILEC networks and the
continuing shift by IXCs to purchasing their access services from CLECs instead
of ILECs.
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 ILECs, 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 ILECs
will be authorized to provide long distance services under the provisions of The
Telecommunications Act of 1996. When ILECs are permitted to provide such
services, they will ultimately be in a position to offer single source service.
The entry of ILECs 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 CLECs to
gain access to their customers.
CLECS AND OTHER COMPETITORS
The Company also faces, and expects to continue to face, competition from
other 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 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 ILECs and other CLECs, potential competitors capable of
offering private line, special access and local exchange 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.
A continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors to the
Company. MCI announced in January 1994 that its MCImetro unit would invest more
than $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 recently
announced acquisition of MCI by British Telecommunications could increase the
resources available to MCI for the above purposes. The Company believes that
this affirms the opportunity in the 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 MCImetro in most of its markets,
and it may provide complementary markets to certain MCImetro markets. See
"Business of the Company-Strategic Relationships" for information concerning the
existing and proposed contractual relationships between the Company and
MCImetro. 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 CLECs or cable operators, and WorldCom and MFS Communications
have recently announced a merger which will enable WorldCom to offer a "one-stop
shopping" combination of long distance and local exchange services.
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 CLECs, such as
Teleport and U.S. West/Time Warner, historically have
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<PAGE> 66
possessed certain advantages over other CLECs 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 ILECs
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 ILECs and electric companies, to afford 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 ILECs 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 CLEC access services to transport their calls among their radio
transmitter/receiver sites through networks that avoid the ILECs 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.
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.
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<PAGE> 67
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 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 TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996, which is comprehensive federal
telecommunications legislation affecting all aspects of the telecommunications
industry. The Telecommunications Act of 1996 establishes a national policy that
promotes local exchange competition. At the heart of the Telecommunications Act
of 1996 is the requirement that local and state barriers to entry into the local
exchange market be removed. The Telecommunications Act of 1996 establishes
uniform standards under which the FCC and state commissions are to implement
local competition and co-carrier arrangements in the local exchange market. The
Telecommunications Act of 1996 also imposes significant obligations on the RBOCs
and other ILECs, including the obligation to interconnect their networks with
the networks of competitors. Each ILEC would be required not only to open its
network but also to unbundle their network elements and services in order that
competitors may purchase only those elements and services that they require. The
pricing of these unbundled network elements and services, which is uncertain and
will depend, among other things, upon regulatory and judicial developments, will
determine whether it is economically attractive for CLECs, IXCs and others to
use these elements and services. ILECs will be required to make available for
resale to new entrants all services they offer end user customers on a retail
basis. The Telecommunications Act of 1996 also imposes requirements on ILECs to
provide reciprocal call termination and telephone number portability.
The Telecommunications Act of 1996 also provides, among other things, that
the RBOCs and other ILECs satisfy a competitive checklist, providing the Company
and other competitors the services and facilities necessary to offer local
switched services. Under the Telecommunications Act of 1996, the FCC is directed
to interpret and clarify these terms. The FCC has engaged in rulemaking
proceedings to establish these arrangements, which will ultimately be
implemented by the state telecommunications or regulatory commissions (see
"State Regulation" below). The following table summarizes the key factors of the
legislatively mandated competitive checklist, often referred to as "co-carrier
status," being pursued by the Company with the FCC and with state regulators and
the anticipated effect of these factors on the Company's ability to provide
fully competitive services on an economically efficient and technically feasible
basis.
<TABLE>
<CAPTION>
CHECKLIST ITEM DEFINITION ANTICIPATED EFFECT
- ----------------------------- ------------------------------ ------------------------------
<S> <C> <C>
Interconnection.............. Efficient network Allows CLECs to service
interconnection to transfer customers not directly
calls back and forth between connected to their networks
ILECs and competitive networks
(including 911, 0+, directory
assistance, etc.)
</TABLE>
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<PAGE> 68
<TABLE>
<CAPTION>
CHECKLIST ITEM DEFINITION ANTICIPATED EFFECT
- ----------------------------- ------------------------------ ------------------------------
<S> <C> <C>
Local Loop Unbundling........ Allows competitors to Reduces the capital and
selectively gain access at service costs of CLECs to
cost-based rates to ILEC wires serve customers not directly
from central offices to connected to their networks
customers' premises
Reciprocal Compensation...... Mandates reciprocal Improves CLEC margins for
compensation for local traffic local service
exchange between ILECs and
competitors
Number Portability........... Allows customers to change Allows customers to switch to
local carriers without CLEC provided local service
changing numbers. True without changing phone numbers
portability allows incoming
calls to be routed directly to
a competitor. Interim
portability allows incoming
calls to be routed through the
ILEC to a competitor at the
economic equivalent of true
portability
Access to Phone Numbers...... Mandates assignment of new Allows CLECs to provide
telephone numbers to CLEC telephone numbers to new
customers customers on the same basis as
the ILEC
</TABLE>
The RBOCs' incentive to comply with the opening under the
Telecommunications Act of 1996 of the local exchange market to competition
derives from the Act's provisions allowing the removal of the current ban on
RBOC provision of interLATA toll service and equipment manufacturing. This ban
will only be removed after the RBOC demonstrates to the FCC, in consultation
with the Department of Justice and the relevant state commissions, that the RBOC
has met the requirements of the competitive checklist, which details the basic
co-carrier requirements, and the FCC concludes that RBOC entry into long
distance is in the public interest. The RBOC must also generally show that it
has entered into an approved interconnection agreement with at least one
unaffiliated, facilities-based competitor in some portion of a state before
offering long distance service in that jurisdiction. In October 1996, Ameritech
filed information with state regulators on the checklist compliance necessary
for it to seek authority to provide inter-LATA long distance service in its
service areas, including Michigan and Ohio, under the Telecommunications Act of
1996.
While state-by-state regulatory activity has to date brought co-carrier
arrangements or initiatives to various degrees of completion in most states, the
Telecommunications Act of 1996 is intended to accelerate the process and create
a competitive environment in all markets, eliminating state and local statutory
and regulatory barriers to entry. This preemption of state laws barring local
competition and the relaxation of regulatory restraints should enhance the
Company's ability to expand its service offerings nationwide.
The Company, as a facilities-based, multi-market competitive provider
already active in emerging co-carrier environments, stands to benefit from the
Telecommunications Act of 1996. In addition to providing the Company with a
national framework to achieve co-carrier status in local exchange markets, the
Telecommunications Act of 1996 permits CLECs with less than 5% of nationwide
prescribed access lines to offer single source combined packages of local and
long distance services. AT&T, MCI and Sprint may not bundle in a RBOC's
territory their local services resold from a RBOC and long distance service
until the RBOC is authorized to enter the inter-LATA long distance market or for
three years, whichever event occurs earlier.
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<PAGE> 69
The Telecommunications Act of 1996, by removing barriers to entry into the
local exchange market and at the same time enabling multiple carriers to compete
with the Company in the provision of telecommunications services, ultimately
allowing the RBOCs and large IXCs to offer their own packages of single source
local/long distance services, substantially increases the competition the
Company will face.
The Telecommunications Act of 1996 also creates a new Federal-State Joint
Board for the purpose of making recommendations to the FCC regarding the
implementation of a largely revised universal service program. All
telecommunications carriers, including the Company, that provide interexchange
services are required to contribute, on an equitable and nondiscriminatory
basis, to the preservation and advancement of universal service pursuant to a
specific and predictable universal service mechanism to be established by the
FCC. The Company is unable to predict the final formulas for universal service
contributions or its own level of contribution.
The Telecommunications Act of 1996 in some sections is self-executing, but
in most cases the FCC must issue regulations that identify specific requirements
before the Company and its competitors can proceed to implement the changes that
the Telecommunications Act of 1996 prescribes. The FCC already has commenced
several of these rulemaking proceedings. In addition, the Telecommunications Act
of 1996 retains for individual state utility commissions authority to impose
their own regulation of local exchange services so long as such regulation is
not inconsistent with the requirements of the Telecommunications Act of 1996.
The Company is unable to predict the final form of such regulation and its
potential impact on the market.
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, ILECs in
most markets are regulated by the FCC as dominant carriers.
As a result of rulings announced in September 1992 and August 1993 (the
"Interconnection Decisions") by the FCC, the Company is able to offer interstate
special access and switched access transport services to virtually every
business and government end user in the metropolitan areas which the Company
elects without being directly connected to such customers. The Interconnection
Decisions enabled CLECs to compete for transport of switched long distance calls
between ILEC central offices and long distance carrier POPs. At the same time
the ILECs were granted greater pricing flexibility for those services. Portions
of the Interconnection Decisions are likely to be further reviewed and addressed
by the FCC as it construes the federal legislation.
In March 1995, a major CLEC introduced an initiative before the FCC calling
for the nationwide unbundling of the "local loops" controlled by the ILECs in
order to make those facilities available on a cost-based basis to all eligible
local service providers, including the Company, following initiation of local
competition. The local loop is the part of the ILEC networks that physically
connects the customer's premises to the central office and is used to receive
and originate local and long distance calls. The Company has simultaneously
pursued similar initiatives before individual state regulatory commissions and
has obtained orders or entered into agreements with ILECs to obtain unbundled
loops in a number of states. The FCC has addressed local loop unbundling and
related unbundling issues in connection with its interpretation of the
Telecommunications Act of 1996.
In July 1995, the FCC took two actions related to the assignment of
telephone numbers, first mandating that over the course of the one year
responsibility for administering and assigning local telephone numbers be
transferred from the RBOCs and a few other ILECs to a neutral entity, and
second, proposing a regulatory structure under which a wide range of number
portability issues would be resolved. The FCC is expected to address those and
other number portability issues in connection with its ongoing interpretation of
the Telecommunications Act of 1996. On July 2, 1996 the FCC issued an order
regarding interim and permanent number portability indicating that rates
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<PAGE> 70
charged by ILECs to CLECs for interim portability should be minimal and that
permanent number portability should be available in the top 100 U.S. markets by
the end of 1997. In September 1996, the FCC designated the members of the North
American Numbering Council, which will advise the FCC on numbering issues. On
November 18, 1996, one RBOC filed a complaint in the U.S. Court of Claims
requesting compensation for costs of interim portability that it claims were not
allowed by the FCC in violation of its rights under the Fifth Amendment of the
U.S. Constitution.
