<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1996
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BROOKS FIBER PROPERTIES, INC.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 4813 43-1656187
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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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)
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David L. Solomon
Executive Vice President and Chief Financial Officer
Brooks Fiber Properties, Inc.
425 Woods Mill Road South, Suite 300
Town & Country, MO 63017
(314) 878-1616
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
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Copies to:
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John P. Denneen, Esq. Robert E. Buckholz, Jr., Esq.
Bryan Cave LLP Sullivan & Cromwell
211 N. Broadway, Suite 3600 125 Broad Street
St. Louis, Missouri 63102-2750 New York, New York 10004
(314) 259-2000 (212) 558-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE(1) PRICE(1) FEE
- ---------------------------------------------------------------------------------------------------------
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Common Stock, $0.01 par
value...................... 7,859,175 shares(2) $32.4375 $254,931,989.10 $77,253.00
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) of the Securities Act of 1933, as amended; the proposed
maximum offering price is based on the average of the high and low prices of
the Registrant's Common Stock on November 19, 1996.
(2) Includes 1,025,109 shares which may be purchased by the Underwriters
pursuant to over allotment options.
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.
<PAGE> 2
BROOKS FIBER PROPERTIES, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(A) AND ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF THE INFORMATION
REQUIRED BY PART I OF FORM S-1
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ITEM LOCATION IN PROSPECTUS
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1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus................ Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.................................... Inside Front Cover Page; Outside Back
Cover Page
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges..................... Prospectus Summary; Risk Factors
4. Use of Proceeds............................... Not Applicable
5. Determination of Offering Price............... Not Applicable
6. Dilution...................................... Not Applicable
7. Selling Security Holders...................... Principal and Selling Stockholders
8. Plan of Distribution.......................... Outside Front Cover Page; Inside Front
Cover Page; Underwriting
9. Description of Securities to be Registered.... Description of Capital Stock
10. Interests of Named Experts and Counsel........ Legal Matters; Independent Auditors
11. Information with Respect to the Registrant
(a) Description of Business.................. Business of the Company; Certain
Relationships and Related Transactions;
Competition
(b) Description of Property.................. Business of the Company
(c) Legal Proceedings........................ Business of the Company
(d) Common Equity Securities................. Description of Capital Stock; Price Range
of Common Stock; Dividend Policy;
Underwriting; Principal and Selling
Stockholders
(e) Financial Statements..................... Consolidated Financial Statements
(f) Selected Financial Data.................. Selected Historical and Pro Forma
Financial and Other Operating Data
(g) Supplementary Financial Information...... Notes to Consolidated Financial
Statements
(h) Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
(i) Changes in and Disagreements with
Accountants.............................. Not Applicable
(j) Directors, Executive Officers, Promoters
and Control Persons...................... Management; Principal and Selling
Stockholders
(k) Executive Compensation................... Management
(l) Security Ownership of Certain Beneficial
Owners and Management.................... Principal and Selling Stockholders
(m) Certain Relationships and Related
Transactions............................. Certain Relationships and Related
Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act Not Applicable
Liabilities...................................
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<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 1996
SHARES
BROOKS FIBER PROPERTIES, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
BROOKS LOGO ---------------------
Of the shares of Common Stock offered, shares are being
offered hereby in the United States and shares are being offered in a
concurrent international offering outside the United States. The public offering
price and the aggregate underwriting discount per share are identical for both
offerings. See "Underwriting."
The shares of Common Stock offered hereby are being sold by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
the shares being offered hereby. See "Principal and Selling Stockholders."
SEE "RISK FACTORS" ON PAGES 13 TO 18 FOR A DISCUSSION OF CERTAIN RISKS
ASSOCIATED WITH AN INVESTMENT IN THE COMMON STOCK.
The Common Stock is listed on the Nasdaq National Market under the symbol
"BFPT." On , 1996, the last reported sale price of the
Common Stock on the Nasdaq National Market was $ per share. See "Price Range
of Common Stock."
---------------------
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.
---------------------
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PROCEEDS TO
PUBLIC UNDERWRITING SELLING
OFFERING PRICE DISCOUNT(1) STOCKHOLDERS(2)
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Per Share................................... $ $ $
Total(3).................................... $ $ $
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Estimated expenses of $ are payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional shares at the public offering price,
less the underwriting discount, solely to cover over-allotments.
Additionally, the Company has granted the International Underwriters a
similar option with respect to an additional shares as part of the
concurrent international offering. If such options are exercised in full,
the total public offering price, underwriting discount and proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
---------------------
The shares are offered severally by the U.S. Underwriters, as specified
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that certificates for the
shares will be ready for delivery in New York, New York on or about
, 1996 against payment therefor in immediately available
funds.
Joint Lead Managers
GOLDMAN, SACHS & CO. SALOMON BROTHERS INC
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The date of this Prospectus is , 1996.
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[MAP OMITTED]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
THE DEPOSITARY SHARES REPRESENTING THE COMPANY'S SERIES D CONVERSION PREFERRED
STOCK AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER
THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<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. Unless
otherwise indicated, the information in this Prospectus assumes no exercise of
the over-allotment options granted to the Underwriters.
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 (the "Concurrent Offering" 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 25 of its 30 networks. The Company is also certified
as a CLEC in 24 of its 30 networks. At September 30, 1996, the Company had a
total of 17 digital telephone switches installed in its networks. The Company
expects that, by the end of 1996,
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switches will have been deployed to serve substantially all of the Company's
networks. The Company has increased the number of networks in operation or under
construction from 11 at December 31, 1994 to 30 at present. At September 30,
1996, the Company had a total of 787 route miles of optical fiber cable
installed, 358,640 voice grade equivalent (VGE) circuits in service, 13,107 CLEC
lines installed and 734 on-net and 913 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 11 7/8% Senior Discount Note Offering, (ii) the proposed sale
of $ Depositary Shares (see "Financing Plan" below), (iii) 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 (iv) the receipt of $7.6
million upon exercises of warrants and options to purchase an aggregate of
1,408,753 shares of Common Stock since September 30, 1996, the Company had cash,
cash equivalents and marketable securities of $ million, total assets of
$ million, long-term debt of $539.5 million and paid-in capital of $
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
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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
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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 17 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 expects to offer such services and products in substantially all of
its operating networks by the end of 1996 and 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
13,107 at September 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
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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. Through the Company's prior investment
and a recent commitment, the Company has committed 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 Company and MaineCom intend to
contribute approximately $5.2 million and $3.5 million, respectively, to the
joint venture company. 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
11 7/8% Senior Discount Notes due November 1, 2006 (the "11 7/8% Senior Discount
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 1,551,083 shares upon exercise of warrants and options. On November ,
1996, the Company filed a Registration Statement on Form S-1 to register up
to 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 "Concurrent
Offering" below, "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 11 7/8% Senior Discount Notes, for which the
Company received proceeds net of underwriting discounts of approximately
$217.2 million (the "11 7/8% Senior Discount Note Offering"). 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 11 7/8%
Senior Discount 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
8
<PAGE> 11
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 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 "Concurrent Offering" 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.
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 substantially all of its
networks by the end of 1996, are only predictions; actual events or results may
differ materially as a result of risks facing the Company. Such risks include,
but are not limited to, the Company's ability to access markets, identify,
finance and complete suitable acquisitions, design fiber optic backbone routes,
install cable and facilities, including switching 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 OFFERING
Common Stock offered................
Common Stock outstanding(1).........
Nasdaq National Market symbol....... BFPT
- ---------------
(1) Includes up to 4,500,000 shares of Common Stock issuable upon the conversion
of the Depositary Shares to be offered in the Depositary Shares Offering
(see "Concurrent Offering" below). Excludes 3,411,882 shares of Common Stock
issuable upon exercise of stock options and warrants outstanding at November
15, 1996, of which 1,714,264 shares were subject to warrants and options
exercisable within 60 days at a weighted average exercise price of $9.61 per
share. See "Description of Capital Stock -- Proposed Offering of Depositary
Shares."
CONCURRENT OFFERING
On November , 1996, the Company filed a Registration Statement on Form
S-1 to register up to of the Company's $ Depositary Shares (the
"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 (the "Depositary Shares Offering"). Each of the Depositary Shares will
represent ownership of 1/100 of a share of the Company's Series D Conversion
Preferred Stock, par value $0.01 per share (the "Series D Preferred Stock"),
will receive cash dividends at an annual rate of $ , will be automatically
converted into Common Stock at a certain date and exchange rate and, after a
certain date, will be convertible at the option of the holder at any time prior
to such date. See "Description of Capital Stock -- Proposed Offering of
Depositary Shares." The Offering made hereby and the Depositary Shares Offering
are not conditioned on each other.
RISK FACTORS
Prospective investors should carefully consider the matters set forth under
"Risk Factors" on pages 13 through 18.
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.
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<PAGE> 13
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>
THREE NINE
YEAR ENDED DECEMBER 31, MONTHS MONTHS
PERIOD FROM ---------------------------------- ENDED ENDED
NOVEMBER 10, PRO FORMA SEPTEMBER 30, SEPTEMBER 30,
1993(1) TO 1995 1996 1996
DECEMBER 31, ----------- ------------- -------------
1993 1994 1995
------------ ------- ---------- (UNAUDITED) (UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA AND RATIOS
<S> <C> <C> <C> <C> <C> <C>
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 70,118 137,053
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
AS OF
AS OF SEPTEMBER 30,
DECEMBER 31, AS OF AS OF AS OF 1996
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, PRO FORMA AS
1994 1995 1996 1996 1996 ADJUSTED(5)
------- -------- ----------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 8,795 $ 59,913 $ 253,796 $ 256,224 $ 203,034 $
Marketable securities........................... -- -- 25,159 150,178 126,634
Working capital................................. 15,862 57,913 264,772 402,920 325,266
Total assets.................................... 71,325 146,610 449,135 633,825 637,350
Long-term debt, less current portion............ 29,403 43,977 298,529 306,391 314,440
Paid-in capital................................. -- -- 145,569(6) 330,963(6) 331,179(6) (6)
Total stockholders' equity(7)................... 36,699 93,455 153,264 300,535 290,759
Ratio of total debt to paid-in capital.......... -- -- 2.05 .93 .95
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF AS OF AS OF
------------------ DECEMBER 31, JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996 1996
------- -------- ------------ ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NETWORK DATA:
Cities in operation............................................ 5 11 13 18 22
Cities under construction...................................... 6 10 12 8 8
On-net buildings connected..................................... 62 216 495 644 734
Route miles.................................................... 107 262 506 705 787
Fiber miles.................................................... 6,437 17,111 26,659 43,152 50,572
VGE circuits(8)................................................ 59,208 122,617 165,122 243,171 358,640
Switches installed............................................. -- 1 3 9 17
CLEC lines in service.......................................... -- 3,187(9) 5,802 9,226 13,107
Employees...................................................... 89 165 456 571 711
</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, and as adjusted to reflect, (i) the
sale of the 11 7/8% Senior Discount Notes on November 7, 1996, (ii) the
exchange of minority interests for shares of Common Stock and the exercise
of warrants and options since September 30, 1996 and (iii) the proposed
sale of the Depositary Shares. 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.
12
<PAGE> 15
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 purchasing the shares of Common Stock offered hereby.
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 expects that,
by the end of 1996, it will have 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
13
<PAGE> 16
and the deployment of switches in all of 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.
At September 30, 1996, on a pro forma basis giving effect to the 11 7/8%
Senior Discount Note Offering and the conversion of the AT&T Credit Facility to
a parent company facility, the Company's total consolidated debt (including
current liabilities) was $560.9 million, of which $12.3 million were outstanding
liabilities of the Company's subsidiaries. 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
The Company is a holding company which derives substantially all of its
revenues from its subsidiaries. As such, the Company is dependent to some extent
upon dividends and other payments from its subsidiaries to generate the funds
necessary to meet its cash obligations. 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 debt
agreements that may restrict the ability of certain 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" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
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
14
<PAGE> 17
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 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
15
<PAGE> 18
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 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 late 1996 or 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.
16
<PAGE> 19
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.
SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON
FUTURE MARKET PRICES
Sales of substantial numbers of shares of Common Stock in the public market
could adversely affect the market price of the Common Stock and make it more
difficult for the Company to raise funds through future equity offerings. At the
request of the representatives of the Underwriters, all shares of Common Stock
(including shares issuable upon exercise of outstanding options and warrants to
purchase shares of Common Stock) held by the Selling Stockholders, except with
respect to shares offered hereby, are subject to contractual agreements pursuant
to which such shares cannot be sold, offered for sale or otherwise disposed of
for a period of 180 days after the date of this Prospectus without the prior
written consent of the designated representative of the Underwriters, except in
certain non-public transactions in which the acquiror or acquirors agree(s) to
such restrictions. Such stockholders will hold an aggregate of approximately
% of the outstanding Common Stock upon completion of the Offering (see
"Principal and Selling Stockholders"). As a result, notwithstanding possible
earlier eligibility for sale under the provisions of Rules 144 and 701 under the
Securities Act, shares subject to such restrictions will not be saleable until
17
<PAGE> 20
such restrictions expire or their terms are waived by the designated
representative of the Underwriters. Assuming the designated representative of
the Underwriters does not earlier release such stockholders from such
restrictions, at the end of such 180-day period, approximately shares held
by such stockholders will be eligible for sale pursuant to Rules 144 and 701,
subject to the volume limitations thereof. There are options to purchase
3,002,022 shares of Common Stock outstanding as of November 15, 1996, of which
1,304,404 are exercisable within 60 days of November 15, 1996, and exercisable
warrants to purchase 409,860 shares of Common Stock outstanding as of November
15, 1996. See "Principal and Selling Stockholders," "Shares Eligible for Future
Sale" and "Description of Capital Stock -- Authorized Stock."
NO DIVIDENDS
The Company does not anticipate paying dividends on the Common Stock for
the foreseeable future, and the ability of the Company to pay dividends on the
Common Stock is restricted by certain covenants in the Senior Discount Notes.
Further, the Depositary Shares being offered concurrently herewith will accrue
cumulative dividends at a rate of $ per annum and, so long as any Series D
Preferred Stock will be outstanding, the Company may not declare or pay any cash
dividends on the Common Stock unless all accrued and unpaid dividends on shares
of such preferred stock shall have been paid or declared and funds sufficient
for payment thereof set apart. The Company anticipates that it will reinvest its
earnings, if any, in the Company's businesses. See "Dividend Policy."
AUTHORIZED BUT UNISSUED STOCK; ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to
additional shares of Common Stock which have not been reserved for
outstanding warrants and employee stock plans or for issuance upon conversion of
the Depositary Shares and shares of undesignated preferred stock and to
determine the price, rights, preferences and privileges of those preferred
shares without any further vote or action by the stockholders. The issuance of
such shares, while potentially providing desirable flexibility in connection
with possible future acquisitions, equity financings and other corporate
purposes, might have a dilutive effect on earnings per share and on the equity
ownership of holders of the Company's Common Stock and could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. At present, there are no pending
proposals for the issuance of any of such additional authorized shares. In
addition, the Company has adopted a Stockholders Protection Rights Plan, and is
subject to the anti-takeover provisions of Section 203 of the General
Corporation Law of the State of Delaware which prohibits the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. Furthermore, the Company's Restated Certificate of
Incorporation provides that the Board of Directors is divided into three classes
with the directors serving staggered three-year terms. In addition, most of the
Company's existing indebtedness and employee stock plans are subject to
acceleration in the event of a change-in-control of the Company. Such agreements
and provisions could have the effect of delaying, deferring or preventing a
change-in-control of the Company by increasing the aggregate cost to potential
investors of an acquisition of the Company. See "Description of Capital Stock --
Authorized Stock," "-- Delaware Law and Certain Charter Provisions," "--
Preferred Stock Purchase Rights" and "-- Proposed Offering of Depositary
Shares."
18
<PAGE> 21
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 11 7/8% Senior
Discount Notes on November 7, 1996, (ii) the exchange of minority interests for
shares of Common Stock and the exercise of warrants and options since September
30, 1996 and (iii) the proposed sale of the Depositary Shares:
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS..................................... $203,034,000 $
MARKETABLE SECURITIES......................................... $126,634,000 $126,634,000
------------ ------------
TOTAL CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES..... $329,668,000 $
============= =============
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; 29,047,623
issued and outstanding, as adjusted(1)(3)................ 264,000 291,000
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
Accumulated deficit......................................... (40,420,000) (40,420,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY(6)................................. $290,759,000 $
------------ ------------
TOTAL CAPITALIZATION.......................................... $615,960,000 $
============= =============
</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 1,408,753 shares of Common Stock issued upon exercise of warrants
and options at a weighted average exercise price of $5.43 per share since
September 30, 1996, and excludes 3,411,882 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."
19
<PAGE> 22
(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.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "BFPT." The following table sets forth the high and low sale prices of
the Common Stock as reported by the Nasdaq National Market for each of the
quarters since the Company's May 1996 IPO.
<TABLE>
<CAPTION>
1996 HIGH LOW
- -------------------------------------------------------------------- -------- --------
<S> <C> <C>
Second Quarter...................................................... $ 36.50 $ 27.75
Third Quarter....................................................... 34.00 27.25
Fourth Quarter (through , 1996)......................
</TABLE>
On , 1996, the last reported sale price of the Common Stock
on the Nasdaq National Market was $ . As of , 1996, there
were approximately stockholders of record of the Common Stock, including
participants in security position listings.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
Except with respect to cash dividends on the Depositary Shares, when, as and if
declared by the Board of Directors out of funds legally available therefor, the
Company currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends in the foreseeable
future. The ability of the Company to pay dividends is restricted by covenants
contained in the Senior Discount Notes.
The Company is a holding company whose principal assets are the stock of
its operating subsidiaries. The principal internal sources of funds for the
Company are distributions from its subsidiaries. The ability of the Company's
subsidiaries to make such payments will be subject to, among other things, the
availability of sufficient funds and restrictive covenants in debt agreements
applicable to certain of such subsidiaries. However, the Company does not
believe that any such restrictions have had or will have any material impact on
the Company's ability to meet its cash obligations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
20
<PAGE> 23
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>
PERIOD FROM
NOVEMBER 10, YEAR ENDED DECEMBER 31, THREE MONTHS NINE MONTHS ENDED
1993(1) TO ---------------------------------- ENDED ------------------------------
DECEMBER 31, PRO FORMA SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1995 1996 1995 1996
------------ ------- ---------- ----------- ------------- -------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA AND RATIOS)
<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 70,118 29,181 137,053
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, AS OF AS OF AS OF SEPTEMBER 30,
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, 1996
1994 1995 1996 1996 1996 PRO FORMA AS
------- -------- ----------- ----------- ------------- ADJUSTED(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 $
Marketable securities........................... -- -- 25,159 150,178 126,634
Working capital................................. 15,862 57,913 264,772 402,920 325,266
Total assets.................................... 71,325 146,610 449,135 633,825 637,350
Long-term debt, less current portion............ 29,403 43,977 298,529 306,391 314,440
Paid-in capital................................. -- -- 145,569(6) 330,963(6) 331,179(6) (6)
Total stockholders' equity(7)................... 36,699 93,455 153,264 300,535 290,759
Ratio of total debt to paid-in capital.......... -- -- 2.05 .93 .95
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF AS OF AS OF
------------------ MARCH 31, JUNE 30, SEPTEMBER 30,
1994 1995 1996 1996 1996
------- -------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NETWORK DATA:
Cities in operation............................... 5 11 13 18 22
Cities under construction......................... 6 10 12 8 8
On-net buildings connected........................ 62 216 495 644 734
Route miles....................................... 107 262 506 705 787
Fiber miles....................................... 6,437 17,111 26,659 43,152 50,572
VGE circuits(8)................................... 59,208 122,617 165,122 243,171 358,640
Switches installed................................ -- 1 3 9 17
CLEC lines in service............................. -- 3,187(9) 5,802 9,226 13,107
Employees......................................... 89 165 456 571 711
</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, and as adjusted to reflect, (i) the
sale of the 11 7/8% Senior Discount Notes on November 7, 1996, (ii) the
exchange of minority interests for shares of Common Stock, and the exercise
of warrants and options since September 30, 1996 and (iii) the proposed
sale of the Depositary Shares. 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.
22
<PAGE> 25
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 17 digital telephone switches installed in its networks. The Company
expects to have switches deployed to offer local dial tone, switched access
termination and origination services, centrex, and desktop products in
substantially all of its operating networks by the end of 1996, and 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."
23
<PAGE> 26
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........................ 37 913 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
24
<PAGE> 27
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.
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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
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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
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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
committed 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.
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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 Company and MaineCom intend to contribute approximately $5.2 million and
$3.5 million, respectively, to the joint venture company. 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 11 7/8% Senior Discount Notes due November
1, 2006, for which the Company received proceeds net of underwriting discounts
of approximately $217.2 million. The 11 7/8% Senior Discount Notes will not
accrue cash interest until November 1, 2001, and thereafter cash interest will
accrue until maturity on the 11 7/8% Senior Discount Notes at a rate of 11 7/8%
per annum. The 11 7/8% Senior Discount Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after November 1, 2001 at
certain redemption prices plus accrued and unpaid interest, if any, to the date
of redemption. In the event of a Strategic Equity Investment (as defined in the
Indenture governing the 11 7/8% Senior Discount Notes) on or before November 1,
1999, up to a maximum of 33 1/3% of the aggregate principal amount of the
11 7/8% Senior Discount 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 (as
defined in the Indenture) thereof. In the event of a Change of Control (as
defined in the Indenture), holders of the 11 7/8% Senior Discount Notes will
have the right to require the Company to purchase their 11 7/8% Senior Discount
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. The 11 7/8% Senior Discount 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
11 7/8% Senior Discount Note Offering and the conversion of the AT&T Credit
Facility to a parent company facility, the Company's total consolidated debt
(including current liabilities) was $560.9 million, of which $12.3 million were
outstanding liabilities of the Company's subsidiaries.
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
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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 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
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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.
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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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
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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 17 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 expects to offer such services and products in substantially all of
its operating networks by the end of 1996 and 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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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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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 13,107 at September 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
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<PAGE> 38
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 17 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 25 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> 39
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> 40
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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<PAGE> 41
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. Through the Company's prior investment and a
recent commitment, the Company has committed 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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<PAGE> 42
<TABLE>
<CAPTION>
OTHER CLEC
NETWORKS OF THE COMPANY NETWORKS IN CITY
---------------------------------------------------- ----------------------
CITY SERVED CURRENT ANNOUNCED
---------------------------------------------------- ------- ---------
<S> <C> <C>
Toledo, Ohio(1)................................... 0 1
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 Company and MaineCom intend
to contribute approximately $5.2 million and $3.5 million, respectively, to the
joint venture company. 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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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> 45
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
43
<PAGE> 46
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
44
<PAGE> 47
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. 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 September 30, 1996, the Company had approximately 711 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.
45
<PAGE> 48
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.
[CLEC LOGO]
46
<PAGE> 49
[LONG DISTANCE NETWORK 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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<PAGE> 50
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 a total of 27 of its operating networks by the end of 1996 and all of
its operating networks by the end of 1997.
When the first CAP networks were built in the 1980s, they could compete
effectively only for the approximately $8.6 billion special access and private
line services portion of the local exchange market (POP to POP Special Access,
POP to End User Special Access and End User to End User Private Line). Beginning
in 1994, after the FCC's Interconnection Decisions, which allowed CAPs to
provide Collocated Special Access, Collocated Switched Access Transport and,
with the installation of a switch, Switched Access Termination services, CAPs
were allowed to compete for an additional estimated $13.8 billion portion of the
market. If regulatory and other industry trends continue, the Company believes
that ultimately the entire approximately $102 billion total U.S. market may be
open to competition as CLECs deploy switches capable of providing the full array
of local exchange services and as state public utility commissions ("PUCs")
authorize CLECs to provide full local telecommunications services.
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<PAGE> 51
The following chart illustrates the potential CLEC revenue opportunities,
based on the total 1995 local exchange revenues, both before and after a CLEC
deploys a switch in its local network.
CLEC POTENTIAL REVENUE OPPORTUNITIES*
<TABLE>
<CAPTION>
TOTAL 1995 U.S. LOCAL
EXCHANGE MARKET
($ BILLIONS)
---------------------
<S> <C>
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.
49
<PAGE> 52
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
50
<PAGE> 53
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> 54
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> 55
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>
53
<PAGE> 56
<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> 57
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> 58
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 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.
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.
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.
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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 24 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.
The Company has established interconnection agreements with ILECs for 25 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 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 Arizona and New Mexico which is scheduled to be completed by
late 1996 or 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.
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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).................. 42 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).......... 62 Director
Jonathan M. Nelson(1,2,4,5)........ 40 Director
G. Jackson Tankersley,
Jr.(1,2,4,5).................... 47 Director
Ronald H. Vander Pol(2,3,4)........ 44 Director
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> 62
cable system operator, financier, expert witness and advisor in cable television
and broadband telecommunications. Mr. Allen was a founder and President, CFO and
COO of Cencom Cable Associates, Vice President of Operations of Telcom
Engineering, Inc., a telecommunications engineering and consulting firm with
clients in both the telephone and cable television industries, Vice President of
Operations of United Cable Television, Divisional Manager of Continental
Telephone Corporation, and Vice President for Finance of National Communications
Service Corporation. He served as Chief Financial and Chief Operating Officer of
David Lipscomb University, from which he holds a B.S. degree.
D. CRAIG YOUNG, PRESIDENT, COO. Mr. Young has served as President and COO
of the Company since April 1995. Mr. Young has 16 years experience in the
telecommunications industry. He served as Vice President-Sales Operations,
Custom Business Services of Ameritech, Inc. from 1993 to 1995; Vice
President-Sales and Service, Business and Government Services of U.S. West
Communications, Inc. from 1992 to 1993; Vice President-Sales, Large Business
Service from 1989 to 1992; and Vice President and General Manager-U.S. West
Information Systems from 1986 to 1988. Mr. Young's responsibilities at
Ameritech, Inc. and U.S. West Communications, Inc. included the management of
all voice and data sales, engineering and pricing activities for large
commercial and government end users, and full P&L responsibility for more than
$650 million in revenue and direction of a work force of more than 400
employees. Prior to that he served as President of Executone Information
Systems, a franchise distributor of voice products. He joined the Company in
1995. He has a B.S., Business Administration/Marketing degree from California
State University and has attended the Executive Management Program at Columbia
University.
JOHN C. SHAPLEIGH, EXECUTIVE VICE PRESIDENT - REGULATORY AND CORPORATE
DEVELOPMENT. Mr. Shapleigh has been Executive Vice President in charge of the
Company's regulatory and corporate development activities since its formation in
November 1993. Mr. Shapleigh has 22 years of entrepreneurial, management,
regulatory, government policy and legal experience. He is currently Chairman and
previously served for two years as President of the Association for Local
Telecommunications Services (ALTS), the national trade association for
competitive local telecommunications companies. He also served for one year as
Associate Administrator of the National Telecommunications and Information
Administration (NTIA) in the U.S. Department of Commerce, a key federal
telecommunications policy position where he directed NTIA TELECOM 2000: Charting
the Course for a New Century, a comprehensive review of 18 telecommunications,
mass media and information industries, including telephone, television and cable
television, three years as Vice President and General Counsel of LDX Net and
WilTel, developers of regional fiber optic telephone networks, positions
involving the negotiation of over $100 million in debt financing agreements and
oversight of all federal, state and local regulatory matters, and three years as
Commissioner, then Chairman, of the Missouri Public Service Commission. He has
an A.B. degree from Dartmouth College (Senior Honors) and a J.D. degree from the
Washington University School of Law (Law Quarterly). He is a recipient of the
President's Award of the Missouri Bar Association.
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 acquired by a
subsidiary of Hallmark Cards, Inc. in 1991. Previous positions with Cencom
included
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<PAGE> 63
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. Mr. Moffit also spent four years on the audit staff of Arthur
Andersen. He holds a B.S., Accounting
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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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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), Nelson and Vander Pol. Directors are not compensated for
their services as directors but are reimbursed for expenses incurred in
connection with Board and committee meetings attended.
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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<PAGE> 66
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.
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<PAGE> 67
STOCK OPTION PLAN. Pursuant to the Company's 1993 Stock Option Plan, the
Board of Directors is authorized to grant options and stock appreciation rights
covering up to 3,400,000 shares of Common Stock of the Company. As of November
15, 1996, options for an aggregate of 1,073,700 shares at $4.00 per share,
464,002 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> 68
1996 EMPLOYEE STOCK PURCHASE PLAN. In February 1996, the Company
established an Employee Stock Purchase Plan (the "ESPP") to provide employees of
the Company with an opportunity to purchase Common Stock through payroll
deductions. Under the ESPP, up to 500,000 shares of Common Stock have been
reserved for issuance, subject to certain antidilution adjustments. The ESPP
became effective at the time of the Company's initial public offering of Common
Stock in May 1996. The ESPP is intended to qualify as an employee stock purchase
plan within the meaning of Section 423 of the Internal Revenue Code. The first
offering period under the ESPP is from May 1996 through April 30, 1997. The
Board of Directors will have authority to authorize up to four annual offering
periods thereafter. The ESPP terminates on April 30, 2001. Eligible employees
may participate in the ESPP by authorizing payroll deductions during an offering
period within a percentage range determined by the Board of Directors.
Initially, the amount of authorized payroll deductions will be not less than 1%
nor more than 10% of an employee's cash compensation during an offering period,
but not more than $25,000 per year. Amounts withheld from payroll are applied at
the end of each offering period to purchase shares of Common Stock. Participants
may withdraw their contributions at any time before stock is purchased, and in
the event of withdrawal such contributions will be returned to the participants
with interest. The purchase price of the Common Stock is equal to 85% of the
lower of (i) the market price of Common Stock immediately before the beginning
of the applicable offering period or (ii) the market price of Common Stock at
the end of each offering period. All expenses incurred in connection with the
implementation and administration of the ESPP will be paid by the Company.
401(K) PLAN. The Company has a 401(k) savings and retirement plan (the
"401(k) Plan") which covers substantially all employees of the Company. All
employees of the Company who are 21 years of age or older are eligible to
participate in the 401(k) Plan upon completion of twelve months of service. The
401(k) Plan allows participants to agree to certain salary deferrals which the
Company allocates to the participant's plan account. These amounts may not
exceed statutorily mandated annual limits set forth in Sections 401(k), 404 and
415 of the Internal Revenue Code. Participants are also eligible to receive
Company matching contributions each year in an amount up to 50% of the
participant's contribution up to a maximum of 4% of such participant's annual
compensation. All contributions to a participant's plan account are subject to
limitations imposed on retirement plans generally and 401(k) plans in
particular. The Company's contributions will generally vest over a five-year
period. Distribution of a participant's account under the 401(k) Plan may be
made at retirement, death, permanent disability or other termination of
employment in a lump-sum form of payment. Participant's may withdraw amounts
from their plan accounts after attainment of age 59 1/2 or in the event of
proven financial hardship, and may also take loans against their plan account
balances.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As a result of the City Signal Acquisition, Ronald H. Vander Pol received
2,240,000 shares of the Company's Common Stock. In connection with the Company's
IPO, 224,000 of such shares were sold. Mr. Vander Pol currently beneficially
owns 2,016,000 of such shares and has the option to require the Company to
repurchase any or all of such shares at a price of $12.50 per share on or before
February 1, 1998.
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<PAGE> 69
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of November 12, 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, (iv) all
of the Company's directors and executive officers as a group and (v) the other
Selling Stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR BENEFICIALLY OWNED
TO OFFERING NUMBER AFTER OFFERING
------------------------ OF SHARES ------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT(1) OFFERED NUMBER PERCENT(1)
- ------------------------------------------ --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <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) 6.62%
7228 Kenowa Ave., S.W.
Byron Center, MI 49315
Media Communications Partners II Limited
Partnership............................. 2,009,208(4) 6.47%
75 State Street
Boston, MA 02109
Putnam Investment Management, Inc. ....... 1,814,950(5) 5.84%
One Post Office Square
Boston, MA 02109
Providence Media Partners, L.P............ 1,426,638(6) 4.59%
Jonathan M. Nelson (Director)
900 Fleet Center, 50 Kennedy Plaza
Providence, RI 02903
Other Directors and Named Executives
Robert F. Benbow (Director)............... 1,063,638(7) 3.42%
Robert A. Brooks (Named Executive and
Director)............................... 944,172(8) 3.01%
James C. Allen (Named Executive and
Director)............................... 323,570(9) 1.04%
John C. Shapleigh (Named Executive)....... 253,929(10) *
David L. Solomon (Named Executive)........ 75,527(11) *
D. Craig Young (Named Executive and
Director)............................... 71,690(12) *
William J. Bresnan (Director)............. 51,634(13) *
Carol deB. Whitaker (Director)............ 20,000(14) *
Directors and executive officers as a
group (17 persons)...................... 6,715,456(15) 21.02%
</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
67
<PAGE> 70
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 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.
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<PAGE> 71
Includes (i) 1,052,568 shares of Common Stock held by Alta V Limited
Partnership and (ii) 11,070 shares of Common Stock held by Customs House
Partners. The respective general partners of Alta V Limited Partnership and
Customs House Partners exercise sole voting and investment power with
respect to the shares owned by such funds. The principals of Burr, Egan,
Deleage & Co. are general partners of Alta V Management Partners, L.P.
(which is a general partner of Alta V Limited Partnership) and Customs
House Partners. As general partners of such funds, they may be deemed to
share voting and investment powers for the shares held by the funds. The
principals of Burr, Egan, Deleage & Co. disclaim beneficial ownership of
all such shares held by the foregoing funds, except to the extent of their
proportionate pecuniary interests therein. Mr. Benbow is a Vice President
of Burr, Egan, Deleage & Co. and general partner of Alta 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 157,020 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 175,540 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 129,260 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 65,187 shares of Common Stock subject to options which are
exercisable within 60 days.
(12) Includes (i) 2,420 shares of Common Stock and 66,667 shares of Common Stock
subject to options which are exercisable within 60 days held by D. Craig
Young, (ii) 833 shares of Common Stock held by D. Craig Young's Individual
Retirement Account, (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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<PAGE> 72
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 CAPITAL STOCK
The Company is incorporated under the laws of the State of Delaware.
Accordingly, the rights of holders of the Company's Common Stock, Preferred
Stock, warrants and options are governed by the General Corporation Law of the
State of Delaware (the "DGCL") and by the Company's Restated Certificate of
Incorporation and By-laws. The following summary of such rights is qualified in
its entirety by reference to the DGCL and the Restated Certificate of
Incorporation and By-laws of the Company. Copies of such documents will be
provided to any stockholder upon request.
AUTHORIZED STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $0.01 per share ("Common Stock"), and 1,040,012 shares of Preferred Stock,
par value $0.01 per share ("Preferred Stock"). Of the Common Stock, 49,669,100
shares are designated Voting Common Stock and 330,900 Shares are designated
Non-Voting Common Stock. Of the Preferred Stock, 50,000 shares are designated
Series C Junior Participating Preferred Stock, are designated Series D
Conversion Preferred Stock and the remainder of the Preferred Stock has the
status of authorized and unissued shares of Preferred Stock subject to issuance
from time to time as new series of Preferred Stock created by resolution of the
Board of Directors. The shares of Series C Junior Participating Preferred Stock
are issuable upon exercise of the Preferred Stock Purchase Rights issued under
the Company's Shareholder Protection Rights Plan (see "--Preferred Stock
Purchase Rights" below).
At November 15, 1996, the 31,063,623 outstanding shares of the Company's
Common Stock were held of record by stockholders, including
participants in security position listings. At such date, (i) 409,860 shares of
Common Stock were subject to outstanding warrants at a weighted average exercise
price of $20.99 per share, (ii) 3,002,022 shares of Common Stock were subject to
outstanding options at a weighted average exercise price of $11.06 per share and
(iii) warrants and options to purchase 1,714,264 shares were exercisable within
60 days.
The warrants and options are subject to adjustment from time to time in
order to prevent dilution of the exercise rights granted thereunder resulting
from (i) any subdivision or combination of the stock subject thereto, (ii) any
reorganization, reclassification, consolidation or merger of the Company or any
sale of the Company's assets, (iii) certain other dilutive events determined by
the Board of Directors of the Company to be dilutive in nature and of the type
for which adjustment should be made and (iv) in the case of the warrants, the
issuance of options, convertible securities or rights to purchase stock,
warrants, securities or other property to the holders of Common Stock, at prices
below the exercise prices thereof.
REDEMPTION
There are no redemption or sinking fund provisions applicable to the Common
Stock.
LIQUIDATION
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata the assets of the Company which
are legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of holders of any Preferred Stock
then outstanding.
NO CUMULATIVE VOTING
There is no cumulative voting. Therefore, the holders of a majority of the
shares of Common Stock voted in an election of directors will be able to elect
all of the directors then standing for election, subject to any rights of the
holders of any outstanding Preferred Stock.
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DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
Except with respect to cash dividends on the Depositary Shares, when, as and if
declared by the Board of Directors out of funds legally available therefor, the
Company currently intends to retain all future earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. See "Dividend Policy."
