<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 1996
REGISTRATION NO. 333-16497
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
BROOKS FIBER PROPERTIES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 43-1656187
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
------------------------------
425 Woods Mill Road South, Suite 300
Town & Country, Missouri 63017
(314) 878-1616
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
------------------------------
David L. Solomon
Executive Vice President and Chief Financial Officer
Brooks Fiber Properties, Inc.
425 Woods Mill Road South, Suite 300
Town & Country, MO 63017
(314) 878-1616
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------------
Copies to:
<TABLE>
<S> <C>
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
</TABLE>
------------------------------
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. [ ]
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
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION, DATED DECEMBER 20, 1996
4,500,000 SHARES
BROOKS FIBER PROPERTIES, INC.
$ DEPOSITARY SHARES
EACH REPRESENTING 1/100 OF A SHARE OF SERIES D CONVERSION PREFERRED STOCK
(AUTOMATICALLY CONVERTIBLE EQUITY SECURITIES)
(PAR VALUE $0.01 PER SHARE)
(SUBJECT TO CONVERSION INTO SHARES OF COMMON STOCK)
---------------------
[BROOKS FIBER LOGO]
Each of the $ Depositary Shares represents ownership of 1/100 of a share
of Series D Conversion Preferred Stock, par value $0.01 per share
("Automatically Convertible Equity Securities" or the "Securities"), of Brooks
Fiber Properties, Inc. (the "Company"), to be deposited with The Boatmen's Trust
Company, as Depositary, and entitles the holder to such proportion of all the
rights and preferences of the Security represented thereby.
The annual dividend rate payable with respect to each Depositary Share is
$ (based on the annual dividend rate for each Security of $ ), will be
cumulative from the date of issuance and will be payable quarterly in arrears,
commencing ,1997. The liquidation preference applicable to each
Depositary Share (based on the liquidation preference of each Security) is equal
to the sum of (i) the per share initial public offering price shown below and
(ii) 1/100 of the amount of any accrued and unpaid dividends on each Security.
On , 2000 (the "Mandatory Conversion Date"), each outstanding
Depositary Share will automatically convert into a number of shares of Common
Stock of the Company equal to the Depositary Shares Exchange Rate. The
Depositary Shares Exchange Rate is equal to (a) if the Current Market Price is
greater than or equal to $ per share (the "Threshold Price"), . of a
share of Common Stock per Depositary Share, (b) if the Current Market Price is
less than the Threshold Price but greater than the Initial Price, a fractional
share of Common Stock per Depositary Share having a value (determined at the
Current Market Price) equal to the Initial Price, and (c) if the Current Market
Price is less than or equal to the Initial Price, one share of Common Stock per
Depositary Share, subject in each case to adjustment in certain events. The
"Initial Price" is $ per share of Common Stock and is equal to the initial
public offering price per Depositary Share offered hereby. The "Current Market
Price" means the average Closing Price per share of Common Stock of the Company
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, the holders of Depositary Shares will have the option to convert their
Depositary Shares into shares of Common Stock of the Company at the rate of
. of a share of Common Stock per Depositary Share, subject to adjustment in
certain events.
Holders of Depositary Shares will be entitled to receive cash dividends at
an annual rate of $ per Depositary Share, whereas the Company does not plan
to pay cash dividends on the Common Stock of the Company. However, the
opportunity for equity appreciation afforded by an investment in the Depositary
Shares (and the Securities represented thereby) is less than that afforded by an
investment in the Common Stock. Holders of Depositary Shares will realize no
equity appreciation if at the Mandatory Conversion Date the Current Market Price
of the Common Stock is below the Threshold Price and less than all of the
appreciation if at such time the Current Market Price of the Common Stock is
above the Threshold Price. Holders of Depositary Shares will realize the entire
decline in equity value if at such time the Current Market Price of the Common
Stock is below the Initial Price. For a detailed description of the terms of the
Securities and the Depositary Shares, see "Description of Securities" and
"Description of Depositary Shares."
SEE "RISK FACTORS" ON PAGES 15 TO 22 FOR A DISCUSSION OF CERTAIN RISKS
ASSOCIATED WITH AN INVESTMENT IN THE DEPOSITARY SHARES.
Application has been made to list the Depositary Shares on the Nasdaq
National Market under the symbol "BFPTZ." On , 1997, the last
reported sale price of the Common Stock on the Nasdaq National Market was $
per share.
---------------------
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.
---------------------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
---------------------------------------------------------------------
<S> <C> <C> <C>
Per Depositary Share............................ $ $ $
Total(3)........................................ $ $ $
</TABLE>
- ---------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 675,000 Depositary Shares at the initial public offering
price, less the underwriting discount, solely to cover over-allotments. If
such option is exercised in full, the total Initial Public Offering Price,
Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
---------------------
The Depositary Shares are offered severally by the 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 receipts for
the Depositary Shares will be ready for delivery in book entry form only through
the facilities of The Depository Trust Company in New York, New York on or about
, 1997 against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO. SALOMON BROTHERS INC
---------------------
The date of this Prospectus is , 1997.
<PAGE> 3
[MAP OMITTED]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE DEPOSITARY
SHARES OFFERED HEREBY AND OF THE OUTSTANDING COMMON STOCK OF THE COMPANY 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.
<PAGE> 4
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 option 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 this Offering, along
with additional financing to be obtained in the future, to fund the Company's
expansion from 30 to 40 networks by the end of 1997. See "Financing Plan" below.
The Company currently has systems in 30 cities, consisting of systems in
operation in 22 cities and under construction in eight cities. The Company's
networks under construction are all expected to become operational by the end of
the second quarter of 1997. Networks are considered operational when they are
able to begin providing services to customers. The Company's networks are
located in three regions -- the Eastern Region, Central Region and Western
Region. See "Business of the Company -- Cities Served." The Company specifically
targets second and third tier markets (those with populations ranging from
250,000 to two million) with attractive demographic, economic, competitive and
telecommunications demand characteristics. The Company's networks are generally
designed to access at least 70% to 80% of the identified business, government
and institutional end user revenue base and the IXC facilities ("Points of
Presence" or "POPs") and substantially all of the central offices of the ILECs
within their markets. In accordance with the pro-competitive provisions of the
Telecommunications Act of 1996, the Company has established interconnection
agreements with ILECs for 26 of its 30 networks. The Company is also certified
as a CLEC in 26 of its 30 networks. At November 30, 1996, the Company had a
total of 20 digital telephone switches installed in its networks. Switches have
been deployed to serve substan-
3
<PAGE> 5
tially all of the Company's operating 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 November 30, 1996, the Company had a total of 931
route miles of optical fiber cable installed, 454,815 voice grade equivalent
(VGE) circuits in service, 17,914 CLEC lines installed and 831 on-net and 1,273
off-net buildings connected.
The Company plans to have systems in operation or under construction in a
total of 40 cities by the end of 1997 and 50 cities by the end of 1998. The
Company expects its expansion into additional cities will be accomplished by the
acquisition of existing networks as well as the construction of new networks.
For a discussion of the steps the Company takes in acquiring and developing new
networks, see "Business of the Company -- Network Acquisition, Development and
Design" and "-- Network Construction." See also "Risk Factors -- Significant
Future Capital Requirements; Substantial Indebtedness," "-- Risks Associated
with Implementation of Growth Strategy" and "-- Risks Associated with Possible
Acquisitions."
The Company believes that there are attractive return opportunities for
CLECs in second and third tier markets due to the combination of (i) continuing
pro-competitive regulatory changes that have increased the addressable market
for CLEC services and (ii) the competitive dynamics which, until 1994, focused
CLEC network development primarily in larger markets. See "Business of the
Company -- CLEC Market Potential," "The Competitive Local Telecommunications
Services Industry" and "Regulatory Overview."
The Company's current annualized revenues, based on September 1996
revenues, are $60.1 million, as compared with total revenues in 1995 of $14.2
million ($23.1 million on a pro forma basis giving effect to the acquisition of
Brooks Telecommunications Corporation ("BTC") on January 2, 1996 and the
acquisition of City Signal, Inc. (the "City Signal Acquisition") on January 31,
1996) and total revenues of $2.8 million in 1994, the Company's first full year
of operation. Since inception, the Company's operations have resulted in
earnings (losses) before minority interests, interest, taxes, depreciation and
amortization (EBITDA) of ($204,000) for the period from November 10, 1993
through December 31, 1993, ($2.7) million for the year ended December 31, 1994,
($4.4) million for the year ended December 31, 1995 and ($9.9) million for the
nine months ended September 30, 1996. As of September 30, 1996, the Company had
an accumulated deficit of $40.4 million. As of September 30, 1996, on a pro
forma adjusted basis giving effect to (i) the proposed sale of $
Depositary Shares offered hereby, (ii) the receipt of $217.2 million pursuant to
the Company's 11 7/8% Senior Discount Note Offering (see "Financing Plan"
below), (iii) the exchanges 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 $7.7 million upon exercises of warrants and options to
purchase an aggregate of 1,427,269 shares of Common Stock since September 30,
1996, the Company had cash, cash equivalents and marketable securities of $
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
<PAGE> 6
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
5
<PAGE> 7
Company for central office collocation and unbundling of local services.
The Company believes that implementation of these and other pro-competitive
policies creates favorable opportunities to pursue more aggressively the
provision of local switched services. The Company has a total of 20 digital
telephone switches installed in its operating networks and plans to
leverage its networks and customer relationships by offering local dial
tone, switched access termination and origination services, centrex and
desktop products. The Company currently offers such services and products
in substantially all of its operating networks and expects to offer such
services and products in all of its operating networks by the end of the
second quarter of 1997. The Company has increased the number of CLEC lines
in service from 3,187 at December 31, 1995 (on a pro forma basis giving
effect to the City Signal Acquisition) to 17,914 at November 30, 1996, with
annualized CLEC revenues increasing from $2.5 million based on December
1995 revenues to $10.2 million based on September 1996 revenues. See
"Business of the Company -- Current Products and Services."
EXPAND ENHANCED SERVICE OFFERINGS. Consistent with its strategy of
aggressively pursuing switched services opportunities, the Company is
expanding its capabilities to provide flexible, enhanced services that
complement its switch-based services. Such enhanced services include, among
others, high speed video conferencing, frame relay and ATM-based packet
transport services and Internet access products. The Company is currently
offering such services in certain markets and expects to offer such
services in all of its operating networks by the end of 1997. The Company
also plans to continue to upgrade and add to its systems and services as
technology and regulations permit. See "Business of the Company -- Planned
Products and Services."
CONTINUE TO BUILD OUT EXISTING SYSTEMS. The Company strives to build a
sufficient revenue base in each of its systems to generate the cash flow
necessary to enable it to devote more resources to developing and expanding
its systems as opposed to funding initial operating losses. As a result of
favorable regulatory developments and the Company's initial favorable
experiences with the provision of local switched services, the Company has
determined to more rapidly develop and expand its systems. Its plans
include increasing the number of cities served, expansion of its existing
networks and accelerating the deployment of switches and ILEC central
office collocations. The Company believes that its access to significant
capital and technical resources and its ongoing efforts to develop close
working relationships with its IXC customers (see "--Build on strategic
relationships" below) will enable it to more rapidly develop and expand its
systems, add to its service offerings and establish the strong customer
relationships necessary to solidify its competitive position in its
selected markets.
CONTINUE TO INCREASE THE NUMBER OF CITIES SERVED. The Company recently
achieved its long-held strategic objective of having systems in operation
or under construction in a total of 30 cities by the end of 1996. The
Company plans to have systems in operation or under construction in a total
of 40 cities by the end of 1997 and a total of 50 cities by the end of
1998. The Company's expansion into additional cities is expected to be
accomplished by the acquisition of existing networks as well as the
development of new networks. See "Business of the Company -- Network
Acquisition, Development and Design" and "-- Network Construction." By
adding networks, the Company believes it can increase revenues and obtain
economies of scale in its operating costs.
BUILD ON STRATEGIC RELATIONSHIPS. In order to capitalize on the
competitive dynamics of the changing IXC/ILEC relationships, the Company
has established close business alliances with major IXCs, including joint
ventures and preferred vendor relationships. In accordance with this
strategy, (1) in September 1995, the Company and MCImetro Access
Transmission Services, Inc. ("MCImetro"), a wholly-owned subsidiary of MCI
Communications Corporation ("MCI"), formed a joint venture company to
operate and expand the Company's existing networks in San Jose, California
and its environs, and in May and June 1996, the Company and MCImetro
entered into agreements which provide that, until September 30, 2001, the
Company will be MCImetro's preferred provider of certain local access
services in a number of the Company's
6
<PAGE> 8
markets and pursuant to which MCImetro acquired a minority investment in
the Company's Sacramento, California network, and made an additional
investment in the San Jose joint venture company (see "Recent Developments"
below), and (2) in December 1995, the Company concluded a national
preferred vendor agreement with AT&T Communications, Inc. ("AT&T
Communications"), a wholly-owned subsidiary of AT&T Corp. ("AT&T"),
pursuant to which the Company expects to become AT&T Communications'
preferred supplier of local access services in most of the Company's
markets. The Company believes preferred vendor relationships with IXCs
provide opportunities to leverage its partners' sales channels and market
support to sell the Company's products and services and expand the
Company's potential revenue base. In addition, the Company believes that
relationships with IXCs facilitate its entry into new markets by providing
access between the IXCs and their customers. The Company has organized a
national account marketing organization to manage such relationships. The
Company believes this marketing effort, along with its number of cities
served, financial resources and telecommunications expertise, position it
well to develop and maintain these strategic relationships. See "Business
of the Company -- Strategic Relationships."
LEVERAGE UPON GLA'S SIGNIFICANT TELECOMMUNICATIONS INFRASTRUCTURE
CAPABILITIES. GLA International, Inc. ("GLA"), a wholly-owned subsidiary of
the Company, offers a full range of consulting, management, engineering and
information system solutions for telecommunications companies. GLA provides
a full range of network engineering, construction, design and strategic
planning services, as well as financial and management software products,
including specifically designed software for billing systems, toll rating,
plant records and financial applications. GLA's capabilities also serve as
an internal source for the telecommunications infrastructure support needed
for the Company's CLEC business.
RECENT DEVELOPMENTS
The Company has recently completed two acquisitions of long distance
service providers for small and medium-sized business customers in California to
complement its existing long distance and facilities management resale
businesses. Effective July 1, 1996, the Company acquired the stock of ALD
Communications, Inc. ("ALD"), a switchless reseller of long distance services
and a shared tenant service provider of telecommunications services primarily to
customers in the San Francisco, California area with aggregate annualized
revenues of approximately $6.4 million, based on August 1996 results. Effective
September 1, 1996, the Company also acquired Bittel Telecommunications
Corporation ("Bittel"), a switch-based long distance reseller serving the San
Francisco and Los Angeles markets with annualized revenues of approximately $9
million, based on July 1996 results. By acquiring ALD and Bittel, the Company
not only added businesses that complement its own long distance and facilities
management resale businesses but was also able to increase its end user sales
force.
The Company believes that Internet and Intranet products and services
complement the Company's existing telecommunications services and present the
Company with potential revenue opportunities, through both the retention of
existing customers and the addition of new customers. To pursue such
opportunities, on June 25, 1996, the Company formed a strategic alliance with
World-Net Access, Inc. ("World-Net"), a privately-held development stage company
founded to form a national ISP network. The Company has invested a total of $20
million for a 25.5% fully-diluted interest in World-Net and it is possible that
the Company may commit additional funds in furtherance of this strategic
alliance. The Company intends that both companies will seek ways to work
together to provide customer oriented Internet and Intranet communications
solutions. The Company plans to develop and offer a wide range of
Internet-related services to users of World-Net's national ISP network,
including various dial-up and dedicated Internet access options.
In accordance with the provisions of the agreements between the Company and
MCImetro (see "Corporate Strategy -- Build on strategic relationships" above),
on October 10, 1996, MCImetro
7
<PAGE> 9
exchanged the agreed value of its investments in subsidiaries of the Company for
958,720 shares of the Company's Common Stock.
On October 24, 1996, the Company and MaineCom Services, Inc. ("MaineCom"),
a subsidiary of Central Maine Power Company, entered into a letter of intent to
form a joint venture company, to be owned 60% by the Company and 40% by
MaineCom, for the purposes of constructing, owning, operating and developing
networks initially in Portland, Maine, and Nashua and Manchester, New Hampshire,
and other markets in Maine and New Hampshire as may be agreed upon by the
Company and MaineCom in the future. The proposal is subject to the negotiation
of definitive agreements approved by the respective Boards of Directors of the
Company and MaineCom.
On November 7, 1996, the Company raised net proceeds of approximately
$217.2 million through the sale of $400.0 million aggregate principal amount of
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 1,569,599 shares upon exercise of warrants and options. See "Business
of the Company -- Strategic Relationships," "Capitalization," "Certain
Relationships and Related Transactions," and "Unaudited Pro Forma Combined
Consolidated Financial Information." The gross proceeds to the Company from
this Offering are estimated to be approximately $ million. See "Use of
Proceeds."
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 acquisitions, as well as its needs for the
development and expansion of its networks. Following initial market entry, the
Company's capital deployment plans for the development and expansion of its
networks have been largely demand driven, including capital spending 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
8
<PAGE> 10
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 this Offering, 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 "Use of Proceeds."
The Company's longer-term strategy contemplates that the Company will have
networks serving a total of 50 cities in operation or under construction by the
end of 1998, which will require substantial additional capital. The Company's
expansion into additional cities is expected to be accomplished by the
acquisition of existing networks as well as the development of new networks. The
Company will continue to evaluate additional revenue opportunities in each of
its markets and other strategic initiatives, and, as attractive additional
opportunities may develop, the Company plans to make additional capital
investments in its networks that might be required to pursue such opportunities,
such as costs required to extend a network or install additional electronics to
meet specific customer requirements. The Company expects to meet its additional
capital needs with the proceeds from the sale of additional equity securities,
additional borrowings under existing and future credit facilities and joint
ventures. However, there can be no assurance that the Company will be able to
generate or raise sufficient capital to enable it to fully realize all of its
strategic objectives.
The Company's expectations of required future capital expenditures are
based on the Company's current estimates. There can be no assurance that actual
expenditures will not be significantly higher or lower. See "Risk Factors --
Significant Future Capital Requirements; Substantial Indebtedness" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus which are not historical facts
are forward-looking statements that involve risks and uncertainties. Management
wishes to caution the reader that these forward-looking statements, such as the
Company's plans to have systems in operation or under construction in a total of
40 cities by the end of 1997 and 50 cities by the end of 1998 and its
expectations for the deployment of switches serving all of its operating
networks by the end of the second quarter of 1997, are only predictions; actual
events or results may differ materially as a result of risks facing the Company.
Such risks include, but are not limited to, the Company's ability to access
markets, identify, finance and complete suitable acquisitions, design fiber
optic backbone routes, install cable and facilities, including switching
electronics, and obtain rights-of-way, building access rights and any required
governmental authorizations, franchises and permits, all in a timely manner, at
reasonable costs and on satisfactory terms and conditions, as well as favorable
regulatory, legislative and judicial developments.
THE OFFERING
Securities Offered.............. 4,500,000 $ Depositary Shares
("Depositary Shares"), each representing
ownership of 1/100 of a share of Series D
Conversion Preferred Stock, par value $0.01
per share (each a "Security") and entitling
the owner to such proportion of all the
rights, preferences and privileges of the
Security represented thereby.