In September 1995, the FCC issued a Notice of Proposed Rulemaking which
proposes rules that, among other things, would increase ILEC pricing flexibility
and deregulation as competition increases.
During 1996 the FCC has taken several actions with respect to competitive
local telecommunications pursuant to the Telecommunications Act of 1996.
On August 1, 1996, the FCC issued an order amending its pole attachment
rules to be pursuant to the Telecommunications Act of 1996 by requiring
utilities, including ILECs and most electric companies, to make poles, conduit
and rights-of-way available to telecommunications carriers, including CLECs, at
reasonable cost and on a nondiscriminatory basis. Several utilities have
appealed the FCC order to the U.S. Court of Appeals, which has not yet issued a
decision.
On August 8, 1996, the FCC issued an order containing rules providing
guidance to the ILECs, CLECs, IXCs and state PUCs regarding several provisions
of the Telecommunications Act of 1996, to be applicable in the event that
parties to interconnection agreements cannot agree on certain terms and the
state PUCs issue orders containing arbitrated results.
The rules include, among other things, FCC guidance on: (1) discounts for
end-to-end resale of ILEC local exchange services (which the FCC has suggested
should be in a range of 17% to 25%); (2) availability of unbundled local loops
and other unbundled ILEC network elements; (3) the use of "total element long
run incremental cost" (TELRIC) in the pricing of these unbundled network
elements; (4) average default proxy prices for unbundled local loops in each
state; (5) mutual compensation rates for termination of ILEC/CLEC local calls;
(6) an access charge transition plan that: (a) leaves access charges unchanged
with respect to situations involving resale of ILEC local exchange services; (b)
leaves all access charges in place with respect to situations involving use of
ILEC unbundled switching and other network elements to provide local exchange
services, except for 25% of the "transport interconnection charge" (TIC); and
(c) permits avoidance of access charges only when the ILEC switch is not
utilized; and (7) the ability of CLECs and other interconnectors to opt into
portions of interconnection agreements negotiated by ILECs with other parties on
a most favored nation (or "pick and choose") basis.
The FCC is expected to issue in December 1996 a Notice of Proposed Rule
Making regarding future changes to access charges. In addition, the
Federal-State Joint Board on Universal Service consisting of FCC and state
commissioners made its recommendations on the implementation of the universal
service provisions of the Telecommunications Act of 1996 on November 7, 1996 and
on November 18, 1996 the FCC issued a public notice requesting comments on these
recommendations . Under the Telecommunications Act of 1996, the FCC must act on
these recommendations by May, 1997 and has stated that it intends to announce
new access charge rules within the same time frame.
The Company envisions that the FCC will initiate many additional
proceedings, as a result of the enactment of federal legislation, defining and
construing the terms and conditions of the various components necessary for
local competition. Many, if not all, of the FCC orders under the federal
legislation will likely be appealed by one or more affected parties to the U.S.
Court of Appeals and U.S. Supreme Court. In addition, the Telecommunications Act
of 1996 may be amended in 1997 or subsequent years. Accordingly, the Company is
unable to determine the final form and impact of existing and future
legislation, and the regulatory and judicial actions under such legislation.
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<PAGE> 71
COURT APPEALS
Various parties, including ILECs and state PUCs, filed appeals from the
FCC's August 8, 1996 order to various U.S. Courts of Appeal, and several parties
petitioned the FCC and the courts to stay the effectiveness of the FCC rules
included in the FCC's order, pending a ruling on the appeals. Many of the
appeals were transferred to the Eighth Circuit U.S. Court of Appeals. On
November 18, 1996, several members of Congress filed an amicus curiae brief in
support of the appeals of the FCC order.
The FCC has not stayed its own order. However, on October 15, 1996, the
Eighth Circuit U.S. Court of Appeals issued an order containing a partial stay,
pending the court's ruling on the various appeals. The order imposed the partial
stay on: (1) the use of TELRIC in the pricing of unbundled ILEC network elements
and the resulting default proxy prices; and (2) the "pick and choose"
provisions. The remainder of the FCC's August 8, 1996 order remains in effect.
On November 12, 1996, the U.S. Supreme Court declined to overturn the stay. The
Eighth Circuit U.S. Court of Appeals is scheduled to hear arguments on the
various appeals in January 1997.
The partial stay will not have any material adverse effect on the Company
because the Company already has in effect interconnection agreements with the
ILECs, or expects to have such agreements in effect after state PUC
arbitrations, in substantially all of its markets by year-end 1996, under the
provisions of The Telecommunications Act of 1996, which have not been stayed,
and which specifically require ILECs to enter into interconnection agreements
and require state PUCs to arbitrate such agreements within certain time frames.
The stay of the FCC rules does not delay the implementation of the Act by the
parties and by the state PUCs, but rather suspends the guidance that the FCC
sought to provide the parties and the state PUCs in the portions of the rules
that were stayed.
STATE REGULATION
The Company's offering of switched local exchange services may be
classified as intrastate and therefore subject to state regulation. The Company
is certified as a CLEC in 26 of its 30 networks. 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 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 CLECs to operate on the
same basis and with the same rights as the ILECs, sometimes referred to as
"co-carrier status." As of September 30, 1996, most states have taken regulatory
and legislative action to open local communications markets to local exchange
competition and co-carrier status. 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, CLECs would expect to realize lower
costs for providing intrastate switched local exchange services in that state.
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<PAGE> 72
The Company has established interconnection agreements with ILECs for 26 of
its 30 networks. The Telecommunications Act of 1996 requires ILECs to enter into
interconnection agreements with CLECs and other competitors and requires state
PUCs to arbitrate such agreements within certain time frames. US West in New
Mexico is the only RBOC in the Company's operating markets with which the
Company does not have an interconnection agreement, and the Company is in
binding arbitration with US West in New Mexico which is scheduled to be
completed by early 1997. 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 were 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.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- -----------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS
Robert A. Brooks(1)................ 64 Chairman; Director
James C. Allen(1,4)................ 50 Vice Chairman & Chief Executive Officer;
Director
D. Craig Young(4).................. 43 President & Chief Operating Officer; Director
John C. Shapleigh.................. 47 Executive Vice President-Regulatory and
Corporate Development
David L. Solomon................... 37 Executive Vice President & Chief Financial
Officer
John K. Brooks..................... 35 Senior Vice President and President, JB
Telecom, Inc.
Gregory J. Christoffel............. 48 Senior Vice President & General Counsel
Marilou Crum....................... 49 Senior Vice President, Marketing and Carrier
Sales
Jim A. Moffit...................... 51 Senior Vice President and Managing Director-GLA
International
Waymon R. Tipton................... 39 Senior Vice President-Corporate Communications
and Strategic Development
Gerard J. Howe..................... 41 Vice President-Finance and Senior Vice
President & Chief Financial Officer-JB Telecom,
Inc.
NON-MANAGEMENT DIRECTORS
Robert F. Benbow(3)................ 61 Director
William J. Bresnan(1,3,5).......... 63 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
Carol deB. Whitaker................ 42 Director
</TABLE>
- -------------------------
(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 an 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,
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<PAGE> 74
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 the immediately past
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.
DAVID L. SOLOMON, EXECUTIVE 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.
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
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<PAGE> 75
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.
MARILOU CRUM, SENIOR VICE PRESIDENT, MARKETING AND CARRIER/RESELLER
SALES. Ms. Crum has over 20 years of management experience within the
telecommunications industry in sales, marketing and product management. Ms. Crum
is a former Vice President of National Accounts of WilTel and was responsible
for establishing and directing their National Accounts program on a nationwide
basis for both network services and customer premises equipment. Prior to
joining WilTel in 1987, Ms. Crum managed the Central Region National Accounts
organization for AT&T. In addition, Ms. Crum was responsible for Product
Marketing, Technical Support and Strategic Account Marketing for this same
region at AT&T. Prior to joining AT&T in 1983, Ms. Crum also held a number of
management positions beginning in 1976 with Southwestern Bell in the areas of
sales, technical support, interstate network services, and product marketing.
Ms. Crum has a B.S. degree from the University of Missouri.
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.
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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.
WAYMON R. TIPTON, CFA, SENIOR VICE PRESIDENT, CORPORATE COMMUNICATIONS AND
STRATEGIC DEVELOPMENT. Mr. Tipton has over fifteen years experience in
investment banking, investment consulting, and institutional equity and fixed
income securities sales. He was previously Senior Vice President, founder, and
manager of the Investment Banking Division of a major regional bank specializing
in acquisition and project financing. Mr. Tipton was previously Senior Managed
Accounts Consultant and partner with the leading consulting group in
PaineWebber. Prior thereto, he was regional institutional securities salesman
with Shearson-Lehman Bros. for intermediate sized money managers, insurance
companies, trust departments, and high net worth individuals. Mr. Tipton is a
holder of the Chartered Financial Analyst designation, and received an MBA from
the Owen Graduate School of Management of Vanderbilt University and a B.A. from
Vanderbilt University.