STOCKHOLDER ACTION WITHOUT A MEETING AND POWER TO CALL SPECIAL MEETINGS
Under the DGCL, any corporate action which may be taken at any annual or
special meeting of stockholders may be taken without a meeting by the written
consent of not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting if a meeting were held to approve
such action. The DGCL further provides that prompt notice of any action taken
without a meeting must be given to all stockholders who have not consented. The
Company's By-laws provide that special meetings of the Company's stockholders
may be called by any two members of the Board of Directors or by the Chairman of
the Board.
BOARD OF DIRECTORS
The number of directors which constitutes the entire Board of Directors of
the Company is ten (10). The Company's Restated Certificate of Incorporation
provides for three classes of directors having staggered terms of office with
each director elected to serve a three year term. See "Management."
LIMITATION ON PERSONAL LIABILITY OF DIRECTORS
Delaware law authorizes a Delaware corporation to eliminate or limit the
personal liability of a director to a corporation and its stockholders for
monetary damages for breach of certain fiduciary duties as a director. The
Company believes that such a provision is beneficial in attracting and retaining
qualified directors, and, accordingly, the Company's Restated Certificate of
Incorporation includes a provision eliminating liability for monetary damages
for any breach of fiduciary duty as a director, except: (1) for any breach of
the duty of loyalty to the Company or its stockholders; (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (3) for any transaction from which the director derives an
improper personal benefit; and (4) for unlawful payments of dividends or
unlawful stock repurchases or redemptions as provided in Section 174 of the
DGCL. Thus, pursuant to Delaware law, directors of the Company are not insulated
from liability for breach of their duty of loyalty (requiring that, in making a
business decision, directors act in good faith and in the honest belief that the
action is taken in the best interests of the Company) or for claims arising
under the federal securities laws. The foregoing provisions of the Company's
Restated Certificate of Incorporation may reduce the likelihood of derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breaches of their
fiduciary duties, even though such an action, if successful, might otherwise
have benefitted the Company and its stockholders. Further, the Company's
Restated Certificate of Incorporation contains provisions for the
indemnification of and advancing of expenses to directors and officers to the
full extent permitted by law. The Company has insurance with a policy limit of
$10 million for the benefit of its officers and directors insuring such persons
against certain liabilities, including certain liabilities under the securities
laws.
VOTE REQUIRED FOR AMENDMENTS
The Company's Restated Certificate of Incorporation requires the
affirmative vote of the holders of record of outstanding shares representing at
least 66 2/3% of all the outstanding capital stock of the Company entitled to
vote generally in the election of directors to amend, alter, change or repeal,
or
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adopt any provision or provisions inconsistent with, Article Fourth of the
Restated Certificate of Incorporation, which sets forth the authorized capital
stock of the Company and the terms thereof.
The Restated Certificate of Incorporation of the Company allows the Board
of Directors to adopt, amend, or repeal the By-laws, subject to the right of the
Company's stockholders entitled to vote with respect thereto to adopt, amend or
repeal the By-laws. The By-laws provide that they may be altered, amended or
repealed by (i) the affirmative vote of at least 66 2/3% of the members of the
Board of Directors present at a meeting at which a quorum is present or (ii) the
holders of 66 2/3% of the issued and outstanding shares of stock entitled to
vote generally at a meeting of stockholders, voting as a single class. This
provision would enable holders of more than 33 1/3% of the voting power to
prevent an amendment to the By-laws by the stockholders even if it were favored
by the holders of a majority of the voting stock.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
Section 203 of the DGCL requires that certain types of business
combinations (including mergers, combinations, and sales or other dispositions
of significant assets of a corporation) may not be accomplished with an
interested stockholder (generally, any person holding 15% or more, directly or
indirectly through affiliates or associates, of the issued and outstanding
shares of voting stock of a corporation) within three years of the date the
person became an interested stockholder unless: (i) prior to such date the Board
of Directors of the corporation approved of the business combination or
transaction which resulted in the stockholder becoming an interested
stockholder; or (ii) upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock (excluding shares of stock owned by persons who
are both directors and officers, and by certain employee stock plans); or (iii)
on or subsequent to such date, the business combination is approved by the Board
of Directors and by the affirmative vote of stockholders holding at least
66 2/3% of the issued and outstanding voting stock of the corporation. Section
203 is applicable to the Company.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Following completion of the Depositary Shares Offering, there will be
additional authorized shares of Common Stock which have not been reserved
for issuance upon conversion of the Depositary Shares, upon exercise of
outstanding warrants and options and under employee stock plans and
authorized shares of Preferred Stock available for issuance by the Company at
such times and under such circumstances as may be determined by the Board of
Directors, and, in the case of the Preferred Stock, with such designations,
rights and preferences as may be determined by the Board of Directors. Such
shares will be available for possible future acquisitions, equity financings and
other corporate purposes, and might be issued at such times and under such
circumstances as to have a dilutive effect on earnings per share and on the
equity ownership of holders of the Company's Common Stock. The ability of the
Company's Board of Directors to issue additional shares of stock could enhance
the Board's ability to negotiate on behalf of stockholders in a takeover
situation but could also be used by the Board to make a change in control more
difficult and could increase the ability of the Board to continue current
management. At present, there are no pending proposals for the issuance of any
such additional authorized shares.
PREFERRED STOCK PURCHASE RIGHTS
Under the Company's Stockholders Protection Rights Plan (the "Rights
Plan"), the Board of Directors has declared and paid a dividend of one Preferred
Stock Purchase Right (a "Right") for each outstanding share of Common Stock.
Except as set forth below, each Right, when exercisable, entitles the registered
holder to purchase from the Company one one-thousandth of a share of Series C
Junior Participating Preferred Stock, $.01 par value (the "Series C Preferred
Stock"), at a price of $100.00 per one one-thousandth of a share (the "Purchase
Price"), subject to adjustment. The terms of the Rights are set forth in the
Rights Agreement between the Company and Boatmen's
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Trust Company, as Rights Agent (the "Rights Agreement"), and the summary of the
terms of the Rights set forth herein is qualified in its entirety by reference
to the Rights Agreement.
Currently, no separate Rights certificates represent the Rights. Until the
earlier of (i) 10 business days following the first to occur of (a) a public
announcement by the Company or an Acquiring Person (defined below) that, without
the prior written consent of the Company, a person or group of affiliated or
associated persons, other than the Company or subsidiaries or employee benefit
or compensation plans of the Company (an "Acquiring Person"), has acquired, or
obtained the right to acquire, 20% or more of the voting power of all securities
of the Company then outstanding and generally entitled to vote for the election
of directors of the Company ("Voting Power"), or (b) the date on which the
Company first has notice or otherwise determines that a person has become an
Acquiring Person (the "Stock Acquisition Date"), or (ii) 10 business days (or
such later date as may be determined by the Board of Directors prior to the time
that any person becomes an Acquiring Person) after the date that a tender offer
or exchange offer is first published or sent, without the prior written consent
of a majority of the Board of Directors, that will result in any person owning
20% or more of the Voting Power (the earlier of the dates in clause (i) or (ii)
above being called the "Distribution Date"), the Rights will be evidenced by the
Company's outstanding Common Stock certificates. Notwithstanding the foregoing,
an Acquiring Person shall not include any person or group who inadvertently
becomes the beneficial owner of 20% or more of the Voting Power, as long as such
person or group promptly enters into an irrevocable commitment to, and promptly
does, divest enough shares to get below the 20% threshold.
The Rights Agreement provides that, until the Distribution Date, the Rights
will be transferable only in connection with the transfer of the Company's
Common Stock. Until the Distribution Date (or earlier redemption, termination or
expiration of the Rights), newly issued Common Stock certificates will contain a
notation incorporating the Rights Agreement by reference. Until the Distribution
Date (or earlier redemption, termination or expiration of the Rights), the
surrender for transfer of any of the Company's outstanding Common Stock
certificates will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificate. As soon as practicable following
the Distribution Date, separate certificates evidencing the Rights ("Right
Certificates") will be mailed to holders of record of the Company's Common Stock
as of the close of business on the Distribution Date and such separate
certificates alone will then evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on February 28, 2006, unless such date is extended or unless earlier
redeemed or exchanged by the Company, as described below.
The Purchase Price payable, the number and identity of shares of Series C
Preferred Stock or other securities or property issuable upon exercise of the
Rights and the number of Rights outstanding are subject to adjustment from time
to time to prevent dilution (i) in the event of a stock dividend on, or a
subdivision, combination or reclassification of, the Series C Preferred Stock,
(ii) upon the issuance to holders of Series C Preferred Stock of rights or
warrants to subscribe for shares of Series C Preferred Stock or securities
convertible into Series C Preferred Stock at less than the then current market
price of the Series C Preferred Stock, or (iii) upon the distribution to holders
of Series C Preferred Stock of evidences of indebtedness or cash (excluding
regular periodic cash dividends out of earnings or retained earnings of the
Company), assets (other than a dividend payable in Series C Preferred Stock) or
convertible securities, subscription rights or warrants (other than those
referred to above).
The number of outstanding Rights and the number of one one-thousandths of a
share of Series C Preferred Stock issuable upon exercise of each Right are also
subject to adjustment in the event of a subdivision, combination or
consolidation of the Common Stock or a stock dividend on the Common Stock
payable in Common Stock occurring, in any such case, prior to the Distribution
Date.
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With certain exceptions, no adjustments in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares will be issued (other than fractions
which are integral multiples of one one-thousandth of a share of Series C
Preferred Stock). In lieu of fractional shares, an adjustment in cash will be
made based on the market price of the stock on the last trading date prior to
the date of exercise.
In the event that, following the Distribution Date, (i) the Company
consolidates with or merges with or into any person, (ii) any person
consolidates with or merges with or into the Company, and the Company continues
or survives such merger and, in connection with such merger, all or part of the
Common Stock is changed into or exchanged for stock or securities of another
person or cash or any other property or (iii) the Company (or one or more of its
subsidiaries) sells or transfers 50% or more of the Company's assets or earning
power (in one transaction or a series of transactions), proper provision shall
be made so that each holder of a Right shall thereafter have the right to
receive, upon the exercise of such Right and payment of the Purchase Price, that
number of shares of common stock of the surviving or purchasing company (or, in
certain cases, one of its affiliates) which at the time of such transaction
would have a market value of two times the Purchase Price (such right being
called the "Merger Right").
In the event that any person shall become an Acquiring Person ("Flip-in
Event"), proper provision shall be made so that each holder of a Right will
thereafter have the right to receive upon exercise that number of shares (or
fractional shares) of Common Stock (or, in certain cases, equivalent securities)
having a market value of two times the Purchase Price (such right being called
the "Subscription Right"). However, the Rights will not become exercisable
following a Flip-in Event as described above until such time as the Rights are
no longer redeemable by the Company as described below.
Any Rights that are beneficially owned by an Acquiring Person or an
affiliate or an associate of an Acquiring Person will become null and void upon
the occurrence of any of the events giving rise to the exercisability or the
Subscription Right or the Merger Right, and any holder of such Rights will have
no right to exercise such Rights from and after the occurrence of such an event
insofar as they relate to the Subscription Right or the Merger Right.
At any time after the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the Voting Power
and prior to the acquisition by such person or group of 50% or more of the
Voting Power, the Board of Directors of the Company may exchange the Rights
(other than Rights owned by such person or group which have become void), in
whole or in part, at an exchange ratio of one share of Common Stock, or one
one-thousandth of a share of Series C Preferred Stock (or of a share of the
Company's Preferred Stock having equivalent rights, preferences and privileges),
per Right (subject to adjustment).
At any time prior to the Distribution Date, the Company may elect to redeem
the Rights in whole, but not in part, at a price of $0.001 per Right as adjusted
to reflect any stock split, stock dividend or similar transaction. Upon the
effective date of the redemption, the right to exercise the Rights will
terminate and the only right thereafter of the holders of Rights will be the
right to receive the redemption price. The Company shall promptly and publicly
disclose any such redemption and provide notice of such redemption to Rights
holders within 10 days after the Board action. However, any failure to give, or
defect in, such disclosure will not affect the validity of such redemption.
The Series C Preferred Stock purchasable upon exercise of the Rights will
not be redeemable and will be junior to any other series of Preferred Stock the
Company may issue (unless otherwise provided in the terms of such stock). Each
share of Series C Preferred Stock will have a preferential dividend in an amount
equal to the greater of $10.00 per share or 1,000 times any dividend declared on
each share of Common Stock. In the event of liquidation, the holders of Series C
Preferred Stock will be entitled to a minimum preferential liquidation payment
of $1,000 per share (plus any accrued but unpaid dividends) and, after payment
of an equivalent amount to holders of the Common Stock, to share ratably and
proportionately with the Common Stock in the distribution of any remaining
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assets. Each share of Series C Preferred Stock will have 1,000 votes, voting
together with the shares of Common Stock. In the event of any merger,
consolidation or other transaction in which shares of Common Stock are
exchanged, each share of Series C Preferred Stock will be entitled to receive
1,000 times the amount and type of consideration received per share of Common
Stock. The rights of the Series C Preferred Stock as to dividends, liquidation
and voting, and in the event of mergers and consolidations, are protected by
customary anti-dilution provisions. Fractional shares of Series C Preferred
Stock in integral multiples of one one-thousandth of a share of Series C
Preferred Stock will be issuable; however, the Company may elect to distribute
depositary receipts in lieu of such fractional shares. In lieu of fractional
shares other than fractions that are multiples of one one-thousandth of a share,
an adjustment in cash will be made based on the market price of the Series C
Preferred Stock on the last trading date prior to the date of exercise.
Because of the nature of the Series C Preferred Stock's voting, dividend
and liquidation features, the value of the one one-thousandth of a share of
Series C Preferred Stock purchasable upon exercise of each Right should
approximate the value of one share of Common Stock.
The Board of Directors of the Company retains a broad ability to amend or
supplement the Rights Agreement without the consent of the holders of the
Rights, including amendments to extend the expiration date of the rights and
lower the threshold for exercisability of the Rights from 20% to not less than
the greater of (i) any percentage greater than the largest percentage of the
Voting Power then known to the Company to be beneficially owned by any person or
group of affiliated or associated persons (other than subsidiaries or employee
benefit or compensation plans of the Company), and (ii) 10%, except that from
and after such time as any person becomes an Acquiring Person no such amendment
may adversely affect the interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends.
Shareholders may, depending upon the circumstances, recognize taxable
income in the event that the Rights become exercisable for Series C Preferred
Stock or other consideration as set forth above.
The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire the Company
without a condition to such an offer that a substantial number of the Rights be
acquired or the Rights be redeemed or otherwise not apply. The Company's ability
to amend the Rights Agreement may, depending upon the circumstances, increase or
decrease the anti-takeover effects of the Rights. The Rights do not prevent the
Board of Directors of the Company from approving in advance any merger or other
business combination since the Rights may be redeemed by the Board of Directors
as described above.
PROPOSED OFFERING OF DEPOSITARY SHARES
The Company has filed a Registration Statement on Form S-1 to register up
to Depositary Shares, shares of Series D Preferred Stock
represented by such Depositary Shares and shares of Common Stock issuable
upon conversion of the Depositary Shares. Each of the Depositary Shares will
represent ownership of 1/100 of a share of Series D Preferred Stock, which will
be deposited with a depositary, and will entitle the holder to such proportion
of all of the rights and preferences of the Series D Preferred Stock represented
thereby.
The annual dividend rate payable with respect to each Depositary Share will
be $ (based on the annual dividend rate for each share of Series D
Preferred Stock of $ .00), will be cumulative from the date of issuance and
will be payable quarterly in arrears, commencing on , 1997. The
liquidation preference applicable to each Depositary Share (based on the
liquidation preference of each share of Series D Preferred Stock) will be equal
to the sum of (i) the per share initial public offering price of the Depositary
Shares and (ii) 1/100 of the amount of the accrued and unpaid dividends on each
share of Series D Preferred Stock.
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On , 1999 (the "Mandatory Conversion Date"), unless previously
converted at the option of the holder, each of the outstanding Depositary Shares
will automatically convert into a number of shares of Common Stock of the
Company equal to the Exchange Rate. The Exchange Rate will in no event exceed
one share of Common Stock for each Depositary Share, will be less than one share
of Common Stock where the Current Market Price exceeds the Initial Price and
will vary depending upon whether the Current Market Price exceeds or is lower
than a predetermined "Threshold Price." The "Initial Price" is the public
offering price per share of the Depositary Shares in the Depositary Shares
Offering. The "Current Market Price" means the average closing sale price per
share of Common Stock on the 20 trading days immediately prior to, but not
including, the Mandatory Conversion Date.
At any time after , 1997 and prior to the Mandatory Conversion
Date, each of the Depositary Shares will be convertible at the option of the
holder thereof into a fraction of a share of Common Stock equivalent to a
conversion price per share equal to the Threshold Price, subject to adjustment
in certain events.
TRANSFER AGENT AND REGISTRAR
The Company's Transfer Agent and Registrar is The Boatmen's Trust Company
("Boatmen's Trust"), St. Louis, Missouri.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering and assuming (i) the Underwriters'
over-allotment options are exercised in full and (ii) no exercise of outstanding
warrants and options, the Company will have outstanding shares of
Common Stock. Of these shares, the shares sold in this Offering
( shares if the Underwriters' over-allotment options are exercised in
full) and the 8,704,202 shares sold in the IPO will be freely tradeable without
restriction or further registration under the Securities Act, except for any
shares purchased by "affiliates" of the Company as the term is defined in Rule
144 under the Securities Act ("Affiliates"), which shares will be subject to the
resale limitations of Rule 144. The remaining shares of Common Stock
("Restricted Shares") held by existing stockholders were issued and sold by the
Company in reliance on exemptions from the registration requirements of the
Securities Act. These shares may be sold in the public market only if registered
or pursuant to an exemption from registration such as those afforded by Rules
144, 144A, 701 and Regulation S under the Securities Act, which are summarized
below.
Upon completion of this Offering, approximately shares held by
existing stockholders will be eligible for sale pursuant to Rules 144 and 701,
subject to the volume limitations thereof.
Beginning 180 days after the date of this Prospectus, upon the expiration
of public sale restrictions described below (see "Underwriting"), or earlier in
the discretion of the Underwriters, the following approximate additional amounts
of Restricted Shares will become eligible for sale in the public market subject
to the volume limitations under Rule 144 discussed below: shares
immediately; and shares from 1997 through 1998.
Options and warrants to purchase 1,304,404 and 409,860 shares of Common
Stock, respectively, were outstanding as of November 15, 1996 and exercisable
within 60 days.
In general, under Rule 144 as currently in effect, an Affiliate of the
Company or other person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least two years will be entitled to
sell in any three-month period a number of shares that does not exceed the
greater of (i) 1% of the then outstanding shares of the Company's Common Stock
(approximately shares immediately after the Offering, if the
Underwriters' over-allotment options are exercised in full) or (ii) the average
weekly trading volume of the Company's Common Stock on the Nasdaq National
Market during the four calendar weeks immediately preceding the date on
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which notice of the sale is filed with the Securities and Exchange Commission.
Sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not deemed to
have been an Affiliate of the Company at any time during the 90 days immediately
preceding the sale and who has beneficially owned Restricted Shares for at least
three years is entitled to sell such shares pursuant to Rule 144(k) without
regard to the limitations described above.
Restricted Shares may also be resold (1) 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 and (2) in an off-shore transaction complying with
Rules 903 and 904 of Regulation S under the Securities Act.
An employee of the Company who purchased shares or was awarded options to
purchase shares pursuant to a written compensatory plan or contract meeting the
requirements of Rule 701 under the Securities Act is entitled to rely on the
resale provisions of Rule 701 under the Securities Act, which permits Affiliates
and non-Affiliates to sell their Rule 701 shares without having to comply with
the holding period restrictions of Rule 144, in each case commencing 90 days
after the date of this Prospectus. In addition, non-Affiliates may sell Rule 701
shares without complying with the public information, volume and notice
provisions of Rule 144.
Shares acquired pursuant to the 1993 Stock Option Plan and the 1996
Employee Stock Purchase Plan will be available for sale in the open market upon
the expiration of the public sale restrictions described below (see
"Underwriting"), subject to Rule 144 volume limitations applicable to
Affiliates, except to the extent such shares are subject to vesting restrictions
with the Company.
Upon completion of the Depositary Shares Offering, up to shares of
Common Stock will be issuable upon conversion of the Depositary Shares. All of
such shares will be issued no later than , 1999, and shares received
upon conversion will be available for sale in the open market, subject to Rule
144 volume limitations applicable to Affiliates. See "Description of Capital
Stock -- Proposed Offering of Depositary Shares."
Future sales of substantial amounts of Common Stock in the public market
could adversely affect market prices prevailing from time to time. As described
herein, only a limited number of Restricted Shares will be available for sale
shortly after the Offerings because of certain contractual and legal
restrictions on resale. Sales of substantial amounts of Common Stock of the
Company in the public market after the restrictions lapse could adversely affect
the prevailing market price and the ability of the Company to raise equity
capital in the future.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Selling Stockholders have agreed to sell to each of the
Underwriters named below (the "U.S. Underwriters"), and each of the U.S.
Underwriters, for whom Goldman, Sachs & Co. and Salomon Brothers Inc. are acting
as representatives, has severally agreed to purchase, the respective number of
shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
PURCHASERS SHARES OF COMMON STOCK
--------------------------------------------------- ----------------------
<S> <C>
Goldman, Sachs & Co. ..............................
Salomon Brothers Inc...............................
--------
Total.......................................
========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the public offering price set forth on the cover page
of this Prospectus, and in part to certain securities dealers at such price less
a concession of $ per share (the "U.S. Offering"). The U.S. Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per share
to certain brokers and dealers. After the shares of Common Stock are released
for sale to the public, the offering price and other selling terms may from time
to time be varied by the representatives.
The Company and the Selling Stockholders have entered into an underwriting
agreement (the "International Underwriting Agreement") with the underwriters of
the International Offering (the "International Underwriters") providing for the
concurrent offer and sale of shares of Common Stock in an international
offering outside the United States (the "International Offering" and, together
with the U.S. Offering, the "Offerings"). The offering price and aggregate
underwriting discounts and commissions per share for the two Offerings are
identical. The closing of the U.S. Offering is conditioned upon the closing of
the International Offering, and vice versa. The representatives of the
International Underwriters are Goldman Sachs International and Salomon Brothers
International Limited.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two Offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares in the U.S. Offering and subject to certain exceptions, it will
offer, sell or deliver the shares of Common Stock, directly or indirectly, only
in the United States of America (including the States thereof and the District
of Columbia), its territories, its possessions and other areas subject to its
jurisdiction (the "United States") and to U.S. persons, which term shall mean,
for purposes of this paragraph: (a) any individual who is a resident of the
United States or (b) any corporation, partnership or other entity organized in
or under the laws of the United States or any political subdivision thereof and
whose office most directly involved with the purchase is located in the United
States. Each of the International Underwriters has agreed pursuant to the
Agreement Between that, as a part of the distribution of the shares offered as a
part
80
<PAGE> 83
of the International Offering, and subject to certain exceptions, it will (i)
not, directly or indirectly, offer, sell or deliver shares of Common Stock (a)
in the United States or to any U.S. persons or (b) to any person who it believes
intends to reoffer, resell or deliver the shares in the United States or to any
U.S. persons and (ii) cause any dealer to whom it may sell such shares at any
concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall be
the public offering price, less an amount not greater than the selling
concession.
The Company has granted the Underwriters an option exercisable for 30
calendar days after the date of this Prospectus to purchase up to an aggregate
of an additional shares of Common Stock to cover over-allotments, if
any. If the Underwriters exercise their over-allotment option, the Underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof that the number of the shares to be purchased by
each of them, as shown in the foregoing table, bears to the shares of
Common Stock offered hereby. The Company has also granted the International
Underwriters a similar option to purchase up to an aggregate of an additional
shares of Common Stock. The Underwriters may exercise such option only to
cover over-allotments in connection with the sale of the shares offered hereby.
The Company and the Selling Stockholders have agreed not to offer, sell,
contract to sell or otherwise dispose of any shares of Common Stock or any
rights to purchase or other securities convertible into or any securities of the
Company substantially similar to any such shares for a period of 180 days after
the date of this Prospectus without the prior written consent of the
Underwriters, except for (i) the Series D Preferred Stock, Depositary Shares and
shares of Common Stock and the related rights issuable upon conversion of the
Series D Preferred Stock offered in connection with the Depositary Shares
Offering, (ii) shares of Common Stock issued pursuant to existing employee
benefit plans, (iii) shares of Common Stock issued in acquisition transactions,
(iv) upon the conversion or exchange of convertible or exchangeable securities,
or the exercise of any warrants or other rights, outstanding as of the date of
the Underwriting Agreement and (v) in the case of the Selling Stockholders, in
certain non-public transactions in which the acquiror or acquirors of such
shares agree(s) to such restrictions.
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of Common Stock to persons located in the United States.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the several Underwriters against certain
liabilities, including certain liabilities under the Securities Act of 1933, or
contribute to payments the Underwriters may be required to make in respect
thereof.
An affiliate of Goldman, Sachs & Co. owns approximately % of the capital
stock of the Company, on a fully diluted basis as of November 15, 1996. Each of
the representatives may serve as a financial advisor to the Company from time to
time in the future.
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
person that, for U.S. federal income tax purposes, is a non-resident alien
individual, a foreign corporation, a foreign partnership or a foreign estate or
trust (a "non-U.S. holder"). This discussion does not consider specific facts
and circumstances that may be relevant to a particular holder's tax position
(including the tax position of certain U.S. expatriates) and does not deal with
U.S. state and local or non-U.S. tax consequences. Furthermore, the following
discussion is based on provisions of the U.S. Internal
81
<PAGE> 84
Revenue Code of 1986, as amended (the "Code"), and administrative and judicial
interpretations as of the date hereof, all of which are subject to change. Each
prospective holder is urged to consult a tax advisor with respect to the U.S.
federal tax consequences of acquiring, holding and disposing of Common Stock as
well as any tax consequences that may arise under the laws of any U.S. state,
municipality or other tax jurisdiction.
DIVIDENDS
Dividends paid to a non-U.S. holder of Common Stock will be subject to
withholding of U.S. federal income tax at a 30% rate or such lower rate as may
be specified by an applicable income tax treaty, unless the dividends are
effectively connected with the conduct of a trade or business within the United
States. Dividends that are effectively connected with such holder's conduct of a
trade or business within the United States and, if an income tax treaty applies,
are attributable to a U.S. permanent establishment of such holder, are subject
to tax at rates applicable to U.S. citizens, resident aliens and domestic U.S.
corporations, and are generally not subject to withholding. Any such effectively
connected dividends received by a foreign corporation may be subject to an
additional "branch profits tax" at a rate of 30% (or such lower rate as may be
specified by an applicable treaty) of its effectively connected earnings and
profits subject to certain adjustments.
Under current United States Treasury regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country (unless the payor has knowledge to the contrary) for purposes of the
withholding discussed above and, under the current interpretation of the United
States Treasury regulations, for purposes of determining the applicability of a
tax treaty rate. Under United States Treasury regulations that are proposed to
be effective for distributions after 1997 (the "Proposed Regulations"), however,
a non-U.S. holder of Common Stock who wishes to claim the benefit of an
applicable treaty rate would be required to satisfy applicable certification
requirements. In addition, under the Proposed Regulations, in the case of Common
Stock held by a foreign partnership, (i) the certification requirement would
generally be applied to the partners of the partnership and (ii) the partnership
would be required to provide certain information, including a United States
taxpayer identification number. The Proposed Regulations also provide
look-through rules for tiered partnerships. It is not certain whether, or in
what form, the Proposed Regulations will be adopted as final regulations.
A non-U.S. holder of Common Stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
U.S. Internal Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of Common Stock unless (i) the
gain is effectively connected with a trade or business of the non-U.S. holder in
the United States, (ii) in the case of a non-U.S. holder who is an individual
and holds the Common Stock as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year of the sale and either
(a) such individual's "tax home" for U.S. federal income tax purposes is in the
United States, or (b) the gain is attributable to an office or other fixed place
of business maintained in the United States by such individual, or (iii) the
Company is or has been a "U.S. real property holding corporation" for federal
income tax purposes and the non-U.S. holder held, directly or indirectly at any
time during the five-year period ending on the date of disposition, more than 5%
of the Common Stock. The Company has not been, is not, and does not anticipate
becoming a "U.S. real property holding corporation" for federal income tax
purposes.
82
<PAGE> 85
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> 86
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> 87
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> 88
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) $ (1.10)
============ ============
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> 89
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> 90
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> 91
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
SEPTEMBER 30, ------------
1996
-------------
(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> 92
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> 93
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............... 8,899 -- -- (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> 94
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> 95
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> 96
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> 97
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 2,070,000
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> 98
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> 99
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> 100
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> 101
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> 102
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
-------------------------------------------- ---------------------------------------
SERIES A-1 SERIES A-2 SERIES B-1 SERIES B-2
-------------------- --------------------- ------------------- -----------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ----------- ------- ----------- ------ ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock,
November 10, 1993...... -- $ -- -- $ -- -- $ -- -- $ --
Issuance and subscription
of Series A preferred
stock.................. 396,000 39,600,000 -- -- -- -- -- --
Issuance and subscription
of Series B preferred
stock.................. -- -- -- -- 12,000 1,200,000 -- --
Subscriptions receivable,
payments and
reclassifications...... -- -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- --
------- ----------- ------- ----------- ------ ---------- ---- --------
Balance, December 31,
1993................... 396,000 39,600,000 -- -- 12,000 1,200,000 -- --
Subscriptions receivable,
payments and
reclassifications...... -- -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------ ---------- ---- --------
Balance, December 31,
1994................... 396,000 39,600,000 -- -- 12,000 1,200,000 -- --
Issuance of Series A-2
preferred stock........ -- -- 419,705 65,596,000 -- -- -- --
Issuance of Series B-2
preferred stock........ -- -- -- -- -- -- 4,545 711,000
Net loss................. -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------ ---------- ---- --------
Balance, December 31,
1995................... 396,000 $39,600,000 419,705 $65,596,000 12,000 $1,200,000 4,545 $711,000
======= =========== ======= =========== ====== ========== ==== ========
<CAPTION>
COMMON
STOCK TOTAL
--------- SUBSCRIPTIONS ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT RECEIVABLE DEFICIT EQUITY
--------- ------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock,
November 10, 1993...... 1,162,800 $12,000 -- (11,000) 1,000
Issuance and subscription
of Series A preferred
stock.................. -- -- (39,018,000) -- 582,000
Issuance and subscription
of Series B preferred
stock.................. -- -- (1,182,000) -- 18,000
Subscriptions receivable,
payments and
reclassifications...... -- -- 4,450,000 -- 4,450,000
Net loss................. -- -- -- (205,000) (205,000)
--------- ------- ----------- ---------- ----------
Balance, December 31,
1993................... 1,162,800 12,000 (35,750,000) (216,000) 4,846,000
Subscriptions receivable,
payments and
reclassifications...... -- -- 35,750,000 -- 35,750,000
Net loss................. -- -- -- (3,897,000) (3,897,000)
--------- ------- ----------- ---------- ----------
Balance, December 31,
1994................... 1,162,800 12,000 -- (4,113,000) 36,699,000
Issuance of Series A-2
preferred stock........ -- -- -- -- 65,596,000
Issuance of Series B-2
preferred stock........ -- -- -- -- 711,000
Net loss................. -- -- -- (9,551,000) (9,551,000)
--------- ------- ----------- ---------- ----------
Balance, December 31,
1995................... 1,162,800 $12,000 -- (13,664,000) 93,455,000
========= ======= =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 103
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> 104
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> 105
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> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
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> 113
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> 114
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> 115
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> 116
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> 117
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> 118
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> 119
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> 120
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> 121
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> 122
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> 123
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> 124
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> 125
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> 126
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> 127
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 TOTAL
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> 128
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> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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> 135
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> 136
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> 137
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> 138
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> 139
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> 140
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> 141
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> 142
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> 143
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE 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 OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT
CONSTITUTE AN OFFER TO SELL TO, OR THE SOLICITATION OF ANY OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY OR TO ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 13
Capitalization............................ 19
Selected Historical and Pro Forma
Financial and Other Operating Data...... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 23
Business of the Company................... 32
The Competitive Local Telecommunications
Industry................................ 46
Competition............................... 50
Regulatory Overview....................... 53
Management................................ 59
Principal and Selling Stockholders........ 67
Certain Relationships and Related
Transactions............................ 70
Description of Capital Stock.............. 72
Shares Eligible for Future Sale........... 78
Underwriting.............................. 80
Certain United States Tax Consequences to
Non-U.S. Holders of Common Stock........ 81
Validity of Common Stock.................. 83
Independent Auditors...................... 83
Additional Information.................... 84
Index to Consolidated Financial
Statements.............................. F-1
Glossary.................................. A-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
SHARES
BROOKS FIBER
PROPERTIES, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
---------------------------------------
LOGO
---------------------------------------
GOLDMAN, SACHS & CO.
SALOMON BROTHERS INC
REPRESENTATIVES OF THE UNDERWRITERS
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 144
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the securities offered hereby.
<TABLE>
<S> <C>
Registration Fee......................................................... $77,253
-------
NASD Filing Fee.......................................................... 25,994
-------
NASDAQ Listing Fee....................................................... *
Printing and Engraving Expenses.......................................... *
Blue Sky Fees and Expenses............................................... *
Registrar and Transfer Agent Fees........................................ *
Legal Fees and Expenses.................................................. *
Accounting Fees and Expenses............................................. *
Miscellaneous............................................................ *
-------
Total............................................................... $ *
========
</TABLE>
- ---------------
*To be completed by amendment.
ITEM 14. 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 made or 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 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 the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, by special independent counsel 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 be 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 a person. Insurance
may be purchased on behalf of any person entitled to indemnification by the
corporation against any liability 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 or surviving 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.
II-1
<PAGE> 145
The Amended and 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 15. RECENT SALES OF UNREGISTERED SECURITIES
1. SALES OF EQUITY SECURITIES.
a) The information set forth in Item 15, paragraph 1, appearing on pages
II-2 through II-4, of the Company's Registration Statement on Form S-1 (File No.
333-1924) is hereby incorporated by reference.
b) The Company and MCImetro Access Transmission Services, Inc.
("MCImetro") entered into a subscription agreement on June 24, 1996 pursuant to
which MCImetro 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 958,720 shares of the Company's Common Stock. The
issuance of such shares was not registered under the Securities Act in reliance
on the exemption for nonpublic offerings provided by Section 4(2) of the
Securities Act. MCImetro, an accredited investor, acquired such shares of the
Company's Common Stock for investment and subject to restrictions on transfer
which were described in appropriate legends on the certificate representing such
shares of Common Stock.
c) On November 12, 1996, the Company issued an aggregate of 234,260 shares
of the Company's Common Stock to AT&T Credit Corporation in exchange for the
agreed value of AT&T Credit Corporation's investments in certain subsidiaries of
the Company made in connection with certain loans to such subsidiaries. The
issuance of such shares was not registered under the Securities Act in reliance
on the exemption for nonpublic offerings provided by Section 4(2) of the
Securities Act. AT&T Credit Corporation, an accredited investor, acquired such
shares of the Company's Common Stock for investment and subject to restrictions
on transfer which were described in appropriate legends on the certificate
representing such shares of Common Stock.
d) On April 18, 1996 and July 16, 1996, two related investment funds
exercised warrants to purchase an aggregate of 9,940 shares of the Company's
Common Stock and 5,120 shares of the Company's Common Stock, respectively, at
$11.00 per share (or an aggregate of $109,340) and at $22.17 per share (or an
aggregate of $113,510), respectively. The issuance and sale of the foregoing
securities was not registered under the Securities Act in reliance on the
exemption for nonpublic offerings provided by Section 4(2) of the Securities
Act. Each of the holders of such securities are accredited investors and
acquired such shares for investment and subject to restrictions on transfer
which were described in appropriate legends on the certificates representing
such shares of Common Stock.
e) On September 24, 1996 and October 3, 1996, an investment fund exercised
warrants to purchase an aggregate of 370,200 shares of the Company's Common
Stock at $22.17 per share and warrants to purchase an aggregate of 119,440
shares of the Company's Common Stock at $11.00 per share, respectively, in net
cashless exercises in which the holder acquired an aggregate of 160,195 shares
of the Company's Common Stock. The issuance and sale of the foregoing securities
was not registered under the Securities Act in reliance on the exemption for
nonpublic offerings provided by Section 4(2) of the Securities Act. The holder
of such securities is an accredited investor and acquired such shares for
investment and subject to restrictions on transfer which were described in
appropriate legends on the certificates representing such shares of Common
Stock.