9
<PAGE> 11
Dividends....................... Annual cumulative dividends at a rate of
$ with respect to each Depositary Share
(equivalent to a rate of $ per annum
for each Security) from the date of initial
issuance, payable quarterly in arrears on the
first day of , , and
, commencing , 1997 or, if
any such date is not a business day, on the
next succeeding business day. So long as any
Securities are outstanding, the Company may
not (a) declare or pay any dividends (other
than dividends payable in Common Stock or
other shares of the Company ranking junior to
the Securities) to holders of Common Stock or
shares of the Company of any other class
ranking on a parity with or junior to the
Securities, or (b) make any distributions of
assets (directly or indirectly, by purchase,
redemption or otherwise) to the holders of
Common Stock or shares of the Company of any
other class ranking on a parity with or
junior to the Securities unless all accrued
and unpaid dividends on the Securities,
including the full dividends for the then
quarterly dividend period, shall have been
paid or declared and funds sufficient for
payment thereof set apart.
Mandatory Conversion............ On the Mandatory Conversion Date,
, 2000, unless previously
converted at the option of the holder, each
outstanding Depositary Share will
automatically convert into a number of shares
of Common Stock of the Company equal to the
Depositary Shares Exchange Rate, plus the
right to receive an amount in cash equal to
any and all accrued and unpaid dividends
(other than dividends declared and payable to
holders of record on a prior date) to the
Mandatory Conversion Date, whether or not
declared. The "Depositary Shares Exchange
Rate" is equal to (a) if the Current Market
Price is greater than or equal to $ per
share (the "Threshold Price"), of a
share of Common Stock per Depositary Share,
(b) if the Current Market Price is less than
the Threshold Price but greater than the
Initial Price, a fractional share of Common
Stock per Depositary Share having a value
(determined at the Current Market Price)
equal to the Initial Price, and (c) if the
Current Market Price is less than or equal to
the Initial Price, one share of Common Stock
per Depositary Share, subject in each case to
adjustment in certain events. The "Initial
Price" is $ per share of Common Stock and
is equal to the initial public offering price
per Depositary Share shown on the cover page
of this Prospectus. The "Current Market
Price" means the average Closing Price per
share of Common Stock of the Company on the
20 Trading Days immediately prior to, but not
including, the Mandatory Conversion Date.
Because the price of the Common Stock is
subject to market fluctuations, the value of
the Common Stock that would be received by an
owner of Depositary Shares upon their
automatic conversion into Common Stock may be
more or
10
<PAGE> 12
less than the amount paid for the Depositary
Shares offered hereby.
Optional Conversion............. At any time after , 1997 and
prior to the Mandatory Conversion Date, each
Depositary Share (and the proportion of a
Security represented thereby) is convertible
at the option of the holder thereof into
of a share of Common Stock of the
Company, subject to adjustment in certain
events (such conversion rate being equivalent
to shares of Common Stock for each
Security). Holders of Depositary Shares at
the close of business on the record date for
any payment of dividends will be entitled to
receive the dividend payable thereon,
provided, however, that such holders who
thereafter convert Depositary Shares prior to
the payment date for such dividend must pay
an amount in cash equal to the proportionate
amount of such dividend accruing between the
date of conversion and such dividend payment
date. Except as described above, upon the
optional conversion of Depositary Shares, the
holder will not receive any value for any
accrued and unpaid dividends, whether or not
in arrears, on such Depositary Shares or for
any accrued and unpaid dividends or
distributions on the shares of Common Stock
issued upon such conversion.
Enhanced Dividend Yield; Less
Equity Appreciation............. Holders of Depositary Shares will be entitled
to receive cash dividends at an annual rate
of $ per Depositary Share, whereas the
Company does not plan to pay cash dividends
on the Common Stock of the Company. However,
the opportunity for equity appreciation
afforded by an investment in the Depositary
Shares (and the Securities represented
thereby) is less than that afforded by an
investment in the Common Stock. Holders of
Depositary Shares will realize no equity
appreciation if at the Mandatory Conversion
Date the Current Market Price of the Common
Stock is below the Threshold Price and less
than all of the appreciation if at such time
the Current Market Price of the Common Stock
is above the Threshold Price. Holders of
Depositary Shares will realize the entire
decline in equity value if at such time the
Current Market Price of the Common Stock is
below the initial public offering price shown
on the cover page of this Prospectus.
Voting Rights................... In the event of a default in the payment, in
whole or in part, of six quarterly dividends
payable on the Securities or on any other
series of Preferred Stock ranking on a parity
with the Securities are in arrears, whether
or not consecutive, the holders of the
Securities, together with the holders of any
such series of Preferred Stock, voting as a
single class without regard to series, will
be entitled to elect two directors to the
Company's Board of Directors to serve in
addition to the directors otherwise elected
until all dividends in arrears and current
dividends have been paid
11
<PAGE> 13
or declared and set aside for payment. The
owners of Depositary Shares will be entitled
to direct the voting of the Securities
represented thereby.
Liquidation Preference and
Ranking......................... The liquidation preference of each Security
is an amount equal to the sum of (i) one
hundred times the initial public offering
price per Depositary Share shown on the cover
page of this Prospectus (equivalent to a
liquidation preference per Depositary Share
of 100 percent of such initial public
offering price) and (ii) all accrued and
unpaid dividends thereon, whether or not
declared, to the date of final distribution
to the holders of the Securities. The
Securities will rank senior to the Series C
Junior Participating Preferred Stock and on a
parity with all other series of Preferred
Stock as to the payment of dividends and the
distribution of assets upon liquidation,
dissolution or winding up, unless the terms
of any such series provide otherwise.
Listing......................... Application has been made to list the
Depositary Shares on the Nasdaq National
Market under the symbol BFPTZ.
Common Stock outstanding after
the Offering(1).................
Ticker Symbol of Common Stock... BFPT.
- ---------------
(1) Includes 4,500,000 shares of Common Stock issuable upon mandatory conversion
of the Depositary Shares offered hereby at the maximum Depositary Shares
Exchange Rate of one share of Common Stock per Depositary Share. See
"Description of Securities -- Automatic Conversion of Securities." Excludes
3,393,366 shares of Common Stock issuable upon exercise of stock options and
warrants outstanding at December 22, 1996, of which 1,929,073 shares were
subject to warrants and options exercisable within 60 days at a weighted
average exercise price of $10.00 per share. See "Description of Capital
Stock -- Authorized Stock."
CONCURRENT OFFERING
On behalf of certain of the Company's stockholders, the Company has filed a
Registration Statement on Form S-1 with the Securities and Exchange Commission
to register 7,062,887 shares (assuming no exercise of any over-allotment
options) of Common Stock to be sold by such stockholders in a firm-commitment
public offering (the "Secondary Offering"). The Offering made hereby and the
Secondary Offering are not conditioned on each other.
RISK FACTORS
Prospective investors should carefully consider the matters set forth under
"Risk Factors" on pages 15 through 22.
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.
12
<PAGE> 14
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
YEAR ENDED DECEMBER 31, MONTHS
PERIOD FROM ---------------------------------- ENDED
NOVEMBER 10, PRO FORMA SEPTEMBER 30,
1993(1) TO 1995 1996
DECEMBER 31, ----------- -------------
1993 1994 1995
------------ ------- ---------- (UNAUDITED) (UNAUDITED)
NINE
MONTHS
ENDED
SEPTEMBER 30,
1996
-------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA AND RATIOS) (UNAUDITED)
<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 75,118 137,053
Ratio of earnings to combined fixed charges and
preferred stock dividends(5)................. -- -- -- -- -- --
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
AS OF AS OF AS OF SEPTEMBER 30,
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, 1996
1994 1995 1996 1996 1996 PRO FORMA AS
------- -------- ----------- ----------- ------------- ADJUSTED(6)
-------------
(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(7) 330,963(7) 331,179(7) (7)
Total stockholders' equity(8)................... 36,699 93,455 125,264 300,535 290,759
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 AS OF
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, NOVEMBER 30,
1994 1995 1996 1996 1996 1996
------- -------- ----------- ----------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NETWORK DATA:
Cities in operation.............................. 5 11 13 18 22 22
Cities under construction........................ 6 10 12 8 8 8
On-net buildings connected....................... 62 216 495 644 734 831
Route miles...................................... 107 262 506 705 787 931
Fiber miles...................................... 6,437 17,111 26,659 43,152 50,572 61,323
VGE circuits(9).................................. 59,208 122,617 165,122 243,171 358,640 454,815
Switches installed............................... -- 1 3 9 17 20
CLEC lines in service............................ -- 3,187(10) 5,802 9,226 13,107 17,914
Employees........................................ 89 165 456 571 711 776
</TABLE>
- ---------------
(1) The Company was organized on November 10, 1993.
(2) Minority interests represent the ownership interests of minority investors
in certain of the Company's subsidiaries. Since September 30, 1996, the
Company has issued an aggregate of 1,192,980 shares of Common Stock in
exchange for all of the Company's then-existing minority interests.
(3) Pro forma net loss per share has been computed using the number of shares
of Common Stock and Common Stock equivalents outstanding. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, shares
issued at prices below the May 1996 initial public offering price of $27.00
per share, and stock options and warrants granted with exercise prices
below the initial public offering price during the twelve-month period
preceding the date of the initial filing of the Company's Registration
Statement relating to the IPO have been included in the calculation of
Common Stock equivalent shares for the nine months ended September 30,
1996, using the treasury stock method, as if such shares, options and
warrants were outstanding for all of 1995 and for the entire six-month
period ended June 30, 1996. For the three months ended September 30, 1996,
the weighted average number of shares was based on Common Stock outstanding
and does not include common stock equivalents as their inclusion would be
anti-dilutive.
(4) EBITDA consists of net income (loss) before minority interests, interest,
income taxes, depreciation and amortization. It is a measure commonly used
in the telecommunications industry and is presented to assist in
understanding the Company's operating results. However, it is not intended
to represent cash flow in accordance with generally accepted accounting
principles. See the Company's Consolidated Statements of Cash Flows
appearing elsewhere in this Prospectus.
(5) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends: (i) earnings consist of loss before income
taxes and minority interest, plus fixed charges excluding capitalized
interest, (ii) fixed charges consist of interest expensed and capitalized,
plus amortization of deferred financing costs, plus the portion of rent
expense under operating leases deemed by the Company to be representative
of the interest factor and (iii) no dividends have accrued or been paid or
payable on any preferred stock. For the period from November 10, 1993 to
December 31, 1993, the years ended December 31, 1994 and December 31, 1995
and the three and nine months ended September 30, 1996, the Company's
earnings were insufficient to cover fixed charges by $205,000, $3,975,000,
$10,636,000, $10,442,000 and $27,977,000, respectively. On a pro forma
basis, for the year ended December 31, 1995, the Company's earnings would
have been insufficient to cover fixed charges by $18,759,000.
(6) 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 sale of the
Depositary Shares offered hereby. See "Capitalization."
(7) Amount represents the total of Common Stock, additional paid-in capital,
and Common Stock subject to redemption.
(8) Amount represents paid-in capital less accumulated deficit. See note (7)
above.
(9) Voice grade equivalent circuits.
(10) On a pro forma basis giving effect to the City Signal Acquisition.
14
<PAGE> 16
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 Depositary Shares 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 the Depositary Shares and the Common
Stock. 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 or pay
dividends on the Depositary Shares 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 or pay dividends on the Depositary Shares.
SIGNIFICANT FUTURE CAPITAL REQUIREMENTS; SUBSTANTIAL INDEBTEDNESS
Expansion of the Company's existing networks and services, the acquisition
and development of new networks and services and the funding of initial
operating losses will require significant capital expenditures. The Company
plans to have systems in operation or under construction in a total of 40 cities
by the end of 1997 and 50 cities by the end of 1998. The Company has deployed
switches serving substantially all of the Company's operating networks. The
Company is also adding capabilities to provide enhanced services such as high
speed video conferencing, frame relay and ATM-based packet transport services
and Internet access products and expects to offer such services in all of its
operating networks by the end of 1997. The Company currently intends to fund its
expansion from its initial 30 networks to 40 networks and the deployment of
switches in all of
15
<PAGE> 17
such networks with full capabilities for local dial tone and switched access
termination and origination services, with the net proceeds from this Offering,
together with additional financing to be obtained in the future. See "Use of
Proceeds." 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 $50 million aggregate
principal amount of subsidiary secured indebtedness to parent company secured
indebtedness on November 12, 1996, (i) the total amount of outstanding
liabilities of the Company (parent only), including trade payables, would have
been approximately $546.8 million, of which $50 million would have been secured
obligations, and (ii) the total amount of outstanding liabilities of the
Company's subsidiaries, including trade payables, would have been $14.1 million,
of which $0.1 million would have represented secured obligations. The Company
expects to fund at least a portion of its capital needs through additional
borrowings, and there can be no assurance as to the Company's ability to service
its existing or future indebtedness. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
HOLDING COMPANY STRUCTURE
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 "-- Restrictions on 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.
16
<PAGE> 18
The Company expects to continue to enhance its systems in order to offer
its customers switched access termination and origination services and local
dial tone, centrex and desk top products, as well as other enhanced services in
all of its systems as quickly as practicable and as permitted by applicable
regulations. The Company believes its ability to offer, market and sell these
additional products and services will be important to the Company's ability to
meet its long term strategic growth objectives, but is dependent on the
Company's ability to obtain the needed capital, favorable regulatory,
legislative and judicial developments and the acceptance of such products and
services by the Company's customers. No assurance can be given that the Company
will be able to obtain such capital or that such developments or acceptance will
occur.
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
The Company expects a substantial part of its future growth will come from
acquisitions. The acquisition of additional systems will depend on the Company's
ability to identify suitable acquisition candidates, to negotiate acceptable
terms for their acquisition and to finance any such acquisitions. The Company
will also be subject to competition for suitable acquisition candidates. Any
acquisitions, if made, could divert the resources and management time of the
Company and would require integration with the Company's existing networks and
services. As a result, there can be no assurance that any such acquisitions will
occur or that any such acquisitions, if made, would be made in a timely manner
or on terms favorable to the Company or would be successfully integrated into
the Company's operations.
COMPETITION
In each of the cities served by the Company's networks, the services
offered by the Company compete principally with the services offered by the ILEC
serving that area. ILECs have long-standing relationships with their customers,
have the potential to subsidize competitive services from monopoly service
revenues, and benefit from favorable state and federal regulations. While the
FCC's Interconnection Decisions and the Telecommunications Act of 1996 provide
increased business opportunities to CLECs such as the Company, they also provide
the ILECs with increased pricing flexibility for their services and other
regulatory relief, which could also have a material adverse effect on CLECs,
including the Company. If the ILECs are allowed by regulators to lower their
rates for their services, engage in substantial volume and term discount pricing
practices for their customers, or seek to charge CLECs substantial fees for
interconnection to the ILECs' networks, the income of CLECs, including the
Company, could be materially adversely affected.
The Company also faces, and expects to continue to face, competition from
other current and potential market entrants, including other CLECs, AT&T, MCI,
Sprint Corporation ("Sprint"), WorldCom, Inc. ("WorldCom") and other IXCs, cable
television companies, electric utilities, microwave carriers, wireless telephone
system operators and private networks built by large end users. In January 1994,
MCI announced that its MCImetro unit would invest more than $2.0 billion in
fiber optic rings and local switching equipment in major metropolitan markets in
the United States to provide direct connection to its customers and to provide
alternative local telephone services to other IXCs. The recently announced
acquisition of MCI by British Telecommunications could increase the resources
available to MCI for the above purposes. AT&T has also indicated its 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
17
<PAGE> 19
and cable companies, increase the likelihood that barriers to local exchange
competition will be removed more quickly than had earlier been anticipated. The
introduction of such competition, however, also means that ILECs may be
authorized to provide long distance services under provisions of the
Telecommunications Act of 1996 more quickly than had earlier been anticipated.
When ILECs are permitted to provide such services, they will ultimately be in a
position to offer single source service. See "Regulatory Overview."
The Company also competes with equipment vendors and installers, and
telecommunications management companies with respect to certain portions of its
business.
Many of the Company's current and potential competitors have financial,
personnel and other resources substantially greater than those of the Company,
as well as other competitive advantages over the Company. See "Competition" for
more detailed information on the competitive environment faced by the Company.
DEPENDENCE ON BUSINESS FROM IXCS
For the three months ended September 30, 1996, approximately 21% of the
Company's consolidated revenues were attributable to access services provided to
IXCs. Approximately 12% of such consolidated revenues were attributable to
services provided to MCI and its affiliates. The loss of access revenues from
IXCs in general or the loss of MCI as a customer could have a material adverse
effect on the Company's business. See "Business of the Company -- Strategic
Relationships" and "-- Sales and Marketing -- Wholesale Customers."
In addition, the Company's growth strategy assumes increased revenues from
IXCs following the deployment of switches on its networks and the provision of
switched access origination and termination services. There is no assurance that
the IXCs will continue to increase their utilization of the Company's services,
or will not reduce or cease their utilization of the Company's services, which
could have a material adverse effect on the Company.
REGULATION
The Company is subject to varying degrees of federal, state and local
regulation. The Company is not currently subject to price cap or rate of return
regulation, nor is it currently required to obtain FCC authorization for the
installation, acquisition or operation of its network facilities. However, the
FCC has determined that non-dominant carriers, such as the Company and its
subsidiaries, are required to file interstate tariffs on an ongoing basis. The
Company's subsidiaries that provide intrastate services are also generally
subject to certification and tariff filing requirements by state regulators.
Challenges to these tariffs by third parties could cause the Company to incur
substantial legal and administrative expenses. Although the trend in federal and
state regulation appears to favor increased competition, no assurance can be
given that changes in current or future regulations adopted by the FCC or state
regulators or other legislative or judicial initiatives relating to the
telecommunications industry would not have a material adverse effect on the
Company. In particular, the Company's belief that the entire $102 billion local
exchange market will open to CLEC competition depends upon continued favorable
pro-competitive regulatory changes, and the ability of the Company to compete in
these new market segments may be adversely affected by the greater pricing
flexibility and other regulatory relief granted to ILECs under the
Telecommunications Act of 1996. The partial stay of recent FCC rules that set
forth the amounts that ILECs can charge CLECs for access to the ILEC's networks
may slow the pace of open competition initiatives and result in individual
states having a more prominent role in the opening of local exchange markets to
competition. However, the Company believes that the partial stay will not have
any material adverse effect on the Company because the Company has in effect (or
expects to have in effect after state PUC arbitrations expected to be completed
by early 1997) interconnection agreements with the
18
<PAGE> 20
ILECs in all of its markets. See "Regulatory Overview" for more detailed
information on the regulatory environment in which the Company operates.
NEED TO OBTAIN AND MAINTAIN PERMITS AND RIGHTS-OF-WAY
In order to acquire and develop its networks, the Company must obtain local
franchises and other permits, as well as rights to utilize underground conduit
and pole space and other rights-of-way from entities such as ILECs and other
utilities, railroads, long distance providers, state highway authorities, local
governments and transit authorities. The Telecommunications Act of 1996 requires
that local governmental authorities treat telecommunications carriers in a
competitively neutral, non-discriminatory manner, and that most utilities,
including most ILECs and electric companies, afford CLECs access to their poles
and conduits and rights-of-way at reasonable rates on non-discriminatory terms
and conditions. There can be no assurance that the Company will be able to
maintain its existing franchises, permits and rights or to obtain and maintain
the other franchises, permits and rights needed to implement its business plan
on acceptable terms. Although the Company does not believe that any of the
existing arrangements will be cancelled, or will not be renewed, as needed,
cancellation or non-renewal of certain of such arrangements could materially
adversely affect the Company's business in the affected city. In addition, the
failure to enter into and maintain any such required arrangements for a
particular network, including a network which is already under construction, may
affect the Company's ability to develop that network. See "Business of the
Company -- Network Construction."