GERARD J. HOWE, VICE PRESIDENT AND SENIOR VICE PRESIDENT & CHIEF FINANCIAL
OFFICER - JB TELECOM, INC. Mr. Howe has over 18 years experience in the
telecommunications industry in the areas of financial, regulatory, information
processing, and human resource management. Mr. Howe previously served as Vice
President-Chief Financial Officer of SBC CableComms, U.K., a joint venture
between SBC Communications and Cox Communications, from 1993 to 1995. SBC
CableComms provided cable television and competitive local telephone services in
seven franchise areas encompassing 1.4 million homes throughout England. In that
position, Mr. Howe was responsible for financial reporting, planning and
budgeting, treasury operations, corporate development, and tax planning and
compliance, as well as for regulatory and legislative affairs. Mr. Howe served
as Vice President-Chief Financial Officer from 1990 to 1993 and as Senior Vice
President-Customer Services from 1995 to 1996 for Southwestern Bell Yellow
Pages. In addition to the aforementioned positions, Mr. Howe also held various
positions in the treasury, regulatory, audit and information systems
organizations of SBC and Southwestern Bell Telephone Company. He joined the
Company on June 1, 1996. Mr. Howe has a B.S. from Southern Illinois University
and an MBA from St. Louis 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.
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<PAGE> 77
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.
CAROL DEB. WHITAKER, DIRECTOR. Ms. Whitaker has almost twenty years of
investment banking and operating experience with both corporations and Wall
Street firms. Ms. Whitaker is Chairman of Whitko & Company, a Denver based
investment banking and management consulting firm. Previous positions included
Chief Executive Officer of W.W. Comm, Inc., a start-up company exploring
videotelecommunications opportunities; acting Chief Financial Officer for
OneComm Corp., an emerging wireless communications company; and Vice President
of Development for Rifkin & Associates, Inc., a privately owned cable television
owner and operator, with responsibility for acquisition financing. Ms. Whitaker
has a B.A. in Economics from Colorado College and an M.B.A. from the University
of Chicago.
-------------------------
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 a Board
Governance Committee. The Compensation Committee is comprised of Messrs.
Tankersley (Chairman) and Nelson and Ms. Whitaker. Directors are not compensated
for their services as directors but are reimbursed for expenses incurred in
connection with Board and committee meetings attended.
The By-laws of the Company provide for a Board of Directors consisting of
ten directors. At the present time there is one vacancy. Each of the directors,
other than Messrs. Bresnan, Vander Pol, Young and Tankersley and Ms. Whitaker,
has served since the formation of the Company in
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November 1993. Messrs. Young and Tankersley have served as directors since April
1995 and December 1995, respectively. Messrs. Bresnan and Vander Pol have served
as directors since May 22, 1996, and Ms. Whitaker was elected on October 15,
1996. The current directors have been elected to serve until the expiration of
the term of the class to which he or she has been elected and until their
respective successors are elected and qualified or until their earlier death,
resignation or removal. The Class I directors, whose term expires in 1997, are
Messrs. Benbow and VanderPol and Ms. Whitaker; the Class II directors, whose
term expires in 1998, are Messrs. Allen, Bresnan and Young; and the Class III
directors, whose term expires in 1999, are Messrs. Brooks, Nelson and
Tankersley.
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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------- -------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(2) ($)(3) OPTIONS(#)(4) ($)(5)
- ---------------------------- ---- -------- ------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Brooks(1)......... 1995 $250,000 $50,000 -- 60,000 --
Chairman of the Board
James C. Allen(1)........... 1995 $225,000 $50,000 -- 60,000 $4,500
Vice Chairman & Chief
Executive Officer
D. Craig Young(6)........... 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
Executive Vice President &
Chief Financial Officer
</TABLE>
- ---------------
(1) 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. Effective January 2,
1996, the Company agreed to make the services of Mr. Brooks available to
Brooks Telecommunications International Inc. on a part-time, as needed
basis. See "Certain Relationships and Related Transactions."
(2) 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.
(3) The value of incidental personal perquisites furnished by the Company to the
named executive officers did not exceed the lesser of $50,000 or 10% of the
total of annual salary and bonus reported for such named executive officers.
(4) Represents shares of Common Stock subject to compensatory stock options
granted during 1995.
(5) Represents contributions made by the Company on behalf of the executive
officer under the Company's 401(k) Plan.
(6) Hired on April 5, 1995.
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
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<PAGE> 79
Common Stock of the Company. As of December 22, 1996, options for an aggregate
of 1,066,850 shares at $4.00 per share, 452,336 shares at $6.60 per share,
320,320 shares at $11.35 per share, 700,000 shares at $12.50 per share, 130,000
shares at $27.00 per share, 80,000 shares at $29.50 per share, 184,000 shares at
$32.00 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 are 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 $12.50. All options granted under the 1993 Stock
Option Plan become fully vested upon a change-in-control of the Company, as
defined in such options. The following table presents certain information
concerning stock options granted to the CEO and each of the other named
executive officers during 1995. The exercise price for all of the grants of
stock options was the fair market value of the Common Stock on the date of grant
as determined by the Compensation Committee of the Board of Directors.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
TOTAL PRICE APPRECIATION
NUMBER OF OPTIONS FOR OPTION TERM(1)
SECURITIES UNDERLYING GRANTED TO EXERCISE OR ---------------------
OPTIONS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION 5% 10%
NAME (#) FISCAL YEAR ($/SH) DATE(2) ($) ($)
- ---------------------- --------------------- ------------ ----------- ---------- -------- ----------
<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
</TABLE>
- ---------------
(1) 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.
(2) The options granted to Mr. Brooks and Mr. Allen are fully vested. 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.
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.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1995(1) AT DECEMBER 31, 1995(2)
------------------------- ----------------------------
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
</TABLE>
- ---------------
(1) Includes substituted options issued upon the effectiveness of the merger
with BTC on January 2, 1996.
(2) Reflects the difference between the exercise price and $12.50 per share.
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<PAGE> 80
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.
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<PAGE> 81
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of December 22, 1996 by
(i) each person or entity who is known by the Company to beneficially own 5% or
more of the Company's Common Stock, (ii) each of the executive officers named in
the Summary Compensation Table, (iii) each of the Company's directors and (iv)
all of the Company's directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES COMMON STOCK
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING(1)
- ------------------------------------------------------------- ------------------ --------------
<S> <C> <C>
5% Stockholders and Affiliated Directors
The Centennial Funds......................................... 2,070,871(2) 6.65%
G. Jackson Tankersley, Jr. (Director)
1999 Broadway, Suite 2100
Denver, CO 80202
Ronald H. Vander Pol (Director).............................. 2,056,000(3) 6.61%
7228 Kenowa Ave., S.W.
Byron Center, MI 49315
Media Communications Partners II Limited Partnership......... 2,009,208(4) 6.46%
75 State Street
Boston, MA 02109
Putnam Investment Management, Inc. .......................... 1,814,950(5) 5.84%
One Post Office Square
Boston, MA 02109
Other Directors and Named Executives
Jonathan M. Nelson (Director)................................ 1,426,638(6) 4.59%
Robert F. Benbow (Director).................................. 1,063,638(7) 3.42%
Robert A. Brooks (Named Executive and Director).............. 977,505(8) 3.12%
James C. Allen (Named Executive and Director)................ 356,903(9) 1.14%
John C. Shapleigh (Named Executive).......................... 280,595(10) *
David L. Solomon (Named Executive)........................... 108,860(11) *
D. Craig Young (Named Executive and Director)................ 78,356(12) *
William J. Bresnan (Director)................................ 51,634(13) *
Carol deB. Whitaker (Director)............................... 20,000(14) *
Directors and executive officers as a group
(17 persons)............................................... 6,855,453(15) 21.35%
</TABLE>
- ---------------
* Represents beneficial ownership of less than one percent.
(1) Percentages are determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended.
(2) Represents (i) 1,194,520 shares beneficially owned by Centennial Fund IV,
L.P. ("Centennial IV"), including 1,177,860 shares of Common Stock and
warrants to purchase 16,660 shares of Common Stock, (ii) 843,670 shares
beneficially owned by Centennial Fund III, L.P. ("Centennial III"),
including 792,250 shares of Common Stock and warrants to purchase 51,420
shares of Common Stock, (iii) 21,510 shares beneficially owned by
Centennial Holdings IV, L.P. ("Holdings IV"), (iv) 5,400 shares
beneficially owned by Centennial Holdings, Inc. ("CHI"), (v) 238 shares
held by The Tankersley Family Limited Partnership ("Tankersley LP") and
(vi) 1,833 shares of Common Stock and 3,700 shares of Common Stock subject
to an option which is exercisable within 60 days owned by G. Jackson
Tankersley, Jr.
Mr. Tankersley is (i) an individual General Partner of each of Centennial
Holdings III, L.P. ("Holdings III") and Holdings IV which serves as the
sole General Partner of Centennial III
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<PAGE> 82
and Centennial IV, respectively, (ii) an executive officer and director of
CHI and (iii) an individual General Partner of Tankersley LP. 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). Holdings III does not own 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, (ii) directly or indirectly owned by Centennial IV or
Holdings IV, (iii) directly or indirectly owned by CHI and (iv) directly or
indirectly owned by Tankersley LP. Each of Centennial III and Holdings III
disclaims beneficial ownership of all shares directly beneficially owned by
Centennial IV; each of Centennial IV and Holdings IV disclaims beneficial
ownership of all shares directly beneficially owned by Centennial III; and
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. In addition, the officers
and directors of CHI disclaim beneficial ownership of shares directly
beneficially owned by CHI, and the General Partners of Tankersley LP
disclaim beneficial ownership of shares directly beneficially owned by
Tankersley LP.
(3) Includes (i) 1,738,443 shares of Common Stock held by Ronald H. Vander Pol
and (ii) 317,557 shares of Common Stock held by Rushing Wind Ltd., Mr.
Vander Pol's private foundation. Mr. Vander Pol has the option to require
the Company to repurchase up to 2,016,000 of such shares at a price of
$12.50 per share on or before February 1, 1998.
(4) Represents 2,009,208 shares of Common Stock. Media/Communications Partners
II Limited Partnership is an investment fund managed by M/C II Limited
Partnership, its General Partner. Other entities managed by M/C II Limited
Partnership beneficially own 73,896 shares of Common Stock, including (i)
55,736 shares of Common Stock held by Media/Communications Investors
Limited Partnership and (ii) 18,160 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.