II-2
<PAGE> 146
f) On various dates from November 1, 1996 through November 6, 1996,
warrants to purchase an aggregate of 37,940 shares of the Company's Common Stock
at $22.17 per share were exercised by six investment funds. An aggregate of
12,320 shares was acquired for an aggregate of $273,134 in cash, and an
aggregate of 5,249 shares was acquired in net cashless exercises. The issuance
and sale of the foregoing securities was not registered under the Securities Act
in reliance on the exemption for nonpublic offerings provided by Section 4(2) of
the Securities Act. Each of the holders of such securities are accredited
investors and acquired such shares for investment and subject to restrictions on
transfer which were described in appropriate legends on the certificates
representing such shares of Common Stock.
g) On various dates from October 8, 1996 through November 8, 1996,
warrants to purchase an aggregate of 1,493,840 shares of the Company's Common
Stock at $11.00 per share and 120 shares at $22.17 per share were exercised by
64 holders thereof. An aggregate of 520,809 shares was acquired for an aggregate
of $5,728,899 in cash, and an aggregate of 593,152 shares was acquired in net
cashless exercises. The issuance and sale of the foregoing securities was not
registered under the Securities Act in reliance on the exemption for nonpublic
offerings provided by Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder. The Company believes that no more than 35
of the holders of such warrants were non-accredited investors and that each
person who was not an accredited investor had such knowledge in financial and
business matters to be capable of evaluating the merits and risks of an
investment in the Company's Common Stock. Each of the holders of such warrants
was furnished the information required by paragraphs (b)(2)(ii)(A) and (C) of
Rule 502 of Regulation D. Each of such holders acquired such securities for
investment and subject to restrictions on transfer which were described in
appropriate legends on the certificates representing such shares of Common
Stock.
h) On November 15, 1996, Alex. Brown & Sons Incorporated exercised a
warrant to purchase 192,340 shares of the Company's Common Stock at $8.25 per
share, or an aggregate of $1,586,805. The issuance and sale of the foregoing
securities was not registered under the Securities Act in reliance on the
exemption for nonpublic offerings provided by Section 4(2) of the Securities
Act. The holder of such securities is an accredited investor and acquired such
shares for investment and subject to restrictions on transfer which were
described in appropriate legends on the certificate representing such shares of
Common Stock.
2. SALES OF DEBT SECURITIES
(a) Pursuant to a Purchase Agreement dated February 16, 1996 with Goldman,
Sachs & Co., Bear, Stearns & Co., Inc. and Salomon Brothers Inc as Purchasers,
the Company has issued and sold to said Purchasers $425,000,000 aggregate
principal amount of 10 7/8% Senior Discount Notes due March 1, 2006 (the
"Private Notes") for aggregate gross cash proceeds to the Company of
approximately $250 million. The issuance of such Notes was not registered under
the Securities Act in reliance on the exemption for nonpublic offerings provided
by Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder. Each of said Purchasers agreed that it would only offer or sell the
Notes in the United States to qualified institutional buyers in reliance on Rule
144A promulgated under the Securities Act and to a limited number of
institutional accredited investors in a manner exempt from the registration
requirements of the Securities Act. On August 15, 1996, the Company completed
the exchange of $425,000,000 aggregate principal amount of its 10 7/8% Senior
Discount Notes (the "Exchange Notes") for all outstanding Private Notes. The
Exchange Notes were registered under the Securities Act pursuant to the
Company's Registration Statement on Form S-4 (File No. 333-06791).
(b) Pursuant to a Purchase Agreement dated November 1, 1996 with Goldman,
Sachs & Co. and Salomon Brothers Inc as Purchasers, the Company has issued and
sold to said Purchasers $400,000,000 aggregate principal amount of 11 7/8%
Senior Discount Notes due November 1, 2006 for aggregate gross cash proceeds to
the Company of approximately $225.1 million. The issuance of such Notes was not
registered under the Securities Act in reliance on the exemption for nonpublic
II-3
<PAGE> 147
offerings provided by Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder. Each of said Purchasers has agreed that it
will only offer or sell such Notes in the United States to qualified
institutional buyers in reliance on Rule 144A under the Securities Act and to a
limited number of institutional accredited investors in a manner exempt from the
registration requirements of the Securities Act, and outside the United States
to non-U.S. persons in offshore transactions in reliance on Regulation S under
the Securities Act. The subsequent resale of such Notes is also restricted. Such
restrictions on transfer were described in appropriate legends on each of such
Notes which have been issued in fully registered form.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See Exhibit Index.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, 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.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To provide to the Underwriters at the closing specified in the
Underwriting Agreement, certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
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<PAGE> 148
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 & Country, State of
Missouri, on November 19, 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 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 or her 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 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 fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming that each of said
attorneys-in-fact and agents and/or either of them, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 19, 1996.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- --------------------------------------- ------------------
<S> <C> <C>
/s/ ROBERT A. BROOKS Director (Chairman of the Board) November 19, 1996
- -------------------------------------
Robert A. Brooks
/s/ JAMES C. ALLEN Vice Chairman and Director (Chief November 19, 1996
- ------------------------------------- Executive Officer)
James C. Allen
/s/ D. CRAIG YOUNG President and Director (Chief Operating November 19, 1996
- ------------------------------------- Officer)
D. Craig Young
/s/ DAVID L. SOLOMON Executive Vice President and Chief November 19, 1996
- ------------------------------------- Financial Officer (Principal Financial
David L. Solomon and Accounting Officer)
/s/ ROBERT F. BENBOW Director November 19, 1996
- -------------------------------------
Robert F. Benbow
/s/ WILLIAM J. BRESNAN Director November 19, 1996
- -------------------------------------
William J. Bresnan
</TABLE>
II-5
<PAGE> 149
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- --------------------------------------- ------------------
<S> <C> <C>
/S/ JONATHAN M. NELSON Director November 19, 1996
- -------------------------------------
Jonathan M. Nelson
/s/ G. JACKSON TANKERSLEY, JR. Director November 18, 1996
- -------------------------------------
G. Jackson Tankersley, Jr.
Director
- -------------------------------------
Ronald H. Vander Pol
/s/ CAROL DEB. WHITAKER Director November 19, 1996
- -------------------------------------
Carol deB. Whitaker
</TABLE>
II-6
<PAGE> 150
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
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)
*3.1(d) Certificate of Designation of Series D Conversion Preferred Stock
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 Specimen Certificate for Common Stock (incorporated by reference to Ex-
hibit 4.1 to the IPO Form S-1)
4.2 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)
4.3 Amended and Restated Stockholders Agreement dated as of June 15, 1995 (incorpo-
rated by reference to Exhibit 4.3 of the IPO Form S-1)
4.4 Amended and Restated Registration Rights Agreement dated as of June 15, 1995
(incorporated by reference to Exhibit 4.4 of the IPO Form S-1)
4.5 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)
4.6 Indenture dated as of November 7, 1996 between the Company and The Bank of New
York, as Trustee
4.7 Exchange and Registration Rights Agreement dated as of November 7, 1996
*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
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.
- ---------------
* To be filed by amendment.
</TABLE>
II-7
<PAGE> 151
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<C> <S>
*5.1 Opinion of Bryan Cave LLP regarding the validity of the Common Stock
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") (incorpo-
rated 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
21.1 Subsidiaries of the Company
*23.1 Consent of Bryan Cave LLP (included in Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of BDO Seidman, LLP
24.1 Power of Attorney (included on signature page)
</TABLE>
II-8
<PAGE> 1
EXHIBIT 4.6
================================================================================
BROOKS FIBER PROPERTIES, INC.
TO
THE BANK OF NEW YORK
Trustee
Indenture
Dated as of November 7, 1996
$400,000,000
11 7/8% SENIOR DISCOUNT NOTES
DUE NOVEMBER 1, 2006
================================================================================
<PAGE> 2
BROOKS FIBER PROPERTIES, INC.
Certain Sections of this Indenture relating to
Sections 310 through 318 of the
Trust Indenture Act of 1939:
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
- --------------- ---------
<S> <C>
Section 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . 609
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . 609
(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . Not
Applicable
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . Not
Applicable
(b) . . . . . . . . . . . . . . . . . . . . . . . . 608
610
Section 311(a) . . . . . . . . . . . . . . . . . . . . . . . . 613
(b) . . . . . . . . . . . . . . . . . . . . . . . . 613
Section 312(a) . . . . . . . . . . . . . . . . . . . . . . . . 701
702(a)
(b) . . . . . . . . . . . . . . . . . . . . . . . . 702(b)
(c) . . . . . . . . . . . . . . . . . . . . . . . . 702(c)
Section 313(a) . . . . . . . . . . . . . . . . . . . . . . . . 703(a)
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . 703(a)
(b) . . . . . . . . . . . . . . . . . . . . . . . . 703(a)
(c) . . . . . . . . . . . . . . . . . . . . . . . . 703(a)
(d) . . . . . . . . . . . . . . . . . . . . . . . . 703(b)
Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . . 704
1018
(b) . . . . . . . . . . . . . . . . . . . . . . . . Not
Applicable
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . 102
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . 102
(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . Not
Applicable
(d) . . . . . . . . . . . . . . . . . . . . . . . . Not
Applicable
(e) . . . . . . . . . . . . . . . . . . . . . . . . 102
Section 315(a) . . . . . . . . . . . . . . . . . . . . . . . . 601
(b) . . . . . . . . . . . . . . . . . . . . . . . . 602
(c) . . . . . . . . . . . . . . . . . . . . . . . . 601
(d) . . . . . . . . . . . . . . . . . . . . . . . . 601
(e) . . . . . . . . . . . . . . . . . . . . . . . . 514
Section 316(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . 502
</TABLE>
_______________
Note: This reconciliation and tie shall not, for any purpose, be deemed to
be a part of the Indenture.
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Trust Indenture Indenture
Act Section Section
- --------------- ---------
<S> <C>
512
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . 513
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . Not
Applicable
(b) . . . . . . . . . . . . . . . . . . . . . . . . 508
(c) . . . . . . . . . . . . . . . . . . . . . . . . 104
Section 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . 503
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . 504
(b) . . . . . . . . . . . . . . . . . . . . . . . . 1003
Section 318(a) . . . . . . . . . . . . . . . . . . . . . . . . 107
</TABLE>
_______________
Note: This reconciliation and tie shall not, for any purpose, be deemed to
be a part of the Indenture.
-ii-
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recitals of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE ONE
Definitions and Other Provisions
of General Application
SECTION 101. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Accreted Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Acquired Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Agent Member . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Applicable Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Asset Disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Attributable Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Board Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Business Day . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Capital Lease Obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Cedel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Company Request . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Capital Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Cash Flow Available for Fixed Charges . . . . . . . . . . . . . . . . . . . . 5
Consolidated Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Consolidated Tangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Continuing Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Corporate Trust Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
____________________
Note: This table of contents shall not, for any purpose, be
deemed to be a part of the Indenture.
-iii-
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C>
Depositary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Disqualified Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Eligible Institution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Euroclear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Exchange Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Exchange Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Exchange Offer Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Exchange Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Global Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Government Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Guarantor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Incur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Interest Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Interest Rate or Currency Protection Agreement . . . . . . . . . . . . . . . . . . . . . . 11
Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Net Available Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Offer to Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Original Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Other Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Permitted Interest Rate or Currency Protection Agreement . . . . . . . . . . . . . . . . . 17
Permitted Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Permitted Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Predecessor Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Preferred Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Purchase Money Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Purchasers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
____________________
Note: This table of contents shall not, for any purpose, be
deemed to be a part of the Indenture.
-iv-
<PAGE> 6
<TABLE>
<CAPTION>
Page
----
<S> <C>
readily marketable cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Receivables Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Redemption Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Registered Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Regular Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Regulation S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Regulation S Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Regulation S Global Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Regulation S Legend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Regulation S Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Related Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Resale Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Responsible Officer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Restricted Global Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Restricted Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Restricted Securities Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Restricted Securities Legend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Rule 144A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Rule 144A Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Sale and Leaseback Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Second Step-Down Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Second Step-Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Secured Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Securities Act Legend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Security Register . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Special Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Special Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Stated Maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Step-Down Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Step-Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Strategic Equity Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Strategic Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Successor Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Telecommunications Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Telecommunications Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
____________________
Note: This table of contents shall not, for any purpose, be
deemed to be a part of the Indenture.
-v-
<PAGE> 7
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Unrestricted Securities Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Voting Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Wholly-Owned Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 102. Compliance Certificates and Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 103. Form of Documents Delivered to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 104. Acts of Holders; Record Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 105. Notices, Etc., to Trustee and Company . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 106. Notice to Holders; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 107. Application of Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 108. Effect of Headings and Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 109. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 110. Separability Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 111. Benefits of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 112. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 113. Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE TWO
Security Forms
SECTION 201. Forms Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 202. Form of Face of Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 203. Form of Reverse of Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 204. Form of Trustee's Certificate of Authentication . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>
____________________
Note: This table of contents shall not, for any purpose, be
deemed to be a part of the Indenture.
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<PAGE> 8
<TABLE>
<CAPTION>
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ARTICLE THREE
The Securities
<S> <C> <C>
SECTION 301. Title and Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 302. Denominations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 303. Execution, Authentication, Delivery and Dating . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 304. Temporary Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 305. Registration, Registration of Transfer and Exchange . . . . . . . . . . . . . . . . . . . 47
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities . . . . . . . . . . . . . . . . . . . . . 55
SECTION 307. Payment of Interest; Interest Rights Preserved . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 308. Persons Deemed Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 309. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 310. Computation of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 311. CUSIP and ISIN Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
ARTICLE FOUR
Satisfaction and Discharge
SECTION 401. Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 402. Application of Trust Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
ARTICLE FIVE
</TABLE>
____________________
Note: This table of contents shall not, for any purpose, be
deemed to be a part of the Indenture.
-vii-
<PAGE> 9
<TABLE>
<CAPTION>
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Remedies
<S> <C> <C>
SECTION 501. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 502. Acceleration of Maturity; Rescission and Annulment . . . . . . . . . . . . . . . . . . . . 63
SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee . . . . . . . . . . . . . 64
SECTION 504. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 505. Trustee May Enforce Claims Without Possession of Securities . . . . . . . . . . . . . . . 66
SECTION 506. Application of Money Collected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 507. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest . . . . . . . . 67
SECTION 509. Restoration of Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 510. Rights and Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 511. Delay or Omission Not Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 512. Control by Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 513. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 514. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 515. Waiver of Stay or Extension Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
ARTICLE SIX
The Trustee
SECTION 601. Certain Duties and Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
</TABLE>
____________________
Note: This table of contents shall not, for any purpose, be
deemed to be a part of the Indenture.
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<PAGE> 10
<TABLE>
<CAPTION>
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<S> <C> <C>
SECTION 602. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 603. Certain Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 604. Not Responsible for Recitals or Issuance of Securities . . . . . . . . . . . . . . . . . . 73
SECTION 605. May Hold Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 606. Money Held in Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 607. Compensation and Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 608. Disqualification; Conflicting Interests . . . . . . . . . . . . . . . . . . . . . . . . . 75
SECTION 609. Corporate Trustee Required; Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . 75
SECTION 610. Resignation and Removal; Appointment of Successor . . . . . . . . . . . . . . . . . . . . 76
SECTION 611. Acceptance of Appointment by Successor . . . . . . . . . . . . . . . . . . . . . . . . . . 77
SECTION 612. Merger, Conversion, Consolidation or Succession to Business . . . . . . . . . . . . . . . 78
SECTION 613. Preferential Collection of Claims Against Company . . . . . . . . . . . . . . . . . . . . 78
SECTION 614. Appointment of Authenticating Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company
SECTION 701. Company to Furnish Trustee Names and Addresses of Holder . . . . . . . . . . . . . . . . . 81
SECTION 702. Preservation of Information; Communications to Holder . . . . . . . . . . . . . . . . . . 81
SECTION 703. Reports by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
</TABLE>
____________________
Note: This table of contents shall not, for any purpose, be
deemed to be a part of the Indenture.
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<PAGE> 11
<TABLE>
<CAPTION>
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<S> <C> <C>
SECTION 704. Reports by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
SECTION 705. Officers' Certificate with Respect to Change in Interest Rate . . . . . . . . . . . . . . 83
ARTICLE EIGHT
Merger, Consolidation, Etc.
SECTION 801. Mergers, Consolidations and Certain Sales of Asset . . . . . . . . . . . . . . . . . . . . 83
SECTION 802. Successor Substituted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
ARTICLE NINE
Supplemental Indentures
SECTION 901. Supplemental Indentures Without Consent of Holders . . . . . . . . . . . . . . . . . . . . 85
SECTION 902. Supplemental Indentures with Consent of Holders . . . . . . . . . . . . . . . . . . . . . 86
SECTION 903. Execution of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
SECTION 904. Effect of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
SECTION 905. Conformity with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
SECTION 906. Reference in Securities to Supplemental Indentures . . . . . . . . . . . . . . . . . . . . 87
ARTICLE TEN
Covenants
SECTION 1001. Payment of Principal, Premium and Interest . . . . . . . . . . . . . . . . . . . . . . . . 88
SECTION 1002. Maintenance of Office or Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
</TABLE>
____________________
Note: This table of contents shall not, for any purpose, be
deemed to be a part of the Indenture.
-x-
<PAGE> 12
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
SECTION 1003. Money for Security Payments to be Held in Trust . . . . . . . . . . . . . . . . . . . . . 89
SECTION 1004. Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
SECTION 1005. Maintenance of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
SECTION 1006. Payment of Taxes and Other Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
SECTION 1007. Maintenance of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
SECTION 1008. Limitation on Consolidated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
SECTION 1009. Limitation on Debt and Preferred Stock of Subsidiaries . . . . . . . . . . . . . . . . . . 94
SECTION 1010. Limitation on Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
SECTION 1011. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries . . . . . . . 97
SECTION 1012. Limitation on Transactions with Affiliates and Related Persons . . . . . . . . . . . . . . 98
SECTION 1013. Limitation on Asset Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
SECTION 1014. Limitation on Issuances and Sales of Capital Stock of Subsidiaries . . . . . . . . . . . . 101
SECTION 1015. Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
SECTION 1016. Limitation on Sale and Leaseback Transactions . . . . . . . . . . . . . . . . . . . . . . 103
SECTION 1017. Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
SECTION 1018. Provision of Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
SECTION 1019. Statement by Officers as to Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
SECTION 1020. Waiver of Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
</TABLE>
____________________
Note: This table of contents shall not, for any purpose, be
deemed to be a part of the Indenture.
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<PAGE> 13
<TABLE>
<CAPTION>
Page
ARTICLE ELEVEN
Redemption of Securities
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<S> <C> <C>
SECTION 1101. Right of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
SECTION 1102. Applicability of Article . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
SECTION 1103. Election to Redeem; Notice to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . 107
SECTION 1104. Securities to Be Redeemed Pro Rata . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
SECTION 1105. Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
SECTION 1106. Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
SECTION 1107. Securities Payable on Redemption Date . . . . . . . . . . . . . . . . . . . . . . . . . . 109
SECTION 1108. Securities Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
ARTICLE TWELVE
Defeasance and Covenant Defeasance
SECTION 1201. Company's Option to Effect Defeasance or Covenant Defeasance . . . . . . . . . . . . . . . 110
SECTION 1202. Defeasance and Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
SECTION 1203. Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
SECTION 1204. Conditions to Defeasance or Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . 112
SECTION 1205. Deposited Money and U.S. Government Obligations to Be Held in Trust;
Other Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
TESTIMONIUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
</TABLE>
____________________
Note: This table of contents shall not, for any purpose, be
deemed to be a part of the Indenture.
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<PAGE> 14
<TABLE>
<CAPTION>
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<S> <C>
SIGNATURES AND SEALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
ANNEX A -- Form of Regulation S Certificate
ANNEX B -- Form of Restricted Securities Certificate
ANNEX C -- Form of Unrestricted Securities Certificate
</TABLE>
____________________
Note: This table of contents shall not, for any purpose, be
deemed to be a part of the Indenture.
-xiii-
<PAGE> 15
INDENTURE, dated as of November 7, 1996 between Brooks Fiber
Properties, Inc., a corporation duly organized and existing under the laws of
the State of Delaware (herein called the "Company"), having its principal
office at 425 Woods Mill Road South, Suite 300, Town and Country, Missouri
63017, and The Bank of New York, duly organized and existing under the laws of
the State of New York, as Trustee (herein called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of
$400,000,000 aggregate principal amount of its 11 7/8% Senior Discount Notes
due November 1, 2006 (the Securities") of substantially the tenor and amount
hereinafter set forth, and to provide therefor the Company has duly authorized
the execution and delivery of this Indenture. The Securities may consist of
Original Securities and/or Exchange Securities, each as defined herein. The
Original Securities and the Exchange Securities shall rank pari passu.
All things necessary to make the Securities, when executed by
the Company and authenticated and delivered hereunder and duly issued by the
Company, the valid obligations of the Company, and to make this Indenture a
valid agreement of the Company, in accordance with their and its terms, have
been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of
the Securities by the Holders thereof, it is mutually covenanted and agreed,
for the equal and proportionate benefit of all Holders of the Securities, as
follows:
ARTICLE ONE
Definitions and Other Provisions
of General Application
SECTION 101. Definitions.
For all purposes of this Indenture, except as otherwise
expressly provided or unless the context otherwise requires:
<PAGE> 16
(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular;
(2) all other terms used herein which are defined in the
Trust Indenture Act, either directly or by reference therein, have the
meanings assigned to them therein;
(3) all accounting terms not otherwise defined herein
have the meanings assigned to them in accordance with generally
accepted accounting principles (whether or not such is indicated
herein) and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any
computation required or permitted hereunder shall mean such accounting
principles as are generally accepted as consistently applied by the
Company at the date of such computation; and
(4) the words "herein", "hereof" and "hereunder" and
other words of similar import refer to this Indenture as a whole and
not to any particular Article, Section or other subdivision.
Certain terms, used principally in Article Six, are defined in
that Article. "Act", when used with respect to any Holder, has the meaning
specified in Section 104.
"Accreted Value" means, as of any date prior to November
1, 2001, an amount per $1,000 principal amount at maturity of Securities that
is equal to the sum of (a) the offering price ($562.77 per $1,000 principal
amount at maturity of Securities) of such Securities and (b) the portion of the
excess of the principal amount of such Securities 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 Securities 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 Security.
"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
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<PAGE> 17
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.
"Agent Member" means any member of, or participant in, the
Depositary.
"Applicable Procedures" means, with respect to any transfer or
transaction involving a Global Security or beneficial interest therein, the
rules and procedures of the Depositary for such Security, Euroclear and Cedel,
in each case to the extent applicable to such transaction and as in effect from
time to time.
"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 Section
1009 of this Indenture), (ii) substantially all of the assets of such Person or
any of its Subsidiaries representing a division or line of business (other than
as part of a Permitted Investment) or (iii) other assets or rights of such
Person or any of its Subsidiaries outside of the ordinary course of business,
provided in each case that the aggregate consideration for such transfer,
conveyance, sale, lease or other disposition is equal to $2.0 million or more
in any 12-month period.
"Attributable Value" means, as to any particular lease under
which any Person is at the time liable other than a Capital Lease Obligation,
and at any date as of which the amount thereof is to be determined, the total
net amount of rent required to be paid by such Person under such lease during
the initial term thereof as determined in accordance with generally accepted
accounting principles, discounted
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<PAGE> 18
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.
"Board of Directors" means either the board of directors of
the Company or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by
the Secretary or an Assistant Secretary of the Company to have been duly
adopted by the Board of Directors and to be in full force and effect on the
date of such certification, and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in the Borough of
Manhattan, The City of New York, New York are authorized or obligated by law or
executive order to close.
"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.
-4-
<PAGE> 19
"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.
"Cedel" means Cedel Bank, S.A. (or any successor securities
clearing agency).
"Change of Control" has the meaning specified in Section 1017.
"Commission" means the Securities and Exchange Commission, as
from time to time constituted, created under the Exchange Act, or, if at any
time after the execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then
the body performing such duties at such time.
"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.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture and thereafter
"Company" shall mean such successor Person.
"Company Request" or "Company Order" means a written request
or order signed in the name of the Company by its Chairman of the Board, its
Vice Chairman of the Board, its President or a Vice President, and by its
Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and
delivered to the Trustee.
"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
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<PAGE> 20
the Company and its Subsidiaries for such period increased by the sum of (i)
Consolidated Interest Expense of the Company and its Subsidiaries for such
period, plus (ii) Consolidated Income Tax Expense of the Company and its
Subsidiaries for such period, plus (iii) the consolidated depreciation and
amortization expense included in the income statement of the Company and its
Subsidiaries for such period, plus (iv) any non- cash expense related to the
issuance to employees of the Company or any Subsidiary of the Company of
options to purchase Capital Stock of the Company or such Subsidiary, plus (v)
any charge related to any premium or penalty paid in connection with redeeming
or retiring any Indebtedness prior to its stated maturity; provided, however,
that there shall be excluded therefrom the Consolidated Cash Flow Available for
Fixed Charges (if positive) of any Subsidiary of the Company (calculated
separately for such Subsidiary in the same manner as provided above for the
Company) that is subject to a restriction which prevents the payment of
dividends or the making of distributions to the Company or another Subsidiary
of the Company to the extent of such restriction.
"Consolidated Income Tax Expense" for any period means the
aggregate amounts of the 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
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<PAGE> 21
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 of Section 1010 of
this Indenture, 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 this 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
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<PAGE> 22
Company who (i) was a member of such Board of Directors of the Company on the
date of this 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.
"Corporate Trust Office" means the principal office of the
Trustee in the Borough of Manhattan, The City of New York, New York, at which
at any particular time its corporate trust business shall be administered,
which at the date hereof is located at 101 Barclay Street, 21-W, New York, New
York 10286.
"corporation" means a corporation, association, company,
limited liability company, joint-stock company or business trust.
"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
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<PAGE> 23
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.
"Defaulted Interest" has the meaning specified in Section 307.
"Depositary" means, with respect to the Securities issuable or
issued in whole or in part in the form of one or more Global Securities, The
Depository Trust Company for so long as it shall be a clearing agency
registered under the Exchange Act, or such successor as the Company shall
designate from time to time in an Officers' Certificate delivered to the
Trustee.
"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 Securities, 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 Securities 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 Securities in Section 1017 of this
Indenture 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 Securities as are required to be repurchased
pursuant to the provisions of Section 1017 of this Indenture.
"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.
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<PAGE> 24
"Euroclear" means the Euroclear Clearance System (or any
successor securities clearing agency).
"Event of Default" has the meaning specified in Section 501.
"Exchange Act" means the Securities Exchange Act of 1934 (and
any statute successor thereto) as amended, and the rules and regulations
thereunder.
"Exchange Offer" has the meaning set forth in the form of the
Securities contained in Section 202.
"Exchange Offer Registration Statement" has the meaning set
forth in the form of the Securities contained in Section 202.
"Exchange Security" means any Security issued in exchange for
an Original Security or Original Securities pursuant to the Exchange Offer or
otherwise registered under the Securities Act and any Security with respect to
which the next preceding Predecessor Security of such Security was an Exchange
Security.
"Global Security" means the security or securities that
evidences all or part of the Securities and bears the legend set forth in
Section 202.
"Government Securities" means direct obligations of, or
obligations guaranteed by, the United States of America for the payment of
which guarantee or obligations the full faith and credit of the United States
is pledged and which have a remaining weighted average life to maturity of not
less than one year from the date of Investment therein.
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person guaranteeing, or having the economic effect of
guaranteeing, any Debt of any other Person (the "primary obligor") in any
manner, whether directly or indirectly, and including, without limitation, any
obligation of such Person, (i) to purchase or pay (or advance or supply funds
for the purchase or payment of) such Debt or to purchase (or to advance or
supply funds for the purchase of) any security for the payment of such Debt,
(ii) to purchase property, securities or services for the purpose of assuring
the holder of such Debt of the payment of such Debt, or (iii) to maintain
working capital, equity capital or other financial statement condition or
liquidity of the primary obligor so as to enable the primary obligor to pay
such Debt (and "Guaranteed", "Guaranteeing" and
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<PAGE> 25
"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 Securities.
"Holder" means a Person in whose name a Security is registered
in the Security Register.
"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.
"Indenture" means this instrument as originally executed or as
it may from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
"Interest Payment Date" means the Stated Maturity of an
installment of interest on the Securities.
"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
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<PAGE> 26
property to others or payments for property or services for the account or use
of others, or otherwise), to, or purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities or evidence of Debt issued by, any
other Person, including any payment on a Guarantee of any obligation of such
other Person, but excluding any loan, advance or extension of credit to an
employee of the Company or any of its Subsidiaries in the ordinary course of
business and commercially reasonable extensions of trade credit.
"Joint Venture" means a corporation, partnership or other
entity engaged in one or more Telecommunications Businesses in which the
Company owns, directly or indirectly, a 45% or greater interest, with the
balance of the ownership interests being held by one or more Strategic
Investors.
"Lien" means, with respect to any property or assets, any
mortgage or deed of trust, pledge, hypothecation, assignment, Receivables Sale,
deposit arrangement, security interest, lien, charge, easement (other than any
easement not materially impairing usefulness), encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including,
without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing).
"Marketable Securities" means: (i) Government Securities; (ii)
any certificate of deposit maturing not more than 270 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution; (iii)
commercial paper maturing not more than 270 days after the date of acquisition
issued by a corporation (other than an Affiliate of the Company) with a rating,
at the time as of which any investment therein is made, of "A-1" (or higher)
according to Standard & Poor's or "P-1" (or higher) according to Moody's
Investor Service, Inc.; (iv) any banker's acceptances or money market deposit
accounts issued or offered by an Eligible Institution; and (v) any fund
investing exclusively in investments of the types described in clauses (i)
through (iv) above.
"Maturity", when used with respect to any Security, means the
date on which the principal of such Security becomes due and payable as therein
or herein provided, whether at the Stated Maturity or by declaration of
acceleration, call for redemption or otherwise.
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<PAGE> 27
"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 Board Resolution 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 this Indenture and
the Securities 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 at its
address appearing in the Security Register on the date of the Offer offering to
purchase up to the principal amount of Securities specified in such Offer at
the purchase price specified in such Offer (as determined pursuant to this
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
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<PAGE> 28
settlement date (the "Purchase Date") for the purchase of Securities 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 this Indenture (which
requirements may be satisfied by delivery of such documents together with the
Offer), (ii) a description of material developments in the Company's business
subsequent to the date of the latest of such financial statements referred to
in clause (i) (including a description of the events requiring the Company to
make the Offer to Purchase), (iii) if applicable, appropriate pro forma
financial information concerning the Offer to Purchase and the events requiring
the Company to make the Offer to Purchase and (iv) any other information
required by applicable law to be included therein). The Offer shall contain all
instructions and materials necessary to enable such Holders to tender
Securities pursuant to the Offer to Purchase. The Offer shall also state:
(a) the Section of this 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 Securities
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 Securities accepted for payment (as specified
pursuant to this Indenture) (the "Purchase Price");
(e) that the Holder may tender all or any portion of the Securities
registered in the name of such Holder and
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<PAGE> 29
that any portion of a Security tendered must be tendered in an integral
multiple of $1,000 principal amount;
(f) the place or places where Securities are to be surrendered for
tender pursuant to the Offer to Purchase;
(g) that interest on any Security 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 Security 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 Security pursuant to the
Offer to Purchase will be required to surrender such Security at the place
or places specified in the Offer prior to the close of business on the
Expiration Date (such Security 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
Securities tendered if the Company (or its Paying Agent) receives, not
later than the close of business on the Expiration Date, a facsimile
transmission or letter setting forth the name of the holder, the principal
amount of the Security the Holder tendered, the certificate number of the
Security the Holder tendered and a statement that such Holder is
withdrawing all or a portion of its tender;
(k) that (a) if Securities 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
Securities and (b) if Securities 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 Securities 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 Securities in
denominations of $1,000 or integral multiples thereof shall be purchased);
and
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<PAGE> 30
(l) that in the case of any Holder whose Security is purchased only
in part, the Company shall execute, and the Trustee shall authenticate and
deliver to the Holder of such Security without service charge, a new
Security or Securities, 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 Security so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with the
Offer for such Offer to Purchase.
"Officers' Certificate" means a certificate signed by the
Chairman of the Board, a Vice Chairman of the Board, the President or a Vice
President, and by the Treasurer, an Assistant Treasurer, the Secretary or an
Assistant Secretary, of the Company, and delivered to the Trustee and
containing the statements provided for in Section 102. One of the officers
signing an Officers' Certificate given pursuant to Section 1019 shall be the
principal executive, financial or accounting officer of the Company.
"Opinion of Counsel" means a written opinion of legal counsel,
who may be counsel for the Company, and who shall be acceptable to the Trustee,
and containing the statements provided for in Section 102.
"Original Securities" means all Securities other than Exchange
Securities.
"Other Securities" means the Securities sold by the Purchasers in
the initial offering contemplated by the Purchase Agreement in reliance on an
exemption from the registration requirements of the Securities Act other than
Rule 144A and Regulation S.
"Outstanding", when used with respect to Securities, means, as of
the date of determination, all Securities theretofore authenticated and
delivered under this Indenture, except:
(i) Securities theretofore cancelled by the Trustee or delivered to
the Trustee for cancellation;
(ii) Securities for whose payment or redemption money in the necessary
amount has been theretofore deposited with the Trustee or any Paying Agent
(other than the Company) in trust or set aside and segregated in trust by
the Company (if the Company shall act as its own Paying Agent) for the
Holders of such Securities; provided that, if such Securities are to be
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<PAGE> 31
redeemed, notice of such redemption has been duly given pursuant to this
Indenture or provision therefor satisfactory to the Trustee has been made;
and
(iii) Securities which have been paid pursuant to Section 306 or in
exchange for or in lieu of which other Securities have been authenticated
and delivered pursuant to this Indenture, other than any such Securities in
respect of which there shall have been presented to the Trustee proof
satisfactory to it that such Securities are held by a bona fide purchaser
in whose hands such Securities are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or of such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Securities which the Trustee knows to be so owned shall
be so disregarded. Securities so owned which have been pledged in good faith
may be regarded as Outstanding if the pledgee establishes to the satisfaction
of the Trustee the pledgee's right so to act with respect to such Securities
and that the pledgee is not the Company or any other obligor upon the
Securities or any Affiliate of the Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay
the principal of (and premium, if any) or interest on any Securities on behalf
of the Company.
"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
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<PAGE> 32
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 any agency or political subdivision thereof or any other entity.
"Predecessor Security" of any particular Security means every
previous Security evidencing all or a portion of
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<PAGE> 33
the same debt as that evidenced by such particular Security; and, for the
purposes of this definition, any Security authenticated and delivered under
Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or
stolen Security shall be deemed to evidence the same debt as the mutilated,
destroyed, lost or stolen Security.
"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 Agreement" means the Purchase Agreement, dated as of
November 1, 1996, between the Company and the Purchasers, as such agreement may
be amended from time to time.
"Purchase Money Debt" means Debt of the Company (including
Acquired Debt and Debt represented by Capital Lease Obligations, mortgage
financings and purchase money obligations) Incurred for the purpose of
financing all or any part of the cost of construction, acquisition or
improvement by the Company or any Subsidiary of the Company or any Joint
Venture of any Telecommunications Assets of the Company, any Subsidiary of the
Company or any Joint Venture, and including any related notes, Guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as the same may be amended, supplemented, modified or restated from
time to time.
"Purchasers" means Goldman, Sachs & Co. and Salomon Brothers Inc.
"readily marketable cash equivalents" means (i) marketable
securities issued or directly and unconditionally guaranteed by the United
States Government or issued by any agency thereof and backed by the full faith
and credit of the United States; (ii) marketable direct obligations issued by
any state of the United States of America or any political subdivision of any
such state or any public instru-
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<PAGE> 34
mentality thereof and, at the time of acquisition, having the highest rating
obtainable from either Standard & Poor's Rating Group or Moody's Investors
Service, Inc.; (iii) commercial paper maturing no more than 180 days from the
date of acquisition thereof and, at the time of acquisition, having a rating of
at least A-1 from Standard & Poor's Ratings Group or at least P-1 from Moody's
Investors Service, Inc.; and (iv) certificates of deposit or bankers'
acceptance maturing within one year from the date of acquisition thereof issued
by any commercial bank organized under the laws of the United States of America
or any state thereof or the District of Columbia having unimpaired capital and
surplus of not less than $100,000,000.
"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.
"Redemption Date", when used with respect to any Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
"Registered Securities" means the Exchange Securities and all
other Securities sold or otherwise disposed of pursuant to an effective
registration statement under the Securities Act, together with their respective
Successor Securities.
"Regular Record Date" for the interest payable on any Interest
Payment Date means the April 15 or October 15 (whether or not a Business Day),
as the case may be, next preceding such Interest Payment Date.
"Regulation S" means Regulation S under the Securities Act (or
any successor provision), as it may be amended from time to time.
"Regulation S Certificate" means a certificate substantially in
the form set forth in Annex A.
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"Regulation S Global Security" has the meaning specified in
Section 201.
"Regulation S Legend" means a legend substantially in the form of
the legend required in the form of Security set forth in Section 202 to be
placed upon each Regulation S Security.
"Regulation S Securities" means all Securities required pursuant
to Section 305(c) to bear a Regulation S Legend. Such term includes the
Regulation S Global Security.
"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 Section 1012, 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).
"Resale Registration Statement" has the meaning set forth in the
Form of the Securities contained in Section 202.