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. While the Company believes that for the foreseeable future these
changes will neither materially affect the continued use of optical fiber
telecommunications networks nor materially hinder the Company's ability to
acquire necessary technologies, the effect of technological changes on the
businesses of the Company cannot be predicted. Thus, there can be no assurance
that technological developments will not have a material adverse effect on the
Company.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a relatively small number of senior
management and operating personnel, the loss of certain of whom could have a
material adverse effect on the Company. See "Management." The Company believes
that its ability to manage its planned growth successfully will depend in large
part on its continued ability to attract and retain highly skilled and qualified
personnel. None of the Company's key executives has a written employment
agreement or non-compete agreement with the Company, nor does the Company
maintain key person life insurance on such persons. See "Management" for
detailed information on the Company's management and directors.
LIMITED APPRECIATION POTENTIAL; COMMON STOCK DEPRECIATION RISK
Although holders of the Depositary Shares will be entitled to receive cash
dividends at an annual rate of $ per Depositary Share and the Company does
not currently pay or plan to pay cash dividends on the Common Stock, there can
be no assurance that the yield on the Depositary Shares will be higher than the
dividend yield on the Common Stock if the Company should determine prior to the
Mandatory Conversion Date to pay cash dividends on the Common Stock. In
addition, because each Depositary Share will be mandatorily converted into less
than one share of Common Stock if the Current Market Price exceeds the Initial
Price, the Depositary Shares have more limited appreciation potential than the
Common Stock. Therefore, the Depositary Shares may trade below the value of the
Common Stock if the Common Stock appreciates in value.
19
<PAGE> 21
The value of the Common Stock to be received by holders of Depositary
Shares on the Mandatory Conversion Date (and any cash received in lieu of
fractions of shares of Common Stock) may be less than the amount paid for the
Depositary Shares. Holders of Depositary Shares will realize the entire decline
in value if the Current Market Price at the Mandatory Conversion Date is less
than the Initial Price, which is shown on the cover page hereof. If the Current
Market Price at the Mandatory Conversion Date is above the Initial Price but
below the Threshold Price, holders of Depositary Shares will realize no equity
appreciation. If the Current Market Price at the Mandatory Conversion Date is
above the Threshold Price, holders of Depositary Shares will realize less than
all of the equity appreciation above the Threshold Price.
DILUTION ADJUSTMENTS; STOCKHOLDER RIGHTS
The number of shares of Common Stock that holders of the Depositary Shares
are entitled to receive upon conversion of the Securities (and the related
Depositary Shares) is subject to adjustment for certain events arising from
stock splits and combinations, stock dividends and certain other actions of the
Company that modify its capital structure. See "Description of
Securities -- Conversion Adjustments; -- Adjustment for Certain Consolidations
or Mergers." The number of shares to be received by such holders may not be
adjusted for other events, such as offerings of Common Stock for cash or in
connection with acquisitions, that may adversely affect the price of the Common
Stock and, because of the relationship of the amount to be received pursuant to
the terms of the Securities to the price of the Common Stock, such other events
may adversely affect the trading price of the Depositary Shares. There can be no
assurance that the Company will not take any of the foregoing actions, or that
it will not make offerings of, or that major stockholders will not sell any,
Common Stock in the future, or as to the amount of any such offering or sales.
See "-- Shares of Common Stock Eligible for Future Sale; Possible Adverse Effect
on Future Market Prices" and "Principal Stockholders."
TRADING VALUE; LISTING
The Securities are innovative securities, and there has been no public
market for the Securities or the Depositary Shares prior to this Offering. It is
not possible to predict how the Depositary Shares will trade in the secondary
market. The trading price of the Depositary Shares may vary considerably prior
to the Mandatory Conversion Date due to, among other things, fluctuations in the
price of the Common Stock (which may occur due to changes in the Company's
financial condition, results of operations or prospects, or because of complex
and interrelated political, economic, financial and other factors that can
affect the capital markets generally, the stock exchanges or quotation systems
on which the Common Stock is traded and the market segment of which the Company
is a part) and fluctuations in interest rates and other factors that are
difficult to predict and beyond the Company's control. The Company believes,
however, that because of the yield on the Depositary Shares and the formula for
determining the number of shares of Common Stock to be delivered on the
Mandatory Conversion Date, the Depositary Shares will tend to trade at a premium
to the market value of the Common Stock if the Common Stock price falls below
the Initial Price and at a discount to the market value of the Common Stock if
the Common Stock price rises above the Initial Price.
The Underwriters currently intend, but are not obligated, to make a market
in the Depositary Shares. There can be no assurance that a secondary market will
develop or, if a secondary market does develop, that it will provide the holders
of Depositary Shares with liquidity of investment or that it will continue for
the life of the Depositary Shares. Application has been made to list the
Depositary Shares on the Nasdaq National Market, but there can be no assurance
that the Depositary Shares will not later be delisted or that trading in the
Depositary Shares on the Nasdaq National Market will not be suspended. In the
event of such delisting or suspension of trading, the Company will apply for
listing of the Depositary Shares on a national securities exchange or for
quotation on another trading market. If the Depositary Shares are not listed or
traded on any securities exchange or
20
<PAGE> 22
trading market, of if trading of the Depositary Shares is suspended, pricing
information for the Depositary Shares may be more difficult to obtain, and the
price and liquidity of the Depositary Shares may be adversely affected.
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, accordingly,
the market price of the Depositary Shares and make it more difficult for the
Company to raise funds through future equity offerings. As noted above under
"Prospectus Summary -- Concurrent Offering," shares of Common Stock
are being sold in the concurrent Secondary Offering. At the request of the
representatives of the Underwriters in the Secondary Offering, all shares of
Common Stock (including shares issuable upon exercise of outstanding options and
warrants to purchase shares of Common Stock) held by the Company's stockholders
who have committed to sell shares in the Secondary Offering 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 the
Secondary Offering without the prior written consent of the designated
representative of the Underwriters, except in the Secondary Offering or 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 this Offering and the
Secondary Offering. (see "Principal 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 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 2,983,506 shares of Common Stock outstanding as of December 22,
1996, of which 1,519,213 are exercisable within 60 days of December 22, 1996,
and exercisable warrants to purchase 409,860 shares of Common Stock outstanding
as of December 22, 1996. See "Principal Stockholders," "Shares Eligible for
Future Sale" and "Description of Capital Stock -- Authorized Stock."
RESTRICTIONS ON DIVIDENDS
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. There can be no assurance that the
Company will be able to pay cash dividends on the Depositary Shares while the
Senior Discount Notes remain outstanding or that funds will be legally available
therefor.
AUTHORIZED BUT UNISSUED STOCK; ANTI-TAKEOVER PROVISIONS
After completion of this Offering, the Company's Board of Directors will
have the authority to issue up to additional shares of Common Stock
which have not been reserved for issuance upon conversion of the Securities or
for outstanding warrants and employee stock plans 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
21
<PAGE> 23
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" and "--
Preferred Stock Purchase Rights."
22
<PAGE> 24
USE OF PROCEEDS
The gross proceeds to the Company from this Offering are estimated to be
approximately $
million. The Company currently intends to use such proceeds (net of underwriting
discounts and expenses), together with additional financing to be obtained in
the future, to fund the Company's expansion to 40 networks by the end of 1997,
as well as to cover the related initial operating losses. The Company's previous
estimate of capital spending during 1996 and 1997 to fund the Company's
expansion to its 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 additional capital
expenditures are required 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. As of September 30, 1996, the Company's cash and cash equivalents and
marketable securities totalled $554.5 million (on a pro forma basis giving
effect to the receipt of $217.2 million pursuant to the 11 7/8% Senior Discount
Note Offering completed on November 7, 1996 and $7.7 million received since
September 30, 1996 upon the exercise of warrants and options), and a subsidiary
of the Company had unused credit commitments under the Bank Credit Facility
totaling approximately $9.9 million.
Expected capital expenditures for the expansion, development and
acquisition of networks include (i) the purchase and installation of switches
and related electronics in existing networks and in networks to be constructed
in new markets, (ii) the purchase and installation of electronics in existing
and new networks to provide enhanced services such as high speed video
conferencing, Internet access, frame relay and ATM-based packet transport
services, (iii) the purchase and installation of fiber and electronics to expand
existing networks and develop new networks, including collocations to ILEC
central offices, connection of new buildings and increases in the capacity of
existing buildings, and (iv) the acquisition and expansion of networks currently
owned and operated by other companies. Although from time to time the Company
has had discussions with other communications providers concerning possible
acquisitions, at the present time the Company has no agreement, agreement in
principle, understanding or arrangement for any acquisition, except for the
proposed joint venture for the construction of three networks in Maine and New
Hampshire (see "Business of the Company -- Cities Served"). 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 that might be
required to pursue such opportunities.
Because of the number and variability of factors that determine the
Company's use of the net proceeds of this Offering, management will retain a
significant amount of discretion over the application of the net proceeds. There
can be no assurance that such applications will not vary substantially from the
Company's current plans.
Pending such utilization, the Company intends to invest the net proceeds of
this Offering in short-term, interest-bearing U.S. government securities and
other short-term, investment grade securities.
Implementation of the Company's longer-term strategy, which envisions that
the Company will have networks in operation or under development in a total of
50 cities by the end of 1998, will require substantial additional capital. The
Company expects to meet its additional capital needs with the proceeds from
additional credit facilities and other borrowings, from sales of additional
equity securities and from 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. See "Risk
Factors -- Significant Future Capital Requirements; Substantial Indebtedness"
and "-- Risk Associated with Implementation of Growth Strategy."
23
<PAGE> 25
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1996, (ii) on a pro forma basis after giving effect to (a) the
sale of the 11 7/8% Senior Discount Notes on November 7, 1996, and (b) the
exchange of minority interests for shares of Common Stock and the exercise of
warrants and options since September 30, 1996 and (iii) on such pro forma basis
as adjusted to reflect the sale of the Depositary Shares offered hereby:
<TABLE>
<CAPTION>
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------------ ------------ ------------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS....................... $203,034,000 $427,880,000 $
MARKETABLE SECURITIES........................... $126,634,000 $126,634,000 $126,634,000
------------ ------------ ------------
TOTAL CASH AND CASH EQUIVALENTS AND MARKETABLE
SECURITIES.................................... $329,668,000 $554,514,000 $
============= ============= =============
LONG-TERM DEBT
11 7/8% Senior Discount Notes due 2006........ -- $225,108,000 $225,108,000
10 7/8% Senior Discount Notes due 2006........ 266,205,000 266,205,000 266,205,000
Other long-term debt.......................... 48,235,000 48,235,000 48,235,000
------------ ------------ ------------
Total...................................... $314,440,000 $539,548,000 $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 25,200,000
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value, 50,000,000
shares authorized, 26,445,890 issued and
outstanding, actual; 29,066,139 issued and
outstanding, pro forma and pro forma as
adjusted(1)(3)............................. 264,000 290,000 290,000
Series C Junior Participating Preferred Stock,
$0.01 par value, 50,000 authorized, none
issued or outstanding(4)................... -- -- --
Series D Conversion Preferred Stock, $0.01 par
value, authorized, issued and
outstanding as adjusted.................... -- -- --
Additional paid-in capital(1)(3)(5)........... 305,715,000 324,168,000
Accumulated deficit........................... (40,420,000) (40,420,000) (40,420,000)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY(6)................... $290,759,000 $309,238,000 $
------------ ------------ ------------
TOTAL CAPITALIZATION............................ $615,960,000 $848,786,000 $
============= ============= =============
</TABLE>
- ---------------
(1) Minority interests represented cash investments in certain of the Company's
subsidiaries from minority investors totaling approximately $13.2 million
through September 30, 1996 less the minority investors' interests in such
subsidiaries' respective operating losses. On October 10, 1996 and November
12, 1996, the Company issued 958,720 shares and 234,260 shares,
respectively, of Common Stock in exchange for such minority interests.
Common Stock outstanding, actual, does not include such shares.
(2) Shown as Common Stock, subject to redemption option, because the holder of
such shares has the option to require the Company to repurchase all or any
of such shares at a price of $12.50 per share on or before February 1, 1998.
The holder of such shares has not indicated to the Company that it has any
current intention to exercise such option. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
(3) Common Stock outstanding, actual, excludes 5,267,028 shares of Common Stock
issuable upon exercise of stock options and warrants outstanding at
September 30, 1996, of which 3,409,785 shares were subject to warrants and
options exercisable within 60 days. Common
24
<PAGE> 26
Stock outstanding, pro forma, and Common Stock outstanding, pro forma as
adjusted, include 1,427,269 shares of Common Stock issued upon exercise of
warrants and options at a weighted average exercise price of $5.41 per share
since September 30, 1996, and excludes 3,393,366 shares subject to warrants
and options outstanding as of the date of this Prospectus. See
"Management -- Executive Compensation -- Stock Option Plan," "Certain
Relationships and Related Transactions" and "Description of Capital Stock."
(4) Reserved for issuance upon the exercise of the Company's Preferred Stock
Purchase Rights pursuant to the terms set forth in the Company's Rights
Agreement dated as of February 29, 1996.
(5) Additional paid-in capital represents the amount of capital in excess of par
value.
(6) Total stockholders' equity includes Common Stock subject to redemption.
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...........................................................
</TABLE>
<TABLE>
<CAPTION>
1997 HIGH LOW
- ------------------------------------------------------------------------- ------ ------
<S> <C> <C>
First Quarter (through , 1997)..........................
</TABLE>
On January , 1997, the last reported sale price of the Common Stock
on the Nasdaq National Market was $ . As of January , 1997, 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."
25
<PAGE> 27
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND
OTHER OPERATING DATA
The selected financial data presented below (other than the pro forma data)
as of and for the periods ended December 31, 1995, 1994 and 1993 are derived
from and qualified by reference to the audited consolidated financial statements
of the Company contained herein. The Company's consolidated financial statements
as of December 31, 1995, 1994 and 1993, and for the years ended December 31,
1995 and 1994, and for the period from inception to December 31, 1993, have been
audited by KPMG Peat Marwick LLP, independent auditors. The selected
consolidated financial data for the three months ended September 30, 1996 and
the nine months ended September 30, 1995 and 1996 have been derived from the
unaudited consolidated financial statements of the Company, which have been
prepared on the same basis as the audited consolidated financial statements of
the Company and, in the opinion of management, reflect all normal recurring
adjustments necessary for a fair presentation of the financial position and
results of operations as of the end of and for such period. The results for the
nine months ended September 30, 1996 are not necessarily indicative of the
operating results to be expected for the entire year. The unaudited pro forma
statement of operations data for the year ended December 31, 1995 gives effect
to the merger with BTC and the City Signal Acquisition using the purchase method
of accounting and assuming that such transactions were consummated on January 1,
1995. All of the selected financial data should be read in conjunction with, and
are qualified by reference to, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the "Unaudited Pro Forma
Combined Consolidated Financial Information," and the Consolidated Financial
Statements of the Company, BTC and City Signal, Inc. and notes thereto contained
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
PERIOD FROM ---------------------------------- ENDED
NOVEMBER 10, PRO FORMA SEPTEMBER 30,
1993(1) TO 1995 1996
DECEMBER 31, ----------- -------------
1993 1994 1995
------------ ------- ---------- (UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
------------- -------------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA AND RATIOS) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications service
revenue......................... $ 2 $ 2,809 $ 14,160 $ 23,072 $ 12,943 $ 10,309 $ 28,147
Costs and expenses:
Service costs................... -- 1,557 7,177 16,319 6,125 5,248 12,585
Selling, general and
administrative
expenses...................... 206 3,966 11,405 15,352 10,158 7,818 25,504
Depreciation and amortization... 3 663 4,118 8,018 4,265 2,873 9,859
----- ------- ----------- ----------- ----------- ----------- -----------
209 6,186 22,700 39,689 20,548 15,939 47,948
Loss from operations............. (207) (3,377) (8,540) (16,617 ) (7,605) (5,630) (19,801)
Interest and other income
(expense), net.................. 2 (598) (2,096) (2,142 ) (2,837) (1,933) (8,176)
----- ------- ----------- ----------- ----------- ----------- -----------
Net loss before minority
interests..................... (205) (3,975) (10,636) (18,759 ) (10,442) (7,563) (27,977)
Minority interests(2)........... -- 78 1,085 1,085 451 589 1,590
----- ------- ----------- ----------- ----------- ----------- -----------
Net loss........................ $ (205) $(3,897) $ (9,551) $ (17,674 ) $ (9,991) $ (6,974) $ (26,387)
===== ======= =========== =========== =========== =========== ===========
Pro forma net loss per
share(3)........................ -- -- $ (.49) $ (.84 ) $ (.35) (.36) $ (1.10)
===== ======= =========== =========== =========== =========== ===========
Pro forma weighted average number
of shares outstanding(3)........ -- -- 19,523,584 20,951,862 28,368,352 19,523,584 24,071,672
===== ======= =========== =========== =========== =========== ===========
OTHER DATA:
EBITDA(4)....................... $ (204) $(2,714) $ (4,422) $ (8,492 ) $ (3,340) $ (2,757) $ (9,942)
Capital expenditures, including
acquisitions of businesses,
net of cash................... -- 42,362 41,518 48,883 75,118 29,181 137,053
Ratio of earnings to combined
fixed charges and preferred
stock dividends(5)............ -- -- -- -- -- -- --
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
AS OF AS OF AS OF SEPTEMBER 30,
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, 1996
1994 1995 1996 1996 1996 PRO FORMA AS
------- -------- ----------- ----------- ------------- ADJUSTED(6)
-------------
(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(7) 330,963(7) 331,179(7) (7)
Total stockholders' equity(8)................... 36,699 93,455 125,264 300,535 290,759
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 AS OF
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, NOVEMBER 30,
1994 1995 1996 1996 1996 1996
------- -------- ----------- ----------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NETWORK DATA:
Cities in operation.............................. 5 11 13 18 22 22
Cities under construction........................ 6 10 12 8 8 8
On-net buildings connected....................... 62 216 495 644 734 831
Route miles...................................... 107 262 506 705 787 931
Fiber miles...................................... 6,437 17,111 26,659 43,152 50,572 61,323
VGE circuits(9).................................. 59,208 122,617 165,122 243,171 358,640 454,815
Switches installed............................... -- 1 3 9 17 20
CLEC lines in service............................ -- 3,187(10) 5,802 9,226 13,107 17,914
Employees........................................ 89 165 456 571 711 776
</TABLE>
- ---------------
(1) The Company was organized on November 10, 1993.
(2) Minority interests represent the ownership interests of minority investors
in certain of the Company's subsidiaries.
(3) Pro forma net loss per share has been computed using the number of shares
of Common Stock and Common Stock equivalents outstanding. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, shares
issued at prices below the May 1996 initial public offering price of $27.00
per share and stock options and warrants granted with exercise prices below
the initial public offering price during the twelve-month period preceding
the date of the initial filing of the Company's Registration Statement
relating to the IPO have been included in the calculation of Common Stock
equivalent shares for the nine months ended September 30, 1996, using the
treasury stock method, as if such shares, options and warrants were
outstanding for all of 1995 and for the entire six-month period ended June
30, 1996. For the three months ended September 30, 1996, the weighted
average number of shares was based on Common Stock outstanding and does not
include common stock equivalents as their inclusion would be anti-dilutive.