(5) Based on information in its filing on Form 13F.
(6) 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. Mr. Nelson disclaims
beneficial ownership of shares beneficially owned by Providence Media
Partners L.P.
(7) 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
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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 V 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 does not directly own any securities of the
Company.
(8) Includes (i) 652,152 shares of Common Stock, warrants to purchase 107,200
shares of Common Stock and 190,353 shares of Common Stock subject to
options which are exercisable within 60 days held by Robert A. Brooks and
(ii) 27,800 shares of Common Stock held by The Brooks Foundation, of which
Mr. Brooks is a trustee.
(9) Represents 147,400 shares of Common Stock, warrants to purchase 260 shares
of Common Stock and 208,873 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.
(10) Includes (i) 82,597 shares of Common Stock and 155,926 shares of Common
Stock subject to options which are exercisable within 60 days held by John
C. Shapleigh, (ii) 24,802 shares of Common Stock and warrants to purchase
520 shares of Common Stock held by John C. Shapleigh's Individual
Retirement Account, (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 owned by Anne T. Shapleigh, wife of Mr.
Shapleigh. Mr. Shapleigh disclaims beneficial ownership of the shares owned
by Mrs. Shapleigh.
(11) Represents 10,320 shares of Common Stock, warrants to purchase 20 shares of
Common Stock and 98,520 shares of Common Stock subject to options which are
exercisable within 60 days.
(12) Includes (i) 2,420 shares of Common Stock and 73,333 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, (iii) 1,220 shares of Common Stock held by The Joan L.
Young Revocable Trust, of which Joan L. 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.
(13) Represents 47,934 shares of Common Stock and an option to purchase 3,700
shares of Common Stock which is exercisable within 60 days.
(14) Represents an option to purchase 20,000 shares of Common Stock which is
exercisable within 60 days.
(15) Excludes 2,065,338 shares beneficially owned directly by Centennial IV,
Centennial III, Holdings IV, CHI and Tankersley LP, as set forth in
footnote (2), above.
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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
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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 had 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 to provide 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. The agreement was terminated effective August 31, 1996.
Centennial IV and CHI are investors in World-Net and have invested a total
of $13.3 million for a 20.1% fully diluted interest in World-Net. G. Jackson
Tankersley, Jr. is an individual General Partner of the sole General Partner of
Centennial IV and an executive officer and director of CHI.
As a result of the City Signal Acquisition, Ronald H. Vander Pol received
2,240,000 shares of the Company's Common Stock. In connection with the Company's
IPO, 224,000 of such shares were sold. Mr. Vander Pol has the option to require
the Company to repurchase any or all of the remaining 2,016,000 shares at a
price of $12.50 per share on or before February 1, 1998.
In March 1995, the Company paid to Whitko & Company, an investment banking
and management consulting firm of which Carol deB. Whitaker is chairman, a fee
of $292,000 for consulting services provided to the Company in connection with
the acquisition of certain assets by the Company. No continuing consulting
relationship exists between Whitko & Company and the Company. The Company
believes that the terms and conditions of such services were no less favorable
to the Company than those that would have been available to the Company in
comparable, arm's-length relationships with unaffiliated persons.
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DESCRIPTION OF THE NOTES
The Private Notes were, and the Exchange Notes will be, issued under that
certain indenture (the "Indenture") dated as of November 7, 1996 between the
Company and The Bank of New York, as Trustee (the "Trustee"). The following
summary of certain provisions of the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of
the Indenture, including the definitions of certain terms therein and those
terms made a part of the Indenture by reference to the TIA as in effect on the
date of the Indenture. The Indenture is by its terms subject to and governed by
the TIA. Unless otherwise indicated, references under this caption to sections,
"sec." or articles are references to the Indenture. A copy of the form of
Indenture may be obtained from the Company or the Initial Purchasers. The
definitions of certain capitalized terms used in the following summary are set
forth below under "-- Certain Definitions".
GENERAL
The Notes are senior unsecured obligations of the Company and are and will
be issued in fully registered form only, without coupons, in denominations of
$1,000 and integral multiples thereof and will mature on November 1, 2006.
Initially, the Trustee will act as paying agent and registrar for the Notes. The
Notes may be presented for registration of transfer and exchange at the offices
of the registrar, which initially will be the Trustee's corporate trust office.
The Company may change any paying agent and registrar without notice to the
holders of the Notes. The Company will pay principal (and premium, if any) on
the Notes at the Trustee's corporate office in New York, New York. At the
Company's option, interest may be paid at the Trustee's corporate trust office
or by check mailed to the registered addresses of holders of the Notes. Any
notes that remain outstanding after the completion of the Exchange Offer,
together with the Exchange Notes issued in connection with the Exchange Offer,
will be treated as a single class of securities under the Indenture. (sec.sec.
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. (sec.sec. 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. (sec. 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. (sec. 305)
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 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 will have no obligation to
guarantee or otherwise pay amounts due under the Notes. Therefore, the Notes
will be effectively subordinated to all indebtedness and other liabilities and
commitments (including trade payables) of the Company's Subsidiaries (including
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<PAGE> 87
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) will be 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 September 30, 1996, on a pro forma basis after giving effect to the
Private Note Offering and the conversion of $50 million aggregate principal
amount of subsidiary secured indebtedness to parent company secured indebtedness
on November 12, 1996, (i) the total amount of outstanding liabilities of the
Company (parent only), including trade payables, would have been approximately
$546.8 million, of which $50 million would have been secured obligations, and
(ii) the total amount of outstanding liabilities of the Company's subsidiaries
including trade payables, would have been $14.1 million, of which $0.1 million
would have represented secured obligations. See "Description of Other Credit
Facilities" and "Pro Forma Combined Consolidated Financial Information."
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.
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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 November 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
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Redemption Prices (expressed as percentages of the principal amount) plus
accrued 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 November 1 of the years indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---------------------------------------------------------- ----------------
<S> <C>
2001...................................................... 105.938%
2002...................................................... 103.958%
2003...................................................... 101.979%
2004 and thereafter....................................... 100.000%
</TABLE>
- ---------------
(sec.sec. 203, 1101, 1105 and 1107)
The Notes are redeemable prior to November 1, 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 November 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 111.875% 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. (sec.
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 consolidated
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.
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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
accrued 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
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(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. (sec. 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
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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. (sec. 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
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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. (sec.
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; (b) 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 abandonment 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. (sec. 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 1.5 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
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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. (sec. 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. (sec. 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
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or before November 1, 2001) or 100% of their principal amount plus accrued 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 accrued 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. (sec. 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 respect 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 Subsidiary 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 complies 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 directors'
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 Disqualified Stock of such Subsidiary,
provided that the amounts of the redemption obligations of such Disqualified
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. (sec. 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. (sec. 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 November 1, 2001) or 101% of their principal amount plus accrued
interest to the date of purchase (if such Offer to Purchase is made thereafter).
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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. (sec. 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,
it will furnish to the holders of the Notes and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act. In addition,
prior to the effectiveness of the Exchange Offer Registration Statement, the
Company will file with the Trustee and furnish to the holders of the Notes the
quarterly and annual financial statements and related notes and an accompanying
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the format that would be required to be included in the Company's
periodic reports filed with the Commission if the Company were required to file
such reports with the Commission. The Company will furnish such information to
the Trustee and the holders of the Notes within 15 days after the date on which
the Company would have been required to file the same with the Commission.
Following the effectiveness of the Exchange Offer Registration Statement (or
earlier if the Company becomes obligated to file reports with the Commission),
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. (sec. 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
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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. (sec. 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. (sec. 101)
"Accreted Value" means, as of any date prior to November 1, 2001, an amount
per $1,000 principal amount at maturity of Notes that is equal to the sum of (a)
the offering price ($562.77 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 May 1 and November 1 at the rate of 11 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 November 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
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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 accounting
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 Strategic Equity Investment, Common Stock shall
include Capital Stock (other than Disqualified Stock) that is convertible into
or exchangeable 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 consolidated 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
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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 provisions 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 consolidated 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 duplication (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, 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 shall not be given effect to.
"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
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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
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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 and that neither
the accrual of interest nor the accretion of original issue discount shall be
deemed an Incurrence of 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).
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"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 proceeds
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 evidenced 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
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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.
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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 principles, 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 represented by Capital Lease Obligations, mortgage financings and
purchase money obligations)
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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 subordinate 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
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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.
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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, continued 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 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. (sec. 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. (sec. 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. (sec. 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. (sec. 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 November
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 November 1, 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. (sec. 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. (sec. 508)
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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. (sec. 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. (sec. 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,
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(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. (sec. 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. (sec. 1020) 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.
(sec. 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 or to secure
the Notes;
(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. (sec. 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. (sec.sec.
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. (sec.sec. 608, 613)
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DESCRIPTION OF OTHER CREDIT FACILITIES
AT&T CREDIT FACILITY
The AT&T Credit Facility currently provides the Company a secured line of
credit totalling $50.0 million which has been used 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.
Indebtedness under the AT&T Credit Facility is secured by the assets of certain
subsidiaries of the Company and is guaranteed by intermediate subsidiaries of
the Company. The facility is further secured by the stock of such subsidiaries
and such guarantors. The AT&T Credit Facility contains covenants substantially
the same as the covenants in the Notes and also contains covenants applicable to
such subsidiaries and such guarantors which place certain additional limitations
on the ability of such entities to incur indebtedness, create liens, engage in
new businesses, dispose of assets, issue additional capital stock and effect
mergers and consolidations.
BANK CREDIT FACILITY
The Bank Credit Facility provides the subsidiary operating the Company's
Tulsa, Oklahoma network 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 payment 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 September 30, 1996, there was $100,000 of
outstanding indebtedness under the Bank Credit Facility.
10 7/8% SENIOR DISCOUNT NOTES
On February 26, 1996, the Company completed the issuance and sale of $425.0
million aggregate principal amount of the 10 7/8% Senior Discount Notes for
which the Company received proceeds net of underwriting discounts of
approximately $241.0 million. The 10 7/8% Senior Discount Notes rank pari passu
with the Notes and contain covenants substantially the same as the covenants in
the Notes.