"Responsible Officer", when used with respect to the Trustee,
means the chairman or any vice-chairman of the board of directors, the chairman
or any vice-chairman of the executive committee of the board of directors, the
chairman of the trust committee, the president, any vice president, the
secretary, any assistant secretary, the treasurer, any assistant treasurer, the
cashier, any assistant cashier, any trust officer or assistant trust officer,
the controller or any assistant controller or any other officer of the Trustee
customarily performing functions similar to those performed by any of the above
designated officers and also means, with respect to a particular corporate
trust matter, any other officer to whom such matter is referred because of his
knowledge of and familiarity with the particular subject.
"Restricted Global Security" has the meaning specified in
Section 201.
"Restricted Period" means the period of 41 consecutive days
beginning on and including the later of (i) the day on which Securities are
first offered to persons
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other than distributors (as defined in Regulation S) in reliance on
Regulation S and (ii) the original issuance date of the Securities.
"Restricted Securities" means all Securities required pursuant to
Section 305(c) to bear any Restricted Securities Legend. Such term includes
the Restricted Global Security.
"Restricted Securities Certificate" means a certificate
substantially in the form set forth in Annex B.
"Restricted Securities Legend" means, collectively, the legends
substantially in the forms of the legends required in the form of Security set
forth in Section 202 to be placed upon each Restricted Security.
"Rule 144A" means Rule 144A under the Securities Act (or any
successor provision), as it may be amended from time to time.
"Rule 144A Securities" means the Securities purchased by the
Purchasers from the Company pursuant to the Purchase Agreement, other than the
Other Securities and the Regulation S Securities.
"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.
"Second Step-Down Date" has the meaning set forth in the form of
Security contained in Section 202.
"Second Step-Up" has the meaning set forth in the form of
Security contained in Section 202.
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"Secured Credit Facility" means Debt outstanding at the date of
this 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.
"Securities" means the Exchange Securities and the Original
Securities.
"Securities Act" means the Securities Act of 1933 and any statute
successor thereto, in each case as amended from time to time.
"Securities Act Legend" means a Restricted Securities Legend or a
Regulation S Legend.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 305.
"Special Interest" has the meaning set forth in the form of
Security contained in Section 202. Unless the context otherwise requires,
references herein to "interest" on the Securities shall include Special
Interest.
"Special Record Date" for the payment of any Defaulted Interest
means a date fixed by the Trustee pursuant to Section 307.
"Stated Maturity", when used with respect to any Security or any
installment of interest thereon, means the date specified in such Security as
the fixed date on which the principal of such Security or such installment of
interest is due and payable.
"Step-Down Date" has the meaning set forth in the form of the
Security contained in Section 202.
"Step-Up" has the meaning set forth in the form of the Security
contained in Section 202.
"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.
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"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 Securities 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 Securities, upon notice by 25% or more in principal amount of the
Securities 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 Securities 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 Securities, 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 of
Section 1017 of this Indenture (and which shall provide that such Debt will not
be repurchased pursuant to such provisions prior to the Company's repurchase of
the Securities required to be repurchased by the Company pursuant to the
provisions of Section 1017 of this Indenture).
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"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.
"Successor Security" of any particular Security means every
Security issued after, and evidencing all or a portion of the same debt as that
evidenced by, such particular Security; and, for the purposes of this
definition, any Security authenticated and delivered under Section 306 in
exchange for or in lieu of a mutilated, destroyed, lost or stolen Security
shall be deemed to evidence the same debt as the mutilated, destroyed, lost or
stolen Security.
"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.
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"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in
force at the date as of which this instrument was executed; provided, however,
that in the event the Trust Indenture Act of 1939 is amended after such date,
"Trust Indenture Act" means, to the extent required by any such amendment, the
Trust Indenture Act of 1939 as so amended.
"Unrestricted Securities Certificate" means a certificate
substantially in the form set forth in Annex C.
"Vice President", when used with respect to the Company or the
Trustee, means any vice president, whether or not designated by a number or a
word or words added before or after the title "vice president".
"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.
SECTION 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish to
the Trustee such certificates and opinions as may be required under the Trust
Indenture Act and under this Indenture. Each such certificate or opinion shall
be given in the form of an Officers' Certificate, if to be given by an officer
of the Company, or an Opinion of Counsel, if to be given by counsel, and shall
comply with the requirements of the Trust Indenture Act and any other
requirement set forth in this Indenture.
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Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include
(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he
has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate of an officer of the Company may be based, insofar as
it relates to legal matters, upon an opinion of counsel submitted therewith,
unless such officer knows, or in the exercise of reasonable care should know,
that the opinion with respect to the matters upon which his certificate is
based is erroneous. Any opinion of counsel may be based, insofar as it relates
to factual matters, upon a certificate of an officer or officers of the Company
submitted therewith stating the information on which counsel is relying, unless
such counsel knows, or in the exercise of
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reasonable care should know, that the certificate with respect to such matters
is erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 104. Acts of Holders; Record Dates.
Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given or taken by Holders may
be embodied in and evidenced by one or more instruments of substantially
similar tenor signed by such Holders in person or by agent duly appointed in
writing; and, except as herein otherwise expressly provided, such action shall
become effective when such instrument or instruments are delivered to the
Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or
of a writing appointing any such agent shall be sufficient for any purpose of
this Indenture and (subject to Section 601) conclusive in favor of the Trustee
and the Company, if made in the manner provided in this Section.
The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where
such execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
The ownership of Securities shall be proved by the Security Register.
Any request, demand, authorization, direction, notice, consent, waiver
or other Act of the Holder of any Security shall bind every future Holder of
the same Security and the
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Holder of every Security issued upon the registration of transfer thereof or in
exchange therefor or in lieu thereof in respect of anything done, omitted or
suffered to be done by the Trustee or the Company in reliance thereon, whether
or not notation of such action is made upon such Security.
The Company may set any day as a record date for the purpose of
determining the Holders of Outstanding Securities entitled to give, make or
take any request, demand, authorization, direction, notice, consent, waiver or
other action provided or permitted by this Indenture to be given, made or taken
by Holders of Securities, provided that the Company may not set a record date
for, and the provisions of this paragraph shall not apply with respect to, the
giving or making of any notice, declaration, request or direction referred to
in the next paragraph. If not set by the Company prior to the first
solicitation of a Holder made by any Person in respect of any such matter
referred to in the foregoing sentence, the record date for any such matter
shall be the 30th day (or, if later, the date of the most recent list of
Holders required to be provided pursuant to Section 701) prior to such first
solicitation. If any record date is set pursuant to this paragraph, the
Holders of Outstanding Securities on such record date, and no other Holders,
shall be entitled to take the relevant action, whether or not such Holders
remain Holders after such record date; provided that no such action shall be
effective hereunder unless taken on or prior to the applicable Expiration Date
by Holders of the requisite principal amount of Outstanding Securities on such
record date. Nothing in this paragraph shall be construed to prevent the
Company from setting a new record date for any action for which a record date
has previously been set pursuant to this paragraph (whereupon the record date
previously set shall automatically and with no action by any Person be
cancelled and of no effect), and nothing in this paragraph shall be construed
to render ineffective any action taken by Holders of the requisite principal
amount of Outstanding Securities on the date such action is taken. Promptly
after any record date is set pursuant to this paragraph, the Company, at its
own expense, shall cause notice of such record date, the proposed action by
Holders and the applicable Expiration Date to be given to the Trustee in
writing and to each Holder of Securities in the manner set forth in Section
106.
The Trustee may set any day as a record date for the purpose of
determining the Holders of Outstanding Securities entitled to join in the
giving or making of (i) any Notice of Default, (ii) any declaration of
acceleration referred to in Section 502, (iii) any request to institute
proceedings referred to in Section 507(2) or (iv) any direction referred
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to in Section 512. If any record date is set pursuant to this paragraph, the
Holders of Outstanding Securities on such record date, and no other Holders,
shall be entitled to join in such notice, declaration, request or direction,
whether or not such Holders remain Holders after such record date; provided
that no such action shall be effective hereunder unless taken on or prior to
the applicable Expiration Date by Holders of the requisite principal amount of
Outstanding Securities on such record date. Nothing in this paragraph shall be
construed to prevent the Trustee from setting a new record date for any action
for which a record date has previously been set pursuant to this paragraph
(whereupon the record date previously set shall automatically and with no
action by any Person be cancelled and of no effect), and nothing in this
paragraph shall be construed to render ineffective any action taken by Holders
of the requisite principal amount of Outstanding Securities on the date such
action is taken. Promptly after any record date is set pursuant to this
paragraph, the Trustee, at the Company's expense, shall cause notice of such
record date, the proposed action by Holders and the applicable Expiration Date
to be given to the Company in writing and to each Holder of Securities in the
manner set forth in Section 106.
With respect to any record date set pursuant to this Section, the
party hereto which sets such record dates may designate any day as the
"Expiration Date" and from time to time may change the Expiration Date to any
earlier or later day; provided that no such change shall be effective unless
notice of the proposed new Expiration Date is given to the other party hereto
in writing, and to each Holder of Securities in the manner set forth in Section
106, on or prior to the existing Expiration Date. If an Expiration Date is not
designated with respect to any record date set pursuant to this Section, the
party hereto which set such record date shall be deemed to have initially
designated the 180th day after such record date as the Expiration Date with
respect thereto, subject to its right to change the Expiration Date as provided
in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be
later than the 180th day after the applicable record date.
Without limiting the foregoing, a Holder entitled hereunder to take
any action hereunder with regard to any particular Security may do so with
regard to all or any part of the principal amount of such Security or by one or
more duly appointed agents each of which may do so pursuant to such appointment
with regard to all or any part of such principal amount.
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SECTION 105. Notices, Etc., to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be sufficient
for every purpose hereunder if delivered in writing to the Trustee at its
Corporate Trust Office, Attention: Corporate Trust Administration, or
(2) the Company by the Trustee or by any Holder shall be sufficient
for every purpose hereunder (unless otherwise herein expressly provided) if
in writing and mailed, first-class postage prepaid, to the Company
addressed to it at the address of its principal office specified in the
first paragraph of this instrument or at any other address previously
furnished in writing to the Trustee by the Company.
SECTION 106. Notice to Holders; Waiver.
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly
provided) if in writing and mailed, first-class postage prepaid, to each Holder
affected by such event, at his address as it appears in the Security Register,
not later than the latest date (if any), and not earlier than the earliest date
(if any), prescribed for the giving of such notice. In any case where notice
to Holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders. Where this Indenture
provides for notice in any manner, such notice may be waived in writing by the
Person entitled to receive such notice, either before or after the event, and
such waiver shall be the equivalent of such notice. Waivers of notice by
Holders shall be filed with the Trustee, but such filing shall not be a
condition precedent to the validity of any action taken in reliance upon such
waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by
mail, then such notification as shall be made with the approval of the Trustee
shall constitute a sufficient notification for every purpose hereunder.
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SECTION 107. Application of Trust Indenture Act.
The Trust Indenture Act shall apply as a matter of contract to this
Indenture for purposes of interpretation, construction and defining the rights
and obligations hereunder. If any provision hereof limits, qualifies or
conflicts with a provision of the Trust Indenture Act that is required under
such Act to be a part of and govern this Indenture, the latter provision shall
control. If any provision of this Indenture modifies or excludes any provision
of the Trust Indenture Act that may be so modified or excluded, the latter
provision shall be deemed to apply to this Indenture as so modified or to be
excluded, as the case may be.
SECTION 108. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
SECTION 109. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not.
SECTION 110. Separability Clause.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 111. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or implied,
shall give to any Person, other than the parties hereto and their successors
hereunder and the Holders of Securities, any benefit or any legal or equitable
right, remedy or claim under this Indenture.
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SECTION 112. Governing Law.
This Indenture and the Securities shall be governed by and construed
in accordance with the laws of the State of New York.
SECTION 113. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date, Purchase
Date or Stated Maturity of any Security shall not be a Business Day, then
(notwithstanding any other provision of this Indenture or of the Securities)
payment of interest or principal (and premium, if any) need not be made on such
date, but may be made on the next succeeding Business Day with the same force
and effect as if made on the Interest Payment Date, Redemption Date, Purchase
Date or at the Stated Maturity, provided that no interest shall accrue for the
period from and after such Interest Payment Date, Redemption Date, Purchase
Date or Stated Maturity, as the case may be.
ARTICLE TWO
Security Forms
SECTION 201. Forms Generally.
The Securities and the Trustee's certificates of authentication
thereof shall be in substantially the forms set forth in this Article, with
such appropriate legends, insertions, omissions, substitutions and other
variations as are required or permitted by this Indenture, and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with the rules of any
securities exchange or as may, consistently herewith, be determined by the
officers executing such Securities, as evidenced by their execution of the
Securities.
Upon their original issuance, Rule 144A Securities shall be issued in
the form of one or more Global Securities registered in the name of the
Depositary or its nominee and deposited with the Trustee, as custodian for the
Depositary, for credit by the Depositary to the respective accounts of
beneficial owners of the Securities represented thereby (or such other accounts
as they may direct). Such Global Securities, together with their Successor
Securities which
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are Global Securities other than the Regulation S Global Security, are
collectively herein called the "Restricted Global Security". Upon their
original issuance, Regulation S Securities shall be issued in the form of one
or more Global Securities registered in the name of the Depositary, or its
nominee and deposited with the Trustee, as custodian for the Depositary, for
credit to the respective accounts of the beneficial owners of the Securities
represented thereby (or such other accounts as they may direct), provided that
upon such deposit all such Securities shall be credited to or through accounts
maintained at the Depositary by or on behalf of Euroclear or Cedel. Such
Global Securities, together with their Successor Securities which are Global
Securities other than the Restricted Global Security, are collectively herein
called the "Regulation S Global Security".
Upon their original issuance, Other Securities shall not be issued in
the form of a Global Security or in any other form intended to facilitate
book-entry trading in beneficial interests in such Securities.
The definitive Securities shall be printed, lithographed or engraved
or produced by any combination of these methods on steel engraved borders or
may be produced in any other manner all as determined by the officers executing
such Securities, as evidenced by their execution of such Securities.
SECTION 202. Form of Face of Security.
[If a Global Security, then insert -- THIS SECURITY IS A GLOBAL
SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS
REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY
NOT BE EXCHANGEABLE IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO
TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF
ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE
LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.]
[If a Global Security to be held by The Depository Trust Company, then
insert -- UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER
OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE
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NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.]
[If Restricted Securities, then insert -- THE SECURITIES EVIDENCED
HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933
(THE "SECURITIES ACT") AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED EXCEPT (A) BY THE INITIAL INVESTOR (1) TO A PERSON WHO 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, (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE
903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (3) PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144
THEREUNDER (IF AVAILABLE) OR (4) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND (B) BY SUBSEQUENT INVESTORS, AS SET
FORTH IN (A) ABOVE AND, IN ADDITION, TO INSTITUTIONAL ACCREDITED INVESTORS IN A
TRANSACTION EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, IN
EACH CASE IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS.]
[If a Regulation S Security, then insert -- THIS SECURITY HAS NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933 (THE "SECURITIES ACT") AND MAY
NOT BE OFFERED, SOLD OR DELIVERED IN THE UNITED STATES OR TO, OR FOR THE
ACCOUNT OR BENEFIT OF, ANY U.S. PERSON, UNLESS THIS SECURITY IS REGISTERED
UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS
THEREOF IS AVAILABLE.]
THIS NOTE WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT. FOR PURPOSES OF
SECTIONS 1272, 1273 AND 1275 OF THE UNITED STATES INTERNAL REVENUE CODE OF
1986, AS AMENDED, THE ISSUE PRICE OF THIS SECURITY IS 56.277% OF ITS PRINCIPAL
AMOUNT, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $437.23 PER $1,000 OF STATED
FACE AMOUNT, THE ISSUE DATE IS NOVEMBER 7, 1996 AND THE YIELD TO MATURITY IS 11
7/8%.
11 7/8% SENIOR DISCOUNT NOTES DUE NOVEMBER 1, 2006
[IF RESTRICTED GLOBAL SECURITY - CUSIP NO. ________]
[IF ANY REGULATION S SECURITY - CUSIP NO. ________]
[IF REGULATION S GLOBAL SECURITY - ISIN NO. - __________]
[IF OTHER SECURITY - CUSIP NO. - ___________]
-35-
<PAGE> 50
No. __________ $_______________
Brooks Fiber Properties, Inc., a corporation duly organized and
existing under the laws of Delaware (herein called the "Company", which term
includes any successor Person under the Indenture hereinafter referred to), for
value received, hereby promises to pay to __________, or registered assigns,
the principal sum of __________ Dollars [if this Security is a Global Security,
then insert: (which principal amount may from time to time be increased or
decreased to such other principal amounts (which, taken together with the
principal amounts of all other Outstanding Securities, shall not exceed
$400,000,000 in the aggregate at any time) by adjustments made on the records
of the Trustee hereinafter referred to in accordance with the Indenture)] on
November 1, 2006, and to pay interest thereon from November 1, 2001 or from the
most recent Interest Payment Date to which interest has been paid or duly
provided for, semi-annually on May 1 and November 1 in each year, commencing
May 1, 2002 at the rate of 11 7/8% per annum, until the principal hereof is
paid or made available for payment [If Original Securities, then insert:
provided, however, that if (i) the Company has not filed a registration
statement (the "Exchange Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), registering a security substantially
identical to this Security (except that such Security will not contain terms
with respect to the Special Interest payments described below or transfer
restrictions) pursuant to an exchange offer (the "Exchange Offer") (or, in lieu
thereof, a registration statement registering this Security for resale (a
"Resale Registration Statement")) by January 6, 1997, or (ii) the Exchange
Registration Statement relating to the Exchange Offer or, if applicable, the
Resale Registration Statement has not become or been declared effective by
February 5, 1997, or (iii) the Exchange Offer has not been completed within 45
days after the date on which the Exchange Registration Statement has become or
been declared effective initially (if the Exchange Offer is then required to be
made pursuant to the Exchange and Registration Rights Agreement (the "Exchange
and Registration Rights Agreement"), dated as of , 1996, by and
between the Company, the Purchasers (as defined therein) and the Holders from
time to time of the Securities) or (iv) either the Exchange Registration
Statement or, if applicable, the Resale Registration Statement is filed and
declared effective (except as specifically permitted therein) but shall
thereafter cease to be effective without being succeeded promptly by an
additional registration statement filed and declared effective, in each case
(i) through (iv) upon the terms and
-36-
<PAGE> 51
conditions set forth in the Exchange and Registration Rights Agreement (each
such event referred to in clauses (i) through (iv), a "Registration Default"),
then interest will accrue (in addition to the original issue discount and any
stated interest on the Securities) (the "Step-Up") at a rate of 0.5% per annum,
determined daily, on the Accreted Value of the Securities (or, after November
1, 2001 on the principal amount of the Securities), from the period from the
occurrence of the Registration Default until such time (the "Step-Down Date")
as no Registration Default is in effect and, provided, further, that if either
the Exchange Offer has not been consummated or, if applicable, the Resale
Registration Statement has not become or been declared effective, in each case
by March 22, 1997, then the per annum rate of such Special Interest shall
increase (the "Second Step-Up") by an additional 0.5% per annum until such time
(the "Second Step Down Date") as the Company consummates the Exchange Offer or,
if applicable, the Resale Registration Statement becomes or has been declared
effective (after which such interest rate will be restored to its initial
rate). Interest accruing as a result of the Step-Up or the Second Step-Up is
referred to herein as "Special Interest." Accrued Special Interest, if any,
shall be paid semi-annually on May 1 and November 1 in each year; and the
amount of accrued Special Interest shall be determined on the basis of the
number of days actually elapsed. Any accrued and unpaid interest (including
Special Interest) on this Security upon the issuance of an Exchange Security
(as defined in the Indenture) in exchange for this Security shall cease to be
payable to the Holder hereof but such accrued and unpaid interest (including
Special Interest) shall be payable on the next Interest Payment Date for such
Exchange Security to the Holder thereof on the related Regular Record Date.]
The interest so payable, and punctually paid or duly provided for, on any
Interest Payment Date will, as provided in such Indenture, be paid to the
Person in whose name this Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest, which shall be April 15 or October 15 (whether or not a Business
Day), as the case may be, next preceding such Interest Payment Date. Any such
interest not so punctually paid or duly provided for will forthwith cease to be
payable to the Holder on such Regular Record Date and may either be paid to the
Person in whose name this Security (or one or more Predecessor Securities) is
registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest to be fixed by the Trustee, notice whereof shall be
given to Holders of Securities not less than 10 days prior to such Special
Record Date, or be paid at any time in any other lawful manner not inconsistent
with
-37-
<PAGE> 52
the requirements of any securities exchange on which the Securities may be
listed, and upon such notice as may be required by such exchange, all as more
fully provided in said Indenture.
The principal of this Security shall not accrue interest (other than
Special Interest, if any) until November 1, 2001, except in the case of a
default in payment of principal and premium, if any, upon acceleration or
redemption, in which case interest shall be payable pursuant to the preceding
paragraph on such overdue principal (and premium, if any), such interest shall
be payable on demand and, if not so paid on demand, such interest shall itself
bear interest at the rate of 11 7/8% per annum (to the extent that the payment
of such interest shall be legally enforceable), and shall accrue from the date
of such demand for payment to the date payment of such interest has been made
or duly provided for, and such interest on unpaid interest shall also be
payable on demand.
Payment of the principal of (and premium, if any) and interest on this
Security will be made at the corporate trust office of the Trustee and at the
office or agency of the Company maintained for that purpose in the Borough of
Manhattan, The City of New York, New York, and at any other office or agency
maintained by the Company for such purpose, in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts; provided, however, that at the option of the
Company payment of interest may be made by check mailed to the address of the
Person entitled thereto as such address shall appear in the Security Register.
Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this
Security shall not be entitled to any benefit under the Indenture or be valid
or obligatory for any purpose.
-38-
<PAGE> 53
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated:
[SEAL]
BROOKS FIBER PROPERTIES, INC.
By______________________________
Attest:
______________________________
SECTION 203. Form of Reverse of Security.
This Security is one of a duly authorized issue of Securities of the
Company designated as its 11 7/8% Senior Discount Notes due November 1, 2006
(the "Securities") issued under an Indenture, dated as of November 7, 1996
(herein called the "Indenture"), between the Company and The Bank of New York,
as trustee (herein called the "Trustee", which term includes any successor
trustee under the Indenture). The Securities are limited in aggregate
principal amount to $400,000,000. Reference is hereby made to the Indenture
and all indentures supplemental thereto for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Company,
the Trustee and the Holders of the Securities and of the terms upon which the
Securities are, and are to be, authenticated and delivered.
The Securities are subject to redemption upon not less than 30 nor
more than 60 days' notice by mail to each Holder of Securities to be redeemed
at such Holder's address appearing in the Security Register, in amounts of
$1,000 or an integral multiple of $1,000, at any time on or after
November 1, 2001 and prior to maturity, as a whole or in part, at the election
of the Company, at the following Redemption Prices (expressed as percentages of
the principal amount) plus accrued interest to but excluding the Redemption
Date (subject to the right of Holder on the relevant Regular Record Date to
receive interest due on an Interest Payment that is on or prior to the
Redemption Date), if redeemed during the 12-month period beginning November 1,
of each of the years indicated below:
-39-
<PAGE> 54
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2001 105.938%
2002 103.958%
2003 101.979%
</TABLE>
and thereafter at a Redemption Price equal to 100% of the principal amount,
together in the case of any such redemption with accrued interest to the
Redemption Date, but interest installments whose Stated Maturity is on or prior
to such Redemption Date will be payable to the Holders of such Securities, or
one or more Predecessor Securities, of record at the close of business on the
relevant Record Dates referred to on the face hereof, all as provided in the
Indenture.
The Securities are further subject to redemption prior to November 1,
2001 only in the event that the Company receives net proceeds from any sale of
its Common Stock (other than Disqualified 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 Securities in a
principal amount of up to an aggregate amount equal to 33 1/3% of the original
principal amount of the Securities, provided, however, that Securities in an
amount equal to at least 66 2/3% of the original principal amount of the
Securities remain outstanding after such redemption. Such redemption must
occur on a Redemption Date within 75 days of any such sale and upon not less
than 30 nor more than 60 days' notice by mail to each Holder of Securities to
be redeemed at such Holder's address appearing in the Security Register, in
amounts of $1,000 or an integral multiple of $1,000 at a Redemption Price of
110% of the Accreted Value of the Securities to but excluding the Redemption
Date.
The Securities do not have the benefit of any sinking fund
obligations.
The Indenture provides that, subject to certain conditions, if (i) a
Change of Control (as defined in the Indenture) occurs or (ii) certain Net
Available Proceeds are available to the Company as a result of any Asset
Disposition, the Company shall be required to make an Offer to Purchase for all
or a specified portion of the Securities.
[If not a Global Security -- In the event of redemption or purchase
pursuant to an Offer to Purchase of this
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<PAGE> 55
Security in part only, a new Security or Securities of like tenor for the
unredeemed or unpurchased portion hereof will be issued in the name of the
Holder hereof upon the cancellation hereof.]
[If a Global Security insert -- In the event of a deposit or
withdrawal of an interest in this Security (including upon an exchange,
transfer, redemption or repurchase of this Security in part only) effected in
accordance with the Applicable Procedures, the Security Registrar, upon receipt
of notice of such event from the Depositary's custodian for this Security,
shall make an adjustment on its records to reflect an increase or decrease of
the Outstanding principal amount of this Security resulting from such deposit
or withdrawal, as the case may be.]
If an Event of Default shall occur and be continuing, the principal of
all the Securities may be declared due and payable in the manner and with the
effect provided in the Indenture.
The Indenture contains provisions for defeasance at any time of (i)
the entire indebtedness of this Security, or (ii) certain restrictive covenants
and Events of Default with respect to this Security, in each case upon
compliance with certain conditions set forth therein.
Unless the context otherwise requires, the Original Securities (as
defined in the Indenture) and the Exchange Securities (as defined in the
Indenture) shall constitute one series for all purposes under the Indenture,
including without limitation, amendments, waivers, redemptions and Offers to
Purchase.
The Indenture permits, with certain exceptions as therein provided,
the amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities under the Indenture at
any time by the Company and the Trustee with the consent of the Holders of a
majority in aggregate principal amount of the Securities at the time
Outstanding. The Indenture also contains provisions permitting the Holders of
specified percentages in aggregate principal amount of the Securities at the
time Outstanding, on behalf of the Holders of all the Securities, to waive
compliance by the Company with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holder of this Security shall be conclusive and binding upon such
Holder and upon all future Holders of this Security and of any Security issued
upon the registra-
-41-
<PAGE> 56
tion of transfer hereof or in exchange herefor or in lieu hereof, whether or
not notation of such consent or waiver is made upon this Security.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of (and premium, if any)
and interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in the Borough of Manhattan, The City of New
York, New York, duly endorsed by, or accompanied by a written instrument of
transfer in form satisfactory to the Company and the Security Registrar duly
executed by, the Holder hereof or his attorney duly authorized in writing, and
thereupon one or more new Securities, of authorized denominations and like
tenor and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
The Exchange Securities are issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof, and the
Original Securities are issuable only in registered form without coupons in
denominations of $100,000 principal amount and any integral multiple of $1,000
in excess thereof. As provided in the Indenture and subject to certain
limitations therein set forth, Securities are exchangeable for a like tenor and
aggregate principal amount of Securities of a different authorized
denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Security is registered as the owner
hereof for all purposes, whether or not this Security be overdue, and neither
the Company, the Trustee nor any such agent shall be affected by notice to the
contrary.
-42-
<PAGE> 57
Interest on this Security shall be computed on the basis of a 360-day
year of twelve 30-day months; provided, however, that Special Interest shall be
computed on the basis of a 365- or 366-day year, as the case may be, and the
number of days actually elapsed.
All terms used in this Security which are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the Company
pursuant to Section 1013 or 1017 of the Indenture, check the box:
[ ]
If you want to elect to have only a part of this Security purchased by
the Company pursuant to Section 1013 or 1017 of the Indenture, state the
amount: $___________
Dated:________________ Your Signature:___________________________________
(Sign exactly as name appears
on the other side of this Security)
Signature Guarantee:________________________________________
Notice: Signature(s) must be guaranteed by an "eligible
guarantor institution" meeting the requirements of the
Security Registrar which requirements will include membership
or participation in STAMP or such other "signature guarantee
program" as may be determined by the Trustee in addition to,
or in substitution for STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.
SECTION 204. Form of Trustee's Certificate of
Authentication.
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<PAGE> 58
This is one of the Securities referred to in the within-mentioned
Indenture.
Date:
The Bank of New York,
as Trustee
By ____________________
Authorized Signatory
ARTICLE THREE
The Securities
SECTION 301. Title and Terms.
The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is limited to $400,000,000,
except for Securities authenticated and delivered upon registration of transfer
of, or in exchange for, or in lieu of, other Securities pursuant to Section
304, 305, 306, 906 or 1108 or in connection with an Offer to Purchase pursuant
to Section 1013 or 1017. The Company may issue Exchange Securities from time
to time pursuant to an Exchange Offer or otherwise, in each case pursuant to a
Board Resolution, subject to Section 303, included in an Officers' Certificate
delivered to the Trustee, in authorized denominations in exchange for a like
principal amount of Original Securities. Upon any such exchange the Original
Securities shall be cancelled in accordance with Section 309 and shall no
longer be deemed Outstanding for any purpose. In no event shall the aggregate
principal amount of Original Securities and Exchange Securities Outstanding
exceed $400,000,000.
The Securities shall be known and designated as the "11 7/8% Senior
Discount Notes due November 1, 2006" of the Company. The Stated Maturity of
the Securities shall be November 1, 2006. The Securities shall bear
interest at the rate of 11 7/8 % per annum, from November 1, 2001 or from the
most recent Interest Payment Date thereafter to which interest has been paid or
duly provided for, as the case may be, payable semi-annually on May 1 and
November 1, commencing May 1, 2002, until the principal thereof is paid or made
available for payment; provided, however, with respect to Original Securities,
if there has been a Registration Default, a Step-Up will occur and the Original
-44-
<PAGE> 59
Securities will from then bear Special Interest until the Step-Down Date and,
if either the Exchange Offer has not been consummated or, if applicable, the
Resale Registration Statement has not become or been declared effective, in
each case, by May 21, 1997, a Second Step-Up will occur and the Original
Securities will from then bear Special Interest until the Second Step-Down
Date. Accrued Special Interest, if any, shall be paid in cash in arrears
semi-annually on May 1 and November 1 in each year, and the amount of
accrued Special Interest shall be determined on the basis of the number of days
actually elapsed.
The principal of and premium, if any, and interest on the Securities
shall be payable at the corporate trust office of the Trustee in the Borough of
Manhattan, The City of New York, New York, maintained for such purpose and at
any other office or agency maintained by the Company for such purpose;
provided, however, that at the option of the Company payment of interest may be
made by check mailed to the address of the Person entitled thereto as such
address shall appear in the Security Register.
The Securities shall be subject to repurchase by the Company pursuant
to an Offer to Purchase as provided in Sections 1013 and 1017 of the Indenture.
The Securities shall be redeemable as provided in Article Eleven.
The Securities shall not have the benefit of any sinking fund
obligations.
The Securities shall be subject to defeasance at the option of the
Company as provided in Article Twelve.
Unless the context otherwise requires, the Original Securities and the
Exchange Securities shall constitute one series for all purposes under the
Indenture, including without limitation, amendments, waivers, redemptions and
Offers to Purchase.
SECTION 302. Denominations.
The Original Securities shall be issuable only in registered form
without coupons and only in denominations of $100,000 and any integral multiple
of $1,000 in excess thereof, and the Exchange Securities shall be issuable only
in registered form without coupons and only in denominations of $1,000 and any
integral multiple thereof.
-45-
<PAGE> 60
SECTION 303. Execution, Authentication, Delivery
and Dating.
The Securities shall be executed on behalf of the Company by its
Chairman of the Board, its Vice Chairman of the Board, its President or one of
its Vice Presidents, under its corporate seal reproduced thereon attested by
its Secretary or one of its Assistant Secretaries. The signature of any of
these officers on the Securities may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Securities executed by the Company to
the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Securities; and the Trustee in accordance
with such Company Order shall authenticate and deliver such Securities as in
this Indenture provided and not otherwise.
At any time and from time to time after the execution and delivery of
this Indenture and after the effectiveness of a Registration Statement under
the Securities Act with respect thereto, the Company may deliver Exchange
Securities executed by the Company to the Trustee for authentication, together
with a Company Order for the authentication and delivery of such Exchange
Securities and a like principal amount of Original Securities for cancellation
in accordance with Section 309 of this Indenture, and the Trustee in accordance
with the Company Order shall authenticate and deliver such Securities. In
authenticating such Exchange Securities, and accepting the additional
responsibilities under this Indenture in relation to such Securities, the
Trustee shall be entitled to receive, and (subject to Section 601) shall be
fully protected in relying upon, an Opinion of Counsel stating,
(a) that such Exchange Securities have been duly and validly issued
in accordance with the terms of the Indenture, and are entitled to all the
rights and benefits set forth herein; and
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<PAGE> 61
(b) that the issuance of the Exchange Securities in exchange for the
Original Securities has been effected in compliance with the Securities Act
of 1933, as amended.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or
be valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature, and such certificate upon any
Security shall be conclusive evidence, and the only evidence, that such
Security has been duly authenticated and delivered hereunder.
SECTION 304. Temporary Securities.
Pending the preparation of definitive Securities, the Company may
execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized denomination, substantially of the
tenor of the definitive Securities in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the officers executing such Securities may determine, as evidenced by their
execution of such Securities.
If temporary Securities are issued, the Company will cause definitive
Securities to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at any office
or agency of the Company designated pursuant to Section 1002, without charge to
the Holder. Upon surrender for cancellation of any one or more temporary
Securities, the Company shall execute and the Trustee shall authenticate and
deliver in exchange therefor a like tenor and principal amount of definitive
Securities of authorized denominations. Until so exchanged, the temporary
Securities shall in all respects be entitled to the same benefits under this
Indenture as definitive Securities.
SECTION 305. Registration, Registration of Transfer and
Exchange.
(a) The Company shall cause to be kept at the Corporate Trust Office
of the Trustee a register (the register
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<PAGE> 62
maintained in such office and in any other office or agency designated pursuant
to Section 1002 being herein sometimes collectively referred to as the
"Security Register") in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of Securities and of
transfers of Securities. The Trustee is hereby appointed "Security Registrar"
for the purpose of registering Securities and transfers of Securities as herein
provided. Such Security Register shall distinguish between Original Securities
and Exchange Securities.
Subject to the other provisions of this Indenture regarding
restrictions on transfer, upon surrender for registration of transfer of any
Security at an office or agency of the Company designated pursuant to Section
1002 for such purpose in accordance with the terms hereof, the Company shall
execute, and the Trustee shall authenticate and deliver, in the name of the
designated transferee or transferees, one or more new Securities of any
authorized denominations and of a like tenor and aggregate principal amount and
bearing such restrictive legends as may be required by this Indenture.
At the option of the Holder, and subject to the other provisions of
this Section 305, Securities may be exchanged for other Securities of any
authorized denominations and of a like tenor and aggregate principal amount,
upon surrender of the Securities to be exchanged at such office or agency.
Whenever any Securities are so surrendered for exchange, the Company shall
execute, and the Trustee shall authenticate and deliver, the Securities which
the Holder making the exchange is entitled to receive.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt, and (subject to the provisions in the Original Securities regarding the
payment of Special Interest) entitled to the same benefits under this
Indenture, as the Securities surrendered upon such registration of transfer or
exchange.
Every Security presented or surrendered for registration of transfer
or for exchange shall (if so required by the Company or the Trustee) be duly
endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed, by the
Holder thereof or his attorney duly authorized in writing.
No service charge shall be made to the Holder for any registration of
transfer or exchange of Securities, but the
-48-
<PAGE> 63
Company may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any registration of
transfer or exchange of Securities, other than exchanges pursuant to Section
304, 305(d), 906 or 1108 or in accordance with any Offer to Purchase pursuant
to Section 1013 or 1017 not involving any transfer.
The Company shall not be required (i) to issue, register the transfer
of or exchange any Security during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption of
Securities selected for redemption under Section 1104 and ending at the close
of business on the day of such mailing, or (ii) to register the transfer of or
exchange any Security so selected for redemption in whole or in part, except
the unredeemed portion of any Security being redeemed in part.
(b) Certain Transfers and Exchanges. Notwithstanding any other
provision of this Indenture or the Securities, transfers and exchanges of
Securities and beneficial interests in a Global Security of the kinds specified
in this Section 305(b) shall be made only in accordance with this Section
305(b).
(i) Restricted Global Security to Regulation S Global Security.