(4) EBITDA consists of net income (loss) before minority interests, interest,
income taxes, depreciation and amortization. It is a measure commonly used
in the telecommunications industry and is presented to assist in
understanding the Company's operating results. However, it is not intended
to represent cash flow in accordance with generally accepted accounting
principles. See the Company's Consolidated Statements of Cash Flows
appearing elsewhere in this Prospectus.
(5) For purposes of calculating the ratio of earnings to combined fixed charges
and preferred stock dividends: (i) earnings consist of loss before income
taxes and minority interest, plus fixed charges excluding capitalized
interest, (ii) fixed charges consist of interest expensed and capitalized,
plus amortization of deferred financing costs, plus the portion of rent
expense under operating leases deemed by the Company to be representative
of the interest factor and (iii) no dividends have accrued or been paid or
payable on any preferred stock. For the period from November 10, 1993 to
December 31, 1993, the years ended December 31, 1994 and December 31, 1995,
the three months ended September 30, 1996, and the nine months ended
September 30, 1995 and 1996, the Company's earnings were insufficient to
cover fixed charges by $205,000, $3,975,000, $10,636,000, $10,442,000,
$7,563,000 and $27,977,000, respectively. On a pro forma basis, for the
year ended December 31, 1995, the Company's earnings would have been
insufficient to cover fixed charges by $18,759,000.
(6) 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 sale of the
Depositary Shares offered hereby. See "Capitalization."
(7) Amount represents the total of Common Stock, additional paid-in capital,
and Common Stock subject to redemption.
(8) Amount represents paid-in capital less accumulated deficit. See note (7)
above.
(9) Voice grade equivalent circuits.
(10) On a pro forma basis giving effect to the City Signal Acquisition.
27
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's audited Consolidated Financial Statements and the notes thereto
appearing elsewhere in this Prospectus.
OVERVIEW
The Company is a leading full service provider of competitive local
telecommunications services in selected markets in the United States. The
Company acquires and constructs its own state-of-the-art fiber optic networks
and facilities and leases network capacity from others to provide IXCs, ISPs,
wireless carriers and business, government and institutional end-users with an
alternative to the ILECs for a broad array of high quality voice, data, video
transport and other telecommunications services.
The Company's goal is to become the primary full service provider of
competitive local telecommunications services to IXCs, ISPs, wireless carriers
and business, government and institutional end-users in selected cities by
offering superior products with excellent customer service at prices below those
charged by the ILECs. The Company currently has systems in 30 cities, consisting
of systems in operation in 22 cities and under construction in eight cities. The
Company plans to expand its network operations to have systems in operation or
under construction in a total of 50 cities by the end of 1998. The Company has a
total of 20 digital telephone switches installed in its networks. The Company
has deployed switches to offer local dial tone, switched access termination and
origination services, centrex, and desktop products in substantially all of its
operating networks, and expects to have switches installed in all of its
operating networks by the end of the second quarter of 1997. The Company is also
adding capabilities to provide enhanced services such as high speed video
conferencing, frame relay and ATM-based packet transport services and Internet
access products and expects to offer all of such services in all of its
operating networks by the end of 1997.
On January 31, 1996, the Company completed the City Signal Acquisition
which included networks in operation or under construction in four cities in
Michigan and Ohio, including an installed switch in Grand Rapids, Michigan. At
the date of acquisition, the acquired networks had approximately 208 route miles
of fiber, 30,456 VGE circuits and 226 buildings connected. In addition,
effective January 2, 1996, BTC, a founding stockholder of the Company, was
merged into the Company. GLA, a wholly owned subsidiary of the Company, offers a
full range of consulting, management, engineering and information systems
solutions for telecommunications companies. GLA's capabilities also serve as an
internal source for the telecommunications infrastructure support needed to
facilitate the Company's network growth and penetration of the CLEC business.
See "Summary -- Recent Developments," "Business of the Company," "Certain
Relationships and Related Transactions" and "Unaudited Pro Forma Combined
Consolidated Financial Information."
28
<PAGE> 30
The following table provides selected statistical and financial data for
the Company as of the dates indicated:
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
---------------------- PERCENTAGE
1995 1996 CHANGE
-------- -------- ----------
<S> <C> <C> <C>
Cities in operation................................ 11 22 100%
Cities under construction.......................... 9 8 (11)
Buildings connected-off net........................ 31 913 NM
Buildings connected-on net......................... 190 734 286
Route miles........................................ 234 787 236
Fiber miles........................................ 14,414 50,572 251
Switches installed................................. -- 17 NM
CLEC lines in service.............................. -- 13,107 NM
VGE circuits....................................... 108,841 358,640 230
Number of employees................................ 136 711 423
Total Assets (dollars in thousands)................ $143,210 $637,350 345
======= ======== ===
</TABLE>
- ---------------
NM -- Not meaningful
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
REVENUES
The Company's revenues increased to $12.9 million for the three months
ended September 30, 1996 from $3.8 million for the three months ended September
30, 1995, an increase of 241%. Network capacity as reflected in VGEs in service
increased to 358,640 VGEs as of September 30, 1996 as compared with 108,841 VGEs
as of September 30, 1995. These increases reflect the impact of the Company's
acquisition and development activities, including an increase in the number of
networks in operation to 22 from 11 in the third quarter of 1995, as well as
increased utilization of the Company's network facilities arising from the sales
of additional services to current and new customers. A significant contributor
to the Company's revenue growth for the third quarter of 1996 relates to the
Company's entry into local exchange services in Grand Rapids, Michigan.
Annualized monthly local exchange services revenues increased from $6.4 million
based on June 1996 revenues to $10.2 million based on September 1996 revenues,
as a result of rapidly growing revenues in Grand Rapids. Local exchange services
revenues for the quarter ended September 30, 1996, totaled $2.2 million as
compared to $1.4 million for the quarter ended June 30, 1996.
COSTS AND EXPENSES
Service costs increased to $6.1 million for the three months ended
September 30, 1996 from $1.8 million for the three months ended September 30,
1995. The increase was due primarily to the increasing costs associated with the
Company's rapidly growing local exchange services in Grand Rapids and its
expanding resale operations. Service costs consist of costs associated directly
with the operation of the Company's networks, facilities management services,
and consulting and system support activities for third parties including local
and long distance service costs, technical salaries and benefits, and
rights-of-way fees.
The Company's selling, general and administrative ("SG&A") expenses for the
three months ended September 30, 1996 were $10.2 million, as compared with SG&A
expenses of $3.0 million for the three months ended September 30, 1995. The
increase was principally due to the increasing number and continued expansion of
the Company's competitive access networks, including added personnel costs and
marketing activities related to the introduction of switched services. There is
typically a period of higher SG&A expenses and a lag time in the generation of
revenues following the acquisition and development of a competitive access
network. Management expects SG&A
29
<PAGE> 31
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.
30
<PAGE> 32
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
31
<PAGE> 33
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
32
<PAGE> 34
to assist in an understanding of the Company's operating results and is not
intended to represent cash flow or results of operations in accordance with
generally accepted accounting principles.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE PERIOD FROM NOVEMBER 10, 1993 TO
DECEMBER 31, 1993
The Company commenced operations on November 10, 1993, and it does not
believe that a comparison of results for the period ended December 31, 1993 with
the year ended December 31, 1994 is meaningful.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased from $146.6 million as of December 31,
1995 to $637.4 million at September 30, 1996. The Company's current assets of
$346.7 million at September 30, 1996, including cash and cash equivalents and
marketable securities of $329.7 million, exceeded current liabilities of $21.4
million, providing working capital of $325.3 million. Network and equipment
totaled $222.0 million at September 30, 1996 as compared to $53.2 million at
December 31, 1995. Other assets, principally goodwill, net of accumulated
amortization, increased to $74.8 million at September 30, 1996 from $33.5
million at December 31, 1995, primarily as a result of the Company's
acquisitions of both City Signal, Inc. and BTC, and debt issuance costs
associated with the 10 7/8% Senior Discount Note Offering.
In connection with the City Signal Acquisition, the seller received an
option to require the Company to repurchase any or all of the 2,240,000 shares
of the Company's Common Stock issued in the City Signal Acquisition at a price
of $12.50 per share on or before February 1, 1998. In conjunction with the
Company's IPO (see below), ten percent (10%) of such shares were sold.
Accordingly, shares subject to redemption totalled 2,016,000 shares at September
30, 1996.
On February 26, 1996, the Company sold $425.0 million aggregate principal
amount of its 10 7/8% Senior Discount Notes, providing gross proceeds of
approximately $250 million, and proceeds net of underwriting fees of
approximately $241 million. No cash payments of interest are required on the
10 7/8% Senior Discount Notes until September 1, 2001.
On May 2, 1996, the Company sold 7,385,331 shares of the Company's Common
Stock in its IPO at a price of $27.00 per share. Gross proceeds from this
offering totaled approximately $199.4 million and proceeds net of underwriting
discounts and advisory fees and expenses totalled approximately $185.2 million.
In June 1996, the Company and MCImetro entered into an agreement pursuant
to which MCImetro has acquired a minority interest in the Company's Sacramento,
California network and has made an additional investment in the San Jose joint
venture company. In connection with these agreements, MCImetro has made
additional cash investments totaling $8.0 million. In accordance with the
provisions of the agreements between the Company and MCImetro, on October 10,
1996 MCImetro exchanged the agreed value of its investments in subsidiaries of
the Company for 958,720 shares of the Company's Common Stock.
The Company has formed a strategic alliance with World-Net and has invested
a total of $20 million for a 25.5% fully-diluted interest in World-Net, and it
is possible that the Company may commit additional funds in furtherance of this
strategic alliance. World-Net is a privately-held development stage company
founded to form a national ISP network. The Company intends for both companies
to seek ways to work together and provide customer-oriented Internet and
Intranet communications solutions.
Effective in July 1996, the Company acquired 100% of the stock of ALD, a
switchless reseller of long distance services, and Tenant Network Services, Inc.
("TNS"), a wholly-owned subsidiary of ALD which acts as a shared tenant service
provider of telecommunications services, both of which provide their services
primarily to customers in the San Francisco, California area.
33
<PAGE> 35
Effective in September 1996, the Company acquired 100% of the stock of
Bittel, a switch-based reseller of long distance services, with such services
provided primarily to customers in the San Francisco and Los Angeles, California
areas.
On October 24, 1996, the Company and MaineCom, a subsidiary of Central
Maine Power Company, entered into a letter of intent to form a joint venture
company, to be owned 60% by the Company and 40% by MaineCom, for the purposes of
constructing, owning, operating and developing networks initially in Portland,
Maine and Nashua and Manchester, New Hampshire, and other markets in Maine and
New Hampshire as may be agreed upon by the Company and MaineCom in the future.
The proposal is subject to the negotiation of definitive agreements approved by
the respective Boards of Directors of the Company and MaineCom.
On November 12, 1996, AT&T Credit exchanged the agreed value of its
investments in certain subsidiaries of the Company made in connection with
certain loans to the Company for an aggregate of 234,260 shares of the Company's
Common Stock.
On November 7, 1996, the Company completed the issuance and sale of $400.0
million aggregate principal amount of 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 $50 million
aggregate principal amount of subsidiary secured indebtedness to parent company
secured indebtedness on November 12, 1996, (i) the total amount of outstanding
liabilities of the Company (parent only), including trade payables, would have
been approximately $546.8 million, of which $50 million would have been secured
obligations, and (ii) the total amount of outstanding liabilities of the
Company's subsidiaries, including trade payables, would have been $14.1 million,
of which $0.1 million would have represented secured obligations.
The 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
34
<PAGE> 36
such subsidiaries and such guarantors which place certain additional limitations
on the ability of such entities to incur indebtedness, create liens, engage in
new businesses, dispose of assets, issue additional capital stock, and effect
mergers and consolidations.
The Bank Credit Facility provides the subsidiary operating the Company's
Tulsa, Oklahoma network the ability to borrow amounts up to $10 million from
time to time prior to June 30, 1997, with a final maturity of all loans no later
than June 30, 2002, with interest only payment through August 31, 1997 and a 4.5
year principal payout period thereafter. The Bank Credit Facility is secured by
the assets and stock of the subsidiary. The loan agreement contains certain
restrictive covenants, including limitations on the ability of the subsidiary to
declare and pay dividends to the Company, to incur additional indebtedness, to
make loans and advances and to engage in transactions with the Company (except
for reimbursement for services rendered on arms-length terms and repayment of up
to $10 million of subordinated debt prior to June 30, 1997 in the absence of a
default under the Bank Credit Facility). The Bank Credit Facility contains
financial covenants, including limitations on the ratios of the subsidiary's
annualized operating cash flow to its outstanding debt, interest expense and
debt service costs and requirements for the maintenance of a 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 this 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
35
<PAGE> 37
particular network to be developed or acquired and the types of electronics
installed can impact significantly the amount of capital required. Similarly,
the potential cost of acquiring additional networks is not determinable, and it
is possible that the Company could acquire existing networks using a variety of
financing alternatives. The Company expects to meet such additional capital
needs with the proceeds from existing and future credit facilities and other
borrowings, and the proceeds from sales of additional equity securities and
joint ventures. The Company's expectations of required future capital
expenditures are based on the Company's current estimates and the current state
and federal regulatory environment. There can be no assurance that actual
expenditures will not be significantly higher or lower. In addition, there can
be no assurance that the Company will be able to raise or generate sufficient
funds to enable it to meet its strategic objectives or that such funds, if
available at all, will be available on a timely basis or on terms that are
acceptable to the Company.
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.
36
<PAGE> 38
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
37
<PAGE> 39
most, if not all, of the ILEC's central offices) and establishing customer
relationships with IXCs, ISPs, wireless carriers and business, government
and institutional end users that will enable it to take advantage of the
attractive potential growth rates for local exchange service revenues in
those markets.
AGGRESSIVELY PURSUE SWITCHED SERVICES OPPORTUNITY. The
Telecommunications Act of 1996 mandates that ILECs throughout the U.S.
enter into arrangements with competitors such as the Company for central
office collocation and unbundling of local services. The Company believes
that implementation of these and other pro-competitive policies creates
favorable opportunities to pursue more aggressively the provision of local
switched services. The Company has a total of 20 digital telephone switches
installed in its operating networks and plans to leverage its networks and
customer relationships by offering local dial tone, switched access
termination and origination services, centrex and desktop products. The
Company currently offers such services and products in substantially all of
its operating networks and expects to offer such services and products in
all of its operating networks by the end of the second quarter of 1997. See
"-- Current Products and Services."
EXPAND ENHANCED SERVICE OFFERINGS. Consistent with its strategy of
aggressively pursuing switched services opportunities, the Company is
expanding its capabilities to provide enhanced services that complement its
switch-based services. Such enhanced services include, among others, high
speed video conferencing, frame relay and ATM-based packet transport
services and Internet access products. The Company is currently offering
such services in certain markets and expects to offer such services in all
of its operating networks by the end of 1997. The Company also plans to
continue to upgrade and add to its systems and services as technology and
regulations permit. See "-- Planned Products and Services."
CONTINUE TO BUILD OUT EXISTING SYSTEMS. The Company strives to build a
sufficient revenue base in each of its systems to generate the cash flow
necessary to enable it to devote more resources to developing and expanding
its systems as opposed to funding initial operating losses. As a result of
favorable regulatory developments and the Company's initial favorable
experiences with the provision of local switched services, the Company has
determined to more rapidly develop and expand its systems. Its plans
include increasing the number of cities served, expansion of its existing
networks and accelerating the deployment of switches and ILEC central
office collocations. The Company believes that its access to significant
capital and technical resources and its ongoing efforts to develop close
working relationships with its IXC customers (see "-- Build on strategic
relationships" below) will enable it to more rapidly develop and expand its
systems, add to its service offerings and establish the strong customer
relationships necessary to solidify its competitive position in its
selected markets.
CONTINUE TO INCREASE THE NUMBER OF CITIES SERVED. The Company recently
achieved its long-stated goal of having systems in operation or under
construction in a total of 30 cities by the end of 1996. The Company plans
to have systems in operation or under construction in a total of 40 cities
by the end of 1997 and a total of 50 cities by the end of 1998. The
Company's expansion into additional cities is expected to be accomplished
by the acquisition of existing networks as well as the development of new
networks. See "Business of the Company -- Network Acquisition, Development
and Design" and "-- Network Construction." By adding networks, the Company
believes it can increase revenues and obtain economies of scale in its
operating costs.
BUILD ON STRATEGIC RELATIONSHIPS. In order to capitalize on the
competitive dynamics of the changing IXC/ILEC relationships, the Company
has established close business alliances with major IXCs, including joint
ventures and preferred vendor relationships. In accordance with this
strategy, (1) in September 1995, the Company and MCImetro formed a joint
venture company to operate and expand the Company's existing networks in
San Jose, California and its environs, and in May and June 1996, the
Company and MCImetro entered into agreements
38
<PAGE> 40
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.
39
<PAGE> 41
The pace of regulatory change in the telecommunications industry has
continued to accelerate with the adoption of the Telecommunications Act of 1996
which provides, among other things, for a national template under which, when
implemented, CLECs will be able to provide competitive services on a more equal
basis with the ILECs by further opening local exchange markets to competition
and pre-empting anti-competitive state laws. The Company believes the following
attributes of the Telecommunications Act of 1996 will have certain positive
effects on the Company's operations:
- Market access. Opening all U.S. markets to local competition.
- Network interconnections. Enabling the Company to more fully interconnect
its networks with ILECs and other carriers to allow the Company to reach
customers not physically connected to its own networks in a more cost
effective manner.
- Number portability. Enabling customers to retain their existing phone
numbers in the event they choose to switch local service providers. The
Company considers number portability to be a significant factor which can
positively influence a customer's decision to purchase service from the
Company.
- Reciprocal compensation. Ensuring fair and reciprocal rates under which
other carriers and the Company compensate one another for calls made to
their customers or, in the alternative, not charge one another for calls
made by customers from one network to the other. The Company expects such
reciprocal compensation arrangements to improve its operating margins over
time.
ENTRY INTO SWITCHED SERVICES. The Company believes that the CLEC business
is positioned for dramatic growth. Of the $32 billion of access fees paid by
IXCs to the ILECs in 1994, CLECs accounted for only $294 million or less than
1%. The Company expects that the entry of the ILECs into the long distance
business will increase these penetration rates as IXCs may seek alternatives to
the ILECs as sources of access to their customers. Most states have taken
regulatory and legislative action to open local communications markets to local
exchange competition and co-carrier status. The Company also expects continuing
pro-competitive regulatory changes, including those mandated by the
Telecommunications Act of 1996, together with increasing customer demand, will
create more opportunities for CLECs to introduce additional services, expand
their networks and address a larger customer base. These changes permit CLECs to
offer local dial tone, centrex, desk top and other enhanced services. The
Company believes that these changes afford CLECs the potential to grow
significantly over the next several years. However, there is no assurance that
such regulatory and other industry trends will continue or that future
regulatory developments will be favorable to CLECs.
Until recently, the Company's capital expenditure programs were directed
primarily toward the construction and acquisition of new networks and the
purchase of related equipment. While the Company intends to continue these
activities, it is also accelerating the expansion of its existing networks,
including more rapid deployment of switches and ILEC central office
interconnections, in order to take advantage of its developing demand-based
opportunities in those networks. Accordingly, the Company has increased the
number of CLEC lines in service from 3,187 at December 31, 1995 (on a pro forma
basis giving effect to the City Signal Acquisition) to 17,914 at November 30,
1996, with annualized CLEC revenues increasing from $2.5 million based on
December 1995 revenues to $10.2 million based on September 1996 revenues.