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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
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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 ($562.77 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 ($562.77 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
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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
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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 49,426 shares of Common
Stock of the Company, and one of such members owns 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.
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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 60661-2511. 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, Executive 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.
113
<PAGE> 116
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
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............................................................. F-3
(b) Pro Forma Combined Consolidated Statement of Operations for the nine months
ended September 30, 1996...................................................... F-4
(c) Notes to Pro Forma Combined Consolidated Financial Statements................. F-5
CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS OF BROOKS FIBER PROPERTIES, INC.
(a) Consolidated Balance Sheets at September 30, 1996 and December 31, 1995....... F-7
(b) Consolidated Statements of Operations for the three months and nine months
ended September 30, 1996 and 1995............................................. F-8
(c) Consolidated Statements of Changes in Shareholders' Equity for the nine months
ended September 30, 1996...................................................... F-9
(d) Consolidated Statements of Cash Flows for the nine months ended September 30,
1996 and 1995................................................................. F-10
(e) Notes to Unaudited Consolidated Financial Statements.......................... F-11
CONSOLIDATED AUDITED FINANCIAL STATEMENTS OF BROOKS FIBER PROPERTIES, INC.
(a) Independent Auditors' Report.................................................. F-15
(b) Consolidated Balance Sheets at December 31, 1995 and 1994..................... F-16
(c) Consolidated Statements of Operations for the years ended December 31, 1995
and 1994 and the period from inception to December 31, 1993................... F-17
(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.......................................................................... F-18
(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-19
(f) Notes to Consolidated Financial Statements.................................... F-20
CONSOLIDATED FINANCIAL STATEMENTS OF CITY SIGNAL, INC.
(a) Independent Auditors' Report.................................................. F-29
(b) Consolidated Balance Sheets at December 31, 1995 and 1994..................... F-30
(c) Consolidated Statements of Operations for the years ended December 31, 1995
and 1994...................................................................... F-31
(d) Consolidated Statements of Shareholder's Equity (Deficit) for the years ended
December 31, 1995 and 1994.................................................... F-32
(e) Consolidated Statements of Cash Flows for the years ended December 31, 1995
and 1994...................................................................... F-33
(f) Notes to Consolidated Financial Statements.................................... F-34
CONSOLIDATED FINANCIAL STATEMENTS OF BROOKS TELECOMMUNICATIONS CORPORATION
(a) Independent Auditors' Report.................................................. F-40
(b) Consolidated Balance Sheet at December 31, 1995............................... F-41
(c) Consolidated Statement of Operations for the year ended December 31, 1995..... F-42
(d) Consolidated Statement of Changes in Shareholders' Equity for the year ended
December 31, 1995............................................................. F-43
(e) Consolidated Statement of Cash Flows for the year ended December 31, 1995..... F-44
(f) Notes to Consolidated Financial Statements.................................... F-45
</TABLE>
F-1
<PAGE> 117
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). 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 nine months ended
September 30, 1996, that the City Signal Acquisition was consummated on January
1, 1996.
The unaudited pro forma combined consolidated financial information and
accompanying notes reflect the historical operations and balances of BTC and
City Signal, Inc. and the application of the purchase method of accounting.
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 and the City Signal Acquisition; or of the
financial position or results of operations of the combined company that would
have actually occurred had the merger with BTC and the City Signal Acquisition
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 September 30, 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 and nine
month periods ended September 30, 1996 and 1995.
F-2
<PAGE> 118
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<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)(1) -- 23,072,000
(1,478,000)(2)
Expenses:
Operating expenses.......... 7,177,000 7,123,000 2,543,000 (590,000)(2) 997,000 (9) 16,319,000
(931,000)(1)
Selling, general and
administrative............ 11,405,000 4,222,000 1,840,000 (328,000)(2) 107,000 (4) 15,352,000
(1,894,000)(1)
Depreciation and
amortization.............. 4,118,000 800,000 1,329,000 179,000 (3) 972,000 (5) 8,018,000
(11,000)(1) 631,000 (6)
------------ ---------- ---------- ---------- ---------- -----------
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)(7) 107,000
Interest income (expense),
net....................... (2,096,000) (260,000) (904,000) 107,000 (1) 904,000 (8) (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)(1) -- 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)(10)
===========
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-3
<PAGE> 119
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA BFP
ADJUSTMENTS PRO FORMA
------------- COMBINED
BFP CITY SIGNAL CONSOLIDATED
------------ ------------- ------------
<S> <C> <C> <C>
Revenues..................................... $ 28,147,000 $ 450,000(11) $ 28,597,000
Expenses:
Service costs.............................. 12,585,000 183,000(11) 12,768,000
Selling, general and administrative
expenses................................ 25,504,000 444,000(11) 25,948,000
Depreciation and amortization.............. 9,859,000 293,000(11) 10,152,000
------------ ---------- ------------
47,948,000 920,000 48,868,000
------------ ---------- ------------
Loss from operations.................... (19,801,000) (470,000) (20,271,000)
Other income (expense):
Interest income............................ 11,074,000 -- 11,074,000
Interest expense........................... (19,250,000) (22,000)(11) (19,272,000)
------------ ---------- ------------
Net loss before minority interests........... (27,977,000) (492,000) (28,469,000)
Minority interests in share of loss.......... 1,590,000 -- 1,590,000
------------ ---------- ------------
Net loss................................ $(26,387,000) $(492,000) $(26,879,000)
============ ========== ============
Pro forma loss per common and common
equivalent share........................... $ (1.10) $ (1.12)
============ ============
Pro forma weighted average number of shares
outstanding................................ 24,071,672 24,071,674
============ ============
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-4
<PAGE> 120
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 form 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 represent the depreciation, over an average period of approximately
12.5 years, of assets which aggregate $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 per share and stock options and warrants
granted with exercise prices below the initial public offering price of
$27.00 during the twelve-month period preceding
F-5
<PAGE> 121
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
the date of the initial filing of the Registration Statement relating to the
Company's May 1996 IPO 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 CSI revenues, expenses and interest expense for January 1996.
F-6
<PAGE> 122
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $203,034,000 $59,913,000
Marketable securities..................................... 126,634,000 --
Accounts receivable, net.................................. 10,349,000 2,003,000
Other current assets...................................... 6,639,000 1,183,000
------------ ------------
Total current assets................................... 346,656,000 63,099,000
------------ ------------
Networks and equipment, net................................. 210,874,000 50,042,000
------------ ------------
Investment in minority-owned venture........................ 5,000,000 --
------------ ------------
Other assets, net........................................... 74,820,000 33,469,000
------------ ------------
$637,350,000 $146,610,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 21,390,000 $ 5,186,000
------------ ------------
Total current liabilities.............................. $ 21,390,000 5,186,000
------------ ------------
Long-term debt.............................................. 314,440,000 43,977,000
------------ ------------
Minority interests.......................................... 10,761,000 3,992,000
------------ ------------
Common stock, subject to redemption, $.01 par value,
2,016,000 and 0 shares issued and outstanding............. 25,200,000 --
Shareholders' equity:
Preferred stock, 1,040,012 shares authorized:
Convertible preferred stock, Series A-1, $.01 par
value;
0 and 396,000 shares issued and outstanding.......... -- 39,600,000
Convertible preferred stock, Series A-2, $.01 par
value;
0 and 419,705 shares issued and outstanding.......... -- 65,596,000
Convertible preferred stock, Series B-1, $.01 par
value;
0 and 12,000 shares issued and outstanding........... -- 1,200,000
Convertible preferred stock, Series B-2, $.01 par
value; 4,545 shares authorized; 0 and 4,545 shares
issued
and outstanding...................................... -- 711,000
Common Stock, $.01 par value; 50,000,000 shares
authorized; 26,445,890 and 1,162,800 shares issued and
outstanding............................................ 264,000 12,000
Additional paid-in capital................................ 305,715,000 --
Accumulated deficit....................................... (40,420,000) (13,664,000)
------------ ------------
Total shareholders' equity............................. 265,559,000 93,455,000
------------ ------------
$637,350,000 $146,610,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 123
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ---------------------------
1996 1995 1996 1995
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues......................... $ 12,943,000 $ 3,797,000 $ 28,147,000 $10,309,000
------------ ----------- ------------ -----------
Expenses:
Service costs.................. 6,125,000 1,831,000 12,585,000 5,248,000
Selling, general and
administrative expenses..... 10,158,000 3,027,000 25,504,000 7,818,000
Depreciation and
amortization................ 4,265,000 1,120,000 9,859,000 2,873,000
------------ ----------- ------------ -----------
20,548,000 5,978,000 47,948,000 15,939,000
------------ ----------- ------------ -----------
Loss from operations........... (7,605,000) (2,181,000) (19,801,000) (5,630,000)
Other income (expense):
Interest income................ 4,816,000 569,000 11,074,000 746,000
Interest expense............... (7,653,000) (965,000) (19,250,000) (2,679,000)
------------ ----------- ------------ -----------
Loss before minority
interests................... (10,442,000) (2,577,000) (27,977,000) (7,563,000)
Minority interests in share
of loss........................ 451,000 271,000 1,590,000 589,000
------------ ----------- ------------ -----------
Net loss....................... $ (9,991,000) $(2,306,000) $(26,387,000) $(6,974,000)
============ =========== ============ ===========
Pro forma loss per common and
common equivalent share........ $ (0.35) $ (0.12) $ (1.10) $ (0.36)
============ =========== ============ ===========