If the owner of a beneficial interest in the Restricted Global Security
wishes at any time to transfer such interest to a Person who wishes to
acquire the same in the form of a beneficial interest in the Regulation S
Global Security, such transfer may be effected only in accordance with the
provisions of this Clause (b)(i) and Clause (b)(vii) below and subject to
the Applicable Procedures. Upon receipt by the Trustee, as Security
Registrar, of (A) an order given by the Depositary or its authorized
representative directing that a beneficial interest in the Regulation S
Global Security in a specified principal amount be credited to a specified
Agent Member's account and that a beneficial interest in the Restricted
Global Security in an equal principal amount be debited from another
specified Agent Member's account and (B) a Regulation S Certificate,
satisfactory to the Trustee and duly executed by the owner of such
beneficial interest in the Restricted Global Security or his attorney duly
authorized in writing, then the Trustee, as Security Registrar but subject
to Clause (b)(vii) below, shall reduce the principal amount of the
Restricted Global Security and increase the principal amount of the
Regulation S Global Security by such specified principal amount as provided
in Section 305(d)(3).
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(ii) Regulation S Global Security to Restricted Global Security.
If the owner of a beneficial interest in the Regulation S Global Security
wishes at any time to transfer such interest to a Person who wishes to
acquire the same in the form of a beneficial interest in the Restricted
Global Security, such transfer may be effected only in accordance with this
Clause (b)(ii) and subject to the Applicable Procedures. Upon receipt by
the Trustee, as Security Registrar, of (A) an order given by the Depositary
or its authorized representative directing that a beneficial interest in
the Restricted Global Security in a specified principal amount be credited
to a specified Agent Member's account and that a beneficial interest in the
Regulation S Global Security in an equal principal amount be debited from
another specified Agent Member's account and (B) if such transfer is to
occur during the Restricted Period, a Restricted Securities Certificate,
satisfactory to the Trustee and duly executed by the owner of such
beneficial interest in the Regulation S Global Security or his attorney
duly authorized in writing, then the Trustee, as Security Registrar, shall
reduce the principal amount of the Regulation S Global Security and
increase the principal amount of the Restricted Global Security by such
specified principal amount as provided in Section 305(d)(3).
(iii) Restricted Non-Global Security to Restricted Global
Security or Regulation S Global Security. If the Holder of a Restricted
Security (other than a Global Security) wishes at any time to transfer all
or any portion of such Restricted Security to a Person who wishes to take
delivery thereof in the form of a beneficial interest in the Restricted
Global Security or the Regulation S Global Security, such transfer may be
effected only in accordance with the provisions of this Clause (b)(iii) and
Clause (b)(vii) below and subject to the Applicable Procedures. Upon
receipt by the Trustee, as Security Registrar, of (A) such Restricted
Security as provided in Section 305(a) and instructions satisfactory to the
Trustee directing that a beneficial interest in the Restricted Global
Security or Regulation S Global Security in a specified principal amount
not greater than the principal amount of such Security be credited to a
specified Agent Member's account and (B) a Restricted Securities
Certificate, if the specified account is to be credited with a beneficial
interest in the Restricted Global Security, or a Regulation S Certificate,
if the specified account is to be credited with a beneficial interest in
the Regulation S Global Security, in either case satisfactory to the
Trustee and duly executed by
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such Holder or his attorney duly authorized in writing, then the Trustee,
as Security Registrar but subject to Clause (b)(vii) below, shall cancel
such Restricted Security (and issue a new Restricted Security in respect of
any untransferred portion thereof) as provided in Section 305(a) and
increase the principal amount of the Restricted Global Security or the
Regulation S Global Security, as the case may be, by the specified
principal amount as provided in Section 305(d)(3).
(iv) Regulation S Non-Global Security to Restricted Global Security
or Regulation S Global Security. If the Holder of a Regulation S Security
(other than a Global Security) wishes at any time to transfer all or any
portion of such Regulation S Security to a Person who wishes to acquire the
same in the form of a beneficial interest in the Restricted Global Security
or the Regulation S Global Security, such transfer may be effected only in
accordance with this Clause (b)(iv) and Clause (b)(vii) below and subject
to the Applicable Procedures. Upon receipt by the Trustee, as Security
Registrar, of (A) such Regulation S Security as provided in Section 305(a)
and instructions satisfactory to the Trustee directing that a beneficial
interest in the Restricted Global Security or Regulation S Global Security
in a specified principal amount not greater than the principal amount of
such Security be credited to a specified Agent Member's account and (B) if
the transfer is to occur during the Restricted Period and the specified
account is to be credited with a beneficial interest in the Restricted
Global Security, a Restricted Securities Certificate satisfactory to the
Trustee and duly executed by such Holder or his attorney duly authorized in
writing, then the Trustee, as Security Registrar but subject to Clause
(b)(vii) below, shall cancel such Regulation S Security (and issue a new
Regulation S Security in respect of any untransferred portion thereof) as
provided in Section 305(a) and increase the principal amount of the
Restricted Global Security or the Regulation S Global Security, as the case
may be, by the specified principal amount as provided in Section 305(d)(3).
(v) Non-Global Security to Non-Global Security. A Security that
is not a Global Security may be transferred, in whole or in part, to a
Person who takes delivery in the form of another Security that is not a
Global Security as provided in Section 305(a), provided that, if the
Security to be transferred in whole or in part is a Restricted Security, or
is a Regulation S Security and the transfer is to occur during the
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Restricted Period, then the Trustee shall have received (A) a Restricted
Securities Certificate, satisfactory to the Trustee and duly executed by
the transferor Holder or his attorney duly authorized in writing, in which
case the transferee Holder shall take delivery in the form of a Restricted
Security, or (B) a Regulation S Certificate, satisfactory to the Trustee
and duly executed by the transferor Holder or his attorney duly authorized
in writing, in which case the transferee Holder shall take delivery in the
form of a Regulation S Security (subject in every case to Section 305(c)).
(vi) Exchanges between Global Security and Non-Global Security. A
beneficial interest in a Global Security may be exchanged for a Security
that is not a Global Security as provided in Section 305(d), provided that,
if such interest is a beneficial interest in the Restricted Global
Security, or if such interest is a beneficial interest in the Regulation S
Global Security and such exchange is to occur during the Restricted Period,
then such interest shall be exchanged for a Restricted Security (subject in
each case to Section 305(c)). A Security that is not a Global Security may
be exchanged for a beneficial interest in a Global Security only if (A)
such exchange occurs in connection with a transfer effected in accordance
with Clause (b)(iii) or (iv) above or (B) such Security is a Regulation S
Security and such exchange occurs after the Restricted Period.
(vii) Regulation S Global Security to be Held Through Euroclear or
Cedel during Restricted Period. The Company shall use its best efforts to
cause the Depositary to ensure that, until the expiration of the Restricted
Period, beneficial interests in the Regulation S Global Security may be
held only in or through accounts maintained at the Depositary by Euroclear
or Cedel (or by Agent Members acting for the account thereof), and no
person shall be entitled to effect any transfer or exchange that would
result in any such interest being held otherwise than in or through such an
account; provided that this Clause (b)(vii) shall not prohibit any transfer
or exchange of such an interest in accordance with Clause (b)(ii) or (vi)
above.
(c) Securities Act Legends. Rule 144A Securities, Other Securities
and their respective Successor Securities shall bear a Restricted Securities
Legend, and the Regulation S Securities and their Successor Securities shall
bear a Regulation S Legend, subject to the following:
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(i) subject to the following Clauses of this Section 305(c), a
Security or any portion thereof which is exchanged, upon transfer or
otherwise, for a Global Security or any portion thereof shall bear the
Securities Act Legend borne by such Global Security while represented
thereby;
(ii) subject to the following Clauses of this Section 305(c), a new
Security which is not a Global Security and is issued in exchange for
another Security (including a Global Security) or any portion thereof, upon
transfer or otherwise, shall bear the Securities Act Legend borne by such
other Security, provided that, if such new Security is required pursuant to
Section 305(b)(v) or (vi) to be issued in the form of a Restricted
Security, it shall bear a Restricted Securities Legend and, if such new
Security is so required to be issued in the form of a Regulation S
Security, it shall bear a Regulation S Legend;
(iii) Registered Securities shall not bear a Securities Act Legend;
(iv) at any time after the Securities may be freely transferred
without registration under the Securities Act or without being subject to
transfer restrictions pursuant to the Securities Act, a new Security which
does not bear a Securities Act Legend may be issued in exchange for or in
lieu of a Security (other than a Global Security) or any portion thereof
which bears such a legend if the Trustee has received an Unrestricted
Securities Certificate, satisfactory to the Trustee and duly executed by
the Holder of such legended Security or his attorney duly authorized in
writing, and after such date and receipt of such certificate, the Trustee
shall authenticate and deliver such a new Security in exchange for or in
lieu of such other Security as provided in this Article Three;
(v) a new Security which does not bear a Securities Act Legend may
be issued in exchange for or in lieu of a Security (other than a Global
Security) or any portion thereof which bears such a legend if, in the
Company's judgment, placing such a legend upon such new Security is not
necessary to ensure compliance with the registration requirements of the
Securities Act, and the Trustee, at the direction of the Company, shall
authenticate and deliver such a new Security as provided in this Article
Three; and
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(vi) notwithstanding the foregoing provisions of this Section
305(c), a Successor Security of a Security that does not bear a particular
form of Securities Act Legend shall not bear such form of legend unless the
Company has reasonable cause to believe that such Successor Security is a
"restricted security" within the meaning of Rule 144, in which case the
Trustee, at the direction of the Company, shall authenticate and deliver a
new Security bearing a Restricted Securities Legend in exchange for such
Successor Security as provided in this Article Three.
(d) The provisions of Clauses (1), (2), (3), (4) and (5) below shall
apply only to Global Securities:
(1) Each Global Security authenticated under this Indenture shall
be registered in the name of the Depositary or a nominee thereof and
delivered to the Depositary or a nominee thereof or custodian therefor, and
each such Global Security shall constitute a single Security for all
purposes of this Indenture.
(2) Notwithstanding any other provision in this Indenture, no
Global Security may be exchanged in whole or in part for Securities
registered, and no transfer of a Global Security in whole or in part may be
registered, in the name of any Person other than the Depositary or a
nominee thereof unless (A) the Depositary (i) has notified the Company that
it is unwilling or unable to continue as Depositary for such Global
Security and the Company thereupon fails to appoint a successor Depository
or (ii) has ceased to be a clearing agency registered under the Exchange
Act, (B) the Company, at its option, notifies the Trustee in writing that
it elects to cause the issuance of the Securities in definitive registered
certificated form or (C) 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 Securities evidenced by
such Global Security.
(3) If any Global Security is to be exchanged for other Securities
or cancelled in whole, it shall be surrendered by or on behalf of the
Depositary or its nominee to the Trustee, as Security Registrar, for
exchange or cancellation as provided in this Article Three. If any Global
Security is to be exchanged for other Securities or cancelled in part, or
if another Security is to be exchanged in whole or in part for a beneficial
interest in any Global Security, then either (i) such Global Security shall
be so surrendered for
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exchange or cancellation as provided in this Article Three or (ii) the
principal amount thereof shall be reduced or increased by an amount equal
to the portion thereof to be so exchanged or cancelled, or equal to the
principal amount of such other Security to be so exchanged for a beneficial
interest therein, as the case may be, by means of an appropriate adjustment
made on the records of the Trustee, as Security Registrar, whereupon the
Trustee, in accordance with the Applicable Procedures, shall instruct the
Depositary or its authorized representative to make a corresponding
adjustment to its records. Upon any such surrender or adjustment of a
Global Security, the Trustee shall, subject to Section 305(d)(2) and as
otherwise provided in this Article Three, authenticate and deliver any
Securities issuable in exchange for such Global Security (or any portion
thereof) to or upon the order of, and registered in such names as may be
directed by, the Depositary or its authorized representative. Upon the
request of the Trustee in connection with the occurrence of any of the
events specified in the preceding paragraph, the Company shall promptly
make available to the Trustee a reasonable supply of Securities that are
not in the form of Global Securities. The Trustee shall be entitled to
rely upon any order, direction or request of the Depositary or its
authorized representative which is given or made pursuant to this Article
Three if such order, direction or request is given or made in accordance
with the Applicable Procedures.
(4) Every Security authenticated and delivered upon registration
of transfer of, or in exchange for or in lieu of, a Global Security or any
portion thereof, whether pursuant to this Section, Section 304, 306, 906,
1013, 1017 or 1108 or otherwise, shall be authenticated and delivered in
the form of, and shall be, a Global Security, unless such Security is
registered in the name of a Person other than the Depositary or a nominee
thereof.
(5) None of the Company, the Trustee, any agent of the Trustee,
any Paying Agent or the Security Registrar will have any responsibility or
liability for any aspect of the Depository's records (or the records of the
participant of such Depository) relating to or payments made on account of
beneficial ownership interests of a Global Security or for maintaining,
supervising or reviewing any records of the Depository relating to such
beneficial ownership interests.
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SECTION 306. Mutilated, Destroyed, Lost and
Stolen Securities.
If any mutilated Security is surrendered to the Trustee, the Company
shall execute and the Trustee shall authenticate and deliver in exchange
therefor a new Security of like tenor and principal amount and bearing a number
not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any
Security and (ii) such security or indemnity as may be required by them to save
each of them and any agent of either of them harmless, then, in the absence of
notice to the Company or the Trustee that such Security has been acquired by a
bona fide purchaser, the Company shall execute and the Trustee shall
authenticate and deliver, in lieu of any such destroyed, lost or stolen
Security, a new Security of like tenor and principal amount and bearing a
number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, the Company in its discretion
may, instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities.
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SECTION 307. Payment of Interest; Interest
Rights Preserved.
Interest on any Security which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name that Security (or one or more Predecessor Securities) is registered
at the close of business on the Regular Record Date for such interest.
Any interest (including Special Interest) on any Security which is
payable, but is not punctually paid or duly provided for, on any Interest
Payment Date (herein called "Defaulted Interest") shall (a) bear interest at
the rate per annum stated in the form of Security included herein (to the
extent that the payment of such interest shall be legally enforceable), and (b)
forthwith cease to be payable to the Holder on the relevant Regular Record Date
by virtue of having been such Holder, and such Defaulted Interest may be paid
by the Company, at its election in each case, as provided in Clause (1) or (2)
below:
(1) The Company may elect to make payment of any Defaulted Interest to the
Persons in whose names the Securities (or their respective Predecessor
Securities) are registered at the close of business on a Special Record Date
for the payment of such Defaulted Interest, which shall be fixed in the
following manner. The Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on each Security and the date
of the proposed payment, and at the same time the Company shall deposit with
the Trustee an amount of money equal to the aggregate amount proposed to be
paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the proposed
payment, such money when deposited to be held in trust for the benefit of the
Persons entitled to such Defaulted Interest as in this Clause provided.
Thereupon the Trustee shall fix a Special Record Date for the payment of such
Defaulted Interest which shall be not more than 15 days and not less than 10
days prior to the date of the proposed payment and not less than 10 days after
the receipt by the Trustee of the notice of the proposed payment. The Trustee
shall promptly notify the Company of such Special
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Record Date and, in the name and at the expense of the Company, shall cause
notice of the proposed payment of such Defaulted Interest and the Special
Record Date therefor to be mailed, first-class postage prepaid, to each Holder
at his address as it appears in the Security Register, not less than 10 days
prior to such Special Record Date. Notice of the proposed payment of such
Defaulted Interest and the Special Record Date therefor having been so mailed,
such Defaulted Interest shall be paid to the Persons in whose names the
Securities (or their respective Predecessor Securities) are registered at the
close of business on such Special Record Date and shall no longer be payable
pursuant to the following Clause (2).
(2) The Company may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Securities may be listed, and upon such notice as may be required
by such exchange, if, after notice given by the Company to the Trustee of the
proposed payment pursuant to this Clause, such manner of payment shall be
deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Security shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Security.
SECTION 308. Persons Deemed Owners.
Prior to due presentment of a Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name such Security is registered as the owner of such
Security for the purpose of receiving payment of principal of and premium, if
any, and (subject to Section 307) interest on such Security and for all other
purposes whatsoever, whether or not such Security be overdue, and neither the
Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.
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SECTION 309. Cancellation.
All Securities surrendered for payment, redemption, registration of
transfer, exchange or pursuant to any Offer to Purchase pursuant to Section
1013 or 1017 shall, if surrendered to any Person other than the Trustee, be
delivered to the Trustee and shall be promptly cancelled by it. The Company
may at any time deliver to the Trustee for cancellation any Securities
previously authenticated and delivered hereunder which the Company may have
acquired in any manner whatsoever, and all Securities so delivered shall be
promptly cancelled by the Trustee. No Securities shall be authenticated in
lieu of or in exchange for any Securities cancelled as provided in this
Section, except as expressly permitted by this Indenture. All cancelled
Securities held by the Trustee shall be disposed of in accordance with its
standard procedures or as directed by a Company Order; provided, however, that
the Trustee shall not be required to destroy such Securities.
SECTION 310. Computation of Interest.
Interest on the Securities shall be computed on the basis of a 360-day
year of twelve 30-day months, provided, however, that Special Interest on
Original Securities shall be computed on the basis of a 365- or 366-day year,
as the case may be, and the number of days actually elapsed.
SECTION 311. CUSIP and ISIN Numbers.
The Company in issuing Securities may use "CUSIP" and "ISIN" numbers
(if then generally in use) in addition to serial numbers; if so, the Trustee
shall use such "CUSIP" and "ISIN" numbers in addition to serial numbers in
notices of redemption and repurchase as a convenience to Holders; provided that
any such notice may state that no representation is made as to the correctness
of such CUSIP and ISIN numbers either as printed on the Securities or as
contained in any notice of a redemption or repurchase and that reliance may be
placed only on the serial or other identification numbers printed on the
Securities, and any such redemption or repurchase shall not be affected by any
defect in or omission of such CUSIP and ISIN numbers.
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ARTICLE FOUR
Satisfaction and Discharge
SECTION 401. Satisfaction and Discharge of Indenture.
This Indenture shall cease to be of further effect as to all
outstanding Securities (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 Securities, (iii)
rights of holders of Securities to receive payment of principal of and premium,
if any, and interest on the Securities, (iv) rights, obligations and immunities
of the Trustee under the Indenture and (v) rights of the holders of the
Securities as beneficiaries of the Indenture with respect to any property
deposited with the Trustee payable to all or any of them), and the Trustee, on
demand of and at the expense of the Company, shall execute proper instruments
acknowledging satisfaction and discharge of this Indenture, when
(1) either
(A) 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
(B) all outstanding Notes (except lost, stolen or destroyed
Notes which have been replaced or paid) have been delivered to the
Trustee for cancellation;
and the Company, in the case of (A) above, has deposited or caused to
be deposited with the Trustee as trust funds in trust for the purpose
an amount sufficient to pay and discharge the entire indebtedness on
such Securities not theretofore delivered to the Trustee for
cancellation, for principal of and premium, if any, and interest to
the date of such deposit (in the case of Securities which have become
due and payable) or to the Stated Maturity or Redemption Date, as the
case may be;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent
herein provided for
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relating to the satisfaction and discharge of this Indenture have been
complied with.
Notwithstanding the satisfaction and discharge of this Indenture, (i) the
obligations of the Company to the Trustee under Section 607, (ii) substitution
of apparently mutilated, defaced, destroyed, lost or stolen Securities, (iii)
rights of holders of Securities to receive payment of principal of and premium,
if any, and interest on the Securities, (iv) rights, obligations and immunities
of the Trustee under this Indenture (including, if money shall have been
deposited with the Trustee pursuant to subclause (B) of Clause (1) of this
Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003), and (v) rights of holders of the Securities as
beneficiaries of this Indenture with respect to any property deposited with the
Trustee payable to all or any of them, shall survive.
SECTION 402. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 1003, all
money deposited with the Trustee pursuant to Section 401 shall be held in trust
and applied by it, in accordance with the provisions of the Securities and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal (and premium, if
any) and interest for whose payment such money has been deposited with the
Trustee.
ARTICLE FIVE
Remedies
SECTION 501. Events of Default.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):
(1) default in the payment of any interest upon any Security when it
becomes due and payable, and continuance of such default for a period of 30
days; or
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(2) default in the payment of the principal of (or premium, if any,
on) any Security when due; or
(3) default in the payment of principal and interest upon any
Security required to be purchased pursuant to an Offer to Purchase pursuant
to Sections 1013 or 1017; or
(4) default in the performance, or breach, of Section 801, 1013 or
1017; or
(5) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture or in any Security (other than a
covenant or warranty a default in whose performance or whose breach is
elsewhere in this Section specifically dealt with), and continuance of such
default or breach for a period of 60 days after there has been given, by
registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in aggregate
principal amount of the Outstanding Securities a written notice specifying
such default or breach and requiring it to be remedied and stating that
such notice is a "Notice of Default" hereunder; or
(6) a default or defaults under any bond(s), debenture(s), note(s) or
other evidence(s) of indebtedness by the Company or any Subsidiary of the
Company or under any mortgage(s), indenture(s) or instrument(s) under which
there may be issued or by which there may be secured or evidenced any
indebtedness of such type by the Company or any such Subsidiary with a
principal amount then outstanding, individually or in the aggregate, in
excess of $5 million, whether such indebtedness now exists or shall
hereafter be created, which default or defaults shall constitute a failure
to pay in excess of $5 million of the principal of such indebtedness when
due at the final maturity thereof, or shall have resulted in excess of $5
million of indebtedness becoming or being declared due and payable prior to
the date on which it would otherwise have become due and payable; or
(7) a final judgment or final judgments for the payment of money are
entered against the Company or any Subsidiary in an aggregate amount in
excess of $5 million by a court or courts of competent jurisdiction, which
judgments remain undischarged or unbonded for a period (during which
execution shall not be effectively stayed) of 45 days after the right to
appeal all such judgments has expired; or
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(8) the entry by a court having jurisdiction in the premises of (A) a
decree or order for relief in respect of the Company or any of its
Subsidiaries in an involuntary case or proceeding under any applicable
Federal or State bankruptcy, insolvency, reorganization or other similar
law or (B) a decree or order adjudging the Company or any of its
Subsidiaries a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition of
or in respect of the Company or any of its Subsidiaries under any
applicable Federal or State law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official of
the Company or any of its Subsidiaries or of any substantial part of its
property, or ordering the winding up or liquidation of its affairs, and the
continuance of any such decree or order for relief or any such other decree
or order unstayed and in effect for a period of 60 consecutive days; or
(9) the commencement by the Company or any of its Subsidiaries of a
voluntary case or proceeding under any applicable Federal or State
bankruptcy, insolvency, reorganization or other similar law or of any other
case or proceeding to be adjudicated a bankrupt or insolvent, or the
consent by it to the entry of a decree or order for relief in respect of
the Company or any of its Subsidiaries in an involuntary case or proceeding
under any applicable Federal or State bankruptcy, insolvency,
reorganization or other similar law or to the commencement of any
bankruptcy or insolvency case or proceeding against it, or the filing by it
of a petition or answer or consent seeking reorganization or relief under
any applicable Federal or State law, or the consent by it to the filing of
such petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee, sequestrator or other similar
official of the Company or any of its Subsidiaries or of any substantial
part of its property, or the making by it of an assignment for the benefit
of creditors, or the admission by it in writing of its inability to pay its
debts generally as they become due, or the taking of corporate action by
the Company or any of its Subsidiaries in furtherance of any such action.
SECTION 502. Acceleration of Maturity; Rescission
and Annulment.
If an Event of Default (other than an Event of Default specified in
Section 501(8) or (9)) occurs and is
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continuing, then and in every such case the Trustee or the Holders of not less
than 25% in principal amount of the Outstanding Securities may declare the
Default Amount of all the Securities to be due and payable immediately, by a
notice in writing to the Company (and to the Trustee if given by Holders), and
upon any such declaration such Default Amount and any accrued interest shall
become immediately due and payable. If an Event of Default specified in
Section 501(8) or (9) occurs, the Default Amount of and any accrued interest on
the Securities then Outstanding shall ipso facto become immediately due and
payable without any declaration or other Act on the part of the Trustee or any
Holder.
The "Default Amount" in respect of any particular Security as of any
particular date of acceleration shall equal the Accreted Value of the Security
on such date.
At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due based on acceleration
has been obtained by the Trustee as hereinafter in this Article provided, the
Holders of a majority in principal amount of the Outstanding Securities, by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if:
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(A) all overdue interest on all Securities,
(B) the principal of (and premium, if any, on) any Securities
which have become due otherwise than by such declaration of
acceleration (including any Securities required to have been purchased
on the Purchase Date pursuant to an Offer to Purchase made by the
Company) and interest thereon at the rate borne by the Securities,
(C) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Securities,
and
(D) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel;
and
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(2) all Events of Default, other than the non-payment of the
principal of Securities which have become due solely by such declaration of
acceleration, have been cured or waived as provided in Section 513.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
SECTION 503. Collection of Indebtedness and Suits
for Enforcement by Trustee.
The Company covenants that if
(1) default is made in the payment of any interest on any Security
when such interest becomes due and payable and such default continues for a
period of 30 days, or
(2) default is made in the payment of the principal of (or premium,
if any, on) any Security at the Maturity thereof or, with respect to any
Security required to have been purchased pursuant to an Offer to Purchase
made by the Company, at the Purchase Date thereof,
the Company will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Securities, the whole amount then due and payable on such
Securities for principal (and premium, if any) and interest, and, to the extent
that payment of such interest shall be legally enforceable, interest on any
overdue principal (and premium, if any) and on any overdue interest, at the
rate provided by the Securities, and, in addition thereto, such further amount
as shall be sufficient to cover the costs and expenses of collection, including
the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may institute
a judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree, and may enforce the same
against the Company or any other obligor upon the Securities and collect the
moneys adjudged or decreed to be payable in the manner provided by law out of
the property of the Company or any other obligor upon the Securities, wherever
situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem most
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effective to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 504. Trustee May File Proofs of Claim.
In case of any judicial proceeding relative to the Company (or any
other obligor upon the Securities), its property or its creditors, the Trustee
shall be entitled and empowered, by intervention in such proceeding or
otherwise, to take any and all actions authorized under the Trust Indenture Act
in order to have claims of the Holders and the Trustee allowed in any such
proceeding. In particular, the Trustee shall be authorized to collect and
receive any moneys, securities or other property payable or deliverable upon
the exchange of the Securities or upon any such claims and to distribute the
same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator
or other similar official in any such judicial proceeding is hereby authorized
by each Holder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the Holders,
to pay to the Trustee any amount due it for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel,
and any other amounts due the Trustee under Section 607.
No provision of this Indenture shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any Holder
any plan of reorganization, arrangement, adjustment or composition affecting
the Securities or the rights of any Holder thereof or to authorize the Trustee
to vote in respect of the claim of any Holder in any such proceeding; provided,
however, that the Trustee may, on behalf of the Holders, vote for the election
of a trustee in bankruptcy or similar official and be a member of a creditors
or other similar committee.
SECTION 505. Trustee May Enforce Claims Without
Possession of Securities.
All rights of action and claims under this Indenture or the Securities
may be prosecuted and enforced by the Trustee without the possession of any of
the Securities or the production thereof in any proceeding relating thereto,
and any such proceeding instituted by the Trustee shall be brought in its own
name as trustee of an express trust, and any recovery of judgment shall, after
provision for the
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payment of the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel, be for the ratable benefit of the Holders
of the Securities in respect of which such judgment has been recovered.
SECTION 506. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal (or premium,
if any) or interest, upon presentation of the Securities and the notation
thereon of the payment if only partially paid and upon surrender thereof if
fully paid:
FIRST: To the payment of all amounts due the Trustee under
Section 607; and
SECOND: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) and interest on the Securities in
respect of which or for the benefit of which such money has been collected,
ratably, without preference or priority of any kind, according to the
amounts due and payable on such Securities for principal (and premium, if
any) and interest, respectively.
SECTION 507. Limitation on Suits.
No Holder of any Security shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee of
a continuing Event of Default;
(2) the Holders of not less than 25% in aggregate principal amount of
the Outstanding Securities shall have made written request to the Trustee
to institute proceedings in respect of such Event of Default in its own
name as Trustee hereunder;
(3) such Holder or Holders have offered and, if requested, provided
to the Trustee reasonable indemnity against the costs, expenses and
liabilities to be incurred in compliance with such request;
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(4) the Trustee for 60 days after its receipt of such notice, request
and offer and, if requested, provision of indemnity has failed to institute
any such proceeding; and
(5) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a majority
in principal amount of the Outstanding Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
SECTION 508. Unconditional Right of Holders
to Receive Principal, Premium and Interest.
Notwithstanding any other provision in this Indenture, the Holder of
any Security shall have the right, which is absolute and unconditional, to
receive payment of the principal of (and premium, if any) and (subject to
Section 307) interest on such Security on the respective Stated Maturities
expressed in such Security (or, in the case of redemption, on the Redemption
Date or, in the case of an Offer to Purchase made by the Company and required
to be accepted as to such Security, on the Purchase Date) and to institute suit
for the enforcement of any such payment, and such rights shall not be impaired
without the consent of such Holder.
SECTION 509. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders
shall be restored severally and respectively to their former positions
hereunder and thereafter all rights and remedies of the Trustee and the Holders
shall continue as though no such proceeding had been instituted.
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SECTION 510. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities in the last
paragraph of Section 306, no right or remedy herein conferred upon or reserved
to the Trustee or to the Holders is intended to be exclusive of any other right
or remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent
the concurrent assertion or employment of any other appropriate right or
remedy.
SECTION 511. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Security
to exercise any right or remedy accruing upon any Event of Default shall impair
any such right or remedy or constitute a waiver of any such Event of Default or
an acquiescence therein. Every right and remedy given by this Article or by
law to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the case
may be.
SECTION 512. Control by Holders.
The Holders of a majority in principal amount of the Outstanding
Securities shall 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, provided that
(1) such direction shall not be in conflict with any rule of law or
with this Indenture or expose the Trustee to personal liability (as
determined in the sole discretion of the Trustee), and
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
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SECTION 513. Waiver of Past Defaults.
The Holders of not less than a majority in aggregate principal amount
of the Outstanding Securities may on behalf of the Holders of all the
Securities by written notice to the Trustee waive any past default hereunder
and its consequences, except a default
(1) in the payment of the principal of (or premium, if any) or
interest on any Security (including any Security which is required to have
been purchased pursuant to an Offer to Purchase which has been made by the
Company), or
(2) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of
each Outstanding Security affected or
(3) arising from failure to purchase any Security tendered pursuant
to Sections 1013 and 1017 of this Indenture.
Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
SECTION 514. Undertaking for Costs.
In any suit for the enforcement of any right or remedy under this
Indenture, or in any suit against the Trustee for any action taken or omitted
by it as Trustee, a court may require any party litigant in such suit to file
an undertaking to pay the costs of such suit, and may assess costs against any
such party litigant, in the manner and to the extent provided in the Trust
Indenture Act; provided, that neither this Section nor the Trust Indenture Act
shall be deemed to authorize any court to require such an undertaking or to
make such an assessment in any suit instituted by the Company; further
provided, that the provisions of this Section 514 shall not apply to any suit
instituted by the Trustee, to any suit instituted by any Holder or group of
Holders holding more than 10% in aggregate principal amount of the Outstanding
Securities, or to any suit instituted by any Holder for the enforcement of the
payment of the principal of, or premium, if any, or interest on any Security on
or after the respective due dates expressed in such Security.
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SECTION 515. Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay or extension law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company (to the extent that it
may lawfully do so) hereby expressly waives all benefit or advantage of any
such law and covenants that it will not hinder, delay or impede the execution
of any power herein granted to the Trustee, but will suffer and permit the
execution of every such power as though no such law had been enacted.
ARTICLE SIX
The Trustee
SECTION 601. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture, and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture; but in
the case of any such certificates or opinions which by any provision hereof
are specifically required to be furnished to the Trustee, the Trustee shall
be under a duty to examine the same to determine whether or not they
conform to the requirements of this Indenture.
(b) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.
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(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that
(1) this Subsection shall not be construed to limit the effect of
Subsection (a) of this Section;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it shall be proved that the
Trustee was negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith in accordance with the direction
of the Holders of a majority in principal amount of the Outstanding
Securities relating to the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or exercising any trust
or power conferred upon the Trustee, under this Indenture; and
(4) no provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder, or in the exercise of any
of its rights or powers, if it shall have reasonable grounds for believing
that repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
(d) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of this
Section.
SECTION 602. Notice of Defaults.
The Trustee shall give the Holders notice of any default hereunder
known to the Trustee as and to the extent provided by the Trust Indenture Act;
provided, however, that in the case of any default of the character specified
in Section 501(5), no such notice to Holders shall be given until at least 30
days after the occurrence thereof. For the purpose of this Section, the term
"default" means any event which is, or after notice or lapse of time or both
would become, an Event of Default.
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SECTION 603. Certain Rights of Trustee.
Subject to the provisions of Section 601:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document believed by it to be genuine and to have been signed or presented
by the proper party or parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a
Board Resolution;
(c) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless
other evidence be herein specifically prescribed) may, in the absence of
bad faith on its part, rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel of its selection and the
written advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction
of any of the Holders pursuant to this Indenture, unless such Holders shall
have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by it in compliance
with such request or direction reasonably satisfactory to the Trustee;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further inquiry
or investigation into such
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facts or matters as it may see fit, and, if the Trustee shall determine to
make such further inquiry or investigation, it shall be entitled to examine
the books, records and premises of the Company, personally or by agent or
attorney;
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder;
(h) the Trustee shall not be liable with respect to any action taken,
suffered or omitted to be taken by it in accordance with the direction of
Holders of Outstanding Securities as provided in Sections 502, 512 and 513
hereof; and
(i) for all purposes under this Indenture, the Trustee shall not be
deemed to have notice of any Event of Default unless a Responsible Officer
of the Trustee has actual knowledge thereof or unless written notice of any
event which is in fact such a default is received by the Trustee at the
Corporate Trust Office of the Trustee, and such notice references the
Securities and this Indenture.
SECTION 604. Not Responsible for Recitals
or Issuance of Securities.
The recitals contained herein and in the Securities, except the
Trustee's certificates of authentication, shall be taken as the statements of
the Company, and the Trustee assumes no responsibility for their correctness.
The Trustee makes no representations as to the validity or sufficiency of this
Indenture or of the Securities. The Trustee shall not be accountable for the
use or application by the Company of Securities or the proceeds thereof.
SECTION 605. May Hold Securities.
The Trustee, any Paying Agent, any Security Registrar or any other
agent of the Company, in its individual or any other capacity, may become the
owner or pledgee of Securities and, subject to Sections 608 and 613, may
otherwise deal with the Company with the same rights it would have if it were
not Trustee, Paying Agent, Security Registrar or such other agent.
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SECTION 606. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on any money received by it hereunder except as
otherwise agreed with the Company.
SECTION 607. Compensation and Reimbursement.
The Company agrees
(1) to pay to the Trustee from time to time reasonable compensation
for all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision
of this Indenture (including the reasonable compensation and the expenses
and disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to its negligence or bad
faith; and
(3) to indemnify the Trustee for, and to hold it harmless against,
any loss, liability or expense incurred without negligence or bad faith on
its part, arising out of or in connection with the acceptance or
administration of this trust, including the costs and expenses of enforcing
this Indenture against the Company (including, without limitation, this
Section 607) and of defending itself against any claim (whether asserted by
any Holder or the Company) or liability in connection with the exercise or
performance of any of its powers or duties hereunder. The provisions of
this Section 607 shall survive any termination of this Indenture and the
resignation or removal of the Trustee.
As security for the performance of the obligations of the Company
under this Section 607, the Trustee shall have a lien prior to the Securities
upon all property and funds held or collected by the Trustee, except funds held
in trust for the payment of principal of (and premium, if any) or interest on
particular Securities. The Trustee's right to receive payment of any amounts
due under this Section 607 shall not be subordinate to any other liability or
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indebtedness of the Company (even though the Securities may be so
subordinated).
When the Trustee incurs expenses or renders services in connection
with an Event of Default specified in Section 501(8) or Section 501(9), the
expenses (including the reasonable charges and expenses of its counsel) and the
compensation for the services are intended to constitute expenses of
administration under any applicable Federal or state bankruptcy, insolvency or
other similar law.
The provisions of this Section shall survive the termination of this
Indenture.
SECTION 608. Disqualification; Conflicting Interests.
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of, the Trust Indenture Act and this Indenture.
SECTION 609. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be a
Person that is eligible pursuant to the Trust Indenture Act to act as such and
has a combined capital and surplus of at least $50,000,000 and its Corporate
Trust Office in the Borough of Manhattan, The City of New York, New York. If
such Person publishes reports of condition at least annually, pursuant to law
or to the requirements of a Federal, State, Territorial or District of Columbia
supervising or examining authority, then for the purposes of this Section, the
combined capital and surplus of such Person shall be deemed to be its combined
capital and surplus as set forth in its most recent report of condition so
published. If at any time the Trustee shall cease to be eligible in accordance
with the provisions of this Section, it shall resign immediately in the manner
and with the effect hereinafter specified in this Article.
SECTION 610. Resignation and Removal; Appointment
of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 611, at which
time
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the retiring Trustee shall be fully discharged from its obligations hereunder.