See "The Competitive Local Telecommunications Industry," "Competition" and
"Regulatory Overview" below.
CURRENT PRODUCTS AND SERVICES
SPECIAL AND SWITCHED ACCESS AND PRIVATE LINE SERVICES. The Company
currently provides several types of special and switched access and private line
services to its IXC and end-user customers. Historically, CAPs such as the
Company were able to offer only non-switched special
40
<PAGE> 42
access and private line services which involved the installation of dedicated
lines to provide the following types of communications links:
- POP-to-POP Special Access -- Telecommunications lines linking the POPs of
one IXC or the POPs of different IXCs in a market, allowing these POPs to
exchange transmissions for transport to their final destinations.
- End-User/IXC Special Access -- Telecommunications lines between an end
user, such as a large business, and the local POP of its selected IXC.
- Private Line -- Telecommunications lines connecting various locations of
one or more customers' operations, suitable for transmitting voice and
data traffic internally.
The Interconnection Decisions allowed CAPs to provide a broader range of
services by enabling them to access additional customers through connections
with the ILECs' networks. These services include:
- Collocated Special Access -- A dedicated line carrying switched
transmissions from the IXC POP, through the ILEC's central office to the
end user.
- Collocated POP-to-ILEC Switched Access Transport -- A dedicated line
carrying switched transmissions from the ILEC's central office to an IXC's
POP.
To provide these services, the Company offers various types of highly
reliable, dedicated fiber optic lines that operate at different speeds and
handle varying amounts of traffic to provide tailor-made solutions to its
customers' needs.
- DS-0 -- A dedicated line service that meets the requirements of everyday
business communications, with transmission capacity of up to 64 kilobits
of bandwidth per second (a voice grade equivalent circuit). This service
offers a basic low capacity dedicated digital channel for connecting
telephones, fax machines, personal computers and other telecommunications
equipment.
- DS-1 -- A high speed channel typically linking high volume customer
locations to IXCs or other customer locations. Used for voice
transmissions as well as the interconnection of Local Area Networks
("LANs"), DS-1 service accommodates transmission speeds of up to 1.544
megabits per second, the equivalent of 24 voice-grade equivalent circuits.
The Company offers this high-capacity service for customers who need a
larger communications pipeline.
- DS-3 -- This service provides a very high capacity digital channel with
transmission capacity of 45 megabits per second, which is equivalent to 28
DS-1 circuits or 672 voice grade equivalent circuits. This is a digital
service used by IXCs for central office connections and by some large
commercial users to link multiple sites.
SWITCH-BASED SERVICES. The Company has added and is continuing to add
capabilities to provide local dial tone and switched access termination and
origination services to its networks. The Company has installed 20 advanced,
state-of-the-art switches. In addition, pursuant to the City Signal Acquisition
and its acquisition of Bittel, the Company acquired three installed
state-of-the-art switches.
Most states have taken regulatory and legislative action to open local
communications markets to various degrees of local exchange competition and
co-carrier status. The Company has established interconnection arrangements with
ILECs for 26 of its 30 networks. The Company expects that continuing
pro-competitive regulatory changes, including those mandated by the
Telecommunications Act of 1996, together with increasing customer demand, will
create more opportunities to introduce additional services and expand the
Company's networks to address a larger customer base. See "-- CLEC Market
Potential," "-- Planned Products and Services" and "Regulatory Overview."
41
<PAGE> 43
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 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,
42
<PAGE> 44
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."
The Company believes that Internet and Intranet products and services
complement the Company's existing telecommunications services and present the
Company with potential revenue
43
<PAGE> 45
opportunities, through both the retention of existing customers and the addition
of new customers. To pursue such opportunities, on June 25, 1996, the Company
formed a strategic alliance with World-Net, a privately-held development stage
company founded to form a national Internet Service Provider network. The
Company has invested a total of $20 million for a 25.5% fully-diluted interest
in World-Net and it is possible that the Company will decide to commit
additional funds in furtherance of this strategic alliance. The Company intends
that both companies will seek ways to work together to provide customer-oriented
Internet and Intranet communications solutions. The Company plans to develop and
offer a wide range of Internet-related services to users of World-Net's national
ISP network, including various dial-up and dedicated Internet access options.
CITIES SERVED
In January 1994, the Company completed its first acquisition, an operating
system in Springfield, Massachusetts and rights of way for the development of
networks in Hartford, Connecticut and Providence, Rhode Island, where networks
have been constructed by the Company and are operational. In October 1994, the
Company acquired an operating system serving Sacramento, a system under
construction in San Jose, and a local and long distance resale operation based
in San Francisco, California that serves small to medium sized businesses in the
San Francisco Bay area. The San Jose network was activated during December 1994
and has been expanded into Sunnyvale and Santa Clara, California. A 37-mile
expansion of the San Jose network is being completed, which will extend the
current 32-mile network into Milpitas and Palo Alto, California. See "--
Strategic Relationships" above.
During 1994, the Company also developed business plans and obtained
right-of-way agreements and the necessary operating rights to construct networks
in Oklahoma City, Oklahoma, and Little Rock, Arkansas. These networks, which
added a total of 46 route miles to the Company's networks, became operational
during the first half of 1995.
During March 1995, the Company acquired the assets of a 105-mile CAP
network in Tulsa, Oklahoma. Also during 1995, the Company commenced the
construction of networks in Bakersfield, Fresno and Stockton, California,
Albuquerque, New Mexico, Knoxville, Tennessee, Jackson, Mississippi, Reno,
Nevada and Tucson, Arizona, all of which are now operational.
Effective January 31, 1996, the Company acquired the business of City
Signal, a CLEC with a 208 mile network in Grand Rapids, Michigan, an operating
network in Lansing, Michigan and networks under construction in Ann Arbor,
Michigan and Toledo, Ohio. Also during 1996, the Company commenced the
construction of networks in White Plains, New York, Stamford, Connecticut,
Kansas City, Missouri, Springfield, Missouri and San Mateo, California, all of
which are expected to be operational by the end of the second quarter of 1997.
Subsidiaries of the Company currently have systems in operation or under
construction in the following cities:
<TABLE>
<CAPTION>
OTHER CLEC
NETWORKS OF THE COMPANY NETWORKS IN CITY
---------------------------------------------------- ----------------------
CITY SERVED CURRENT ANNOUNCED
---------------------------------------------------- ------- ---------
<S> <C> <C>
EASTERN REGION
Springfield, Massachusetts........................ 0 0
Providence, Rhode Island.......................... 1 0
Hartford, Connecticut............................. 3 0
Grand Rapids, Michigan............................ 0 0
Lansing, Michigan................................. 0 1
Traverse City, Michigan(1)........................ 0 0
Toledo, Ohio(1)................................... 0 1
White Plains, New York(1)......................... 1 0
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
OTHER CLEC
NETWORKS OF THE COMPANY NETWORKS IN CITY
---------------------------------------------------- ----------------------
CITY SERVED CURRENT ANNOUNCED
---------------------------------------------------- ------- ---------
Stamford, Connecticut(1).......................... 1 0
<S> <C> <C>
CENTRAL REGION
Oklahoma City, Oklahoma........................... 2 0
Tulsa, Oklahoma................................... 0 1
Little Rock, Arkansas............................. 1 1
Tucson, Arizona................................... 2 0
Albuquerque, New Mexico........................... 2 0
Knoxville, Tennessee.............................. 0 2
Jackson, Mississippi.............................. 1 1
Kansas City, Missouri(1).......................... 1 1
Springfield, Missouri(1).......................... 0 1
WESTERN REGION
Sacramento, California............................ 1 1
San Jose, California.............................. 2 0
Sunnyvale, California............................. 2 0
Santa Clara, California........................... 2 0
Stockton, California.............................. 0 0
Fresno, California................................ 0 1
Bakersfield, California........................... 0 1
Milpitas, California.............................. 2 0
Palo Alto, California............................. 2 0
San Mateo, California(1).......................... 2 0
Reno, Nevada(1)................................... 0 1
San Francisco, California(2)...................... N/A N/A
</TABLE>
- ---------------
(1) Networks under construction.
(2) Facilities management operations serving the San Francisco Bay area.
On October 24, 1996, the Company and MaineCom, a subsidiary of Central
Maine Power Company, entered into a letter of intent to form a joint venture
company, to be owned 60% by the Company and 40% by MaineCom, for the purposes of
constructing, operating and developing networks initially in Portland, Maine and
Nashua and Manchester, New Hampshire and other markets in Maine and New
Hampshire as may be agreed upon in the future. The proposal is subject to the
negotiation of definitive agreements approved by the respective Boards of
Directors of the Company and MaineCom.
The Company believes its regional aggregation strategy will yield economies
of scale in service costs and allow service-affecting decisions to occur closer
to its customers.
NETWORK ACQUISITION, DEVELOPMENT AND DESIGN
Before determining to acquire or construct a network in a particular city,
the Company's corporate development staff reviews the demographic, economic,
competitive and telecommunications demand characteristics of the city, including
its location, the concentration of potential business, government and
institutional end user customers, the economic prospects for the area, available
data regarding IXC and end user demand and actual and potential CLEC
competitors. Market demand is estimated on the basis of market research
performed by Company personnel and others, utilizing a variety of data including
estimates of the number of interstate access and intrastate private lines in the
city based primarily on FCC reports and commercial data bases.
45
<PAGE> 47
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
46
<PAGE> 48
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,
47
<PAGE> 49
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
48
<PAGE> 50
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
49
<PAGE> 51
customer and often before the customer even notices a problem. The NOC Centers
provide real-time alarm status and performance information for each of the
Company's networks around the country. They also afford improved disaster
recovery to customers through remote circuit provisioning and cross-connect
features.
CORPORATE OFFICE
The Company's principal executive offices are located at 425 Woods Mill
Road South, Suite 300, Town & Country, Missouri 63017, and its telephone number
at those offices is (314) 878-1616.
NETWORK FACILITIES AND OFFICES
The Company leases network hub sites and other facility locations and sales
and administrative offices in each of the cities in which it has operations.
During the nine months ended September 30, 1996, rental expense for such
locations and offices totaled $1.5 million. At September 30, 1996, minimum
future rental payments under noncancelable leases covering the Company's
locations and offices totaled $17.1 million. The Company owns a 23 acre parcel
of land in Town & Country, Missouri, on which it is constructing its new
corporate headquarters building. A wholly-owned subsidiary of the Company owns a
42,000 square foot office building in Grand Rapids, Michigan that houses a
switch, NOC Center and office facilities.
EMPLOYEES
At November 30, 1996, the Company had approximately 776 full-time
employees. None of the Company's employees is represented by a union or covered
by a collective bargaining agreement. The Company believes it has a highly
capable and motivated work force with whom relations are good. In connection
with the construction and maintenance of its fiber optic networks, the Company
uses third-party contractors, some of whose employees may be represented by
unions or covered by collective bargaining agreements.
LEGAL PROCEEDINGS
On September 22, 1995, GST Tucson Lightwave, Inc. ("Lightwave") was
permitted to intervene in litigation originally filed by Brooks Fiber
Communications of Tucson, Inc., a wholly-owned subsidiary of the Company ("BFC
Tucson"), styled Brooks Fiber Communications of Tucson, Inc. v. City of Tucson,
cause No. CIV 95-655-TUC-RMB, U.S. District Court, District of Arizona. On
October 2, 1995, Lightwave filed a counterclaim against BFC Tucson, the Company
and Tucson Electric Power Company ("TEP"), charging BFC Tucson, the Company and
TEP with violations of antitrust laws, all of which alleged violations stem from
an agreement between BFC Tucson and TEP that allowed BFC Tucson exclusive
rights, for one year, to utilize certain of TEP's rights of way. The original
causes of action have been settled; however, the counterclaim by Lightwave is
currently still pending. The counterclaim seeks treble damages, attorneys' fees,
costs (all in an unspecified amount) and such other relief as the court deems
proper. The Company believes the claims are without merit and intends to defend
vigorously against this action. The Company believes that resolution of the
matter will not have a material adverse effect on the consolidated financial
condition or results of operations of the Company.
From time to time the Company or a subsidiary of the Company is named as a
defendant in routine lawsuits incidental to its business. Based on the
information currently available, the Company believes that none of such current
proceedings, individually or in the aggregate, will have a material adverse
effect on the Company.
50
<PAGE> 52
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 NETWORK LOGO]
51
<PAGE> 53
[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
52
<PAGE> 54
in September 1992, in which the FCC ordered the larger ILECs to allow CLECs
interconnection with ILECs for special access. The FCC also reaffirmed its
"Fresh Look" policy which allows certain customers who have entered into
long-term contracts with ILECs for access services to terminate those agreements
with only limited termination charges. This policy is intended to allow local
competitive access providers to penetrate a market more quickly since it permits
end users to move their telecommunications traffic to the competitive provider
with minimal transfer costs.
The FCC also granted ILECs additional pricing flexibility for switched
access services in the form of zone density pricing similar to zone density
pricing allowed for special access interconnection. In addition, the FCC allowed
the local exchange carriers to offer volume discounts and term discounts,
subject to certain limitations.
In total, the FCC's Interconnection Decisions permitted CLECs to compete
for an additional $13.8 billion portion of the local exchange market (including
$7.0 million of switched access termination).
The Telecommunications Act of 1996, which contains provisions that mandate
local and long distance telecommunications services competition, was enacted
into law on February 8, 1996 (see "Regulatory Overview"). The FCC has issued and
will issue further orders under the Telecommunications Act of 1996, many of
which, if not all, will likely be appealed by one or more affected parties to
the U.S. Court of Appeals and U.S. Supreme Court. In addition, the
Telecommunications Act of 1996 may be amended in 1997 or subsequent years.
Therefore, the Company is unable to determine the final form and impact of
existing and future legislation, and the regulatory and judicial actions under
such legislation.
In addition to the federal initiatives and rulings, most states have now
taken regulatory and legislative action to open local telecommunications markets
to local exchange competition and co-carrier status. The Company is deploying
switches on its networks as rapidly as possible and plans to have switches
serving all of its operating networks by the end of the second quarter of 1997.
When the first CAP networks were built in the 1980s, they could compete
effectively only for the approximately $8.6 billion special access and private
line services portion of the local exchange market (POP to POP Special Access,
POP to End User Special Access and End User to End User Private Line). Beginning
in 1994, after the FCC's Interconnection Decisions, which allowed CAPs to
provide Collocated Special Access, Collocated Switched Access Transport and,
with the installation of a switch, Switched Access Termination services, CAPs
were allowed to compete for an additional estimated $13.8 billion portion of the
market. If regulatory and other industry trends continue, the Company believes
that ultimately the entire approximately $102 billion total U.S. market may be
open to competition as CLECs deploy switches capable of providing the full array
of local exchange services and as state public utility commissions ("PUCs")
authorize CLECs to provide full local telecommunications services.
53
<PAGE> 55
The following chart illustrates the potential CLEC revenue opportunities,
based on the total 1995 local exchange revenues, both before and after a CLEC
deploys a switch in its local network.
CLEC POTENTIAL REVENUE OPPORTUNITIES*
<TABLE>
<CAPTION>
TOTAL 1995 U.S. LOCAL
EXCHANGE MARKET
($ BILLIONS)
---------------------
<S> <C> <C>
Access/Private Line Services (Non-Switched)
1. POP to POP -- Special Access..................................... $ 2.0
2. POP to End User -- Special Access................................ 2.6
3. End User to End User -- Private Line............................. 4.0
4. Collocated Special Access........................................ 2.5
5. Collocated Switched Access Transport............................. 4.3
Switched Services
6. Switched Access Termination...................................... 7.0
7. Switched Access Origination...................................... 4.7
8. End User Common Line Access Charge
(Business)...................................................... 5.9
(Residential)................................................... 5.4
9. Co-Carrier Switched Local Services (centrex)
(Business)....................................................... 23.0
10. Co-Carrier Switched Local Services
(Residential)................................................... 20.8
11. Intralata Toll and Other......................................... 17.6
12. Unclassified "other"............................................. 2.0
------
Total U.S. Market..................................................... $101.8
======
</TABLE>
- ---------------
* Source: Paradigm Resources, Inc. Includes data for Tier 1, Tier 2, Tier 3 and
all other markets.
54
<PAGE> 56
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
55
<PAGE> 57
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
56
<PAGE> 58
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.
57
<PAGE> 59
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>
58
<PAGE> 60
<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.
59
<PAGE> 61
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
60
<PAGE> 62
charged by ILECs to CLECs for interim portability should be minimal and that
permanent number portability should be available in the top 100 U.S. markets by
the end of 1997. In September 1996, the FCC designated the members of the North
American Numbering Council, which will advise the FCC on numbering issues. On
November 18, 1996, one RBOC filed a complaint in the U.S. Court of Claims
requesting compensation for costs of interim portability that it claims were not
allowed by the FCC in violation of its rights under the Fifth Amendment of the
U.S. Constitution.
In September 1995, the FCC issued a Notice of Proposed Rulemaking which
proposes rules that, among other things, would increase ILEC pricing flexibility
and deregulation as competition increases.
During 1996 the FCC has taken several actions with respect to competitive
local telecommunications pursuant to the Telecommunications Act of 1996.
On August 1, 1996, the FCC issued an order amending its pole attachment
rules to be pursuant to the Telecommunications Act of 1996 by requiring
utilities, including ILECs and most electric companies, to make poles, conduit
and rights-of-way available to telecommunications carriers, including CLECs, at
reasonable cost and on a nondiscriminatory basis. Several utilities have
appealed the FCC order to the U.S. Court of Appeals, which has not yet issued a
decision.
On August 8, 1996, the FCC issued an order containing rules providing
guidance to the ILECs, CLECs, IXCs and state PUCs regarding several provisions
of the Telecommunications Act of 1996, to be applicable in the event that
parties to interconnection agreements cannot agree on certain terms and the
state PUCs issue orders containing arbitrated results.
The rules include, among other things, FCC guidance on: (1) discounts for
end-to-end resale of ILEC local exchange services (which the FCC has suggested
should be in a range of 17% to 25%); (2) availability of unbundled local loops
and other unbundled ILEC network elements; (3) the use of "total element long
run incremental cost" (TELRIC) in the pricing of these unbundled network
elements; (4) average default proxy prices for unbundled local loops in each
state; (5) mutual compensation rates for termination of ILEC/CLEC local calls;
(6) an access charge transition plan that: (a) leaves access charges unchanged
with respect to situations involving resale of ILEC local exchange services; (b)
leaves all access charges in place with respect to situations involving use of
ILEC unbundled switching and other network elements to provide local exchange
services, except for 25% of the "transport interconnection charge" (TIC); and
(c) permits avoidance of access charges only when the ILEC switch is not
utilized; and (7) the ability of CLECs and other interconnectors to opt into
portions of interconnection agreements negotiated by ILECs with other parties on
a most favored nation (or "pick and choose") basis.
The FCC is expected to issue in December 1996 a Notice of Proposed Rule
Making regarding future changes to access charges. In addition, the
Federal-State Joint Board on Universal Service consisting of FCC and state
commissioners made its recommendations on the implementation of the universal
service provisions of the Telecommunications Act of 1996 on November 7, 1996 and
on November 18, 1996 the FCC issued a public notice requesting comments on these
recommendations. Under the Telecommunications Act of 1996, the FCC must act on
these recommendations by May, 1997 and has stated that it intends to announce
new access charge rules within the same time frame.
The Company envisions that the FCC will initiate many additional
proceedings, as a result of the enactment of federal legislation, defining and
construing the terms and conditions of the various components necessary for
local competition. Many, if not all, of the FCC orders under the federal
legislation will likely be appealed by one or more affected parties to the U.S.