Pro forma weighted average number
of shares outstanding.......... 28,368,352 19,523,584 24,071,672 19,523,584
============ =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 124
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<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>
Balance, January 1, 1996.... 396,000 $ 39,600,000 419,705 $ 65,596,000 12,000 $ 1,200,000 4,545 $ 711,000
Merger with BTC
-- issuance of common
stock.................... -- -- -- -- -- -- -- --
-- conversion of preferred
stock to common
stock.................... (6,350) (635,000) (6,061) (1,000,000) -- -- -- --
Issuance of Series A-2
Preferred Stock............ -- -- 6,060 997,000 -- -- -- --
Preferred Stock Warrants
Exercised.................. 9,940 109,000 -- -- -- -- -- --
Initial Public Offering
-- issuance of common
stock.................... -- -- -- -- -- -- -- --
-- common stock, subject to
redemption, exchanged for
common stock............. -- -- -- -- -- -- -- --
-- conversion of preferred
stock to common
stock.................... (399,590) (39,074,000) (419,704) (65,593,000) (12,000) (1,200,000) (4,545) (711,000)
Common Stock Options
Exercised.................. -- -- -- -- -- -- -- --
Common Stock Warrants
Exercised.................. -- -- -- -- -- -- -- --
Conversion of minority
interest in subsidiary to
common stock............... -- -- -- -- -- -- -- --
Net Loss.................... -- -- -- -- -- -- -- --
-------- ------------ -------- ------------ ------- ----------- ------ ---------
Balance, September 30,
1996....................... -- $ -- -- $ -- -- $ -- -- $ --
======== ============ ======== ============ ======= =========== ====== =========
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- -------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996.... 1,162,800 $ 12,000 $ -- $(13,664,000) $ 93,455,000
Merger with BTC
-- issuance of common
stock.................... 756,340 8,000 9,447,000 -- 9,455,000
-- conversion of preferred
stock to common
stock.................... 248,220 2,000 1,633,000 -- --
Issuance of Series A-2
Preferred Stock............ -- -- -- 997,000
Preferred Stock Warrants
Exercised.................. -- -- -- -- 109,000
Initial Public Offering
-- issuance of common
stock.................... 7,385,331 74,000 185,119,000 -- 185,193,000
-- common stock, subject to
redemption, exchanged for
common stock............. 224,000 2,000 2,798,000 -- 2,800,000
-- conversion of preferred
stock to common
stock.................... 16,527,920 165,000 106,413,000 -- --
Common Stock Options
Exercised.................. 40,492 -- 192,000 -- 192,000
Common Stock Warrants
Exercised.................. 91,898 1,000 113,000 -- 114,000
Conversion of minority
interest in subsidiary to
common stock............... 8,889 -- -- (369,000 ) (369,000 )
Net Loss.................... -- -- -- (26,387,000 ) (26,387,000 )
---------- -------- ------------ ------------ ------------
Balance, September 30,
1996....................... 26,445,890 $264,000 $305,715,000 $(40,420,000) $265,559,000
========== ======== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 125
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
------------------------------
1996 1995
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (26,387,000) $ (6,974,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 9,859,000 2,873,000
Non-cash interest expense.............................. 19,026,000 2,656,000
Minority interests..................................... (1,590,000) (589,000)
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable.................................. (5,578,000) (212,000)
Accounts payable and accrued expenses................ (147,000) 1,247,000
Other, net........................................... (3,674,000) (1,000)
------------- ------------
Net cash used in operating activities........... (8,491,000) (1,000,000)
------------- ------------
Cash flows from investing activities:
Purchase of networks and equipment........................ (134,348,000) (15,240,000)
Purchase of marketable securities......................... (250,123,000) --
Maturity of marketable securities......................... 122,994,000 --
Additions to other assets................................. (9,353,000) (1,871,000)
Acquisitions of businesses, net of cash acquired.......... (2,705,000) (13,941,000)
Investment in minority owned venture...................... (5,000,000) --
------------- ------------
Net cash used in investing activities........... (278,535,000) (31,052,000)
------------- ------------
Cash flows from financing activities:
Issuance of common stock.................................. 185,500,000 --
Issuance of preferred stock and subscriptions receivable
payments, net.......................................... 1,106,000 84,170,000
Proceeds from minority interests.......................... 7,991,000 4,088,000
Proceeds from long-term debt, net......................... 238,926,000 5,682,000
Repayment of long-term debt and capital leases............ (3,376,000) --
------------- ------------
Net cash provided by financing activities....... 430,147,000 93,940,000
------------- ------------
Net increase in cash............................ 143,121,000 61,888,000
Cash, beginning of period................................... 59,913,000 8,795,000
------------- ------------
Cash, end of period......................................... $ 203,034,000 $ 70,683,000
============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 221,000 $ 130,000
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 126
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 and nine months ended
September 30, 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.
2. CASH AND CASH EQUIVALENTS
For the purpose of reporting cash flows, cash and cash equivalents consist
primarily of cash on hand and highly liquid securities with insignificant
interest-rate risk and original maturities of three months or less at date of
acquisition.
3. MARKETABLE SECURITIES
Marketable securities consist of treasury bills, commercial paper, and
repurchase agreements with original maturities beyond three months but less than
twelve months. Marketable securities are stated at cost, adjusted for discount
accretion and premium amortization. The securities in the Company's portfolio
are classified as "held to maturity", as management has the intent and ability
to hold those securities to maturity.
4. 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
canceled. 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 of BFP held by BTC at the time of acquisition, the Company issued 756,340
shares of common stock valued at $12.50 per share and certain options and
warrants (see Note 8). Intangible assets of approximately $6.1 million were
recorded as a result of this acquisition.
On January 31, 1996, the Company acquired City Signal, Inc., a provider of
competitive access and local exchange services in Michigan and Ohio, and certain
assets of a related entity, from an unrelated party. In connection with the
acquisition, the Company issued approximately 2.2 million shares of common stock
and assumed certain specified liabilities. Intangible assets of approximately
$13.1 million were recorded as a result of this acquisition. In addition, the
Company granted the seller 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. In
conjunction with the Company's initial public offering (see Note 7), the holder
of such shares sold 10% of the shares. Accordingly, approximately 2.0 million
shares remain subject to redemption.
Effective July 1, 1996, the Company acquired 100% of 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.
F-11
<PAGE> 127
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Effective September 1, 1996, the Company acquired 100% of the stock of
Bittel Telecommunications Corporation ("Bittel"), a switch-based reseller of
long distance services, with such services provided primarily to customers in
the San Francisco and Los Angeles, California area.
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:
<TABLE>
<S> <C>
Fair value of tangible assets acquired......................... $ 41,683,985
Fair value of intangible assets acquired....................... 35,820,751
Liabilities assumed............................................ (37,345,272)
------------
Purchase price, net of cash acquired........................... $ 40,159,464
============
</TABLE>
In June 1996, the Company and MCImetro Access Transmission Services, Inc.
("MCImetro") entered into an agreement pursuant to which MCImetro has acquired a
15% interest in the Company's Sacramento, California network for $4.5 million,
and has invested an additional $3.5 million in the Company's San Jose joint
venture company. In accordance with the provisions of the agreements between the
Company and MCImetro, on October 10, 1996, MCImetro exchanged the agreed value
of these investments for approximately 3.2% of the Company's common stock.
In June 1996, the Company formed a strategic alliance with World-Net
Access, Inc., ("World-Net") through a $5 million investment in exchange for a 20
percent fully-diluted interest in World-Net. The investment in World-Net is
classified as Investment in Minority-Owned Venture on the Company's consolidated
balance sheet. World-Net is a privately-held, development stage company founded
to form a national Internet Service Provider network. (See Note 11 for
discussion of an additional commitment to World-Net.)
5. NETWORKS AND EQUIPMENT, NET
Networks and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Telecommunications networks.................. $ 85,748,000 $30,158,000
Electronic and related equipment............. 98,141,000 20,174,000
Office equipment and furniture............... 17,302,000 2,435,000
Land and buildings........................... 12,668,000 --
Leasehold improvements....................... 4,013,000 232,000
Transportation equipment..................... 4,034,000 173,000
------------ -----------
221,906,000 53,172,000
Less accumulated depreciation................ 11,032,000 3,130,000
------------ -----------
$210,874,000 $50,042,000
============ ===========
</TABLE>
As of September 30, 1996 and December 31, 1995, networks and equipment
include $33,455,000 and $4,469,000, respectively, of networks in progress that
are not in service and, accordingly, have not been depreciated. In addition, for
the nine months ended September 30, 1996, interest totalling $1,243,000 has been
capitalized in connection with the Company's construction activities. There was
no interest capitalized for the twelve-month period ended December 31, 1995.
F-12
<PAGE> 128
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ASSETS, NET
Other assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Goodwill..................................... $51,925,000 $29,129,000
Debt issuance costs.......................... 13,744,000 3,070,000
Organization, development, and pre-operating
costs...................................... 13,347,000 2,922,000
----------- -----------
79,016,000 35,121,000
Less accumulated amortization................ 4,196,000 1,652,000
----------- -----------
$74,820,000 $33,469,000
=========== ===========
</TABLE>
7. SHAREHOLDERS' EQUITY
Effective 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 reflect the 20-for-1
stock split.
On May 2, 1996, the Company completed its initial public offering of
7,385,331 shares of Common Stock at a price of $27.00 per share, for gross
proceeds of approximately $199.4 million and proceeds net of underwriting
discounts, advisory fees and expenses of approximately $185.2 million.
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 Plan for the nine months ended September 30,
1996 is as follows:
<TABLE>
<CAPTION>
PRICE PER
NUMBER SHARE
--------- -------------
<S> <C> <C>
Balance, December 31, 1995........................ 1,651,660 $ 4.00-$ 6.60
Granted......................................... 1,226,000 $12.50-$33.75
Exercised....................................... 40,492 $ 4.00-$ 6.60
Cancelled....................................... 144,000 $ 6.00-$12.50
--------- ------------
Balance, June 30, 1996............................ 2,693,168 $ 4.00-$33.75
========= ============
</TABLE>
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 date of grant.
F-13
<PAGE> 129
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. 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 10 7/8% Senior Discount Notes, totaling approximately $46.2 million
annually.