(b) The Trustee may resign at any time by giving written notice
thereof to the Company. If an instrument of acceptance by a successor Trustee
shall not have been delivered to the Trustee within 30 days after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders of a
majority in principal amount of the Outstanding Securities, delivered to the
Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 608 after written
request therefor by the Company or by any Holder who has been a bona fide
Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 609 and
shall fail to resign after written request therefor by the Company or by
any such Holder, or
(3) the Trustee shall become incapable of acting or shall be adjudged
a bankrupt or insolvent or a receiver of the Trustee or of its property
shall be appointed or any public officer shall take charge or control of
the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee, or (ii) subject to Section 514, any Holder who has been a bona fide
Holder of a Security for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution, shall promptly appoint a successor Trustee.
If, within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee shall be appointed by Act of
the Holders of a majority in principal amount of the Outstanding Securities
delivered to the Company and the retiring Trustee, the successor Trustee
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so appointed shall, forthwith upon its acceptance of such appointment, become
the successor Trustee and supersede the successor Trustee appointed by the
Company. If no successor Trustee shall have been so appointed by the Company
or the Holders and accepted appointment in the manner hereinafter provided, any
Holder who has been a bona fide Holder of a Security for at least six months
may, on behalf of himself and all others similarly situated, petition any court
of competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee to all
Holders in the manner provided in Section 106. Each notice shall include the
name of the successor Trustee and the address of its Corporate Trust Office.
SECTION 611. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the retiring
Trustee shall become effective and such successor Trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers,
trusts and duties of the retiring Trustee; but, on request of the Company or
the successor Trustee, such retiring Trustee shall, upon payment of all sums
owing to the Trustee under Section 607, execute and deliver an instrument
transferring to such successor Trustee all the rights, powers and trusts of the
retiring Trustee and shall duly assign, transfer and deliver to such successor
Trustee all property and money held by such retiring Trustee hereunder. Upon
request of any such successor Trustee, the Company shall execute any and all
instruments for more fully and certainly vesting in and confirming to such
successor Trustee all such rights, powers and trusts.
No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article.
SECTION 612. Merger, Conversion, Consolidation
or Succession to Business.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any
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corporation resulting from any merger, conversion or consolidation to which the
Trustee shall be a party, or any corporation succeeding to all or substantially
all the corporate trust business of the Trustee, shall be the successor of the
Trustee hereunder, provided that such corporation shall be otherwise qualified
and eligible under this Article, without the execution or filing of any paper
or any further act on the part of any of the parties hereto. In case any
Securities shall have been authenticated, but not delivered, by the Trustee
then in office, any successor by merger, conversion or consolidation to such
authenticating Trustee may adopt such authentication and deliver the Securities
so authenticated with the same effect as if such successor Trustee had itself
authenticated such Securities.
SECTION 613. Preferential Collection
of Claims Against Company.
If and when the Trustee shall be or become a creditor of the Company
(or any other obligor upon the Securities), the Trustee shall be subject to the
provisions of the Trust Indenture Act regarding the collection of claims
against the Company (or any such other obligor).
SECTION 614. Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents with respect
to the Securities which shall be authorized to act on behalf of the Trustee to
authenticate Securities issued upon original issue and upon exchange,
registration of transfer or partial redemption thereof or pursuant to Section
306, and Securities so authenticated shall be entitled to the benefits of this
Indenture and shall be valid and obligatory for all purposes as if
authenticated by the Trustee hereunder. Wherever reference is made in this
Indenture to the authentication and delivery of Securities by the Trustee or
the Trustee's certificate of authentication, such reference shall be deemed to
include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and shall at all times be a corporation organized and
doing business under the laws of the United States of America, any State
thereof or the District of Columbia, authorized under such laws to act as
Authenticating Agent, having a combined capital and surplus of not less than
$50,000,000 and subject to supervision or examination by
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Federal or State authority. If such Authenticating Agent publishes reports of
condition at least annually, pursuant to law or to the requirements of said
supervising or examining authority, then for the purposes of this Section, the
combined capital and surplus of such Authenticating Agent shall be deemed to be
its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time an Authenticating Agent shall cease to
be eligible in accordance with the provisions of this Section, such
Authenticating Agent shall resign immediately in the manner and with the effect
specified in this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section, without the execution or filing of any paper or any further
act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written
notice thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice
thereof to such Authenticating Agent and to the Company. Upon receiving such a
notice of resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall give notice of such
appointment in the manner provided in Section 106 to all Holders of Securities.
Any successor Authenticating Agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section.
The Trustee agrees to pay to each Authenticating Agent from time to
time reasonable compensation for its services under this Section, and the
Trustee shall be entitled to be reimbursed for such payments, subject to the
provisions of Section 607.
If an appointment is made pursuant to this Section, the Securities may
have endorsed thereon, in lieu of the
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Trustee's certificate of authentication, an alternative certificate of
authentication in the following form:
This is one of the Securities referred to in the within-mentioned
Indenture.
Dated:
THE BANK OF NEW YORK,
As Trustee
By......................................,
As Authenticating Agent
By.......................................
Authorized Signatory
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ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company
SECTION 701. Company to Furnish Trustee
Names and Addresses of Holder.
The Company will furnish or cause to be furnished to the Trustee
(a) semi-annually, not more than 15 days after each Regular Record
Date, a list, in such form as the Trustee may reasonably require, of the
names and addresses of the Holders as of such Regular Record Date, and
(b) at such other times as the Trustee may request in writing, within
30 days after the receipt by the Company of any such request, a list of
similar form and content as of a date not more than 15 days prior to the
time such list is furnished;
excluding from any such list names and addresses received by the Trustee in its
capacity as Security Registrar.
SECTION 702. Preservation of Information;
Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 701 and the names and
addresses of Holders received by the Trustee in its capacity as Security
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 701 upon receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders with
respect to their rights under this Indenture or under the Securities, and the
corresponding rights and duties of the Trustee, shall be as provided by the
Trust Indenture Act.
(c) Every Holder of Securities, by receiving and holding the same,
agrees with the Company and the Trustee that neither the Company nor the
Trustee nor any agent of either of them shall be held accountable by reason of
any disclosure of information as to names and addresses of Holders made
pursuant to the Trust Indenture Act.
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SECTION 703. Reports by Trustee.
(a) Within 60 days after May 15 of each year, commencing with the
first May 15 following the first issuance of Securities pursuant to Section
301, if required by Section 313(a) of the Trust Indenture Act, the Trustee
shall transmit, pursuant to Section 313(c) of the Trust Indenture Act, a brief
report dated as of such May 15 with respect to any of the events specified in
said Section 313(a) which may have occurred since the later of the immediately
preceding May 15 and the date of this Indenture.
(b) The Trustee shall transmit the reports required by Section 313(b)
of the Trust Indenture Act and Section 602 hereof at the times specified
therein.
(c) Reports pursuant to this Section shall be transmitted in the
manner and to the persons required by Sections 313(c) and 313(d) of the Trust
Indenture Act.
(d) A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock exchange upon
which the Securities are listed, with the Commission and with the Company. The
Company will promptly notify the Trustee when the Securities are listed on any
stock exchange.
SECTION 704. Reports by Company.
The Company shall file with the Trustee and the Commission, and
transmit to Holders, such information, documents and other reports, and such
summaries thereof, as may be required pursuant to the Trust Indenture Act at
the times and in the manner provided pursuant to such Act and in the manner set
forth in Section 1018; provided that any such information, documents or reports
required to be filed with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act ("SEC Reports") shall be filed with the Trustee within 15 days
after the same is so required to be filed with the Commission. In the event
the Company shall cease to be required to file SEC Reports pursuant to the
Exchange Act, the Company will nonetheless continue to file such reports with
the Commission (unless the Commission will not accept such a filing) and the
Trustee and to furnish copies of such SEC Reports to the Holders of Securities
at the time the Company is required to file such reports with the Trustee and
will make such information available to investors who request it in writing.
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SECTION 705. Officers' Certificate with Respect
to Change in Interest Rates.
Within five days after any Step-Up, Second Step-Up, Step-Down Date or
Second Step-Down Date, the Company shall deliver an Officers' Certificate to
the Trustee stating the new interest rate and the date on which it became
effective.
ARTICLE EIGHT
Merger, Consolidation, Etc.
SECTION 801. Mergers, Consolidations and Certain
Sales of Assets.
The Company shall 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, in any such transaction
specified in Clause (i) or (ii):
(1) immediately before and after giving effect to such transaction
and treating any Debt that becomes an obligation of the Company or a
Subsidiary of the Company, as a result of such transaction, as having been
Incurred by the Company or such Subsidiary at the time of the transaction,
no Event of Default or event that with the passing of time or the giving of
notice, or both, would constitute an Event of Default, shall have occurred
and be continuing;
(2) in case the Company shall consolidate with or merge with or into
another Person or permit any other Person to consolidate with or merge into
the Company, or shall directly or indirectly transfer, sell, lease or
otherwise dispose of all or substantially all of its properties or assets
to any other Person, the Person formed by such consolidation or into which
the Company is merged or the Person which acquires by transfer, conveyance,
sale, lease or otherwise all or substantially all of the assets of the
Company (for purposes of this Section 801, a "Successor Company") shall be
a corporation, partnership, or trust and shall be organized and validly
existing under the laws of the United States of America, any State thereof
or the District of Columbia and shall expressly assume, by an indenture
supplemental
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hereto, executed and delivered to the Trustee in form satisfactory to the
Trustee, all of the Company's obligations under this Indenture, including
the due and punctual payment of the principal of and premium, if any, and
interest on all the Securities, and the performance of every covenant of
this Indenture on the part of the Company to be performed or observed;
(3) immediately after giving effect to such transaction, (i) 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, and (ii) 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 first paragraph of Section 1008 of this Indenture;
(4) if, as a result of any such transaction, property or assets of
the Company would become subject to a Lien which would not be permitted by
Section 1015, the Company or, if applicable, the Successor Company, as the
case may be, shall take such steps as shall be necessary effectively to
secure the Securities as required by Section 1015 of this Indenture; and
(5) the Company has delivered to the Trustee an Officer's Certificate
and an Opinion of Counsel, each in form and substance satisfactory to the
Trustee stating that such consolidation, merger, conveyance, transfer,
lease or acquisition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture, complies
with this Article and that all conditions precedent herein provided for
relating to such transaction have been complied with, and, with respect to
such Officer's Certificate, setting forth the manner of determination of
the Consolidated Net Worth in accordance with Clause (3) of Section 801, of
the Company or, if applicable, of the Successor Company as required
pursuant to the foregoing.
SECTION 802. Successor Substituted.
Upon any consolidation of the Company with, or merger of the Company
with or into, any other Person or any conveyance, transfer or lease of the
properties and assets of the Company substantially as an entirety in accordance
with
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Section 801, the successor Person formed by such consolidation or into which
the Company is merged or to which such conveyance, transfer or lease is made
shall succeed to, and be substituted for, and may exercise every right and
power of, the Company under this Indenture with the same effect as if such
successor Person had been named as the Company herein, and thereafter, except
in the case of a lease, the predecessor Person shall be relieved of all
obligations and covenants under this Indenture and the Securities.
ARTICLE NINE
Supplemental Indentures
SECTION 901. Supplemental Indentures
Without Consent of Holders.
Without the consent of any Holders, the Company, when authorized by a
Board Resolution, and the Trustee, at any time and from time to time, may enter
into one or more indentures supplemental hereto, in form satisfactory to the
Trustee, for any of the following purposes:
(1) to evidence the succession of another Person to the Company and
the assumption by any such successor of the covenants of the Company herein
and in the Securities; or
(2) to add to the covenants of the Company for the benefit of the
Holders, or to surrender any right or power herein conferred upon the
Company; or
(3) to secure the Securities pursuant to the requirements of Section
1015 or otherwise; or
(4) to modify, eliminate or add to the provisions of this Indenture
to such extent as shall be necessary to comply with any requirement of the
Commission in order to effect qualification of this Indenture under the
Trust Indenture Act in connection with the issuance of Exchange Securities
or thereafter to maintain the qualification of this Indenture under the
Trust Indenture Act;
(5) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein, or to
make any other provisions with respect to matters or questions arising
under this Indenture which shall not be inconsistent with the
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provisions of this Indenture, provided that such action pursuant to this
Clause (5) shall not adversely affect the interests of the Holders in any
material respect; or
(6) to provide for uncertificated Securities in addition to or in
place of certificated Securities.
SECTION 902. Supplemental Indentures
with Consent of Holders.
With the consent of the Holders of not less than a majority in
aggregate principal amount of the Outstanding Securities, by Act of said
Holders delivered to the Company and the Trustee, and consistent with Section
513, the Company, when authorized by a Board Resolution, and the Trustee may
enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Indenture or of modifying in any manner the rights of the
Holders under this Indenture; provided, however, that no such supplemental
indenture shall, without the consent of the Holder of each Outstanding Security
affected thereby,
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any Security, or reduce the principal amount
thereof or the rate of interest thereon or any premium payable thereon, or
change the place of payment where, or the coin or currency in which, any
Security or any premium or interest thereon is payable, or impair the right
to institute suit for the enforcement of any such payment on or after the
Stated Maturity thereof (or, in the case of redemption, on or after the
Redemption Date) or, in the case of an Offer to Purchase which has been
made, on or after the applicable Purchase Date, or
(2) reduce the percentage in principal amount of the Outstanding
Securities, the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for any
waiver (of compliance with certain provisions of this Indenture or certain
defaults hereunder and their consequences) provided for in this Indenture,
or
(3) modify any of the provisions of this Section, Section 513 or
Section 1020, except to increase any such percentage or to provide that
certain other provisions of this Indenture cannot be modified or waived
without the consent of the Holder of each Outstanding Security affected
thereby, or
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(4) following the making of an Offer with respect to an Offer to
Purchase pursuant to Sections 1013 or 1017, modify the provisions of this
Indenture with respect to such Offer to Purchase in a manner adverse to
such Holder.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it
shall be sufficient if such Act shall approve the substance thereof.
SECTION 903. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby
of the trusts created by this Indenture, the Trustee shall be entitled to
receive, and (subject to Section 601) shall be fully protected in relying upon,
an Opinion of Counsel stating that the execution of such supplemental indenture
is authorized or permitted by this Indenture. The Trustee may, but shall not
be obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
SECTION 904. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every
Holder of Securities theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
SECTION 905. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act.
SECTION 906. Reference in Securities
to Supplemental Indentures
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
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provided for in such supplemental indenture. If the Company shall so
determine, new Securities so modified as to conform, in the opinion of the
Trustee and the Company, to any such supplemental indenture may be prepared and
executed by the Company and authenticated and delivered by the Trustee in
exchange for Outstanding Securities.
ARTICLE TEN
Covenants
SECTION 1001. Payment of Principal, Premium and
Interest.
The Company will duly and punctually pay the principal of and premium,
if any, and interest on the Securities in accordance with the terms of the
Securities and this Indenture.
SECTION 1002. Maintenance of Office or Agency.
The Company will maintain in the Borough of Manhattan, The City of New
York, New York, an office or agency where Securities may be presented or
surrendered for payment, where Securities may be surrendered for registration
of transfer or exchange and where notices and demands to or upon the Company in
respect of the Securities and this Indenture may be served. The Company will
give prompt written notice to the Trustee of the location, and any change in
the location, of such office or agency. If at any time the Company shall fail
to maintain any such required office or agency or shall fail to furnish the
Trustee with the address thereof, such presentations, surrenders, notices and
demands may be made or served at the Corporate Trust Office of the Trustee, and
the Company hereby appoints the Trustee as its agent to receive all such
presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside the Borough of Manhattan, The City of New
York, New York) where the Securities may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, The City of New York, New York for such purposes. The
Company will give prompt written notice to the Trustee
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of any such designation or rescission and of any change in the location of any
such other office or agency.
SECTION 1003. Money for Security
Payments to be Held in Trust.
If the Company shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of (and premium, if any) or
interest on any of the Securities, segregate and hold in trust for the benefit
of the Persons entitled thereto a sum sufficient to pay the principal (and
premium, if any) or interest so becoming due until such sums shall be paid to
such Persons or otherwise disposed of as herein provided and will promptly
notify the Trustee in writing of its action or failure so to act. As provided
in Section 504, upon any bankruptcy or reorganization proceeding relative to
the Company, the Trustee shall serve as the Paying Agent for the Securities.
Whenever the Company shall have one or more Paying Agents, it will,
prior to each due date of the principal of (and premium, if any) or interest on
any Securities, deposit with a Paying Agent a sum sufficient to pay the
principal (and premium, if any) or interest so becoming due, such sum to be
held in trust for the benefit of the Persons entitled to such principal,
premium or interest, and (unless such Paying Agent is the Trustee) the Company
will promptly notify the Trustee in writing of its action or failure so to act.
As provided in Section 504, upon any bankruptcy or reorganization proceeding
relative to the Company, the Trustee shall serve as the Paying Agent for the
Securities.
The Company will cause each Paying Agent other than the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will:
(1) hold all sums held by it for the payment of the principal of (and
premium, if any) or interest on Securities in trust for the benefit of the
Persons entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or any
other obligor upon the Securities) in the making of any payment of
principal (and premium, if any) or interest;
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(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent; and
(4) acknowledge, accept and agree to comply in all respects with the
provisions of this Indenture relating to the duties, rights and obligations
of such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held
in trust by the Company or such Paying Agent, such sums to be held by the
Trustee upon the same trusts as those upon which such sums were held by the
Company or such Paying Agent; and, upon such payment by any Paying Agent to the
Trustee, such Paying Agent shall be released from all further liability with
respect to such money.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of (and premium, if
any) or interest on any Security and remaining unclaimed for two years after
such principal (and premium, if any) or interest has become due and payable
shall be paid to the Company on Company Request, or (if then held by the
Company) shall be discharged from such trust; and the Holder of such Security
shall thereafter, as an unsecured general creditor, look only to the Company
for payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in a newspaper published in
the English language, customarily published on each Business Day and of general
circulation in the Borough of Manhattan, The City of New York, New York, notice
that such money remains unclaimed and that, after a date specified therein,
which shall not be less than 30 days from the date of such publication, any
unclaimed balance of such money then remaining will be repaid to the Company.
SECTION 1004. Existence.
Subject to Article Eight, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its existence,
rights (charter and
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statutory) and franchises; provided, however, that the Company shall not be
required to preserve any such right or franchise if the Board of Directors
shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Company and that the loss thereof is not
disadvantageous in any material respect to the Holders.
SECTION 1005. Maintenance of Properties.
The Company will cause all properties used or useful in the conduct of
its business or the business of any Subsidiary to be maintained and kept in
good condition, repair and working order and supplied with all necessary
equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that nothing in this Section shall prevent the Company from
discontinuing the operation or maintenance of any of such properties if such
discontinuance is, as determined in the good faith judgment of the Board of
Directors evidenced by a Board Resolution, desirable in the conduct of its
business or the business of any Subsidiary and not disadvantageous in any
material respect to the Holders.
SECTION 1006. Payment of Taxes and Other Claims.
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (1) all taxes, assessments and
governmental charges levied or imposed upon the Company or any of its
Subsidiaries or upon the income, profits or property of the Company or any of
its Subsidiaries, and (2) all lawful claims for labor, materials and supplies
which, if unpaid, might by law become a lien upon the property of the Company
or any of its Subsidiaries; provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or claim whose amount, applicability or validity is being
contested in good faith by appropriate proceedings.
SECTION 1007. Maintenance of Insurance.
The Company shall, and shall cause its Subsidiaries to, keep at all
times all of their properties which are of an insurable nature insured against
loss or damage with
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insurers believed by the Company to be responsible to the extent that property
of similar character is usually so insured by corporations similarly situated
and owning like properties in accordance with good business practice.
SECTION 1008. Limitation on Consolidated Debt.
The Company shall not, and shall not permit any Subsidiary of the
Company to, Incur or suffer to exist 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.
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;
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(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 this Indenture or Incurred
pursuant to clause (ii) of this paragraph or the Securities 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 Securities or Debt which is pari passu to the
Securities or Debt which is subordinate in right of payment to the Securities
shall only be permitted if (A) in the case of any refinancing of the Securities
or Debt which is pari passu to the Securities, the refinancing Debt is made
pari passu to the Securities 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
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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 the provisions of Section 1017 of this Indenture;
(v) Debt consisting of Permitted Interest Rate and Currency Protection
Agreements; and
(vi) Debt not otherwise permitted to be Incurred pursuant to clauses
(i) through (v) above, which, together with any other outstanding Debt Incurred
pursuant to this clause (vi), has an aggregate principal amount not in excess
of $10 million at any time outstanding.
SECTION 1009. Limitation on Debt and Preferred Stock
of Subsidiaries.
The Company shall 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 this Indenture
after giving effect to the application of the proceeds of the Securities;
(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;
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(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 second paragraph of Section 1008 of this
Indenture; and
(vii) Debt or Preferred Stock which is exchanged for, or the proceeds
of which are used to refinance, refund or redeem, any Debt or Preferred Stock
permitted to be outstanding pursuant to clauses (i) and (iii) hereof (or any
extension or renewal thereof) (for purposes hereof, a "refinancing"), in an
aggregate principal amount, in the case of Debt, or with an aggregate
liquidation preference in the case of Preferred Stock, not to exceed the
aggregate principal amount of the Debt so refinanced or the aggregate
liquidation preference of the Preferred Stock so refinanced, plus the amount of
any premium required to be paid in connection with such refinancing pursuant to
the terms of the Debt or Preferred Stock so refinanced or the amount of any
premium reasonably determined by the Company as necessary to accomplish such
refinancing by means of a tender offer or privately negotiated repurchase, plus
the amount of expenses of the Company and the applicable Subsidiary Incurred in
connection therewith and provided the Debt or Preferred Stock Incurred or
issued upon such refinancing is by its terms, or by the terms of any agreement
or instrument pursuant to which such Debt or Preferred Stock is Incurred or
issued, (x) does not provide for payments of principal or liquidation value at
the stated maturity of such Debt or Preferred Stock or by way of a sinking fund
applicable to such Debt or Preferred Stock or by way of any mandatory
redemption, defeasance, retirement or repurchase of such Debt or Preferred
Stock by the Company or any Subsidiary of the Company (including any
redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of acceleration
of such Debt upon an event of default thereunder), in each case prior to the
time the same are required by the terms of the Debt or Preferred Stock being
refinanced and (y) does not permit redemption or other retirement (including
pursuant to an offer to purchase made by the Company or a Subsidiary of the
Company) of such Debt or Preferred Stock at the option of the holder thereof
prior to the stated maturity of the Debt or Preferred Stock being refinanced,
other than a redemption or other retirement at the option of the holder of such
Debt or Preferred Stock (including pursuant to an offer to purchase made by the
Company or a Subsidiary of the Company) which is conditioned upon the change of
control of the Company pursuant to provisions substantially similar to the
provisions of Section 1017 of this Indenture and provided, further, that
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in the case of any exchange or redemption of Preferred Stock of a Subsidiary of
the Company, such Preferred Stock may only be exchanged for or redeemed with
Preferred Stock of such Subsidiary.
SECTION 1010. Limitation on Restricted Payments.
The Company (i) shall 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) shall not, and shall 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) shall 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 of such investment,
except for Permitted Investments, and (iv) shall not, and shall 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
Securities (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 provisions of the first paragraph of Section 1008 of this Indenture, or
(3) upon giving effect to such Restricted Payment, the aggregate of all
Restricted Payments from the date of this 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
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the end of the last full fiscal quarter prior to the date of this 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
this 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 this 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 this Indenture from issuances of its Common Stock or options to acquire
its Common Stock to directors, officers and employees of the Company or any of
its Subsidiaries, (iii) the Company and its Subsidiaries may refinance any Debt
otherwise permitted by clause (iv) of the second paragraph of Section 1008 of
this Indenture, and (iv) the Company and its Subsidiaries may retire or
repurchase any Capital Stock of the Company or of any Subsidiary of the Company
in exchange for, or out of the proceeds of the substantially concurrent sale
(other than to a Subsidiary of the Company) of, Capital Stock (other than
Disqualified Stock) of the Company.
SECTION 1011. Limitation on Dividend and Other Payment
Restrictions Affecting Subsidiaries.
The Company shall not, and shall not permit any Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any consensual
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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 this
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 this 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 this Indenture and the Securities.
SECTION 1012. Limitation on Transactions with
Affiliates and Related Persons.
The Company shall not, and shall not permit any Subsidiary of the
Company to, enter into any transaction (or
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series of related transactions) with an Affiliate or Related Person of the
Company (other than the Company or a Wholly-Owned Subsidiary of the Company),
including any Investment, but excluding transactions pursuant to employee
compensation arrangements approved by the Board of Directors of the Company,
either directly or indirectly, unless such transaction is on terms no less
favorable to the Company or such Subsidiary than those that could be obtained
in a comparable arm's-length transaction with an entity that is not an
Affiliate or Related Person and is in the best interests of such Company or
such Subsidiary. For any transaction that involves in excess of $1.0 million
but less than or equal to $5.0 million, the Chief Executive Officer of the
Company shall determine that the transaction satisfies the above criteria and
shall evidence such a determination by a certificate filed with the Trustee.
For any transaction that involves in excess of $5.0 million, a majority of the
disinterested members of the Board of Directors shall determine that the
transaction satisfies the above criteria and shall evidence such a
determination by a Board Resolution filed with the Trustee.
SECTION 1013. Limitation on Asset Dispositions.
(a) The Company shall not, and shall not permit any Subsidiary 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 otherwise disposed of (which shall be as
determined in good faith by the Board of Directors, evidenced by a Board
Resolution filed with the Trustee); (ii) at least 75% of the consideration for
such disposition shall consist of (1) cash or readily marketable cash
equivalents or the assumption of Debt of the Company (other than Debt that is
subordinated to the Securities) 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 (A) 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 (B) following, (B) second, to the
extent of any remaining Net Available Proceeds, to make an Offer to Purchase
outstanding Securities at 100% of their Accreted Value (if such Offer to
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Purchase is made on 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 Securities 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), (C) 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
(D) 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 this
Indenture.
(b) The Company will mail the Offer for an Offer to Purchase required
pursuant to Section 1013(a) not more than 360 days after consummation of the
disposition referred to in Section 1013(a). The aggregate principal amount of
the Securities to be offered to be purchased pursuant to the Offer to Purchase
shall equal the Net Available Proceeds available therefor pursuant to Clause
(iii)(B) of Section 1013(a) (rounded down to the next lowest integral multiple
of $1,000). Each Holder shall be entitled to tender all or any portion of the
Securities owned by such Holder pursuant to the Offer to Purchase, subject to
the requirement that any portion of a Security tendered must be tendered in an
integral multiple of $1,000 principal amount.
The Company shall not be entitled to any credit against its
obligations under this Section 1013 for the principal amount of any Securities
acquired or redeemed by the Company otherwise than pursuant to the Offer to
Purchase pursuant to this Section 1013.
(c) Not later than the date of the Offer with respect to an Offer to
Purchase pursuant to this Section 1013, the Company shall deliver to the
Trustee an Officers' Certificate as to (i) the Purchase Amount, (ii) the
allocation of the Net Available Proceeds from the Asset Disposition pursuant to
which such Offer is being made, including, if amounts are invested in
Telecommunication Assets, the actual assets acquired and (iii) the compliance
of such allocation with the provisions of Section 1013(a).
The Company and the Trustee shall perform their respective obligations
specified in the Offer for the Offer to Purchase. On or prior to the Purchase
Date, the Company
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shall (i) accept for payment (on a pro rata basis, if necessary) Securities or
portions thereof tendered pursuant to the Offer, (ii) deposit with the paying
agent (or, if the Company is acting as its own Paying Agent, segregate and hold
in trust as provided in Section 1003) money sufficient to pay the purchase
price of all Securities or portions thereof so accepted and (iii) deliver or
cause to be delivered to the Trustee all Securities so accepted together with
an Officers' Certificate stating the Securities or portions thereof accepted
for payment by the Company. The Paying Agent (or the Company, if so acting)
shall promptly mail or deliver to Holders of Securities so accepted payment in
an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail or deliver to such Holders a new Security of like tenor
equal in principal amount to any unpurchased portion of the Security
surrendered. Any Security not accepted for payment shall be promptly mailed or
delivered by the Company to the Holder thereof.
(d) Notwithstanding the foregoing, this Section 1013 shall not apply
to any Asset Disposition which constitutes a transfer, conveyance, sale, lease
or other disposition of all or substantially all of the Company's properties or
assets within the meaning of Section 801 hereof.
SECTION 1014. Limitation on Issuances and Sales of
Capital Stock of Subsidiaries.
The Company shall not, and shall 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 of Section 1013 of
this Indenture 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 of Section 1013 of this Indenture 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,
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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.
SECTION 1015. 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
Securities (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 Securities, 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 this Indenture and securing Debt outstanding on the date of this
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
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 Securities to secure Purchase Money Debt which is Incurred for
the construction, acquisition and improvement of Telecommunications Assets and
is otherwise permitted under this 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
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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 Section 1008 of this Indenture; (vii) Liens not
otherwise permitted by the foregoing clauses (i) through (vi) in an amount not
to exceed 5% of the Company's Consolidated Tangible Assets; and (viii)
Permitted Liens.
SECTION 1016. Limitation on Sale and Leaseback
Transactions.
The Company shall not, and shall 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 of Section 1015 of this Indenture, equal in amount to
the Attributable Value of the Sale and Leaseback Transaction without equally
and ratably securing the Securities or (ii) the Sale and Leaseback Transaction
is treated as an Asset Disposition and all of the conditions of Section 1013 of
this Indenture (including the provisions concerning the application of Net
Available Proceeds) are satisfied with respect to such Sale and Leaseback
Transaction, treating all of the consideration received in such Sale and
Leaseback Transaction as Net Available Proceeds for purposes of such covenant.
SECTION 1017. Change of Control.
(a) Upon the occurrence of a Change of Control (as defined below),
each Holder of a Security shall have the right to have such Security
repurchased by the Company on the terms and conditions precedent set forth in
this Section 1017 and this Indenture. The Company shall, within 30 days
following the date of the consummation of a transaction resulting in a Change
of Control, mail an Offer with respect to an Offer to Purchase all Outstanding
Securities at a
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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
consummated thereafter). Installments of interest (including Special Interest)
whose Stated Maturity is on or prior to the Purchase Date shall be payable to
the Holders of such Securities, or one or more Predecessor Securities,
registered as such at the close of business on the relevant Record Dates
according to their terms and the provisions of Section 307. Each Holder shall
be entitled to tender all or any portion of the Securities owned by such Holder
pursuant to the Offer to Purchase, subject to the requirement that any portion
of a Security tendered must be tendered in an integral multiple of $1,000
principal amount.
(b) The Company and Trustee shall perform their respective
obligations specified in the Offer for the Offer to Purchase. Prior to the
Purchase Date, the Company shall (i) accept for payment Securities or portions
thereof tendered pursuant to the Offer, (ii) deposit with the Paying Agent (or,
if the Company is acting as its own Paying Agent, segregate and hold in trust
as provided in Section 1003) money sufficient to pay the purchase price of all
Securities or portions thereof so accepted and (iii) deliver or cause to be
delivered to the Trustee all Securities so accepted together with an Officers'
Certificate stating the Securities or portions thereof accepted for payment by
the Company. The Paying Agent shall promptly mail or deliver to Holders of
Securities so accepted payment in an amount equal to the purchase price, and
the Trustee shall promptly authenticate and mail or deliver to such Holders a
new Security or Securities equal in principal amount to any unpurchased portion
of the Security surrendered as requested by the Holder. Any Security not
accepted for payment shall be promptly mailed or delivered by the Company to
the Holder thereof.
(c) A "Change of Control" shall be deemed to have occurred in the
event that, after the date of this Indenture, either (A) any Person or any
Persons acting together that would constitute a "group" (a "Group") for
purposes of Section 13(d) of the Exchange Act, or any successor provision
thereto, together with any Affiliates or Related Persons thereof, shall
beneficially own (as defined in Rule 13d-3 of the Exchange Act 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 or their nominees elected to the Board of Directors of the
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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), shall constitute a majority of the Board of Directors of the
Company.
(d) In the event that the Company makes an Offer to Purchase the
Securities, the Company shall 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.
SECTION 1018. Provision of Financial Information.
The Company shall 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 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 Securities at the time the Company is
required to file the same with the Trustee and will make such information
available to investors who request it in writing.
SECTION 1019. Statement by Officers as to Default.
(a) The Company will deliver to the Trustee, within 120 days after
the end of each fiscal year of the Company ending after the date hereof, an
Officers' Certificate, stating whether or not to the best knowledge of the
signers thereof the Company is in default in the performance and observance of
any of the terms, provisions and conditions of Sections 1004 to 1018,
inclusive, and if the Company shall be in default, specifying all such defaults
and the nature and status thereof of which they may have knowledge.
(b) The Company shall deliver to the Trustee, as soon as possible and
in any event within 10 days after the Company becomes aware of the occurrence
of an Event of Default or an event which, with notice or the lapse of time or
both, would constitute an Event of Default, an Officers' Certificate setting
forth the details of such Event of
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Default or default and the action which the Company proposes to take with
respect thereto.
SECTION 1020. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any
covenant or condition set forth in Sections 1004 to 1017, inclusive, if before
or after the time for such compliance the Holders of at least a majority in
aggregate principal amount of the Outstanding Securities shall, by Act of such
Holders, either waive such compliance in such instance or generally waive
compliance with such covenant or condition, but no such waiver shall extend to
or affect such covenant or condition except to the extent so expressly waived,
and, until such waiver shall become effective, the obligations of the Company
and the duties of the Trustee in respect of any such covenant or condition
shall remain in full force and effect.
ARTICLE ELEVEN
Redemption of Securities
SECTION 1101. Right of Redemption.
(a) The Securities may be redeemed prior to November 1, 2001 only in
the event that the Company receives net proceeds from any sale of its Common
Stock (other than Disqualified 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 Securities in a principal
amount of up to an aggregate amount equal to 33 1/3% of the original principal
amount of the Securities provided, however, that Securities in an amount equal
to at least 66 2/3% of the original principal amount of the Securities remain
outstanding after such redemption. Such redemption must occur on a Redemption
Date within 75 days of any such sale and upon not less than 30 nor more than 60
days' notice by mail to each Holder of Securities to be redeemed at such
Holder's address appearing in the Security 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 Securities to but excluding the Redemption Date (subject to the
right of Holders of record on the relevant Regular Record Date to receive
Special Interest due on an Interest Payment Date that is on or prior to the
Redemption Date).
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(b) The Securities further may be redeemed, as a whole or in part, at
the election of the Company, at any time on or after November 1, 2001 and prior
to maturity, upon not less than 30 nor more than 60 days' notice by mail to
each Holder of Securities to be redeemed at such Holder's address appearing in
the Security Register, in amounts of $1,000 or an integral multiple of $1,000,
at the Redemption Prices specified in the form of Security hereinbefore set
forth, together with accrued interest to, but excluding, the Redemption Date.
SECTION 1102. Applicability of Article.
Redemption of Securities at the election of the Company, as permitted
or required by any provision of this Indenture, shall be made in accordance
with such provision and this Article.
SECTION 1103. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities pursuant to
Section 1101 shall be evidenced by a Board Resolution. In case of any
redemption at the election of the Company of less than all the Securities, the
Company shall, at least 60 days prior to the Redemption Date fixed by the
Company (unless a shorter notice shall be satisfactory to the Trustee), notify
the Trustee in writing of such Redemption Date and of the principal amount of
Securities to be redeemed. In the case of any redemption of Securities prior to
the expiration of any restriction on such redemption provided in the terms of
such Securities or elsewhere in this Indenture, the Company shall furnish the
Trustee with an Officers' Certificate evidencing compliance with such
restriction.
SECTION 1104. Securities to Be Redeemed Pro Rata.
If less than all the Securities are to be redeemed in any redemption,
the Securities to be redeemed shall be selected by the Trustee by prorating, as
nearly as may be practicable, the principal amount of Securities to be
redeemed. In any proration pursuant to this Section, the Trustee shall make
such adjustments, reallocations and eliminations as it shall deem proper to the
end that the principal amount of Securities so prorated shall be $1,000 or a
multiple thereof, by increasing or decreasing or eliminating the amount which
would be allocable to any Holder on the basis of exact proportion by an amount
not
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exceeding $1,000. The Trustee in its discretion may determine the particular
Securities (if there are more than one) registered in the name of any Holder
which are to be redeemed, in whole or in part.
The Trustee shall promptly notify the Company and each Security
Registrar in writing of the Securities selected for redemption and, in the case
of any Securities selected for partial redemption, the principal amount thereof
to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Securities redeemed or to be redeemed only in part, to the
portion of the principal amount of such Securities which has been or is to be
redeemed.
SECTION 1105. Notice of Redemption.