Court of Appeals and U.S. Supreme Court. In addition, the Telecommunications Act
of 1996 may be amended in 1997 or subsequent years. Accordingly, the Company is
unable to determine the final form and impact of existing and future
legislation, and the regulatory and judicial actions under such legislation.
61
<PAGE> 63
COURT APPEALS
Various parties, including ILECs and state PUCs, filed appeals from the
FCC's August 8, 1996 order to various U.S. Courts of Appeal, and several parties
petitioned the FCC and the courts to stay the effectiveness of the FCC rules
included in the FCC's order, pending a ruling on the appeals. Many of the
appeals were transferred to the Eighth Circuit U.S. Court of Appeals. On
November 18, 1996, several members of Congress filed an amicus curiae brief in
support of the appeals of the FCC order.
The FCC has not stayed its own order. However, on October 15, 1996, the
Eighth Circuit U.S. Court of Appeals issued an order containing a partial stay,
pending the court's ruling on the various appeals. The order imposed the partial
stay on: (1) the use of TELRIC in the pricing of unbundled ILEC network elements
and the resulting default proxy prices; and (2) the "pick and choose"
provisions. The remainder of the FCC's August 8, 1996 order remains in effect.
On November 12, 1996, the U.S. Supreme Court declined to overturn the stay. The
Eighth Circuit U.S. Court of Appeals is scheduled to hear arguments on the
various appeals in January 1997.
The partial stay will not have any material adverse effect on the Company
because the Company already has in effect interconnection agreements with the
ILECs, or expects to have such agreements in effect after state PUC
arbitrations, in substantially all of its markets by year-end 1996, under the
provisions of The Telecommunications Act of 1996, which have not been stayed,
and which specifically require ILECs to enter into interconnection agreements
and require state PUCs to arbitrate such agreements within certain time frames.
The stay of the FCC rules does not delay the implementation of the Act by the
parties and by the state PUCs, but rather suspends the guidance that the FCC
sought to provide the parties and the state PUCs in the portions of the rules
that were stayed.
STATE REGULATION
The Company's offering of switched local exchange services may be
classified as intrastate and therefore subject to state regulation. The Company
is certified as a CLEC in 26 of its 30 networks. State authorizations vary in
the scope of the intrastate services permitted. The Company is in the process of
seeking to expand the scope of its intrastate certification in various
jurisdictions, a process which will depend upon regulatory action in the
individual states. State laws and regulations that prohibit or have the effect
of prohibiting, local and long distance telecommunications competition are
preempted under the Telecommunications Act of 1996.
In most states, the Company is required to file tariffs setting forth the
terms, conditions and prices for services which are classified as intrastate. In
some states, the Company's tariff can list a range of prices for particular
services, and in others, such prices can be set on an individual customer basis.
The Company is not subject to price cap or to rate of return regulation in any
state in which it currently provides services.
Under the Telecommunications Act of 1996, implementation of the Company's
plans to compete in local markets is and will continue to be, to a certain
extent, controlled by the individual states. The Company continues to support
efforts at the state government level to more quickly implement competition in
their markets under the new federal law and to permit CLECs to operate on the
same basis and with the same rights as the ILECs, sometimes referred to as
"co-carrier status." As of September 30, 1996, most states have taken regulatory
and legislative action to open local communications markets to local exchange
competition and co-carrier status. The Company believes that most of the states
in which it operates will open all local exchange markets to competition in 1996
in accordance with the requirements of the new federal law. When co-carrier
status is granted in a particular state, CLECs would expect to realize lower
costs for providing intrastate switched local exchange services in that state.
62
<PAGE> 64
The Company has established interconnection agreements with ILECs for 26 of
its 30 networks. The Telecommunications Act of 1996 requires ILECs to enter into
interconnection agreements with CLECs and other competitors and requires state
PUCs to arbitrate such agreements within certain time frames. US West in New
Mexico is the only RBOC in the Company's operating markets with which the
Company does not have an interconnection agreement, and the Company is in
binding arbitration with US West in New Mexico which is scheduled to be
completed by late 1996. While the Telecommunications Act of 1996 mandates the
implementation of interconnection arrangements, there can be no assurance that
such negotiations will enable the Company to secure its desired co-carrier
arrangements in a timely fashion or for appropriate rates and terms.
LOCAL GOVERNMENT AUTHORIZATIONS
In certain locations, the Company is required to obtain local franchises,
licenses or other operating rights and street opening and construction permits
to install and expand its fiber optic networks. In some of the areas where the
Company provides network services, the Company's subsidiaries pay license or
franchise fees based on a percent of gross revenues or on a per linear foot
basis. There is no assurance that certain cities that do not impose fees will
not seek to impose fees, nor is there any assurance that, following the
expiration of existing franchises, fees will remain at their current levels.
The Telecommunications Act of 1996 prohibits local governmental authorities
from discriminating among telecommunications carriers and mandates competitively
neutral treatment.
If any of the Company's existing franchise or license agreements were
terminated prior to its expiration date and the Company were forced to remove
its fiber from the streets or abandon its network in place, such termination
would have a material adverse effect on the Company's subsidiary in that
metropolitan area and could have a material adverse effect on the Company.
63
<PAGE> 65
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS
Robert A. Brooks(1)............... 64 Chairman; Director
James C. Allen(1,4)............... 50 Vice Chairman & Chief Executive Officer; Director
D. Craig Young(4)................. 43 President & Chief Operating Officer; Director
John C. Shapleigh................. 47 Executive Vice President-Regulatory and Corporate
Development
David L. Solomon.................. 37 Executive Vice President & Chief Financial Officer
John K. Brooks.................... 35 Senior Vice President and President, JB Telecom,
Inc.
Gregory J. Christoffel............ 48 Senior Vice President & General Counsel
Marilou Crum...................... 49 Senior Vice President, Marketing and Carrier Sales
Jim A. Moffit..................... 51 Senior Vice President and Managing Director-GLA
International
Waymon R. Tipton.................. 39 Senior Vice President-Corporate Communications and
Strategic Development
Gerard J. Howe.................... 41 Vice President-Finance and Senior Vice President &
Chief Financial Officer-JB Telecom, Inc.
NON-MANAGEMENT DIRECTORS
Robert F. Benbow(3)............... 61 Director
William J. Bresnan(1,3,5)......... 63 Director
Jonathan M. Nelson(1,2,4,5)....... 40 Director
G. Jackson Tankersley,
Jr.(1,2,4,5)................... 47 Director
Ronald H. Vander Pol(2,3,4)....... 44 Director
Carol deB. Whitaker............... 42 Director
</TABLE>
- -------------------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
(4) Member of Finance Committee
(5) Member of Board Governance Committee
EXECUTIVE OFFICERS
ROBERT A. BROOKS, CHAIRMAN. Mr. Brooks has been Chairman of the Company
since its formation in November 1993. Mr. Brooks was founder and previously
served as Chairman of the Board and CEO of BTC. Mr. Brooks has 39 years
experience as an entrepreneur, business planner and developer, cable system
operator, investor, engineer, consultant, project manager, expert witness and
management advisor in cable television and broadband telecommunications. Mr.
Brooks was a founder and Chairman for ten years of Cencom Cable Associates,
which was founded in 1982 with initial capitalization of approximately $300,000
and was purchased in 1991 by Crown Media (a Hallmark affiliate) in a transaction
valued at approximately $1 billion. Mr. Brooks previously served as a Director
of OneComm and Chem Design Corporation. He has a B.S.E.E. from Northeastern
University and currently is a member of its Corporation. Mr. Brooks currently
serves as a member of President's Council of St. Louis University and is a
Registered Professional Engineer, a Member of N.S.P.E., a Senior Member of
I.E.E.E. and an inducted member of the prestigious Cable Television Pioneers
Club.
JAMES C. ALLEN, VICE CHAIRMAN, CEO. Mr. Allen has been Vice Chairman and
CEO of the Company since its formation in November 1993. Mr. Allen previously
served as President and COO of BTC. Mr. Allen has 25 years experience as an
entrepreneur, business planner and developer, cable system operator, financier,
expert witness and advisor in cable television and broadband
64
<PAGE> 66
telecommunications. Mr. Allen was a founder and President, CFO and COO of Cencom
Cable Associates, Vice President of Operations of Telcom Engineering, Inc., a
telecommunications engineering and consulting firm with clients in both the
telephone and cable television industries, Vice President of Operations of
United Cable Television, Divisional Manager of Continental Telephone
Corporation, and Vice President for Finance of National Communications Service
Corporation. He served as Chief Financial and Chief Operating Officer of David
Lipscomb University, from which he holds a B.S. degree.
D. CRAIG YOUNG, PRESIDENT, COO. Mr. Young has served as President and COO
of the Company since April 1995. Mr. Young has 16 years experience in the
telecommunications industry. He served as Vice President-Sales Operations,
Custom Business Services of Ameritech, Inc. from 1993 to 1995; Vice
President-Sales and Service, Business and Government Services of U.S. West
Communications, Inc. from 1992 to 1993; Vice President-Sales, Large Business
Service from 1989 to 1992; and Vice President and General Manager-U.S. West
Information Systems from 1986 to 1988. Mr. Young's responsibilities at
Ameritech, Inc. and U.S. West Communications, Inc. included the management of
all voice and data sales, engineering and pricing activities for large
commercial and government end users, and full P&L responsibility for more than
$650 million in revenue and direction of a work force of more than 400
employees. Prior to that he served as President of Executone Information
Systems, a franchise distributor of voice products. He joined the Company in
1995. He has a B.S., Business Administration/Marketing degree from California
State University and has attended the Executive Management Program at Columbia
University.
JOHN C. SHAPLEIGH, EXECUTIVE VICE PRESIDENT - REGULATORY AND CORPORATE
DEVELOPMENT. Mr. Shapleigh has been Executive Vice President in charge of the
Company's regulatory and corporate development activities since its formation in
November 1993. Mr. Shapleigh has 22 years of entrepreneurial, management,
regulatory, government policy and legal experience. He is the immediately past
Chairman and previously served for two years as President of the Association for
Local Telecommunications Services (ALTS), the national trade association for
competitive local telecommunications companies. He also served for one year as
Associate Administrator of the National Telecommunications and Information
Administration (NTIA) in the U.S. Department of Commerce, a key federal
telecommunications policy position where he directed NTIA TELECOM 2000: Charting
the Course for a New Century, a comprehensive review of 18 telecommunications,
mass media and information industries, including telephone, television and cable
television, three years as Vice President and General Counsel of LDX Net and
WilTel, developers of regional fiber optic telephone networks, positions
involving the negotiation of over $100 million in debt financing agreements and
oversight of all federal, state and local regulatory matters, and three years as
Commissioner, then Chairman, of the Missouri Public Service Commission. He has
an A.B. degree from Dartmouth College (Senior Honors) and a J.D. degree from the
Washington University School of Law (Law Quarterly). He is a recipient of the
President's Award of the Missouri Bar Association.
DAVID L. SOLOMON, EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL OFFICER. Mr.
Solomon has 13 years experience in financial management and reporting, auditing
and business advisory services with KPMG Peat Marwick LLP, most recently as
partner. Responsibilities included working with SEC registrants including
participation in initial public offerings, equity offerings, debt offerings and
required filings. Clients served included organizations in the banking, thrift,
insurance, and real estate industries. He joined the Company as Senior Vice
President and CFO and has previously served as Secretary and Chief Financial
Officer of BTC in 1994. He is a member of the American Institute and Tennessee
Society of CPAs. He has a Bachelor of Science degree from David Lipscomb
University.
JOHN K. BROOKS, SENIOR VICE PRESIDENT AND PRESIDENT - JB TELECOM, INC. Mr.
Brooks has over 11 years of entrepreneurial, cable TV system management,
marketing and regulatory experience. He was Vice President of Operations of
Cencom Cable Associates, Inc. from 1983 until Cencom was acquired by a
subsidiary of Hallmark Cards, Inc. in 1991. Previous positions with Cencom
included
65
<PAGE> 67
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
66
<PAGE> 68
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.
67
<PAGE> 69
JONATHAN M. NELSON, DIRECTOR. Mr. Nelson is a managing general partner of
Providence Ventures, L.P., which is the general partner of the general partner
of Providence Media Partners L.P. ("PMP"). Mr. Nelson is Co-Chairman of
Providence Ventures Inc. ("Providence"), which is the management company for
PMP. He joined that firm in 1990. Mr. Nelson is also a Managing Director of
Narragansett Capital, Inc. ("Narragansett"), the management company for three
separate equity investment funds. Affiliates of Providence and Narragansett have
equity investments in cellular telephone, paging, wireless data, ESMR, PCS,
cable television and broadcast businesses. Mr. Nelson is currently a director of
Wellman, Inc., and numerous privately-held companies affiliated with Providence
or Narragansett, including, Cellnet Data Systems Inc., Interep National Radio
Sales, Inc., Powerfone Holdings, Inc. and Western Wireless Corporation. Mr.
Nelson received a Master of Business Administration from the Harvard Business
School in 1983 and a Bachelor of Arts from Brown University in 1977.
G. JACKSON TANKERSLEY, JR., DIRECTOR. Mr. Tankersley is a co-founder and
General Partner of The Centennial Funds ("Centennial"). He joined that firm in
1981. He also serves as the President and Chief Executive Officer of Centennial
Holdings, Inc., which manages Centennial. Since the formation of Centennial in
1981, it has specialized its investment activities in the electronic
communications industries. Previously, Mr. Tankersley served as a vice president
of Continental Illinois Venture Corporation and Continental Illinois Equity
Corporation, the private equity investment arms of Continental Illinois Corp. He
has served on a number of the boards of directors of various public and private
portfolio investments of Centennial. Mr. Tankersley received a B.A. degree (high
honors) from Denison University and an M.B.A. from The Amos Tuck School of
Business Administration at Dartmouth College.
RONALD H. VANDER POL, DIRECTOR. Mr. Vander Pol has been a participant in
the telecommunications industry for the last 16 years. In 1982, he founded
Teledial America, Inc., a long distance reseller. He started Digital Signal,
Inc., a fiber optic provider, in 1986 and City Signal, Inc., a competitive
access provider, in 1989 (see "Summary -- Recent Developments" and "Certain
Relationships and Related Transactions"). Since then, Mr. Vander Pol has started
two additional long distance companies, Teledial of North Carolina and ATS
Network Services in Tennessee. He holds a bachelor's degree from Calvin College
in Grand Rapids, Michigan.
CAROL DEB. WHITAKER, DIRECTOR. Ms. Whitaker has almost twenty years of
investment banking and operating experience with both corporations and Wall
Street firms. Ms. Whitaker is Chairman of Whitko & Company, a Denver based
investment banking and management consulting firm. Previous positions included
Chief Executive Officer of W.W. Comm, Inc., a start-up company exploring
videotelecommunications opportunities; acting Chief Financial Officer for
OneComm Corp., an emerging wireless communications company; and Vice President
of Development for Rifkin & Associates, Inc., a privately owned cable television
owner and operator, with responsibility for acquisition financing. Ms. Whitaker
has a B.A. in Economics from Colorado College and an M.B.A. from the University
of Chicago.
-------------------------
Officers are elected by and serve at the discretion of the Board of
Directors. John K. Brooks is the son of Robert A. Brooks. There are no other
family relationships among the directors and executive officers of the Company.
The Board of Directors has an Executive Committee, a Finance Committee, an
Audit Committee, a Compensation Committee, a Nominating Committee and a Board
Governance Committee. The Compensation Committee is comprised of Messrs.
Tankersley (Chairman) and Nelson and Ms. Whitaker. Directors are not compensated
for their services as directors but are reimbursed for expenses incurred in
connection with Board and committee meetings attended.
The By-laws of the Company provide for a Board of Directors consisting of
ten directors. At the present time there is one vacancy. Each of the directors,
other than Messrs. Bresnan, Vander Pol, Young and Tankersley and Ms. Whitaker,
has served since the formation of the Company in
68
<PAGE> 70
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.
69
<PAGE> 71
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 December
22, 1996, options for an aggregate of 1,066,850 shares at $4.00 per share,
452,336 shares at $6.60 per share, 320,320 shares at $11.35 per share, 700,000
shares at $12.50 per share, 130,000 shares at $27.00 per share, 80,000 shares at
$29.50 per share, 184,000 shares at $32.00 per share and 50,000 shares at $33.75
per share were outstanding (including substituted options issued upon
effectiveness of the merger with BTC on January 2, 1996). Options held by the
CEO and each of the other executive officers named in the Summary Compensation
Table are as follows: Mr. Brooks -- 60,000 shares at $4.00, 60,000 shares at
$6.60, 37,020 shares at $11.35 and 100,000 shares at $12.50; Mr. Allen -- 60,000
shares at $4.00, 60,000 shares at $6.60, 55,540 shares at $11.35 and 100,000
shares at $12.50; Mr. Young -- 200,000 shares at $4.00 and 20,000 shares at
$12.50; and Mr. Shapleigh -- 120,000 shares at $4.00, 9,260 shares at $11.35 and
80,000 shares at $12.50; and Mr. Solomon -- 40,000 shares at $4.00, 60,000
shares at $6.60, 18,520 shares at $11.35 and 100,000 shares at $12.50. All
options granted under the 1993 Stock Option Plan become fully vested upon a
change-in-control of the Company, as defined in such options. The following
table presents certain information concerning stock options granted to the CEO
and each of the other named executive officers during 1995. The exercise price
for all of the grants of stock options was the fair market value of the Common
Stock on the date of grant as determined by the Compensation Committee of the
Board of Directors.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
TOTAL PRICE APPRECIATION
NUMBER OF OPTIONS FOR OPTION TERM(1)
SECURITIES UNDERLYING GRANTED TO EXERCISE OR ---------------------
OPTIONS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION 5% 10%
NAME (#) FISCAL YEAR ($/SH) DATE(2) ($) ($)
- ---------------------- --------------------- ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Brooks...... 60,000 6.9% $6.60 10/17/05 $249,042 $ 631,105
James C. Allen........ 60,000 6.9% $6.60 10/17/05 $249,042 $ 631,105
D. Craig Young........ 200,000 22.9% $4.00 04/13/05 $503,112 $1,274,992
John C. Shapleigh..... 0 0 -- -- -- --
David L. Solomon...... 60,000 6.9% $6.60 07/13/05 $249,042 $ 631,105
</TABLE>
- ---------------
(1) The dollar amounts under the 5% and 10% columns are the result of
calculations required by the rules of the Securities and Exchange Commission
and, therefore, are not intended to forecast possible future appreciation,
if any, of the Common Stock price. The amounts shown reflect the difference
between the appreciation and the exercise price at the assumed annual rates
of appreciation through the tenth anniversary of the dates of grant.
(2) The options granted to Mr. Brooks and Mr. Allen are fully vested. All other
options vest in one-third increments on the first, second and third
anniversaries of the date of initial grant. Mr. Young's options would fully
vest upon a termination of his employment without cause.
The following table sets forth certain information with respect to the CEO
and the named executive officers regarding the value of their unexercised
options held as of December 31, 1995. No options were exercised during 1995.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1995(1) AT DECEMBER 31, 1995(2)
------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------- -------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert A. Brooks............................ 104,680 52,340 $ 604,382 $ 302,191
James C. Allen.............................. 117,027 58,513 618,588 309,290
D. Craig Young.............................. -- 200,000 -- 1,700,000
John C. Shapleigh........................... 86,173 43,087 687,099 343,550
David L. Solomon............................ 25,680 92,840 127,530 587,768
</TABLE>
- ---------------
(1) Includes substituted options issued upon the effectiveness of the merger
with BTC on January 2, 1996.