10. 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 weighted average
number of shares used in computing pro forma loss per share was 28,368,352 and
24,071,672 for the three and nine month periods ended September 30, 1996,
respectively, and 19,523,584 for the three and nine month periods ended
September 30, 1995. 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 for the nine
months ended September 30, 1996, using the treasury stock method, as if they
were outstanding for all of 1995 and for the entire six-month period ended June
30, 1996. For the three months ended September 30, 1996, the weighted average
number of shares was based on common stock outstanding and does not include
common stock equivalents as their inclusion would be anti-dilutive.
11. 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.
Subsequent to September 30, 1996, the Company committed an additional $15
million to World-Net (see Note 4), which would increase the Company's
fully-diluted interest to 25.5% from its present 20%. It is possible that the
Company may commit additional funds to World-Net in furtherance of this
strategic alliance.
F-14
<PAGE> 130
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 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.
KPMG Peat Marwick LLP
St. Louis, Missouri
January 26, 1996
F-15
<PAGE> 131
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<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
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 132
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
<TABLE>
<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)
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE> 133
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
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK CONVERTIBLE PREFERRED STOCK
-------------------------------------------- ---------------------------------------
COMMON
SERIES A-1 SERIES A-2 SERIES B-1 SERIES B-2 STOCK
-------------------- --------------------- ------------------- ----------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------- ----------- ------- ----------- ------ ---------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock,
November 10, 1993...... -- $ -- -- $ -- -- $ -- -- $ -- 1,162,800
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 -- -- 1,162,800
Subscriptions receivable,
payments and
reclassifications...... -- -- -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------ ---------- ---- -------- ---------
Balance, December 31,
1994................... 396,000 39,600,000 -- -- 12,000 1,200,000 -- -- 1,162,800
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 1,162,800
======= =========== ======= =========== ====== ========== ==== ======== =========
<CAPTION>
TOTAL
SUBSCRIPTIONS ACCUMULATED SHAREHOLDERS'
AMOUNT RECEIVABLE DEFICIT EQUITY
------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Issuance of common stock,
November 10, 1993...... $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................... 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................... 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................... $12,000 -- (13,664,000) 93,455,000
======= =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 134
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
<TABLE>
<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 period............................... $ 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 $ --
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 135
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:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Telecommunications networks.......................................... 8-25
Electronic and related equipment..................................... 8
Furniture and office equipment....................................... 7
Motor vehicles....................................................... 3
</TABLE>
(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
F-20
<PAGE> 136
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
F-21
<PAGE> 137
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
F-22
<PAGE> 138
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Revenue.......................................... $ 14,536,000 $12,803,000
Loss before minority interest.................... (10,722,000) (6,352,000)
============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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.
F-23
<PAGE> 139
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER ASSETS, NET
Other assets consist of the following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
NOTIONAL
CONTRACT PERIOD AMOUNT
---------------------------------------------------------------- -----------
<S> <C>
October 1996 through October 2001............................... $ 4,752,000
January 1997 through January 2002............................... 30,551,000
===========
</TABLE>
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
F-24
<PAGE> 140
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<S> <C>
1996.......................... $ --
1997.......................... 115,000
1998.......................... 2,315,000
1999.......................... 4,513,000
2000.......................... 6,714,000
Thereafter.................... 30,320,000
-----------
$43,977,000
===========
</TABLE>
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.
F-25
<PAGE> 141
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
PRICE
NUMBER PER SHARE
--------- ----------
<S> <C> <C>
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
========= ==========
</TABLE>
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
F-26
<PAGE> 142
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
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.................... $ -- $ --
=========== ===========
</TABLE>
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:
<TABLE>
<S> <C>
1996........................... $1,169,000
1997........................... 1,181,000
1998........................... 850,000
1999........................... 667,000
2000........................... 532,000
Thereafter..................... 1,455,000
----------
$5,854,000
==========
</TABLE>
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
F-27
<PAGE> 143
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<S> <C>
Revenue........................ $ 23,072,000
Loss before minority
interest..................... (18,759,000)
============
</TABLE>
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.
F-28
<PAGE> 144
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
F-29
<PAGE> 145
CITY SIGNAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<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 SHAREHOLDER'S 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
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-30
<PAGE> 146
CITY SIGNAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<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)
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 147
CITY SIGNAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
<TABLE>
<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
====== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE> 148
CITY SIGNAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<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
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE> 149
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:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Network equipment.................................................... 7
Fiber optic cable.................................................... 15
Furniture and office equipment....................................... 5-7
Vehicles............................................................. 5
</TABLE>
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.
F-34
<PAGE> 150
CITY SIGNAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
Network equipment................................... $1,085,088 $1,518,460
Less accumulated depreciation....................... 118,541 241,685
---------- ----------
$ 966,547 $1,276,775
========== ==========
</TABLE>
Future minimum payments under capital leases and noncancelable operating
leases with initial or remaining terms of one or more years consist of the
following:
<TABLE>
<CAPTION>
OPERATING
---------------------
REAL
YEAR ENDING DECEMBER 31, CAPITAL ESTATE EQUIPMENT
------------------------------------------- -------- -------- ---------
<S> <C> <C> <C>
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
========
</TABLE>
F-35
<PAGE> 151
CITY SIGNAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-36
<PAGE> 152
CITY SIGNAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------------------------------------------------
<S> <C>
1996.................................................. $400,778
1997.................................................. 425,279
1998.................................................. 444,672
1999.................................................. 54,487
</TABLE>
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).
F-37
<PAGE> 153
CITY SIGNAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
F-38
<PAGE> 154
CITY SIGNAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1995 1994
---------- -----------
<S> <C> <C>
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)
</TABLE>
The Company sold its interest in a consolidated entity for $2,992,114. In
connection with the sale, liabilities were relieved as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Fair value of assets sold................................ $ 3,183,298
Cash received............................................ 2,992,114
----------
Liabilities relieved..................................... $ 191,184
==========
</TABLE>
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.
F-39
<PAGE> 155
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.
KPMG Peat Marwick LLP
February 16, 1996
St. Louis, Missouri
F-40
<PAGE> 156
BROOKS TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<S> <C>
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
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE> 157
BROOKS TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
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 losses.................................................. 673,376
----------
Net loss............................................................... $(3,051,919)
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-42
<PAGE> 158
BROOKS TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-------------------------------------------------------------------------------------------------
SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES
A-1 A-2 B-1 B-2 B-3 C D E
---------- ------- --------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.... $1,400,000 500,000 3,000,006 2,000,000 500,000 2,500,000 -- --
Issuance of stock............. -- -- -- -- -- -- 1,999,094 5,000,000
Net loss...................... -- -- -- -- -- -- -- --
Purchase of treasury stock.... -- -- -- -- -- -- -- --
---------- ------- --------- --------- ------- --------- --------- ---------
Balance, December 31, 1995.... $1,400,000 500,000 3,000,006 2,000,000 500,000 2,500,000 1,999,094 5,000,000
========== ======= ========= ========= ======= ========= ========= =========
<CAPTION>
CONVERTIBLE PREFERRED STOCK ACCUMU- SHARE-
--------------------------- COMMON PAID-IN LATED TREASURY HOLDERS'
TOTAL STOCK CAPITAL DEFICIT STOCK EQUITY
---------- ------ --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.... 9,900,006 6,211 4,433,035 (6,372,190) (12,700) 7,954,362
Issuance of stock............. 6,999,094 806 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.... 16,899,100 7,017 7,484,090 (9,424,109) (120,395) 14,845,703
========== ===== ========= ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE> 159
BROOKS TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
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
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-44
<PAGE> 160
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
F-45
<PAGE> 161
BROOKS TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<S> <C>
Investment in Brooks Fiber Properties, Inc. (BFP)................ $1,635,065
Investment in Guangzhou HuaMei Communications Limited............ 6,350,000
----------
Total....................................................... $7,985,065
==========
</TABLE>
F-46
<PAGE> 162
BROOKS TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Condensed financial information of the Company's majority-owned venture,
SBP, is as follows:
<TABLE>
<S> <C>
BALANCE SHEET
Current assets.................................................. $ 140,504
Investment in Guangzhou HuaMei 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)
===========
</TABLE>
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 HuaMei Communications Limited (the
HuaMei Interest). The operations of the HuaMei 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 HuaMei 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 HuaMei Interest will be shared equally by SBP
and Galaxy. As of December 31, 1995, SBP had invested $6,350,000 in the HuaMei
Interest.
5. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of the following:
<TABLE>
<S> <C>
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
==========
</TABLE>
F-47
<PAGE> 163
BROOKS TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ASSETS, NET
Other assets consist of the following:
<TABLE>
<S> <C>
Goodwill......................................................... $4,943,482
Organization costs............................................... 153,536
Other............................................................ 125,193
----------
5,222,211
Less accumulated amortization.................................... 77,111
----------
$5,145,100
==========
</TABLE>
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
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
==========
</TABLE>
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.
F-48
<PAGE> 164
BROOKS TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1995, maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1997........................... $ 256,478
1998........................... 744,416
1999........................... 244,416
2000........................... 244,416
Thereafter..................... 1,998,288
----------
$3,488,014
==========
</TABLE>
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's 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:
<TABLE>
<S> <C>
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 income taxes................................ $ --
===========
</TABLE>
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.