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption
Date, to each Holder of Securities to be redeemed, at such Holder's address
appearing in the Security Register.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) whether the redemption is being made pursuant to Section 1101(a)
or (b) and, if being made pursuant to Section 1101(a), a brief statement
setting forth the Company's right to effect such redemption and the
Company's basis therefor,
(4) if less than all the Outstanding Securities are to be redeemed,
the identification (and, in the case of partial redemption of any
Securities, the principal amounts) of the particular Securities to be
redeemed,
(5) that on the Redemption Date the Redemption Price will become due
and payable upon each such Security to be redeemed and that interest
thereon will cease to accrue on and after said date,
(6) the place or places where such Securities are to be surrendered
for payment of the Redemption Price, and
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(7) that in the case that a Security is only redeemed in part, the
Company shall execute and the Trustee shall authenticate and deliver to the
Holder of such Security without service charge, a new Security or
Securities in an aggregate amount equal to the unredeemed portion of the
Security.
Notice of redemption of Securities to be redeemed at the election of
the Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
SECTION 1106. Deposit of Redemption Price.
Prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, segregate and hold in trust as provided in Section 1003) an amount of
money sufficient to pay the Redemption Price of, and (except if the Redemption
Date shall be an Interest Payment Date) accrued interest on, all the Securities
which are to be redeemed on that date.
SECTION 1107. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Securities so
to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Securities shall cease to bear interest. Upon surrender of any
such Security for redemption in accordance with said notice, such Security
shall be paid by the Company at the Redemption Price, together with accrued
interest to the Redemption Date; provided, however, that installments of
interest whose Stated Maturity is on or prior to the Redemption Date shall be
payable to the Holders of such Securities, or one or more Predecessor
Securities, registered as such at the close of business on the relevant Record
Dates according to their terms and the provisions of Section 307.
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal (and premium, if any) shall,
until paid, bear interest from the Redemption Date at the rate provided by the
Security.
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SECTION 1108. Securities Redeemed in Part.
Any Security which is to be redeemed only in part shall be surrendered
at an office or agency of the Company designated for that purpose pursuant to
Section 1002 (with, if the Company or the Trustee so requires, due endorsement
by, or 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), and the Company shall execute, and the Trustee shall
authenticate and deliver to the Holder of such Security without service charge,
a new Security or Securities of like tenor, of any authorized denomination as
requested by such Holder, in aggregate principal amount equal to and in
exchange for the unredeemed portion of the principal of the Security so
surrendered.
ARTICLE TWELVE
Defeasance and Covenant Defeasance
SECTION 1201. Company's Option to Effect Defeasance or
Covenant Defeasance.
The Company may at its option by Board Resolution, at any time
(subject to 10-day prior written notification to the Trustee), elect to have
either Section 1202 or Section 1203 applied to the Outstanding Securities upon
compliance with the conditions set forth below in this Article Twelve.
SECTION 1202. Defeasance and Discharge.
Upon the Company's exercise of the option provided in Section 1201
applicable to this Section, the Company shall be deemed to have been
discharged from its obligations with respect to the Outstanding Securities on
the date the conditions set forth below are satisfied (hereinafter,
"defeasance"). For this purpose, such defeasance means that the Company shall
be deemed to have paid and discharged the entire indebtedness represented by
the Outstanding Securities and to have satisfied all its other obligations
under such Securities and this Indenture insofar as such Securities are
concerned (and the Trustee, at the expense of the Company, shall execute proper
instruments acknowledging the same), except for the following which shall
survive until otherwise terminated or discharged hereunder: (A) the rights of
Holders of Outstanding Securities to receive,
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solely from the trust fund described in Section 1204 and as more fully set
forth in such Section, payments in respect of the principal of (and premium, if
any) and interest on such Securities when such payments are due, (B) the
Company's obligations with respect to such Securities under Sections 304, 305,
306, 1002 and 1003, (C) the rights, powers, trusts, duties and immunities of
the Trustee hereunder and (D) this Article Twelve. Subject to compliance with
this Article Twelve, the Company may exercise its option under this Section
1202 notwithstanding the prior exercise of its option under Section 1203.
SECTION 1203. Covenant Defeasance.
Upon the Company's exercise of the option provided in Section 1201
applicable to this Section (i) the Company shall be released from its
obligations under Sections 1005 through 1018, inclusive, and Clauses (3) and
(4) of Section 801, (ii) the occurrence of an event specified in Sections
501(3), 501(4) (with respect to Clauses (3) and (4) of Section 801), and 501
(5) (with respect to Sections 1005 through 1018, inclusive) shall not be deemed
to be an Event of Default, on and after the date the conditions set forth below
are satisfied (hereinafter, "covenant defeasance"). For this purpose, such
covenant defeasance means that the Company may omit to comply with and shall
have no liability in respect of any term, condition or limitation set forth in
any such Section or Article, whether directly or indirectly by reason of any
reference elsewhere herein to any such Section or Article or by reason of any
reference in any such Section or Article to any other provision herein or in
any other document, but the remainder of this Indenture and such Securities
shall be unaffected thereby.
SECTION 1204. Conditions to Defeasance or
Covenant Defeasance.
The following shall be the conditions to application of either Section
1202 or Section 1203 to the Outstanding Securities:
(1) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements
of Section 609 who shall agree to comply with the provisions of this
Article Twelve applicable to it) as trust funds in trust for the purpose of
making the following payments, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of such Securities, (A)
money in
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an amount, or (B) U.S. Government Obligations which through the scheduled
payment of principal and interest in respect thereof in accordance with
their terms will provide, not later than one day before the due date of any
payment, money in an amount, or (C) a combination thereof, sufficient, in
the opinion of a nationally recognized accounting firm expressed in a
written certification thereof delivered to the Trustee, to pay and
discharge, and which shall be applied by the Trustee (or other qualifying
trustee) to pay and discharge, the principal of, premium, if any, and each
installment of interest on the Securities on the Stated Maturity of such
principal or installment of interest on the day on which such payments are
due and payable in accordance with the terms of this Indenture and of such
Securities. For this purpose, "U.S. Government Obligations" means
securities that are (x) direct obligations of the United States of America
for the payment of which its full faith and credit is pledged or (y)
obligations of a Person controlled or supervised by and acting as an agency
or instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the
United States of America, which, in either case, are not callable or
redeemable at the option of the issuer thereof, and shall also include a
depository receipt issued by a bank (as defined in Section 3(a)(2) of the
Securities Act) as custodian with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such
U.S. Government Obligation held by such custodian for the account of the
holder of such depository receipt, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received
by the custodian in respect of the U.S. Government Obligation or the
specific payment of principal of or interest on the U.S. Government
Obligation evidenced by such depository receipt.
(2) No Event of Default or event which with notice or lapse of time
or both would become an Event of Default shall have occurred and be
continuing on the date of such deposit or, insofar as subsections 501(8)
and (9) are concerned, at any time during the period ending on the 91st day
after the date of such deposit (it being understood that this condition
shall not be deemed satisfied until the expiration of such period).
(3) Such defeasance or covenant defeasance shall not cause the
Trustee to have a conflicting interest as
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defined in Section 608 and for purposes of the Trust Indenture Act with
respect to any securities of the Company.
(4) Such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, this Indenture or
any other agreement or instrument to which the Company is a party or by
which it is bound.
(5) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to either the defeasance under Section 1202
or the covenant defeasance under Section 1203 (as the case may be) have
been complied with.
(6) In the case of an election under Section 1202, the Company shall
have delivered to the Trustee an Opinion of Counsel stating that (x) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling, or (y) since the date of this Indenture there has
been a change in the applicable Federal income tax law, in either case to
the effect that, and based thereon such opinion shall confirm that, the
Holders of the Outstanding Securities will not recognize income, 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.
(7) In the case of an election under Section 1203, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of the Outstanding Securities will not recognize income, gain or
loss for Federal income tax purposes as a result of such deposit and
covenant 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 covenant defeasance had not occurred.
(8) The Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that such deposit and defeasance or covenant
defeasance shall not result in the trust arising from such deposit
constituting an investment company as defined in the Investment Company Act
of 1940, as amended, or such trust shall be qualified under such act or
exempt from regulation thereunder.
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SECTION 1205. Deposited Money and U.S. Government Obligations to Be
Held in Trust; Other Miscellaneous Provisions.
Subject to the provisions of the last paragraph of Section 1003, all
money and U.S. Government Obligations (including the proceeds thereof)
deposited with the Trustee (or other qualifying trustee--collectively, for
purposes of this Section 1205, the "Trustee") pursuant to Section 1204 in
respect of the Securities shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Securities and this Indenture, to the
payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent) as the Trustee may determine, to the Holders of
such Securities, of all sums due and to become due thereon in respect of
principal (and premium, if any) and interest, but such money need not be
segregated from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the U.S. Government Obligations
deposited pursuant to Section 1204 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is
for the account of the Holders of the Outstanding Securities.
Anything in this Article Twelve to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or U.S. Government Obligations held by it as provided in
Section 1204 which, in the opinion of a nationally recognized accounting firm
expressed in a written certification thereof delivered to the Trustee, are in
excess of the amount thereof which would then be required to be deposited to
effect an equivalent defeasance or covenant defeasance.
____________________________
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
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<PAGE> 130
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
BROOKS FIBER PROPERTIES, INC.
By /s/ David L. Solomon
----------------------------------------
Name: David L. Solomon
Title: Executive Vice President & Chief
Financial Officer
[SEAL]
Attest:
/s/ John P. Denneen
- ---------------------------------
THE BANK OF NEW YORK
By /s/ Timothy J. Shea
----------------------------------------
Name: Timothy J. Shea
Title: Assistant Treasurer
[SEAL]
Attest:
/s/ Walter N. Gitlin
- ---------------------------------
Vice President
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<PAGE> 131
STATE OF NEW YORK ) ss.:
COUNTY OF NEW YORK )
On the 7th day of November, 1996, before me personally came
David L. Solomon, to me known, who, being by me duly sworn, did depose and say
that he is the Executive Vice President and Chief Financial Officer of Brooks
Fiber Properties, Inc., one of the corporations described in and which executed
the foregoing instrument; that he knows the seal of said corporation; that the
seal affixed to said instrument is such corporate seal; that it was so
affixed by authority of the Board of Directors of said corporation, and that he
signed his name thereto by like authority.
/s/ Kin Yu Lee
---------------------------------
Kin Yu Lee
Notary Public, State of New York
STATE OF NEW YORK ) ss.: No. 01LE5031199
COUNTY OF NEW YORK ) Qualified in New York County
Commission Expires: Aug. 1, 1998
On the _____ day of , 1996, before me personally came
_______________, to me known, who, being by me duly sworn, did depose and say
that he is a ____________________ of The Bank of New York one of the
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the By-Laws of said
corporation, and that he signed his name thereto by like authority.
______________________________
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<PAGE> 132
STATE OF NEW YORK ) ss.:
COUNTY OF NEW YORK )
On the ______ day of , 1996, before me personally came
________________, to me known, who, being by me duly sworn, did depose and say
that he is the _______________________________________________________ of
Brooks Fiber Properties, Inc., one of the corporations described in and which
executed the foregoing instrument; that he knows the seal of said corporation;
that the seal affixed to said instrument is such corporate seal; that it was so
affixed by authority of the Board of Directors of said corporation, and that he
signed his name thereto by like authority.
__________________________________
STATE OF NEW YORK ) ss.:
COUNTY OF NEW YORK )
On the 6th day of November, 1996, before me personally came
Timothy J. Shea, to me known, who, being by me duly sworn, did depose and say
that he is a Corporate Trust Officer of The Bank of New York one of the
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the By-Laws of said
corporation, and that he signed his name thereto by like authority.
/s/ William J. Cassels
---------------------------------
William J. Cassels
Notary Public, State of New York
No. 01CA5027729
Qualified in Bronx County
Certificate Filed in New York County
Commission Expires May 10, 1998
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<PAGE> 133
ANNEX A -- Form of
Regulation S Certificate
REGULATION S CERTIFICATE
(For transfers pursuant to Section 305(b)(i), (iii) and (v)
of the Indenture)
The Bank of New York,
as Trustee
101 Barclay Street, Floor 21 West
New York, New York 10286
Attention: Corporate Trust Trustee Administration
Re: 11 7/8% Senior Discount Notes due November 1, 2006
of Brooks Fiber Properties, Inc. (the "Securities")
Reference is made to the Indenture, dated as of November 7, 1996 (the
"Indenture"), between Brooks Fiber Properties, Inc. (the "Company") and The
Bank of New York, as Trustee. Terms used herein and defined in the Indenture
or in Regulation S or Rule 144 under the U.S. Securities Act of 1933, as
amended (the "Securities Act") are used herein as so defined.
This certificate relates to U.S. $____________ principal amount of
Securities, which are evidenced by the following certificate(s) (the "Specified
Securities"):
CUSIP No(s). ___________________________
CERTIFICATE No(s). _____________________
The person in whose name this certificate is executed below (the "Undersigned")
hereby certifies that either (i) it is the sole beneficial owner of the
Specified Securities or (ii) it is acting on behalf of all the beneficial
owners of the Specified Securities and is duly authorized by them to do so.
Such beneficial owner or owners are referred to herein collectively as the
"Owner". If the Specified Securities are represented by a Global Security,
they are held through the Depositary or an Agent Member in the name of the
Undersigned, as or on behalf of the Owner. If the Specified Securities are not
represented by a Global Security, they are registered in the name of the
Undersigned, as or on behalf of the Owner.
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<PAGE> 134
The Owner has requested that the Specified Securities be transferred
to a person (the "Transferee") who will take delivery in the form of a
Regulation S Security. In connection with such transfer, the Owner hereby
certifies that, unless such transfer is being effected pursuant to an effective
registration statement under the Securities Act, it is being effected in
accordance with Rule 904 or Rule 144 under the Securities Act and with all
applicable securities laws of the states of the United States and other
jurisdictions. Accordingly, the Owner hereby further certifies as follows:
(1) Rule 904 Transfers. If the transfer is being effected in
accordance with Rule 904:
(A) the Owner is not a distributor of the Securities, an
affiliate of the Company or any such distributor or a person acting on
behalf of any of the foregoing;
(B) the offer of the Specified Securities was not made to a
person in the United States;
(C) either:
(i) at the time the buy order was originated, the Transferee
was outside the United States or the Owner and any person acting
on its behalf reasonably believed that the Transferee was outside
the United States, or
(ii) the transaction is being executed in, on or through
the facilities of the Eurobond market, as regulated by the
Association of International Bond Dealers, or another designated
offshore securities market and neither the Owner nor any person
acting on its behalf knows that the transaction has been
prearranged with a buyer in the United States;
(D) no directed selling efforts have been made in the United
States by or on behalf of the Owner or any affiliate thereof;
(E) if the Owner is a dealer in securities or has received a
selling concession, fee or other remuneration in respect of the
Specified Securities, and the transfer is to occur during the
Restricted Period, then the requirements of Rule 904(c)(1) have been
satisfied; and
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<PAGE> 135
(F) the transaction is not part of a plan or scheme to evade
the registration requirements of the Securities Act.
(2) Rule 144 Transfers. If the transfer is being effected pursuant
to Rule 144:
(A) the transfer is occurring after a holding period of at
least two years (computed in accordance with paragraph (d) of Rule
144) has elapsed since the Specified Securities were last acquired
from the Company or from an affiliate of the Company, whichever is
later, and is being effected in accordance with the applicable amount,
manner of sale and notice requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at
least three years has elapsed since the Specified Securities were last
acquired from the Company or from an affiliate of the Company,
whichever is later, and the Owner is not, and during the preceding
three months has not been, an affiliate of the Company.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and the Purchasers.
Dated: _______________________________________________
(Print the name of the Undersigned, as such term is
defined in the second paragraph of this certificate.)
By:___________________________
Name:
Title:
(If the Undersigned is a corporation, partnership or
fiduciary, the title of the person signing on behalf of
the Undersigned must be stated.)
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<PAGE> 136
ANNEX B -- Form of Restricted
Securities Certificate
RESTRICTED SECURITIES CERTIFICATE
(For transfers pursuant to Section 305(b)(ii), (iii), (iv) and (v)
of the Indenture)
The Bank of New York,
as Trustee
101 Barclay Street, Floor 21 West
New York, New York 10286
Attention: Corporate Trust Trustee Administration
Re: 11 7/8% Senior Discount Notes due November 1, 2006 of Brooks Fiber
Properties, Inc. (the "Securities")
Reference is made to the Indenture, dated as of November 7, 1996 (the
"Indenture"), between Brooks Fiber Properties, Inc. (the "Company") and The
Bank of New York, as Trustee. Terms used herein and defined in the Indenture
or in Regulation S or Rule 144 under the U.S. Securities Act of 1933, as
amended (the "Securities Act") are used herein as so defined.
This certificate relates to U.S. $_____________ principal amount of
Securities, which are evidenced by the following certificate(s) (the "Specified
Securities"):
CUSIP No(s). ___________________________
CERTIFICATE No(s). _____________________
The person in whose name this certificate is executed below (the "Undersigned")
hereby certifies that either (i) it is the sole beneficial owner of the
Specified Securities or (ii) it is acting on behalf of all the beneficial
owners of the Specified Securities and is duly authorized by them to do so.
Such beneficial owner or owners are referred to herein collectively as the
"Owner". If the Specified Securities are represented by a Global Security,
they are held through the Depositary or an Agent Member in the name of the
Undersigned, as or on behalf of the Owner. If the Specified Securities are not
represented by a Global Security, they are registered in the name of the
Undersigned, as or on behalf of the Owner.
The Owner has requested that the Specified Securities be transferred
to a person (the "Transferee") who will take delivery in the form of a
Restricted Security. In
B-1
<PAGE> 137
connection with such transfer, the Owner hereby certifies that, unless such
transfer is being effected pursuant to an effective registration statement
under the Securities Act, it is being effected in accordance with Rule 144A or
Rule 144 under the Securities Act and all applicable securities laws of the
states of the United States and other jurisdictions. Accordingly, the Owner
hereby further certifies as follows:
(1) Rule 144A Transfers. If the transfer is being effected in
accordance with Rule 144A:
(A) the Specified Securities are being transferred to a person
that the Owner and any person acting on its behalf reasonably believe
is a "qualified institutional buyer" within the meaning of Rule 144A,
acquiring for its own account or for the account of a qualified
institutional buyer; and
(B) the Owner and any person acting on its behalf have taken
reasonable steps to ensure that the Transferee is aware that the Owner
may be relying on Rule 144A in connection with the transfer; and
(2) Rule 144 Transfers. If the transfer is being effected pursuant
to Rule 144:
(A) the transfer is occurring after a holding period of at
least two years (computed in accordance with paragraph (d) of Rule
144) has elapsed since the Specified Securities were last acquired
from the Company or from an affiliate of the Company, whichever is
later, and is being effected in accordance with the applicable amount,
manner of sale and notice requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at
least three years has elapsed since the Specified Securities were last
acquired from the Company or from an affiliate of the Company,
whichever is later, and the Owner is not, and during the preceding
three months has not been, an affiliate of the Company.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and the Purchasers.
B-2
<PAGE> 138
Dated: ______________________________________________
(Print the name of the Undersigned, as such term is
defined in the second paragraph of this certificate.)
By:___________________________
Name:
Title:
(If the Undersigned is a corporation, partnership or
fiduciary, the title of the person signing on behalf of
the Undersigned must be stated.)
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<PAGE> 139
ANNEX C -- Form of Unrestricted
Securities Certificate
UNRESTRICTED SECURITIES CERTIFICATE
(For removal of Securities Act Legends pursuant to Section 305(c))
The Bank of New York,
as Trustee
101 Barclay Street, Floor 21 West
New York, New York 10286
Attention: Corporate Trust Trustee Administration
Re: 11 7/8% Senior Discount Notes due November 1, 2006
of Brooks Fiber Properties, Inc. (the "Securities")
Reference is made to the Indenture, dated as of November 7, 1996 (the
"Indenture"), between Brooks Fiber Properties, Inc. (the "Company") and The
Bank of New York, as Trustee. Terms used herein and defined in the Indenture
or in Regulation S or Rule 144 under the U.S. Securities Act of 1933, as
amended (the "Securities Act") are used herein as so defined.
This certificate relates to U.S. $_____________ principal amount of
Securities, which are evidenced by the following certificate(s) (the "Specified
Securities"):
CUSIP No(s). ___________________________
CERTIFICATE No(s). _____________________
The person in whose name this certificate is executed below (the "Undersigned")
hereby certifies that either (i) it is the sole beneficial owner of the
Specified Securities or (ii) it is acting on behalf of all the beneficial
owners of the Specified Securities and is duly authorized by them to do so.
Such beneficial owner or owners are referred to herein collectively as the
"Owner". If the Specified Securities are represented by a Global Security,
they are held through the Depositary or an Agent Member in the name of the
Undersigned, as or on behalf of the Owner. If the Specified Securities are not
represented by a Global Security, they are registered in the name of the
Undersigned, as or on behalf of the Owner.
The Owner has requested that the Specified Securities be exchanged for
Securities bearing no Securities Act Legend pursuant to Section 305(c) of the
Indenture. In connection with such exchange, the Owner hereby certifies that
the
<PAGE> 140
exchange is occurring after a holding period of at least three years (computed
in accordance with paragraph (d) of Rule 144) has elapsed since the Specified
Securities were last acquired from the Company or from an affiliate of the
Company, whichever is later, and the Owner is not, and during the preceding
three months has not been, an affiliate of the Company. The Owner also
acknowledges that any future transfers of the Specified Securities must comply
with all applicable securities laws of the states of the United States and
other jurisdictions.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and the Purchasers.
Dated: ______________________________________________
(Print the name of the Undersigned, as such term is
defined in the second paragraph of this certificate.)
By:___________________________
Name:
Title:
(If the Undersigned is a corporation, partnership or
fiduciary, the title of the person signing on behalf of
the Undersigned must be stated.)
<PAGE> 1
EXHIBIT 4.7
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT, dated as of November 7,
1996 by and between Brooks Fiber Properties, Inc., a Delaware corporation (the
"Company"), and Goldman, Sachs & Co. and Salomon Brothers Inc (collectively,
the "Purchasers") of the 11 7/8% Senior Discount Notes due November 1, 2006 of
the Company.
1. Certain Definitions.
For purposes of this Exchange and Registration Rights Agreement, the
following terms shall have the following respective meanings:
(a) "Closing Date" shall mean the date on which the Securities
are initially issued.
(b) "Commission" shall mean the Securities and Exchange
Commission, or any other federal agency at the time administering the
Exchange Act or the Securities Act, whichever is the relevant statute
for the particular purpose.
(c) "Effective Time", in the case of (i) an Exchange Offer,
shall mean the date on which the Commission declares the Exchange
Offer registration statement effective or on which such registration
statement otherwise becomes effective and (ii) a Shelf Registration,
shall mean the date on which the Commission declares the Shelf
Registration effective or on which the Shelf Registration otherwise
becomes effective.
(d) "Exchange Act" shall mean the Securities Exchange Act of
1934, or any successor thereto, as the same shall be amended from time
to time.
(e) "Exchange Offer" shall have the meaning assigned thereto
in Section 2(a).
(f) "Exchange Securities" shall have the meaning assigned
thereto in Section 2(a).
(g) The term "holder" shall mean each of the Purchasers for so
long as it owns any Registrable Securities, and such of its respective
successors and assigns who acquire Registrable Securities, directly or
indirectly, from such person or from any successor or assign of such
person, in each case for so long as such person owns any Registrable
Securities.
(h) "Indenture" shall mean the Indenture, dated as of
November 7, 1996, between the Company and The Bank of New York, as
Trustee.
(i) The term "person" shall mean a corporation, association,
partnership, organization, business, individual, government or
political subdivision thereof or governmental agency.
(j) "Purchase Agreement" shall mean the Purchase Agreement
dated November 1, 1996 between the Company and the Purchasers.
<PAGE> 2
(k) "Registrable Securities" shall mean the Securities;
provided, however, that such Securities shall cease to be Registrable
Securities when (i) except if prior to the consummation of the
Exchange Offer existing Commission interpretations are changed such
that the Exchange Securities received by holders in the Exchange Offer
for Registrable Securities are not or would not be, upon receipt,
transferable by each such holder (other than a Restricted Holder)
without restriction under the Securities Act in the circumstances
contemplated by Section 2(a), the Exchange Offer is conducted as
contemplated in Section 2(a); provided, however, that any such
Securities that, pursuant to the last two sentences of Section 2(a),
are included in a prospectus for use in connection with resales by
broker-dealers shall be deemed to be Registrable Securities with
respect to Sections 5, 6 and 9 until resale of such Exchange
Securities has been effected within the 90-day period referred to in
Section 2(a); (ii) in the circumstances contemplated by Section 2(b),
a registration statement registering such Securities under the
Securities Act has been declared or becomes effective and such
Securities have been sold or otherwise transferred by the holder
thereof pursuant to such effective registration statement; (iii) such
Securities are sold pursuant to Rule 144 (or any successor provision)
promulgated under the Securities Act under circumstances in which any
legend borne by such Securities relating to restrictions on
transferability thereof, under the Securities Act or otherwise, is
removed by the Company or pursuant to the Indenture or such Securities
are eligible to be sold pursuant to paragraph (k) of Rule 144; or (iv)
such Securities shall cease to be outstanding.
(l) "Registration Default" shall have the meaning assigned
thereto in Section 2(c) hereof.
(m) "Registration Expenses" shall have the meaning assigned
thereto in Section 4 hereof.
(n) "Restricted Holder" shall mean (i) a holder that is an
affiliate of the Company within the meaning of Rule 405 under the
Securities Act, (ii) a holder who acquires Exchange Securities outside
the ordinary course of such holder's business or (iii) a holder who
has arrangements or understandings with any person to participate in
the Exchange Offer for the purpose of distributing Exchange
Securities.
(o) "Securities" shall mean, collectively, the 11 7/8% Senior
Discount Notes due November 1, 2006, of the Company to be issued and
sold to the Purchasers, and securities issued in exchange therefor or
in lieu thereof pursuant to the Indenture.
(p) "Securities Act" shall mean the Securities Act of 1933, or
any successor thereto, as the same shall be amended from time to time.
(q) "Shelf Registration" shall have the meaning assigned
thereto in Section 2(b) hereof.
(r) "Special Interest" shall have the meaning assigned thereto
in Section 2(c) hereof.
(s) "Trust Indenture Act" shall mean the Trust Indenture Act
of 1939, or any successor thereto, and the rules, regulations and
forms promulgated thereunder, all as the same shall be amended from
time to time.
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<PAGE> 3
2. Registration Under the Securities Act.
(a) Except as set forth in Section 2(b) below, the Company agrees to
use its best efforts to file under the Securities Act no later than 60 days
after the Closing Date, a registration statement relating to an offer to
exchange (the "Exchange Offer") for a like aggregate principal amount of debt
securities of the Company which are substantially identical to the Securities
(and which are entitled to the benefits of a trust indenture which is
substantially identical to the Indenture or is the Indenture and which has been
qualified under the Trust Indenture Act) except that they have been registered
pursuant to an effective registration statement under the Securities Act (such
new debt securities hereinafter called "Exchange Securities") for any or all of
the Registrable Securities. The Company agrees to use its reasonable best
efforts to cause such registration statement to become effective under the
Securities Act no later than 90 days after the Closing Date. The Exchange
Offer will be registered under the Act on the appropriate form and will comply
with all applicable tender offer rules and regulations under the Exchange Act.
The Company further agrees to commence and complete the Exchange Offer promptly
after such registration statement has become effective, hold the Exchange Offer
open for at least 30 days and exchange Exchange Securities for all Registrable
Securities that have been tendered and not withdrawn on or prior to the
expiration of the Exchange Offer. The Exchange Offer will be deemed to have
been completed only if the Exchange Securities received by holders other than
Restricted Holders in the Exchange Offer for Registrable Securities are, upon
receipt, transferable by each such holder without restriction under the
Securities Act and the Exchange Act and without material restrictions under the
blue sky or securities laws of a substantial majority of the States of the
United States of America. The Exchange Offer shall be deemed to have been
completed upon the earlier to occur of (i) the Company having exchanged the
Exchange Securities for all outstanding Registrable Securities pursuant to the
Exchange Offer and (ii) the Company having exchanged, pursuant to the Exchange
Offer, Exchange Securities for all Registrable Securities that have been
tendered and not withdrawn before the expiration of the Exchange Offer, which
shall be on a date that is at least 30 days following the commencement of the
Exchange Offer. The Company agrees (i) to include in the registration statement
a prospectus for use in connection with any resales by any holder of Exchange
Securities that is a broker-dealer and (ii) to keep such registration statement
effective for a period ending on the earlier of the 90th day after the Exchange
Offer has been completed or such time as such broker-dealers no longer own any
Registrable Securities. With respect to such registration statement the Company
and any such holder shall have the benefit of, and shall each provide to the
other, the rights of indemnification and contribution set forth in Section 6
hereof.
(b) If prior to the consummation of the Exchange Offer existing
Commission interpretations are changed such that the Exchange Securities
received by holders other than Restricted Holders in the Exchange Offer for
Registrable Securities are not or would not be, upon receipt, transferable by
each such holder without restriction under the Securities Act, in lieu of
conducting the Exchange Offer contemplated by Section 2(a) the Company shall
file under the Securities Act a "shelf" registration statement providing for
the registration of, and the sale on a continuous or delayed basis by the
holders of, all of the Registrable Securities, pursuant to Rule 415 under the
Securities Act and/or any similar rule that may be adopted by the Commission
(the "Shelf Registration"). The Company agrees to use its reasonable best
efforts to cause the Shelf Registration to become or be declared effective no
later than 90 days after the Closing Date and to keep such Shelf Registration
continuously effective for a period ending on the earlier of the
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<PAGE> 4
third anniversary of the Closing Date or such time as there are no longer any
Registrable Securities outstanding. The Company further agrees to supplement
or make amendments to the Shelf Registration, as and when required by the
rules, regulations or instructions applicable to the registration form used by
the Company for such Shelf Registration or by the Securities Act or rules and
regulations thereunder for shelf registration, and the Company agrees to
furnish to the holders of the Registrable Securities copies of any such
supplement or amendment prior to its being used and/or filed with the
Commission.
(c) In the event that (i) the Company has not filed the registration
statement relating to the Exchange Offer (or, if applicable, the Shelf
Registration) on or before the 60th day after the Closing Date, or (ii) such
registration statement or, in lieu thereof, the Shelf Registration, has not
become effective or been declared effective by the Commission on or before the
90th day after the Closing Date, or (iii) the Exchange Offer has not been
completed within 45 days after the initial effective date of the registration
statement (if the Exchange Offer is then required to be made) or (iv) any
registration statement required by Section 2(a) or 2(b) is filed and declared
effective but shall thereafter cease to be effective (except as specifically
permitted herein) without being succeeded promptly by an additional
registration statement filed and declared effective (each such event referred
to in clauses (i) through (iv), a "Registration Default"), then interest will
accrue (in addition to the original issue discount and any stated interest on
the Securities) at the rate of 0.5% per annum on the Accreted Value (as defined
in the Indenture) of the Securities (or after November 1, 2001, on the
principal amount of the Securities), determined daily (calculated on the same
basis as Accreted Value of or interest on the Securities, as the case may be,
shall be calculated) for the period from the occurrence of the Registration
Default until such time as no Registration Default is in effect (after which
time no such special interest will accrue). Such special interest (the "Special
Interest") will be payable in cash semi-annually in arrears on each May 1 and
November 1 in accordance with the Indenture. In addition, in the event that the
Exchange Offer has not been completed or, if applicable, the Shelf Registration
has not become effective or been declared effective by the Commission on or
before the 135th day after the Closing Date, then the per annum rate of Special
Interest shall increase by an additional 0.5%, and Special Interest will be
paid at such increased rate until such time as the Company completes the
Exchange Offer or, if applicable, the Shelf Registration has become or been
declared effective.
(d) In the event that either of the Purchasers shall not have sold
all of the Securities initially purchased by it pursuant to the Purchase
Agreement within 60 days after the Closing Date and such Purchaser requests on
the business day following the expiration of such 60- day period that the
Company register a resale of such unsold Securities, the Company shall file
under the Securities Act as soon as practicable after receipt of such request a
registration statement on the appropriate form covering a resale of such unsold
Securities (the "Resale Registration") and will use its reasonable best efforts
to cause such registration statement to become effective under the Securities
Act as promptly as practicable and to keep such registration statement
continuously effective pursuant to Rule 415 under the Securities Act and/or any
similar rule that may be adopted by the Commission for a period of up to 30
days.
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<PAGE> 5
3. Registration Procedures.
If the Company files a registration statement pursuant to Section 2(a)
or Section 2(b), the following provisions shall apply:
(a) At or before the Effective Time of the Exchange Offer or the
Shelf Registration, as the case may be, the Company shall qualify the Indenture
under the Trust Indenture Act of 1939.
(b) In the event that such qualification would require the
appointment of a new trustee under the Indenture, the Company shall appoint a
new trustee thereunder pursuant to the applicable provisions of the Indenture.