(2) Reflects the difference between the exercise price and $12.50 per share.
70
<PAGE> 72
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.
71
<PAGE> 73
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of December 22, 1996 by
(i) each person or entity who is known by the Company to beneficially own 5% or
more of the Company's Common Stock, (ii) each of the executive officers named in
the Summary Compensation Table, (iii) each of the Company's directors and (iv)
all of the Company's directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES COMMON STOCK
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING(1)
- ------------------------------------------------------ ------------------ --------------
<S> <C> <C>
5% Stockholders and Affiliated Directors
The Centennial Funds.................................. 2,070,871(2) 6.65%
G. Jackson Tankersley, Jr. (Director)
1999 Broadway, Suite 2100
Denver, CO 80202
Ronald H. Vander Pol (Director)....................... 2,056,000(3) 6.61%
7228 Kenowa Ave., S.W.
Byron Center, MI 49315
Media Communications Partners II Limited
Partnership......................................... 2,009,208(4) 6.46%
75 State Street
Boston, MA 02109
Putnam Investment Management, Inc. ................... 1,814,950(5) 5.84%
One Post Office Square
Boston, MA 02109
Other Directors and Named Executives
Jonathan M. Nelson (Director)......................... 1,426,638(6) 4.59%
Robert F. Benbow (Director)........................... 1,063,638(7) 3.42%
Robert A. Brooks (Named Executive and Director)....... 977,505(8) 3.12%
James C. Allen (Named Executive and Director)......... 356,903(9) 1.14%
John C. Shapleigh (Named Executive)................... 280,595(10) *
David L. Solomon (Named Executive).................... 108,860(11) *
D. Craig Young (Named Executive and Director)......... 78,356(12) *
William J. Bresnan (Director)......................... 51,634(13) *
Carol deB. Whitaker (Director)........................ 20,000(14) *
Directors and executive officers as a group
(17 persons)........................................ 6,855,453(15) 21.35%
</TABLE>
- ---------------
* Represents beneficial ownership of less than one percent.
(1) Percentages are determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended.
(2) Represents (i) 1,194,520 shares beneficially owned by Centennial Fund IV,
L.P. ("Centennial IV"), including 1,177,860 shares of Common Stock and
warrants to purchase 16,660 shares of Common Stock, (ii) 843,670 shares
beneficially owned by Centennial Fund III, L.P. ("Centennial III"),
including 792,250 shares of Common Stock and warrants to purchase 51,420
shares of Common Stock, (iii) 21,510 shares beneficially owned by
Centennial Holdings IV, L.P. ("Holdings IV"), (iv) 5,400 shares
beneficially owned by Centennial Holdings, Inc. ("CHI"), (v) 238 shares
held by The Tankersley Family Limited Partnership ("Tankersley LP") and
(vi) 1,833 shares of Common Stock and 3,700 shares of Common Stock subject
to an option which is exercisable within 60 days owned by G. Jackson
Tankersley, Jr.
Mr. Tankersley is (i) an individual General Partner of each of Centennial
Holdings III, L.P. ("Holdings III") and Holdings IV which serves as the
sole General Partner of Centennial III and Centennial IV, respectively,
(ii) an executive officer and director of CHI and (iii) an
72
<PAGE> 74
individual General Partner of Tankersley LP. As the sole General Partner of
Centennial III, Holdings III may be deemed to be the indirect beneficial
owner of Centennial III's shares by virtue of its authority to make
investment decisions regarding the voting and disposition of shares
directly beneficially owned by Centennial III (such decisions are made by
the majority decision of a three member Investment Committee of Holdings
III on which Mr. Tankersley serves). As the sole General Partner of
Centennial IV, Holdings IV may be deemed to be the indirect beneficial
owner of Centennial IV's shares by virtue of its authority to make
investment decisions regarding the voting and disposition of shares
directly beneficially owned by Centennial IV (such decisions are made by
the majority decision of a seven member Investment Committee of Holdings IV
on which Mr. Tankersley serves). Holdings III does not own directly any
shares of Common Stock.
Mr. Tankersley disclaims beneficial ownership of all shares of the
Company's Common Stock (i) directly or indirectly owned by Centennial III
or Holdings III, (ii) directly or indirectly owned by Centennial IV or
Holdings IV, (iii) directly or indirectly owned by CHI and (iv) directly or
indirectly owned by Tankersley LP. Each of Centennial III and Holdings III
disclaims beneficial ownership of all shares directly beneficially owned by
Centennial IV; each of Centennial IV and Holdings IV disclaims beneficial
ownership of all shares directly beneficially owned by Centennial III; and
all members of the Holdings III and Holdings IV Investment Committees
disclaim beneficial ownership of shares directly beneficially owned by
Centennial III and Centennial IV, respectively. In addition, the officers
and directors of CHI disclaim beneficial ownership of shares directly
beneficially owned by CHI, and the General Partners of Tankersley LP
disclaim beneficial ownership of shares directly beneficially owned by
Tankersley LP.
(3) Includes (i) 1,738,443 shares of Common Stock held by Ronald H. Vander Pol
and (ii) 317,557 shares of Common Stock held by Rushing Wind Ltd., Mr.
Vander Pol's private foundation. Mr. Vander Pol has the option to require
the Company to repurchase up to 2,016,000 of such shares at a price of
$12.50 per share on or before February 1, 1998.
(4) Represents 2,009,208 shares of Common Stock. Media/Communications Partners
II Limited Partnership is an investment fund managed by M/C II Limited
Partnership, its General Partner. Other entities managed by M/C II Limited
Partnership beneficially own 73,896 shares of Common Stock, including (i)
55,736 shares of Common Stock held by Media/Communications Investors
Limited Partnership and (ii) 18,160 shares of Common Stock held by Chestnut
Street Partners, Inc. Media/Communication Partners II Limited Partnership
disclaims beneficial ownership of the shares of Common Stock beneficially
owned by Media/Communications Investors Limited Partnership and Chestnut
Street Partners, Inc.
(5) Based on information in its filing on Form 13F.
(6) Includes (i) 1,423,638 shares of Common Stock held by Providence Media
Partners, L.P. and (ii) 3,000 shares of Common Stock held by Jonathan M.
Nelson. Mr. Nelson is a managing general partner of Providence Ventures,
L.P., which is the general partner of the general partner of Providence
Media Partners, L.P. Providence Media Partners, L.P. disclaims beneficial
ownership of shares beneficially owned by Mr. Nelson. Mr. Nelson disclaims
beneficial ownership of shares beneficially owned by Providence Media
Partners L.P.
(7) Represents shares beneficially owned by entities to which Burr, Egan,
Deleage & Co., of which Mr. Benbow is a Vice President, directly or
indirectly provides investment advisory services. Includes (i) 1,052,568
shares of Common Stock held by Alta V Limited Partnership and (ii) 11,070
shares of Common Stock held by Customs House Partners. The respective
general partners of Alta V Limited Partnership and Customs House Partners
exercise sole voting and investment power with respect to the shares owned
by such funds. The principals of Burr, Egan, Deleage & Co. are general
partners of Alta V Management Partners, L.P. (which is a general partner of
Alta V Limited Partnership) and Customs House Partners. As general partners
of such funds, they may be deemed to share voting and investment powers for
the shares held by the funds. The principals of Burr, Egan, Deleage & Co.
disclaim
73
<PAGE> 75
beneficial ownership of all such shares held by the foregoing funds, except
to the extent of their proportionate pecuniary interests therein. Mr.
Benbow is a Vice President of Burr, Egan, Deleage & Co. and general partner
of Alta V Management Partners, L.P. (which is the general partner of Alta V
Limited Partnership). As a general partner of the fund, he may be deemed to
share voting and investment powers for the shares held by the fund. He
disclaims beneficial ownership of all such shares held by the
aforementioned fund except to the extent of his proportionate pecuniary
interests (if any) therein. He does not directly own any securities of the
Company.
(8) Includes (i) 652,152 shares of Common Stock, warrants to purchase 107,200
shares of Common Stock and 190,353 shares of Common Stock subject to
options which are exercisable within 60 days held by Robert A. Brooks and
(ii) 27,800 shares of Common Stock held by The Brooks Foundation, of which
Mr. Brooks is a trustee.
(9) Represents 147,400 shares of Common Stock, warrants to purchase 260 shares
of Common Stock and 208,873 shares of Common Stock subject to options which
are exercisable within 60 days owned by Mr. Allen and 370 shares of Common
Stock owned jointly by Mr. Allen and his wife.
(10) Includes (i) 82,597 shares of Common Stock and 155,926 shares of Common
Stock subject to options which are exercisable within 60 days held by John
C. Shapleigh, (ii) 24,802 shares of Common Stock and warrants to purchase
520 shares of Common Stock held by John C. Shapleigh's Individual
Retirement Account, (iii) 12,120 shares of Common Stock held by John C.
Shapleigh Holdings, L.P., of which Mr. Shapleigh is the General Partner and
(iv) 4,630 shares of Common Stock owned by Anne T. Shapleigh, wife of Mr.
Shapleigh. Mr. Shapleigh disclaims beneficial ownership of the shares owned
by Mrs. Shapleigh.
(11) Represents 10,320 shares of Common Stock, warrants to purchase 20 shares of
Common Stock and 98,520 shares of Common Stock subject to options which are
exercisable within 60 days.
(12) Includes (i) 2,420 shares of Common Stock and 73,333 shares of Common Stock
subject to options which are exercisable within 60 days held by D. Craig
Young, (ii) 833 shares of Common Stock held by D. Craig Young's Individual
Retirement Account, (iii) 1,220 shares of Common Stock held by The Joan L.
Young Revocable Trust, of which Joan L. Young, the wife of D. Craig Young,
is trustee and (iv) 550 shares of Common Stock held by Joan L. Young's
Individual Retirement Account.
(13) Represents 47,934 shares of Common Stock and an option to purchase 3,700
shares of Common Stock which is exercisable within 60 days.
(14) Represents an option to purchase 20,000 shares of Common Stock which is
exercisable within 60 days.
(15) Excludes 2,065,338 shares beneficially owned directly by Centennial IV,
Centennial III, Holdings IV, CHI and Tankersley LP, as set forth in
footnote (2), above.
74
<PAGE> 76
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
75
<PAGE> 77
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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Secondary Offering and assuming (i) the
Underwriters' over-allotment options thereunder are exercised in full and (ii)
no exercise of outstanding warrants and options, the Company will have
outstanding shares of Common Stock. Of those shares, the
shares sold in the Secondary 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 the Secondary 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.
76
<PAGE> 78
Options and warrants to purchase 1,519,213 and 409,860 shares of Common
Stock, respectively, were outstanding as of December 22, 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 Secondary 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 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 this 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 , 2000, and shares received upon conversion
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. See "Description 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 Secondary Offering 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.
77
<PAGE> 79
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, 51,750 shares 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 December 22, 1996, the 31,082,139 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) 2,983,506 shares of Common Stock were subject to
outstanding options at a weighted average exercise price of $11.09 per share and
(iii) warrants and options to purchase 1,929,073 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 the Securities and any other outstanding Preferred Stock.
78
<PAGE> 80
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
79
<PAGE> 81
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 this 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
80
<PAGE> 82
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.
81
<PAGE> 83
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
82
<PAGE> 84
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.
TRANSFER AGENT AND REGISTRAR
The Company's Transfer Agent and Registrar is The Boatmen's Trust Company
("Boatmen's Trust"), St. Louis, Missouri.
83
<PAGE> 85
DESCRIPTION OF SECURITIES
The Finance Committee of the Board of Directors has adopted resolutions
authorizing issuance of the Series D Conversion Preferred Stock (referred to
herein as the "Automatically Convertible Equity Securities" or the
"Securities"). Each of the Depositary Shares represents beneficial ownership of
1/100 of a Security and entitles the owner to such proportion of all the rights
and preferences of the Security represented thereby. See "Description of
Depositary Shares".
The summary of the terms of the Securities contained herein does not
purport to be complete and is subject to, and qualified in its entirety by, the
provisions of the Company's Restated Certificate of Incorporation and the
certificate of designation of the Securities thereunder ("Certificate of
Designation"), forms of which are filed as exhibits to the Registration
Statement. The Company will file the final form of Certificate of Designation
with the Secretary of State of Delaware, which final form will be substantially
in the form filed as an exhibit to the Registration Statement.
The Restated Certificate of Incorporation authorizes the issuance of
1,040,012 shares of Preferred Stock, and the Securities constitute a series of
the Preferred Stock. See "Description of Capital Stock" above for a description
of certain terms applicable to all series of Preferred Stock and to the Common
Stock of the Company.
DIVIDENDS
Holders of Securities (and thereby holders of Depositary Shares) shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds of the Company legally available for payment, cash dividends from the date
of initial issuance of the Securities at the rate of $ .00 per annum or
$ .00 per quarter for each Security (equivalent to $ per annum or $ per
quarter for each Depositary Share), payable quarterly in arrears on the 1st day
of , , and or, if any such date is not a business
day, on the next succeeding business day. The first dividend payment will be for
the period from the date of initial issuance of the Securities to ,
1997 and will be paid on , 1997. Dividends will cease to accrue in
respect of the Securities on the Mandatory Conversion Date or on the date of
their earlier conversion. Dividends (or cash amounts equal to accrued and unpaid
dividends) payable on the Securities for any period less than a full quarterly
dividend period will be computed on the basis of a 360-day year of twelve 30-day
months.
Dividends on the Securities will accrue whether or not there are funds
legally available for the payment of such dividends and whether or not such
dividends are declared. Accrued but unpaid dividends on the Securities shall
cumulate as of the dividend payment date on which they first become payable, but
no interest shall accrue on accumulated but unpaid dividends on the Securities.
So long as any Securities are outstanding, the Company may not (a) declare
or pay any dividends (other than dividends payable in Common Stock or other
shares of the Company ranking junior to the Securities) to holders of Common
Stock or shares of the Company of any other class ranking on a parity with or
junior to the Securities, or (b) make any distributions of assets (directly or
indirectly, by purchase, redemption or otherwise) to the holders of Common Stock
or shares of the Company of any other class ranking on a parity with or junior
to the Securities unless all accrued and unpaid dividends on the Securities,
including the full dividends for the then quarterly dividend period, shall have
been paid or declared and funds sufficient for payment thereof set apart.
No dividends may be paid upon or declared or set apart for any of the
Preferred Stock ranking on a parity with the Securities for any quarterly
dividend period unless at the same time a like proportionate dividend for the
same quarterly dividend period, ratably in proportion to the respective annual
dividend rates fixed therefor, shall be paid upon or declared or set apart for
the Securities.
84
<PAGE> 86
AUTOMATIC CONVERSION OF SECURITIES
On , 2000 (the "Mandatory Conversion Date"), unless previously
converted at the option of the holder, each of the outstanding Securities (and
the related Depositary Shares) will automatically convert into a number of
shares of Common Stock of the Company at the Exchange Rate, plus the right to
receive an amount of cash equal to any and all accrued and unpaid dividends
(other than dividends declared and payable to holders of record on a prior date)
to the Mandatory Conversion Date. The "Exchange Rate" is equal to (a) if the
Current Market Price of Common Stock is greater than or equal to $ per share
(the "Threshold Price"), shares of Common Stock for each Security, (b)
if the Current Market Price is less than the Threshold Price but greater than
the Initial Price, the number of shares of Common Stock having a value
(determined at the Current Market Price) equal to 100 times the Initial Price,
and (c) if the Current Market Price is less than or equal to the Initial Price,
100 shares of Common Stock for each per Security (the "Upper Exchange Rate"),
subject in each case to adjustment in certain events.
The "Initial Price" is per share of Common Stock. The "Current
Market Price" means the average Closing Price per share of the Common Stock of
the Company on the 20 Trading Days immediately prior to, but not including, the
Mandatory Conversion Date. The "Closing Price" of a share of Common Stock on any
date of determination means the closing sale price (or, if no closing price is
reported, the last reported sale price) of such share as reported by The Nasdaq
National Market on such date, or, if it is not so reported, as reported in the
composite transactions for the principal United States securities exchange on
which the Common Stock is so listed, or, if it is not so listed on a United
States national or regional securities exchange, the last quoted bid price for
the Common Stock in the over-the-counter market as reported by the National
Quotation Bureau or similar organization, or, if such bid price is not
available, the market value of a share of Common Stock on such date as
determined by a nationally recognized independent investment banking firm
retained for this purpose by the Company. A "Trading Day" is defined as a day on
which the Common Stock (a) is not suspended from trading on any national or
regional securities exchange or association or over-the-counter market at the
close of business and (b) has traded at least once on the national or regional
securities exchange or association or over-the-counter market that is the
primary market for the trading of such security.
Because the price of the Common Stock is subject to market fluctuations,
the value of the Common Stock received by a holder of Securities upon automatic
conversion of the Securities on the Mandatory Conversion Date may be more or
less than the Current Market Price used to compute the Exchange Rate.
CONVERSION AT OPTION OF HOLDER
The Securities (and the related Depositary Shares) are convertible, in
whole or in part, at the option of the holders thereof, at any time after
, 1997 and prior to the Mandatory Conversion Date, into shares of
Common Stock at a rate (the "Optional Conversion Rate") of shares of
Common Stock for each Security ( of a share of Common Stock per
Depositary Share), subject to adjustment as described below.
The Depositary Shares may be voluntarily converted by the holders thereof
upon the same terms and conditions as the Securities represented by such
Depositary Shares, adjusted to reflect the fact that 100 Depositary Shares are
the equivalent of one Security. See "Description of Depositary Shares --
Conversion Provisions."
Holders of Securities at the close of business on a record date for any
payment of dividends will be entitled to receive the dividend payable on such
Securities on the corresponding dividend payment date notwithstanding the
optional conversion of such Securities following such record date and prior to
such dividend payment date. However, Securities surrendered for conversion after
the close of business on a record date for any payment of dividends and before
the opening of business on the next succeeding dividend payment date must be
accompanied by payment of an amount
85
<PAGE> 87
equal to the proportionate amount of the dividend thereon which is to be paid on
such dividend payment date accruing between the date of conversion and such
dividend payment date. Except as provided above, upon any optional conversion of
Securities, the Company will make no payment or allowance for unpaid dividends,
whether or not in arrears, on such Securities, or for dividends or distributions
on the shares of Common Stock issued upon such conversion.
ENHANCED DIVIDEND YIELD; LESS EQUITY APPRECIATION
Holders of Securities (or Depositary Shares representing Securities) will
receive dividends at an annual rate of $ per Security (equivalent to $
per annum for each Depositary Share), whereas the Company does not plan to pay
cash dividends on the Common Stock. The opportunity for equity appreciation
afforded by an investment in the Securities (and in the Depositary Shares),
however, is less than that afforded by an investment in Common Stock. Holders of
Securities (or the related Depositary Shares) will realize no equity
appreciation if at the Mandatory Conversion Date the Current Market Price is
below the Threshold Price, and less than all of such appreciation if at such
time the Current Market Price is above the Threshold Price. Holders of
Securities (or the related Depositary Shares) will realize the entire decline in
equity value if at such time the Current Market Price is less than the Initial
Price.