F-49
<PAGE> 165
BROOKS TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<S> <C>
1996............................. $365,935
1997............................. 377,486
1998............................. 110,832
--------
$854,253
========
</TABLE>
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:
<TABLE>
<CAPTION>
PRICE PER
NUMBER SHARE
------- ------------
<S> <C> <C>
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
======= ============
</TABLE>
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:
<TABLE>
<CAPTION>
EXERCISE
PRICE
NUMBER RANGE
-------- ---------
<S> <C> <C>
Balance, 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, December 31, 1995......................................... 440,037 $40-70.00
======== =========
</TABLE>
F-50
<PAGE> 166
BROOKS TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The warrants outstanding at December 31, 1995 are exercisable on the
following basis:
<TABLE>
<CAPTION>
EXERCISE
OUTSTANDING PRICE
EXPIRATION DURING THE YEAR ENDED WARRANTS RANGE
- ------------------------------------------------------------------ ----------- ---------
<S> <C> <C>
1996............................................... 201,704 $50-70.00
1997............................................... 208,333 50-60.00
1998............................................... 30,000 40.00
-------- =========
440,037
========
</TABLE>
12. PREFERRED STOCK
Preferred stock transactions during 1995 are summarized as follows:
<TABLE>
<CAPTION>
PREFERRED STOCK
----------------------
SHARES AMOUNT
------- -----------
<S> <C> <C>
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
======= ===========
</TABLE>
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 HuaMei 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
F-51
<PAGE> 167
BROOKS TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 statement of operations and totaled $1,080,000 for 1995. Consulting
fee revenues charged to SBP generally are billable to the HuaMei 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.
F-52
<PAGE> 168
ANNEX A
GLOSSARY
ACCESS CHARGES -- The fees paid by long distance carriers to ILECs or CLECs
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 ILECs.
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 ILEC 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 CLEC such as the Company to connect its
network to the ILEC's central offices. Physical collocation occurs when a CLEC
places its network connection equipment inside the ILEC's central offices.
Virtual collocation is an alternative to physical collocation pursuant to which
the ILEC permits a CLEC to connect its network to the ILEC's central offices on
comparable terms, even though the CLEC's network connection equipment is not
physically located inside the central offices.
A-1
<PAGE> 169
DEDICATED LINES -- Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the ILEC'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.
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."
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.
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 CLECs 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.
A-2
<PAGE> 170
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.
ILEC -- (Incumbent Local Exchange Carrier) -- The incumbent carrier
providing Local Exchange Services.
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.
ISP -- Internet Service Provider
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 ILEC 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 CLECs 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.
LOCAL COMPETITION -- The term "local competition" describes the events in
the local arena to afford true "co-carrier" status to CLECs. Specifically, the
ILECs, who once had a monopoly on local exchange telephone service, are
beginning to experience competition at the local level from CLECs 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 CLECs.
A-3
<PAGE> 171
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 an ILEC 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 TELECOMMUNICATIONS OR LOCAL TELEPHONE SERVICES -- See Local Exchange
Services.
LONG DISTANCE ACCESS SERVICES -- Long Distance Access Services are the
services provided by an ILEC 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 an ILEC
network.
ON-NET -- a customer that is physically connected to one of the Company's
networks.
A-4
<PAGE> 172
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.
PCS -- Personal communications service. A type of wireless telephone system
that uses light, inexpensive handheld sets and communicates via low power
antennas.
PHYSICAL COLLOCATION -- Physical Collocation occurs when a CLEC places its
own network connection equipment inside the ILEC 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 an ILEC'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 ILEC'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 from an ILEC to a CLEC for
termination of a local call on the CLEC network, as the CLEC pays the ILEC for
termination of local calls on the ILEC 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 and most,
if not all, of the ILEC's central offices.
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 an ILEC or a CLEC
(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.
A-5
<PAGE> 173
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 an ILEC 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 an ILEC 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 an ILEC or CLEC network from an IXC POP using a Switch.
SWITCHED ACCESS TRANSPORT SERVICES -- Transportation of switched traffic
along dedicated lines between the ILEC central offices and long distance carrier
POPs.
SWITCHED LOCAL SERVICES -- Switched Local Services are services provided by
an ILEC 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
an ILEC, CLEC or IXC.
VIRTUAL COLLOCATION -- Virtual Collocation is an alternative to Physical
Collocation in which CLECs connect their equipment to the ILECs facilities from
a remote location and request that the ILEC install the necessary electronics in
its central office which is then leased by the ILEC to the CLEC for charges
which are generally higher than the charges for physical collocation. However,
the CLEC avoids payment of the initial capital costs for the leased facilities
which the CLEC 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.
A-6
<PAGE> 174
- ------------------------------------------------------
- ------------------------------------------------------
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 THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 18
No Cash Proceeds to the Company........... 24
Price Range of the Private Notes.......... 24
Capitalization............................ 25
The Exchange Offer........................ 26
Selected Historical and Pro Forma
Financial and Other Operating Data...... 33
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 35
Business of the Company................... 44
The Competitive Local Telecommunications
Industry................................ 58
Competition............................... 62
Regulatory Overview....................... 65
Management................................ 71
Principal Stockholders.................... 79
Certain Relationships and Related
Transactions............................ 82
Description of The Notes.................. 84
Description of Other Credit Facilities.... 108
Certain United States Federal Income Tax
Considerations.......................... 109
Plan of Distribution...................... 111
Validity of The Exchange Notes............ 112
Independent Auditors...................... 112
Additional Information.................... 113
Index to Consolidated Financial
Statements.............................. F-1
Glossary.................................. A-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
BROOKS FIBER
PROPERTIES, INC.
OFFER TO EXCHANGE
11 7/8% SENIOR DISCOUNT NOTES
DUE NOVEMBER 1, 2006
FOR ALL OUTSTANDING
11 7/8% SENIOR DISCOUNT NOTES
DUE NOVEMBER 1, 2006
---------------------------------------
LOGO
---------------------------------------
, 199
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 175
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
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<PAGE> 176
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.
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<PAGE> 177
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Town and Country, State
of Missouri, on December 17, 1996.
BROOKS FIBER PROPERTIES, INC.
By: /s/ JAMES C. ALLEN
------------------------------------
James C. Allen
Vice Chairman and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints James C. Allen and David L. Solomon, and
each of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his or her name, place
and stead, in any and all capacities to sign any and all amendments (including
post-effective amendments) to this registration statement and all amendments and
supplements to any prospectus relating thereto 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
each of them, or his or her 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 been signed by the following persons in the
capacities indicated on December 17, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
- -------------------------------------------- --------------------------------------------
/s/ ROBERT A. BROOKS Director (Chairman of the Board)
- --------------------------------------------
Robert A. Brooks
/s/ JAMES C. ALLEN Vice Chairman, Chief Executive Officer
- -------------------------------------------- and Director (Principal Executive Officer)
James C. Allen
/s/ D. CRAIG YOUNG President and Director
- -------------------------------------------- (Chief Operating Officer)
D. Craig Young
/s/ DAVID L. SOLOMON Executive Vice President and
- -------------------------------------------- Chief Financial Officer
David L. Solomon (Principal Financial and Accounting Officer)
/s/ ROBERT F. BENBOW Director
- --------------------------------------------
Robert F. Benbow
/s/ WILLIAM J. BRESNAN Director
- --------------------------------------------
William J. Bresnan
/s/ JONATHAN M. NELSON Director
- --------------------------------------------
Jonathan M. Nelson
</TABLE>
II-3
<PAGE> 178
SIGNATURE TITLE
--------- -----
/s/ G. JACKSON TANERSLEY Director
- --------------------------------------------
G. Jackson Tanersley
Director
- --------------------------------------------
Ronald H. Vander Pol
/s/ CAROL DEB. WHITAKER Director
- --------------------------------------------
Carol deB. Whitaker
II-4
<PAGE> 179
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<C> <S>
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 (the "IPO Form S-1"))
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 IPO Form S-1)
3.1(a) Restated Certificate of Incorporation of the Company (incorporated by reference
to Exhibit 3.1(a) to the IPO Form S-1)
3.1(b) Certificate of Designation of Series C Junior Participating Preferred Stock
(incorporated by reference to Exhibit 3.1(c) to the IPO Form S-1)
3.1(c) Certificate of Amendment of Certificate of Incorporation of the Company dated as
of August 20, 1996 (incorporated by reference to Exhibit 3 to the Company's
Quarterly Report on Form 10-Q, as amended, for the Period Ended September 30,
1996 (File No. 0-28036) filed with the Commission on November 14, 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 4.2).
4.2 Indenture dated as of November 7, 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. 333-16495) filed with the Commission
on November 20, 1996 (the "Secondary Offering Form S-1"))
4.3 Exchange and Registration Rights Agreement dated as of November 7, 1996 between
the Company and Goldman Sachs, and Co. and Salomon Brothers, Inc, as Purchasers
(incorporated by reference to Exhibit 4.7 to the Secondary Offering Form S-1)
4.4 Rights Agreement dated February 29, 1996 between the Company and The Boatmen's
Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.2 to the
IPO Form S-1)
4.5 Amended and Restated Stockholders Agreement dated as of June 15, 1995
(incorporated by reference to Exhibit 4.3 to the IPO Form S-1)
4.6 Amended and Restated Registration Rights Agreement dated as of June 15, 1995
(incorporated by reference to Exhibit 4.4 to the IPO Form S-1)
4.7 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 IPO Form S-1)
4.8 Amended and Restated Loan and Security Agreement dated as of October 1, 1996
among AT&T Credit Corporation, the Company and certain subsidiaries of the
Company (incorporated by reference to Exhibit 4.8 to the Secondary Form S-1)
4.9 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.
</TABLE>
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<PAGE> 180
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<S> <C>
*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 the IPO Form S-1)
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 the IPO Form S-1)
10.3 1996 Employee Stock Purchase Plan of the Company (incorporated by reference to
Exhibit 10.3 to the IPO Form S-1)
10.4 1993 Stock Option Plan of Brooks Telecommunications Corporation ("BTC")
(incorporated by reference to Exhibit 10.4 to the IPO Form S-1)
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 the IPO Form S-1)
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 the IPO Form S-1)
*11.1 Statement Re Computation of Per Share Earnings
*12.1 Statement Re Computation of Ratio of Earnings to Combined Fixed Charges
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the
Secondary Offering Form S-1)
*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
</TABLE>
- -------------------------
* To be filed by amendment
II-6
<PAGE> 1
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
December 20, 1996
<PAGE> 1
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
BDO Seidman, LLP
Grand Rapids, Michigan
December 19, 1996