(c) In connection with the Company's obligations with respect to the
Shelf Registration or any Resale Registration, if applicable, the Company shall
use its reasonable best efforts to effect or cause the Shelf Registration or
Resale Registration to permit the sale of the Registrable Securities by the
holders thereof in accordance with the intended method or methods of
distribution thereof described in the Shelf Registration. In connection
therewith, the Company shall:
(i) prepare and file with the Commission a registration
statement with respect to the Shelf Registration or Resale
Registration on any form which may be utilized by the Company and
which shall permit the disposition of the Registrable Securities in
accordance with the intended method or methods thereof, as specified
in writing to the Company by the holders of the Registrable
Securities;
(ii) as soon as reasonably possible, prepare and file with the
Commission such amendments and supplements to such registration
statement and the prospectus included therein as may be necessary to
effect and maintain the effectiveness of such registration statement
for the period specified in Section 2(b) or Section 2(d) hereof, as
applicable, and as may be required by the applicable rules and
regulations of the Commission and the instructions applicable to the
form of such registration statement;
(iii) as soon as reasonably possible, comply with the
provisions of the Securities Act applicable to the Company in
connection with the disposition of all of the Registrable Securities
covered by such registration statement in accordance with the intended
methods of disposition by the holders thereof, set forth in such
registration statement;
(iv) provide (A) the holders of the Registrable Securities to
be included in such registration statement and not more than one
counsel for all the holders of such Registrable Securities, (B) the
underwriters (which term, for purposes of this Exchange and
Registration Rights Agreement, shall include a person deemed to be an
underwriter within the meaning of Section 2(11) of the Securities
Act), if any, thereof, (C) the sales or placement agent, if any,
therefor, and (D) one counsel for such underwriters or agents, if any,
reasonable opportunity to participate in the preparation of such
registration statement, each prospectus included therein or filed with
the Commission, and each amendment or supplement thereto;
-5-
<PAGE> 6
(v) for a reasonable period prior to the filing of such
registration statement, and throughout the period specified in Section
2(b) or Section 2(d), as applicable, make available at reasonable
times at the Company's principal place of business or such other
reasonable place for inspection by the persons referred to in Section
3(c)(iv) who shall certify to the Company that they have a current
intention to sell the Registrable Securities pursuant to the Shelf
Registration or Resale Registration such financial and other
information and books and records of the Company, and cause the
officers, employees, counsel and independent certified public
accountants of the Company to respond to such inquiries, as shall be
reasonably necessary, in the judgment of the respective counsel
referred to in such Section, to conduct a reasonable investigation
within the meaning of Section 11 of the Securities Act; provided,
however, that each such party shall be required to maintain in
confidence and not to disclose to any other person any information or
records reasonably designated by the Company as being confidential,
until such time as (A) such information becomes a matter of public
record (whether by virtue of its inclusion in such registration
statement or otherwise, except by disclosure by such party in breach
of this Agreement), or (B) such person shall be required so to
disclose such information pursuant to the subpoena or order of any
court or other governmental agency or body having jurisdiction over
the matter (subject to, and only to the extent required by, the
requirements of such order, and only after such person shall have
given the Company prompt prior written notice of such requirement), or
(C) such information is required to be set forth in such registration
statement or the prospectus included therein or in an amendment to
such registration statement or an amendment or supplement to such
prospectus in order that such registration statement, prospectus,
amendment or supplement, as the case may be, does not contain an
untrue statement of a material fact or omit to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then
existing;
(vi) promptly notify the selling holders of Registrable
Securities, the sales or placement agent, if any, therefor and the
managing underwriter or underwriters, if any, thereof and confirm such
advice in writing, (A) when such registration statement or the
prospectus included therein or any prospectus amendment or supplement
or post-effective amendment has been filed, and, with respect to such
registration statement or any post-effective amendment, when the same
has become effective, (B) of any comments by the Commission and by the
Blue Sky or securities commissioner or regulator of any state with
respect thereto or any request by the Commission for amendments or
supplements to such registration statement or prospectus or for
additional information, (C) of the issuance by the Commission of any
stop order suspending the effectiveness of such registration statement
or the initiation or threatening of any proceedings for that purpose,
(D) if at any time the representations and warranties of the Company
contemplated by Section 3(c)(xv) or Section 5 cease to be true and
correct in all material respects, (E) of the receipt by the Company of
any notification with respect to the suspension of the qualification
of the Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose, or (F)
at any time when a prospectus is required to be delivered under the
Securities Act, that such registration statement, prospectus,
prospectus amendment or supplement or post-effective amendment, or any
document incorporated by reference in any of the foregoing, contains
an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing;
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<PAGE> 7
(vii) use its reasonable best efforts to obtain the
withdrawal of any order suspending the effectiveness of such
registration statement or any post-effective amendment thereto at the
earliest practicable date;
(viii) if requested in writing by any managing underwriter or
underwriters, any placement or sales agent or counsel for the holders
of Registrable Securities, promptly incorporate in a prospectus
supplement or post-effective amendment such information as is required
by the applicable rules and regulations of the Commission and as such
managing underwriter or underwriters, such agent or such holder
specifies should be included therein relating to the terms of the sale
of such Registrable Securities, including, without limitation,
information with respect to the principal amount of Registrable
Securities being sold by any holder or agent or to any underwriters,
the name and description of such holder, agent or underwriter, the
offering price of such Registrable Securities and any discount,
commission or other compensation payable in respect thereof, the
purchase price being paid therefor by such underwriters and with
respect to any other terms of the offering of the Registrable
Securities, to be sold by such holder or agent or to such
underwriters; and make all required filings of such prospectus
supplement or post-effective amendment promptly after notification of
the matters to be incorporated in such prospectus supplement or
post-effective amendment;
(ix) furnish to each holder of Registrable Securities, each
placement or sales agent, if any, therefor, each underwriter, if any,
thereof and the respective counsel referred to in Section 3(c)(iv) an
executed copy of such registration statement, each such amendment and
supplement thereto (in each case including all exhibits thereto and
documents incorporated by reference therein) and such number of copies
of such registration statement (excluding exhibits thereto and
documents incorporated by reference therein unless specifically so
requested by such holder, agent or underwriter, as the case may be)
and of the prospectus included in such registration statement
(including each preliminary prospectus and any summary prospectus), in
conformity with the requirements of the Securities Act, and such other
documents, as such holder, agent, if any, and underwriter, if any, may
reasonably request in order to facilitate the offering and disposition
of the Registrable Securities owned by such holder, offered or sold by
such agent or underwritten by such underwriter and to permit such
holder, agent and underwriter to satisfy the prospectus delivery
requirements of the Securities Act; and the Company hereby consents to
the use of such prospectus (including such preliminary and summary
prospectus) and any amendment or supplement thereto by each such
holder and by any such agent and underwriter, in each case in the form
most recently provided to such party by the Company, in connection
with the offering and sale of the Registrable Securities covered by
the prospectus (including such preliminary and summary prospectus) or
any supplement or amendment thereto;
(x) use its reasonable best efforts to (A) register or qualify
the Registrable Securities to be included in such registration
statement under such securities laws or blue sky laws of such
jurisdictions as any holder of such Registrable Securities and each
placement or sales agent, if any, therefor and underwriter, if any,
thereof shall reasonably request, (B) keep such registrations or
qualifications in effect and comply with such laws so as to permit the
continuance of offers, sales and dealings therein in such
jurisdictions during the period the Shelf Registration or Resale
Registration is required to remain effective under Section 2(b) or
Section 2(d) above, as applicable, and for so long as may be necessary
to enable any such
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<PAGE> 8
holder, agent or underwriter to complete its distribution of
Securities pursuant to such registration statement and (C) take any
and all other actions as may be reasonably necessary or advisable to
enable each such holder, agent, if any, and underwriter, if any, to
consummate the disposition in such jurisdictions of Registrable
Securities; provided, however, that the Company shall not be required
for any such purpose to (1) qualify as a foreign corporation in any
jurisdiction wherein it would not otherwise be required to qualify but
for the requirements of this Section 3(c)(x), (2) consent to general
service of process in any such jurisdiction, (3) subject itself to
taxation in any jurisdiction where the Company is not already subject
to taxation or (4) make any changes to the Company's certificate of
incorporation or by-laws or any agreement between the Company and its
stockholders;
(xi) use its reasonable best efforts to obtain the consent or
approval of each governmental agency or authority, whether federal,
state or local, which may be required to effect the Shelf Registration
or Resale Registration or the offering or sale in connection therewith
or to enable the selling holder or holders to offer, or to consummate
the disposition of, their Registrable Securities;
(xii) cooperate with the holders of the Registrable Securities
and the managing underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable
Securities to be sold, which certificates shall be printed,
lithographed or engraved, or produced by any combination of such
methods, and which shall not bear any restrictive legends; and, in the
case of an underwritten offering, enable such Registrable Securities
to be in such denominations and registered in such names as the
managing underwriters may request at least two business days prior to
any sale of the Registrable Securities;
(xiii) provide a CUSIP number for all Registrable Securities,
not later than the effective date of the Shelf Registration or Resale
Registration;
(xiv) enter into one or more underwriting agreements,
engagement letters, agency agreements or similar agreements, as
appropriate, including (without limitation) provisions relating to
indemnification and contribution substantially the same as those set
forth in Section 6 hereof, and take such other actions in connection
therewith as any holders of Registrable Securities aggregating at
least 25% in aggregate principal amount of the Registrable Securities
included in such Shelf Registration or Resale Registration shall
request in order to expedite or facilitate the disposition of such
Registrable Securities; provided, that the Company shall not be
required to enter into any such agreement more than once with respect
to all of the Registrable Securities and may delay entering into such
agreement until the consummation of any underwritten public offering
which the Company shall have then undertaken;
(xv) whether or not an agreement of the type referred to in
Section (3)(c)(xiv) hereof is entered into and whether or not any
portion of the offering contemplated by such registration statement is
an underwritten offering or is made through a placement or sales agent
or any other entity, (A) make such representations and warranties to
the holders of such Registrable Securities and the placement or sales
agent, if any, therefor and the underwriters, if any, thereof
substantially the same as those set forth in Section 1 of the Purchase
Agreement and such other representations and warranties as are
customarily made with respect to the offering
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<PAGE> 9
of debt securities pursuant to a shelf registration statement on the
applicable form under the Act; (B) obtain an opinion or opinions of
counsel to the Company substantially the same as the opinions provided
for in Section 7 of the Purchase Agreement, addressed to such holder
or holders and the placement or sales agent, if any, therefor and the
underwriters, if any, thereof and dated the effective date of such
registration statement (and if such registration statement
contemplates an underwritten offering of a part or all of the
Registrable Securities, dated the date of the closing under the
underwriting agreement relating thereto) (it being agreed that the
matters to be covered by such opinion shall also include, without
limitation, the absence of governmental approvals required to be
obtained in connection with the Shelf Registration or Resale
Registration, the offering and sale of the Registrable Securities,
this Exchange and Registration Rights Agreement or any agreement of
the type referred to in Section (3)(c)(xiv) hereof, except such
approvals as may be required under state securities or blue sky laws;
and the compliance as to form of such registration statement and any
documents incorporated by reference therein and of the Indenture with
the requirements of the Securities Act and the Trust Indenture Act,
respectively; and, such opinion shall also state that such counsel has
no reason to believe that, as of the date of the opinion and of the
registration statement or most recent post-effective amendment
thereto, as the case may be, such registration statement and the
prospectus included therein, as then amended or supplemented, and the
documents incorporated by reference therein (in each case other than
the financial statements and other financial information contained
therein) contains or contained an untrue statement of a material fact
or omits or omitted to state therein a material fact necessary to make
the statements therein not misleading (in the case of such documents,
in the light of the circumstances existing at the time that such
documents were filed with the Commission under the Exchange Act)); (C)
obtain a "cold comfort" letter or letters from the independent
certified public accountants of the Company addressed to the selling
holders of Registrable Securities, the placement or sales agent, if
any, therefor and the underwriters, if any, thereof, dated (i) the
effective date of such registration statement and (ii) the effective
date of any prospectus supplement to the prospectus included in such
registration statement or post-effective amendment to such
registration statement which includes unaudited or audited financial
statements as of a date or for a period subsequent to that of the
latest such statements included in such prospectus (and, if such
registration statement contemplates an underwritten offering pursuant
to any prospectus supplement to the prospectus included in such
registration statement or post-effective amendment to such
registration statement which includes unaudited or audited financial
statements as of a date or for a period subsequent to that of the
latest such statements included in such prospectus, dated the date of
the closing under the underwriting agreement relating thereto), such
letter or letters to be in customary form and covering such matters of
the type customarily covered by letters of such type; (D) deliver such
other documents and certificates, including officers' certificates, as
may be reasonably requested by any holders of at least 25% in
aggregate principal amount of the Registrable Securities included in
such Shelf Registration or Resale Registration or the placement or
sales agent, if any, therefor and the managing underwriters, if any,
thereof to evidence the accuracy of the representations and warranties
made pursuant to clause (A) above or those contained in Section 5(a)
hereof and the compliance with or satisfaction of any agreements or
conditions contained in the underwriting agreement or other agreement
entered into by the Company; and (E) undertake such obligations
relating to expense reimbursement, indemnification and contribution as
are provided in Section 6 hereof;
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<PAGE> 10
(xvi) notify in writing each holder of Registrable Securities
of any proposal by the Company to amend or waive any provision of this
Exchange and Registration Rights Agreement pursuant to Section 9(h)
hereof and of any amendment or waiver effected pursuant thereto, each
of which notices shall contain the text of the amendment or waiver
proposed or effected, as the case may be; and
(xvii) in the event that any broker-dealer registered under
the Exchange Act shall underwrite any Registrable Securities or
participate as a member of an underwriting syndicate or selling group
or "participate in the distribution" (within the meaning of the
Conduct Rules and the By-Laws of the National Association of
Securities Dealers, Inc. ("NASD") or any successor thereto, as amended
from time to time) thereof, whether as a holder of such Registrable
Securities or as an underwriter, a placement or sales agent or a
broker or dealer in respect thereof, or otherwise, assist such
broker-dealer in complying with the requirements of such Rules and
By-Laws, including, without limitation, by (A) if such Rules or
By-Laws, including Rule 2720 (or any successor thereto), shall so
require, engaging a "qualified independent underwriter" (as defined in
Rule 2720 (or any successor thereto)) to participate in the
preparation of the registration statement relating to such Registrable
Securities, to exercise usual standards of due diligence in respect
thereto and, if any portion of the offering contemplated by such
registration statement is an underwritten offering or is made through
a placement or sales agent, to recommend the yield of such Registrable
Securities, (B) indemnifying any such qualified independent
underwriter to the extent of the indemnification of underwriters
provided in Section 6 hereof, and (C) providing such information to
such broker-dealer as may be required in order for such broker-dealer
to comply with the requirements of the Conduct Rules of the NASD.
(d) In the event that the Company would be required, pursuant to
Section 3(c)(vi)(F) above, to notify the selling holders of Registrable
Securities, the placement or sales agent, if any, therefor and the managing
underwriters, if any, thereof, the Company shall without delay prepare and
furnish to each such holder, to each placement or sales agent, if any, and to
each underwriter, if any, a reasonable number of copies of a prospectus
supplemented or amended so that, as thereafter delivered to purchasers of
Registrable Securities, such prospectus shall not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing. Each holder of Registrable Securities agrees
that upon receipt of any notice from the Company pursuant to Section
3(c)(vi)(F) hereof, such holder shall forthwith discontinue the disposition of
Registrable Securities, pursuant to the registration statement applicable to
such Registrable Securities until such holder shall have received copies of
such amended or supplemented prospectus, and if so directed by the Company,
such holder shall deliver to the Company (at the Company's expense) all copies,
other than permanent file copies, then in such holder's possession of the
prospectus covering such Registrable Securities at the time of receipt of such
notice.
(e) The Company may require each holder of Registrable Securities as
to which any registration is being effected to furnish in writing to the
Company such information regarding such holder and such holder's intended
method of distribution of such Registrable Securities as the Company may from
time to time reasonably request in writing, but only to the extent that such
information is required in order to comply with the Securities Act, and may
exclude from
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<PAGE> 11
any such registration the Registrable Securities of any such holder who fails
to furnish such reasonably requested information within 30 days after such
request. Each such holder agrees to notify the Company as promptly as
practicable of any inaccuracy or change in information previously furnished by
such holder to the Company or of the occurrence of any event in either case as
a result of which any prospectus relating to such registration contains or
would contain an untrue statement of a material fact regarding such holder or
such holder's intended method of distribution of such Registrable Securities or
omits to state any material fact regarding such holder or such holder's
intended method of distribution of such Registrable Securities required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing, and promptly to furnish to the
Company any additional information required to correct and update any
previously furnished information or required so that such prospectus shall not
contain, with respect to such holder or the distribution of such Registrable
Securities, an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing. Each such holder
shall comply with the provisions of the Securities Act applicable to such
holder with respect to the disposition by such holder of Registrable Securities
covered by such registration statement in accordance with the intended methods
of disposition by such holder set forth in such registration statement.
(f) Until three years after the Closing Date, the Company will not,
and will not permit any of its "affiliates" (as defined in Rule 144 under the
Act) to, resell any of the Securities which constitute "restricted securities"
under Rule 144 that have been reacquired by any of them except pursuant to an
effective registration statement under the Act or any exemption therefrom.
4. Registration Expenses.
If the Company files a registration statement pursuant to Section 2(a)
or Section 2(b), the following provisions shall apply:
The Company agrees to bear and to pay or cause to be paid all expenses
incident to the Company's performance of or compliance with this Exchange and
Registration Rights Agreement, including, without limitation, (a) all
Commission and any NASD registration and filing fees and expenses, (b) any fees
and expenses in connection with the qualification of Registrable Securities for
offering and sale under the State securities and blue sky laws referred to in
Section 3(c)(x) hereof, including reasonable fees and disbursements of counsel
for the placement or sales agent, if any, or underwriters, if any, in
connection with such qualifications, (c) all expenses relating to the
preparation, printing, distribution and reproduction of each registration
statement required to be filed hereunder, each prospectus included therein or
prepared for distribution pursuant hereto, each amendment or supplement to the
foregoing, and the certificates representing the Securities, (d) messenger and
delivery expenses, (e) fees and expenses of the Trustee under the Indenture and
of any escrow agent or custodian, (f) internal expenses (including, without
limitation, all salaries and expenses of the Company's officers and employees
performing legal or accounting duties), (g) fees, disbursements and expenses of
counsel and independent certified public accountants of the Company (including
the expenses of any opinions or "cold comfort" letters required by or incident
to such performance and compliance), (h) fees, disbursements and expenses of
any "qualified independent underwriter" engaged pursuant to Section 3(c)(xvii)
hereof, (i) fees, disbursements and expenses of one counsel for the holders of
Registrable
-11-
<PAGE> 12
Securities retained in connection with a Shelf Registration, as selected by the
holders of at least a majority in aggregate principal amount of the Registrable
Securities being registered, and fees, expenses and disbursements of any other
persons, including special experts, retained by the Company in connection with
such registration (collectively, the "Registration Expenses"). To the extent
that any Registration Expenses are incurred, assumed or paid by any holder of
Registrable Securities or any placement or sales agent therefor or underwriter
thereof, the Company shall reimburse such person for the full amount of the
Registration Expenses so incurred, assumed or paid promptly after receipt of a
written request therefor. Notwithstanding the foregoing, the holders of the
Registrable Securities being registered shall pay all agency or brokerage fees
and commissions and underwriting discounts and commissions attributable to the
sale of such Registered Securities and the fees and disbursements of any
counsel or other advisors or experts retained by such holders (severally or
jointly), other than the counsel and experts specifically referred to above,
transfer taxes on resale of any of the Securities by such holders and any
advertising expenses incurred by or on behalf of such holders in connection
with any offers they may make.
5. Representations and Warranties.
The Company represents and warrants to, and agrees with, each
Purchaser and each of the holders from time to time of Registrable Securities
that:
(a) Each registration statement covering Registrable
Securities and each prospectus (including any preliminary or summary
prospectus) contained therein or furnished pursuant to Section
3(c)(ix) hereof and any further amendments or supplements to any such
registration statement or prospectus, when it becomes effective or is
filed with the Commission, as the case may be, and, in the case of an
underwritten offering of Registrable Securities, at the time of the
closing under the underwriting agreement relating thereto, will
conform in all material respects to the requirements of the Securities
Act and the Trust Indenture Act and any such registration statement
and any amendment thereto will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading and
any such prospectus or any amendment or supplement thereto will not
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then
existing; and at all times subsequent to the Effective Time of any
such registration statement when a prospectus would be required to be
delivered under the Securities Act, other than from (i) such time as a
notice has been given to holders of Registrable Securities pursuant to
Section 3(c)(vi)(F) hereof until (ii) such time as the Company
furnishes an amended or supplemented prospectus pursuant to Section
3(d) hereof, each such registration statement, and each prospectus
(including any summary prospectus) contained therein or furnished
pursuant to Section 3(c)(ix) hereof, as then amended or supplemented,
will conform in all material respects to the requirements of the
Securities Act and the Trust Indenture Act and will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then
existing; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon
and in conformity with information furnished in writing to the
-12-
<PAGE> 13
Company by a holder of Registrable Securities or any placement or
sales agent therefor or underwriter thereof expressly for use therein.
(b) Any documents incorporated by reference in any prospectus
referred to in Section 5(a) hereof, when they become or became
effective or are or were filed with the Commission, as the case may
be, will conform or conformed in all material respects to the
requirements of the Securities Act or the Exchange Act, as applicable,
and none of such documents will contain or contained an untrue
statement of a material fact or will omit or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that this
representation and warranty shall not apply to any statements or
omissions made in reliance upon and in conformity with information
furnished in writing to the Company by a holder of Registrable
Securities expressly for use therein.
(c) The compliance by the Company with all of the provisions
of this Exchange and Registration Rights Agreement and the
consummation of the transactions herein contemplated will not conflict
with or result in a breach of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company
or any subsidiary of the Company is a party or by which the Company or
any subsidiary of the Company is bound or to which any of the property
or assets of the Company or any subsidiary of the Company is subject,
nor will such action result in any violation of the provisions of the
certificate of incorporation, as amended, or the by-laws of the
Company or any statute or any order, rule or regulation of any court
or governmental agency or body having jurisdiction over the Company or
any subsidiary of the Company or any of their properties; and no
consent, approval, authorization, order, registration or qualification
of or with any such court or governmental agency or body is required
for the consummation by the Company of the transactions contemplated
by this Exchange and Registration Rights Agreement, except the
registration under the Securities Act of the Registrable Securities,
qualification of the Indenture under the Trust Indenture Act and such
consents, approvals, authorizations, registrations or qualifications
as may be required under State securities or blue sky laws in
connection with the offering and distribution of the Registrable
Securities.
(d) This Exchange and Registration Rights Agreement has been
duly authorized, executed and delivered by the Company.
6. Indemnification.
(a) Indemnification by the Company. Upon the registration of the
Registrable Securities pursuant to Section 2 hereof, and in consideration of
the agreements of the Purchasers contained herein, and as an inducement to the
Purchasers to purchase the Securities, the Company shall, and it hereby agrees
to, (i) indemnify and hold harmless each of the holders of Registrable
Securities to be included in such registration, and each person who
participates as a placement or sales agent or as an underwriter in any offering
or sale of such Registrable Securities against any losses, claims, damages or
liabilities, joint or several, to which such holder, agent or underwriter may
become subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon an untrue statement or alleged untrue statement of a material
fact contained in any registration
-13-
<PAGE> 14
statement under which such Registrable Securities were registered under the
Securities Act, or any preliminary, final or summary prospectus contained
therein or furnished by the Company to any such holder, agent or underwriter,
or any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(ii) reimburse such holder, such agent and such underwriter for any legal or
other expenses reasonably incurred by them in connection with investigating or
defending any such action or claim as such expenses are incurred; provided,
however, that the Company shall not be liable to any such person in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any such registration statement, or preliminary, final
or summary prospectus, or amendment or supplement thereto, in reliance upon and
in conformity with written information furnished to the Company by any holders
of Registrable Securities or any placement or sales agent thereof or
underwriter thereof expressly for use therein;
(b) Indemnification by the Holders and any Agents and Underwriters.
The Company may require, as a condition to including any Registrable Securities
in any registration statement filed pursuant to Section 2 hereof and to
entering into any placement or underwriting agreement with respect thereto,
that the Company shall have received an undertaking reasonably satisfactory to
it from the holder of such Registrable Securities and from each placement agent
or underwriter named in any such placement agreement or underwriting agreement,
severally and not jointly, to (i) indemnify and hold harmless the Company, and
all other holders of Registrable Securities, against any losses, claims,
damages or liabilities to which the Company or such other holders of
Registrable Securities may become subject, under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in such registration
statement, or any preliminary, final or summary prospectus contained therein or
furnished by the Company to any such holder, agent or underwriter, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by
such holder, agent or underwriter expressly for use therein, and (ii) reimburse
the Company for any legal or other expenses reasonably incurred by the Company
in connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that no such holder shall be required
to undertake liability to any person under this Section 6(b) for any amounts in
excess of the dollar amount of the proceeds to be received by such holder from
the sale of such holder's Registrable Securities pursuant to such registration.
(c) Notices of Claims, Etc. Promptly after receipt by an indemnified
party under subsection (a) or (b) above of written notice of the commencement
of any action, such indemnified party shall, if a claim in respect thereof is
to be made against an indemnifying party pursuant to the indemnification
provisions of or contemplated by this Section 6, notify such indemnifying party
in writing of the commencement of such action; but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may
have to any indemnified party other than under the indemnification provisions
of or contemplated by Section 6(a) or 6(b) hereof. In case
-14-
<PAGE> 15
any such action shall be brought against any indemnified party and it shall
notify an indemnifying party of the commencement thereof, such indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, such
indemnifying party shall not be liable to such indemnified party for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof
other than reasonable costs of investigation. No indemnifying party shall,
without the written consent of the indemnified party, effect the settlement or
compromise of, or consent to the entry of any judgment with respect to, any
pending or threatened action or claim in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified party is
an actual or potential party to such action or claim) unless such settlement,
compromise or judgment (i) includes an unconditional release of the indemnified
party from all liability arising out of such action or claim and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act by or on behalf of any indemnified party. No indemnifying party shall be
liable for the cost of any settlement effected by an indemnified party without
the written consent of such indemnifying party, which consent shall not be
unreasonably withheld. In no event shall any indemnifying party be liable for
the fees and expenses of more than one firm or counsel (except to the extent
that local counsel, in addition to such firm or counsel, is required for
effective representation) to represent all indemnified parties with respect to
a single action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations.
(d) Contribution. If for any reason the indemnification provisions
contemplated by Section 6(a) or Section 6(b) are unavailable to or insufficient
to hold harmless an indemnified party in respect of any losses, claims, damages
or liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
not only (i) the relative benefits received by the holders of the Registrable
Securities, on the one hand, and any agents or underwriters, on the other, from
any offering or sale of the Registrable Securities, but also (ii) the relative
fault of the indemnifying party and the indemnified party in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the holders of the
Registrable Securities on the one hand and any agents or underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from any offering or sale thereof (before deducting expenses) received by such
holders bear to the total discounts and commissions received by any such agents
or underwriters with respect to such offer or sale. The relative fault of such
indemnifying party and indemnified party shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by such indemnifying party or by such indemnified
party, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The parties
hereto agree that it would not be just and equitable if contributions pursuant
to this Section 6(d) were determined by pro rata allocation (even if the
holders or any agents or underwriters or all of them were treated as one entity
for such purpose) or by any other method of allocation
-15-
<PAGE> 16
which does not take account of the equitable considerations referred to in this
Section 6(d). The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, or liabilities (or actions in respect thereof)
referred to above shall be deemed to include any legal or other fees or
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 6(d), no holder shall be required to contribute any
amount in excess of the amount by which the dollar amount of the proceeds
received by such holder from the sale of any Registrable Securities (after
deducting any fees, discounts and commissions applicable thereto) exceeds the
amount of any damages which such holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission, and no underwriter or agent shall be required to contribute any
amount in excess of the amount by which the total price at which the
Registrable Securities placed or underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
underwriter or agent has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The holders' and any
underwriters' or agent's obligations in this Section 6(d) to contribute shall
be several in proportion to the principal amount of Registrable Securities
registered, underwritten or placed, as the case may be, by them and not joint.
(e) The obligations of the Company under this Section 6 shall be in
addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each officer, director and
partner of each holder, agent and underwriter and each person, if any, who
controls any holder, agent or underwriter within the meaning of the Securities
Act; and the obligations of the holders and any agents or underwriters
contemplated by this Section 6 shall be in addition to any liability which the
respective holder, agent or underwriter may otherwise have and shall extend,
upon the same terms and conditions, to each officer and director of the Company
(including any person who, with his consent, is named in any registration
statement as about to become a director of the Company) and to each person, if
any, who controls the Company within the meaning of the Securities Act.
7. Underwritten Offerings.
(a) Selection of Underwriters. If any of the Registrable Securities
covered by the Shelf Registration are to be sold pursuant to an underwritten
offering, the managing underwriter or underwriters thereof shall be designated
by the holders of at least a majority in aggregate principal amount of the
Registrable Securities to be included in such offering, provided that such
designated managing underwriter or underwriters is or are reasonably acceptable
to the Company.
(b) Participation by Holders. Each holder of Registrable Securities
hereby agrees with each other such holder that no such holder may participate
in any underwritten offering hereunder unless such holder (i) agrees to sell
such holder's Registrable Securities on the basis provided in any underwriting
arrangements approved by the persons entitled hereunder to approve such
arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
-16-
<PAGE> 17
(c) Consolidated Earnings Statements. In the event of an underwritten
offering, the Company agrees to make generally available to its securityholders
as soon as practicable, but in any event not later than eighteen months after
the effective date of the applicable registration statement (as defined in Rule
158(c) under the Act), a consolidated earnings statement of the Company
complying with Section 11(a) of the Act and the rules and regulations of the
Commission thereunder (including, at the option of the Company, Rule 158 under
the Act).
8. Rule 144.
The Company covenants to the holders of Registrable Securities that to
the extent it shall be required to do so under the Exchange Act, the Company
shall timely file the reports required to be filed by it under the Exchange Act
or the Securities Act (including, but not limited to, the reports under Section
13 and 15(d) of the Exchange Act referred to in subparagraph (c)(1) of Rule 144
adopted by the Commission under the Securities Act) and the rules and
regulations adopted by the Commission thereunder, and shall take such further
action as any holder of Registrable Securities may reasonably request, all to
the extent required from time to time to make Rule 144 available to such holder
for the sale of Registrable Securities without registration under the
Securities Act within the limitations of the exemption provided by Rule 144
under the Securities Act, as such Rule may be amended from time to time, or any
similar or successor rule or regulation hereafter adopted by the Commission.
Upon the request of any holder of Registrable Securities in connection with
that holder's sale pursuant to Rule 144, the Company shall deliver to such
holder a written statement as to whether it has complied with such
requirements.
9. Miscellaneous.
(a) No Inconsistent Agreements. The Company represents, warrants,
covenants and agrees that it has not granted, and shall not grant, registration
rights with respect to Registrable Securities or any other securities which
would be inconsistent with the terms contained in this Exchange and
Registration Rights Agreement.
(b) Specific Performance. The parties hereto acknowledge that there
would be no adequate remedy at law if any party fails to perform any of its
obligations hereunder and that each party may be irreparably harmed by any such
failure, and accordingly agree that each party, in addition to any other remedy
to which it may be entitled at law or in equity, shall be entitled to compel
specific performance of the obligations of any other party under this Exchange
and Registration Rights Agreement in accordance with the terms and conditions
of this Exchange and Registration Rights Agreement, in any court of the United
States or any State thereof having jurisdiction.
(c) Notices. All notices, requests, claims, demands, waivers and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered by hand, if delivered personally or by courier, or
three days after being deposited in the mail (registered or certified mail,
postage prepaid, return receipt requested) as follows: If to the Company, to it
at 425 Woods Mill South, Town & Country, Missouri 63017, Attention: David L.
Solomon and if to a holder, to the address of such holder set forth in the
security register or other records of the Company, or to such other address as
any party may have furnished to the others in writing in accordance herewith,
except that notices of change of address shall be effective only upon receipt.
-17-
<PAGE> 18
(d) Parties in Interest. All the terms and provisions of this Exchange
and Registration Rights Agreement shall be binding upon, shall inure to the
benefit of and shall be enforceable by the respective successors and assigns of
the parties hereto. In the event that any transferee of any holder of
Registrable Securities shall become a holder of Registrable Securities, in any
manner, whether by gift, bequest, purchase, operation of law or otherwise, such
transferee shall, without any further writing or action of any kind, be deemed
a party hereto for all purposes and such Registrable Securities shall be held
subject to all of the terms of this Exchange and Registration Rights Agreement,
and by taking and holding such Registrable Securities such transferee shall be
entitled to receive the benefits of and be conclusively deemed to have agreed
to be bound by and to perform all of the terms and provisions of this Exchange
and Registration Rights Agreement. If the Company shall so request, any such
successor, assign or transferee shall agree in writing to acquire and hold the
Registrable Securities subject to all of the terms hereof.
(e) Survival. The respective indemnities, agreements, representations,
warranties and each other provision set forth in this Exchange and Registration
Rights Agreement or made pursuant hereto shall remain in full force and effect
regardless of any investigation (or statement as to the results thereof) made
by or on behalf of any holder of Registrable Securities, any director, officer
or partner of such holder, any agent or underwriter or any director, officer or
partner thereof, or any controlling person of any of the foregoing, and shall
survive delivery of and payment for the Registrable Securities pursuant to the
Purchase Agreement and the transfer and registration of Registrable Securities
by such holder and the consummation of an Exchange Offer.
(f) LAW GOVERNING. THIS EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK.
(g) Headings. The descriptive headings of the several Sections and
paragraphs of this Exchange and Registration Rights Agreement are inserted for
convenience only, do not constitute a part of this Exchange and Registration
Rights Agreement and shall not affect in any way the meaning or interpretation
of this Exchange and Registration Rights Agreement.
(h) Entire Agreement; Amendments. This Exchange and Registration
Rights Agreement and the other writings referred to herein (including the
Indenture and the form of Securities) or delivered pursuant hereto which form a
part hereof contain the entire understanding of the parties with respect to its
subject matter. This Exchange and Registration Rights Agreement supersedes all
prior agreements and understandings between the parties with respect to its
subject matter. This Exchange and Registration Rights Agreement may be amended
and the observance of any term of this Exchange and Registration Rights
Agreement may be waived (either generally or in a particular instance and
either retroactively or prospectively) only by a written instrument duly
executed by the Company and the holders of at least 66-2/3 percent in aggregate
principal amount of the Registrable Securities at the time outstanding. Each
holder of any Registrable Securities at the time or thereafter outstanding
shall be bound by any amendment or waiver effected pursuant to this Section
9(h), whether or not any notice, writing or marking indicating such amendment
or waiver appears on such Registrable Securities or is delivered to such
holder.
(i) Inspection. For so long as this Exchange and Registration Rights
Agreement shall be in effect, this Exchange and Registration Rights Agreement
and a complete list of the names and
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<PAGE> 19
addresses of all the holders of Registrable Securities shall be made available
for inspection and copying on any business day by any holder of Registrable
Securities at the offices of the Company at the address thereof set forth in
Section 9(c) above or at the office of the Trustee under the Indenture.
(j) Counterparts. This agreement may be executed by the parties in
counterparts, each of which shall be deemed to be an original, but all such
respective counterparts shall together constitute one and the same instrument.
-19-
<PAGE> 20
Agreed to and accepted as of the date referred to above.
BROOKS FIBER PROPERTIES, INC.
By: /s/ David L. Solomon
------------------------------------
Name: David L. Solomon
Title: Executive Vice President
& Chief Financial Officer
GOLDMAN, SACHS & CO.
SALOMON BROTHERS INC
/s/ Goldman, Sachs & Co.
------------------------------------
(Goldman, Sachs & Co.)
-20-
<PAGE> 1
EXHIBIT 11.1
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1996
<TABLE>
<S> <C>
Shares outstanding -- January 1, 1995................................ 1,162,800
Weighted average number of common and common equivalent shares issued
(1)................................................................ 18,360,784
------------
Weighted average number of common and common equivalent shares
outstanding -- December 31, 1995................................... 19,523,584
============
Net loss for the year ended December 31, 1995........................ $ (9,551,000)
============
Pro forma loss per common and common equivalent share for the year
ended December 31, 1995............................................ $ (.49)
============
Weighted average number of common and common equivalent shares
outstanding -- September 30, 1996 (1).............................. 24,071,672
============
Net loss for the nine months ended September 30, 1996................ $(26,387,000)
============
Pro forma loss per common and common equivalent share for the nine
months ended September 30, 1996.................................... $ (1.10)
============
</TABLE>
- ---------------
(1) Common and common equivalent shares issued consist of certain effects of
shares issued, stock options, warrants, and Preferred Stock. Common
equivalent shares from convertible Preferred Stock (using the if converted
method) and stock options and warrants (using the treasury stock method)
have been included in the computation. Pursuant to the Securities and
Exchange Commission rules, convertible Preferred Stock which will be
automatically converted at the date of issuance is included even through
inclusion may be antidilutive. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, shares issued and stock options
and warrants granted at prices below the initial public offering price of
$27.00 per share during the twelve-month period preceding the date of the
Company's initial filing of the Registration Statement relating to such
initial public offering have been included in the calculation of common
stock equivalent shares, using the treasury stock method, as if they were
outstanding for all of 1995 and for the first nine months of 1996.
<PAGE> 1
EXHIBIT 21.1
BROOKS FIBER PROPERTIES, INC.
AND ITS SUBSIDIARIES
NAME OF CORPORATION DOMESTIC FOREIGN
- ------------------- -------- -------
ALD Communications, Inc. California Arizona
Florida
Illinois
Maryland
Michigan
Minnesota
Missouri
New York
Oregon
Texas
Washington
Bittel Telecommunications Corporation California Arizona
California
D.C.
Florida
Georgia
Hawaii
Illinois
Kansas
Maine
Maryland
Michigan
Missouri
Nevada
New Jersey
New York
Oklahoma
Oregon
Texas
Utah
Washington
Brooks Fiber Properties, Inc. Delaware California
Missouri
BFC Communications, Inc. Nevada California
Missouri
Brooks Fiber Communications-LD, Inc. Nevada California
Missouri
Brooks Fiber Communications-Midwest, Inc. Delaware Missouri
Brooks Fiber Communications-Northeast, Inc. Delaware Missouri
Brooks Fiber Communications of Arkansas, Inc. Delaware Missouri
Arkansas
Brooks Fiber Communications of Bakersfield, Inc. Delaware Missouri
California
Brooks Fiber Communications of California, Inc. Delaware Missouri
Brooks Fiber Communications of Connecticut, Inc. Delaware Missouri
Connecticut
Brooks Fiber Communications of El Paso, Inc. Delaware Missouri
Texas
<PAGE> 2
NAME OF CORPORATION DOMESTIC FOREIGN
- ------------------- -------- -------
Brooks Fiber Communications of Fresno, Inc. Delaware Missouri
California
Brooks Fiber Communications of Massachusetts, Inc. Delaware Missouri
Massachusetts
Brooks Fiber Communications of Michigan, Inc. Michigan Missouri
Brooks Fiber Communications of Mississippi, Inc. Delaware Missouri
Mississippi
Brooks Fiber Communications of Missouri, Inc. Delaware Kansas
Missouri
Brooks Fiber Communications of Nevada, Inc. Delaware Missouri
Nevada
Brooks Fiber Communications of New England, Inc. Delaware Missouri
Brooks Fiber Communications of New Mexico, Inc. Delaware Missouri
New Mexico
Brooks Fiber Communications of New York, Inc. Delaware Missouri
New York
Brooks Fiber Communications of Ohio, Inc. Delaware Missouri
Ohio
Brooks Fiber Communications of Oklahoma, Inc. Delaware Missouri
Oklahoma
Brooks Fiber Communications of Rhode Island, Inc. Delaware Missouri
Rhode Island
Brooks Fiber Communications of Sacramento, Inc. Nevada Missouri
California
Brooks Fiber Communications of San Jose, Inc. Nevada Missouri
California
Brooks Fiber Communications of Stockton, Inc. Delaware Missouri
California
Brooks Fiber Communications of Tennessee, Inc. Delaware Missouri
Tennessee
Brooks Fiber Communications of Tucson, Inc. Delaware Missouri
Arizona
Brooks Fiber Communications of Tulsa, Inc. Delaware Missouri
Oklahoma
B.T.C. Real Estate Investments, Inc. Missouri
BTC Transportation, Inc. Delaware
Fibercom of Missouri, Inc. Missouri
GLA International, Inc. Missouri
J.B. Telecom, Inc. Missouri
Silicon Valley Fiber, L.L.C. Delaware California
Missouri
Tenant Network Services, Inc. California Missouri
<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-1.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
St. Louis, Missouri
November 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
November 20, 1996