CONVERSION ADJUSTMENTS
The Exchange Rate and the Optional Conversion Rate are subject to
adjustment as appropriate in certain circumstances, including if the Company (a)
pays a stock dividend or makes a distribution with respect to its Common Stock
in shares of Common Stock, (b) subdivides or splits its outstanding Common
Stock, (c) combines its outstanding Common Stock into a smaller number of
shares, (d) issues by reclassification of its shares of Common Stock any shares
of Common Stock, (e) issues certain rights or warrants to all holders of its
Common Stock or (f) pays a dividend or distributes to all holders of its Common
Stock evidences of its indebtedness or other assets (including capital stock of
the Company but excluding any cash dividends or distributions and dividends
referred to in clause (a) above). In addition, the Company will be entitled to
make upward adjustments in the Exchange Rate and the Optional Conversion Rate as
the Company, in its discretion, determines to be advisable, in order that any
stock dividend, subdivision of shares, distribution of rights to purchase stock
or securities, or distribution of securities convertible into or exchangeable
for stock (or any transaction which could be treated as any of the foregoing
transactions pursuant to Section 305 of the Internal Revenue Code of 1986, as
amended) hereafter made by the Company to its stockholders will not be taxable.
All adjustments to the Exchange Rate and the Optional Conversion Rate will be
calculated to the nearest 1/100th of a share of Common Stock. No adjustment in
the Exchange Rate or the Optional Conversion Rate will be required unless such
adjustment would require an increase or decrease of at least one percent in the
Upper Exchange Rate, provided, however, that any adjustments which, by reason of
the foregoing, are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All adjustments will be made
successively.
Whenever the Exchange Rate and the Optional Conversion Rate are adjusted as
provided in the preceding paragraph, the Company will file with each transfer
agent for the Securities a certificate with respect to such adjustment, make a
prompt public announcement thereof and mail a notice to holders of the
Securities providing specified information with respect to such adjustment.
At least 10 days prior to taking any action which could result in an
adjustment in the Exchange Rate and the Optional Conversion Rate, the Company
will notify each holder of Securities concerning such proposed action.
86
<PAGE> 88
ADJUSTMENT FOR CERTAIN CONSOLIDATIONS OR MERGERS
In case of any consolidation or merger to which the Company is a party
(other than a merger or consolidation in which the Company is the continuing
corporation and in which the Common Stock outstanding immediately prior to the
merger or consolidation remains unchanged), or in case of any sale or transfer
to another entity of the property of the Company as an entirety or substantially
as an entirety, or in case of any statutory exchange of securities with another
entity (other than in connection with a merger or acquisition), each Security
shall, after consummation of such transaction, be subject to (i) conversion at
the option of the holder into the kind and amount of securities, cash, or other
property receivable upon consummation of such transaction by a holder of the
number of shares of Common Stock into which such Security might have been
converted immediately prior to consummation of such transaction and (ii)
conversion on the Mandatory Conversion Date into the kind and amount of
securities, cash, or other property receivable upon consummation of such
transaction by a holder of the number of shares of Common Stock into which such
Security would have been converted if the conversion on the Mandatory Conversion
Date had occurred immediately prior to the date of consummation of such
transaction assuming in each case that such holder of Common Stock failed to
exercise rights of election, if any, as to the kind or amount of securities,
cash, or other property receivable upon consummation of such transaction
(provided that if the kind or amount of securities, cash, or other property
receivable upon consummation of such transaction is not the same for each
nonelecting share, then the kind and amount of securities, cash, or other
property receivable upon consummation of such transaction for each nonelecting
share shall be deemed to be the kind and amount so receivable per share by a
plurality of the nonelecting shares). The kind and amount of securities into
which the Securities shall be convertible after consummation of such transaction
shall be subject to adjustment as described above under the caption "Conversion
Adjustments" following the date of consummation of such transaction. The Company
may not become a party to any such transaction unless the terms thereof are
consistent with the foregoing.
FRACTIONAL SHARES
No fractional shares of Common Stock will be issued upon conversion of
Securities. In lieu of any fractional share otherwise issuable in respect of the
aggregate number of Securities of any holder which are converted upon mandatory
conversion or any optional conversion, such holder shall be entitled to receive
an amount in cash equal to the same fraction of the Closing Price of the Common
Stock determined (a) as of the fifth Trading Day immediately preceding the
Mandatory Conversion Date, in the case of automatic conversion, or (b) as of the
second Trading Day immediately preceding the effective date of conversion, in
the case of an optional conversion by a holder.
PREFERRED STOCK PURCHASE RIGHTS
Reference is made to the "Description of Capital Stock -- Preferred Stock
Purchase Rights" for a description of the preferred stock purchase rights issued
by the Company. The method of calculation of the Current Market Price of the
Common Stock does not take into account the separate value of any rights such as
the Rights, except to the extent any such value may be reflected in the Current
Market Price. Because, subject to limitations contained therein, the holders of
Securities are provided with the benefits of the Rights Agreement, to the extent
the Securities are converted into Common Stock additional Rights may be issued.
LIQUIDATION RIGHTS
The holders of Securities will be entitled to receive in the event of any
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, $ per Security (equivalent to $ per Depositary
Share) plus an amount per Security equal to all dividends (whether or not
declared) accrued and unpaid thereon to the date of final distribution to such
holders (the "liquidation preference"), and no more.
87
<PAGE> 89
VOTING RIGHTS
In the event of default in the payment, in whole or in part, of six
quarterly dividends on the Securities or on the Preferred Stock of any other
series ranking on a parity with the Securities, whether or not consecutive, the
holders of shares of the Securities and such series of Preferred Stock, voting
as a single class, will be entitled to elect two directors of the Company, to
serve in addition to the directors otherwise elected. Such right to elect
additional directors is in lieu of any other rights of such holders to vote for
directors, and will remain in effect until no such quarterly dividend is in
default. The vote or written consent of at least two-thirds of the outstanding
Securities is necessary to effect (i) any amendment or repeal of any of the
provisions of the Restated Certificate of Incorporation or the By-laws of the
Company which affects the voting powers, rights, privileges or preferences of
the holders of the Securities, (ii) the authorization or issuance of any stock,
or any security convertible into any stock, ranking prior to the Securities,
(iii) the purchase or redemption of less than all the Securities then
outstanding (except in accordance with a stock purchase offer made to all
holders of Securities) when any dividends on the Securities are in arrears, or
(iv) the sale, lease or conveyance by the Company of all or substantially all of
its property or business, its voluntary liquidation or dissolution, or its
consolidation with or merger into any other entity, unless the resulting entity
will have no shares authorized or outstanding ranking prior to or on a parity
with the Securities except the same number with the same rights and preferences
as those of the Company authorized and outstanding immediately preceding such
consolidation or merger, and unless each holder of Securities immediately prior
thereto receives the same number of shares, with the same rights and
preferences, of the resulting entity.
RANKING
The Securities will rank senior to the Series C Junior Participating
Preferred Stock and on a parity with all other series of Preferred Stock as to
the payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up, unless the terms of any such series provide
otherwise.
MISCELLANEOUS
Upon issuance, the Securities will be fully paid and nonassessable. Holders
of Securities have no preemptive rights. The Company shall at all times reserve
and keep available out of its authorized and unissued Common Stock, solely for
issuance upon the conversion of Securities, such number of shares of Common
Stock as shall from time to time be issuable upon the conversion of all the
Securities then outstanding. Securities converted into Common Stock of the
Company or otherwise reacquired by the Company shall resume the status of
authorized and unissued shares of Preferred Stock, undesignated as to series,
and shall be available for subsequent issuance.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
Boatmen's Trust will act as transfer agent, registrar and paying agent for
the payment of dividends for the Securities.
DESCRIPTION OF DEPOSITARY SHARES
Each Depositary Share represents 1/100 of a Security deposited under the
Deposit Agreement dated as of , 1997 (the "Deposit Agreement"),
among the Company, Boatmen's Trust, as Depositary (the "Depositary"), and all
holders from time to time of depositary receipts issued thereunder (the
"Depositary Receipts"). Subject to the terms of the Deposit Agreement, a form of
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, each owner of a Depositary Share is entitled,
proportionately, to all the rights, preferences and privileges of the fractional
Security represented thereby (including dividend, conversion, voting, and
liquidation rights), and is subject to all of the limitations of the fractional
Security represented thereby,
88
<PAGE> 90
which are summarized above under "Description of Securities." The Depositary
Shares are evidenced by Depositary Receipts.
The following summary of the terms and provisions of the Deposit Agreement,
Depositary Shares and Depositary Receipts does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the Deposit Agreement (which contains the form of the Depositary Receipts).
Copies of the forms of Deposit Agreement and Depositary Receipt may be obtained
from the Company or the Depositary at the principal office of the Depositary at
which at any particular time its depositary business shall be administered,
which on the date hereof is The Boatmen's Trust Company, 510 Locust Street --
2nd Floor, Corporate Trust Department, St. Louis, Missouri 63101, upon request.
ISSUANCE OF DEPOSITARY RECEIPTS AND WITHDRAWAL OF SECURITIES
Immediately following the issuance of the Securities by the Company, the
Company will deposit the Securities with the Depositary, which will then issue
and deliver the Depositary Receipts to the Company. The Company will, in turn,
deliver the Depositary Receipts to the Underwriters. Depositary Receipts will be
issued evidencing only whole Depositary Shares.
Upon surrender of Depositary Receipts at the Corporate Office (as defined
in the Deposit Agreement) of the Depositary (or such other office as the
Depositary may designate), the owner of the Depositary Shares evidenced thereby
is entitled to delivery at such Corporate Office of certificates evidencing the
number of Securities (but only in whole Securities) and any money and other
property represented by such Depositary Receipts. If the Depositary Receipts
delivered by the holder evidence a number of Depositary Shares in excess of the
number of whole Securities to be withdrawn, the Depositary will deliver to such
holder at the same time a new Depositary Receipt evidencing such excess number
of Depositary Shares. The Company does not expect that there will be any public
trading market for the Securities except as represented by the Depositary
Shares.
CONVERSION PROVISIONS
AUTOMATIC CONVERSION. As described under "Description of Securities --
Automatic Conversion of Securities," the Securities are subject to automatic
conversion into shares of Common Stock on the Mandatory Conversion Date. The
Depositary Shares are subject to automatic conversion upon the same terms and
conditions as the Securities held by the Depositary, except that the number of
shares of Common Stock (and amount of any cash in respect of accrued and unpaid
dividends) received upon automatic conversion of each Depositary Share will be
equal to the number of shares of Common Stock (and amount of cash) received upon
automatic conversion of each Security divided by 100.
CONVERSION AT OPTION OF HOLDER. As described under "Description of
Securities -- Conversion at Option of Holder," the Securities may be converted,
in whole or in part, into shares of Common Stock at the option of the holders of
Securities at any time prior to the Mandatory Conversion Date. The Depositary
Shares may, at the option of holders thereof, be converted into shares of Common
Stock upon the same terms and conditions as the Securities, except that the
number of shares of Common Stock received upon conversion of each Depositary
Share will be equal to the number of shares of Common Stock received upon
conversion of each Security divided by 100. To effect such an optional
conversion, a holder of Depositary Shares must deliver Depositary Receipts
evidencing the Depositary Shares to be converted, together with a written notice
of conversion and a proper assignment of the Depositary Receipts to the Company,
to any transfer agent for the Depositary Shares, or endorsed in blank (and, if
applicable, payment of an amount equal to the dividend payable on such
Depositary Shares), to the Depositary or its agent. Each optional conversion of
Depositary Shares shall be deemed to have been effected immediately prior to the
close of business on the date on which the foregoing requirements shall have
been satisfied. The conversion shall be
89
<PAGE> 91
at the Optional Conversion Rate in effect at such time and on such date,
adjusted to reflect the fact that 100 Depositary Shares are the equivalent of
one Security.
FRACTIONAL SHARES. No fractional shares of Common Stock will be issued to
any holder of Depositary Shares upon the conversion of Depositary Shares. If any
such conversion would result in a fractional share of Common Stock being issued,
an amount will be paid in cash by the Company equal to the value of the
fractional interest.
To the extent that Depositary Shares are converted into shares of Common
Stock and all of such shares of Common Stock cannot be distributed to the record
holders of Depositary Receipts without creating fractional interests in such
shares, the Depositary may, with the consent of the Company, sell such shares of
Common Stock, and the net proceeds of any such sale shall be distributed or made
available for distribution to such record holders that would otherwise have
received fractional interests in such shares of Common Stock.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Depositary will distribute all cash dividends or other cash
distributions received in respect of the Securities to the record holders of
Depositary Shares in proportion, insofar as possible, to the number of
Depositary Shares owned by such holders, subject to obligations of holders to
file proofs, certificates and other information and to pay certain charges and
expenses to the Depositary.
In the event of a distribution other than cash in respect of the
Securities, the Depositary will distribute property received by it to the record
holders of Depositary Shares in proportion, insofar as possible, to the number
of Depositary Shares owned by such holder, subject to obligations of holders to
file proofs, certificates and other information and to pay certain charges and
expenses to the Depositary, unless the Depositary determines that it is not
feasible to make such distribution, in which case the Depositary may, with the
approval of the Company, sell such property and distribute the net proceeds from
such sale to such holders.
RECORD DATE
Whenever (i) any cash dividend or other cash distribution shall become
payable, any distribution other than cash shall be made, or any rights,
preferences or privileges shall be offered with respect to the Securities, or
(ii) the Depositary shall receive notice of any meeting at which holders of
Securities are entitled to vote or of which holders of Securities are entitled
to notice, the Depositary shall in each such instance fix a record date (which
shall be the same date as the record date for the Securities) for the
determination of the holders of Depositary Receipts (x) who shall be entitled to
receive such dividend, distribution, rights, preferences or privileges, or the
net proceeds of the sale thereof or (y) who shall be entitled to give
instructions for the exercise of voting rights at any such meeting or to receive
notice of such meeting.
VOTING OF SECURITIES
Upon receipt of notice of any meeting at which the holders of Securities
are entitled to vote, the Depositary will mail the information contained in such
notice of meeting to the record holders of Depositary Shares. Each record holder
of Depositary Shares on the record date (which will be the same date as the
record date for the Securities) will be entitled to instruct the Depositary as
to the exercise of voting rights pertaining to the number of Securities (or
fraction thereof) represented by such holder's Depositary Shares. The Depositary
will endeavor, insofar as practicable, to vote the number of Securities (or
fractions thereof) represented by such Depositary Shares in accordance with such
instructions, and the Company has agreed to take all action which may be deemed
necessary by the Depositary in order to enable the Depositary to do so. The
Depositary will abstain from voting the Securities to the extent it does not
receive specific written instructions from the holders of Depositary Shares
representing such Securities.
90
<PAGE> 92
Each Depositary Share shall entitle the holder to instruct the Depositary
to cast 1/100th of the vote of a Security on each matter submitted to a vote of
the stockholders of the Company.
AMENDMENT OF DEPOSIT AGREEMENT
The form of Depositary Receipts and any provision of the Deposit Agreement
may at any time be amended by agreement between the Company and the Depositary.
However, any amendment that materially and adversely alters the rights of the
holders of Depositary Shares will not be effective unless such amendment has
been approved by the holders of at least 66 2/3% of the Depositary Shares then
outstanding. Every holder of Depositary Receipts at the time any such amendment
becomes effective shall be deemed to consent and agree to such amendment and to
be bound by the Deposit Agreement.
CHARGES OF DEPOSITARY
The Company will pay all transfer and other taxes and governmental charges
that arise solely from the existence of the depositary arrangements, the initial
deposit of the Securities, withdrawals of the Securities, and the issuance of
shares of Common Stock upon conversion. Holders of Depositary Shares will pay
all other transfer and other taxes and governmental charges, and, in addition,
such other charges as are expressly provided in the Deposit Agreement to be for
their accounts.
RESIGNATION AND REMOVAL OF DEPOSITARY; TERMINATION OF THE DEPOSIT AGREEMENT
The Depositary may resign at any time by delivering to the Company notice
of its election to do so, and the Company may at any time remove the Depositary;
any such resignation or removal to take effect upon the appointment of a
successor Depositary and its acceptance of such appointment. Such successor
Depositary will be appointed by the Company within 45 days after delivery of the
notice of resignation or removal. The Deposit Agreement may be terminated by the
Company or by the Depositary if (i) there has been a final distribution in
respect of the Securities in connection with any liquidation, dissolution or
winding up of the Company and such distribution has been distributed to the
holders of Depositary Receipts, or (ii) each Security shall have been converted
into shares of Common Stock.
BOOK-ENTRY ONLY ISSUANCE -- THE DEPOSITORY TRUST COMPANY
The Depository Trust Company ("DTC") will act as securities depository for
the Depositary Shares. The information in this section concerning DTC and DTC's
book-entry system is based upon information obtained from DTC. The Depositary
Shares will be issued only as fully-registered Depositary Receipts registered in
the name of Cede & Co. (as nominee for DTC). One or more fully-registered global
Depositary Receipts will be issued, evidencing in the aggregate the total number
of Depositary Shares, and will be deposited with DTC.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations ("Direct Participants"). Access to
the DTC system is also available to others such as securities brokers and
dealers, banks and trust companies that clear
91
<PAGE> 93
through or maintain a custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants").
Purchases of Depositary Shares within the DTC system must be made by or
through Direct Participants, which will receive a credit for the Depositary
Shares on DTC's records. The ownership interest of each actual purchaser of a
Depositary Share ("Beneficial Owner") is in turn to be recorded on the Direct or
Indirect Participants' records. Beneficial Owners will not receive written
confirmation from DTC of their purchases, but Beneficial Owners are expected to
receive written confirmation providing details of the transactions, as well as
periodic statements of their holdings, from the Direct or Indirect Participants
through which the Beneficial Owners purchased Depositary Shares. Transfers of
ownership interests in Depositary Shares are to be accomplished by entries made
on the books of Participants acting on behalf of Beneficial Owners.
DTC has no knowledge of the actual Beneficial Owners of the Depositary
Shares; DTC's records reflect only the identity of the Direct Participants to
whose accounts such Depositary Shares are credited, which may or may not be the
Beneficial Owners. The Participants will remain responsible for keeping account
of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Dividend payments on the Depositary Shares will be made to DTC. DTC's
practice is to credit Direct Participants' accounts on the relevant payment date
in accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payments on such payment date.
Payments by Participants to Beneficial Owners will be governed by standing
instructions and customary practices and will be the responsibility of such
Participant and not of DTC or the Company, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
dividends to DTC is the responsibility of the Company, disbursement of such
payments to Direct Participants is the responsibility of DTC, and disbursement
of such payments to the Beneficial Owners is the responsibility of Direct and
Indirect Participants.
No Depositary Shares evidenced by global Depositary Receipts may be
exchanged in whole or in part for Depositary Receipts registered, and no
transfer of global Depositary Receipts in whole or in part may be registered, in
the name of any person other than DTC or any nominee of DTC unless DTC has
notified the Company that it is unwilling or unable to continue as depositary
for such global Depositary Receipts. All Depositary Shares evidenced by one or
more global Depositary Receipts or any portion thereof will be registered in
such names as DTC may direct.
The laws of some jurisdictions require such certain potential purchasers of
Depositary Shares take physical delivery of such Depositary Shares in definitive
form. Such laws may impair the ability to transfer beneficial interests in
Depositary Shares so long as such Depositary Shares are evidenced by global
Depositary Receipts.
As long as DTC, or its nominee, is the registered owner of the global
Depositary Receipts, DTC or such nominee, as the case may be, will be considered
the sole owner and holder of the global Depositary Receipts and all Depositary
Shares evidenced thereby for all purposes under the Depositary Shares. Except in
the limited circumstances referred to above, owners of beneficial interests in
global Depositary Shares will not be entitled to have the global Depositary
Receipts evidencing such Shares or such Depositary Shares registered in their
names, will not receive or be entitled to receive physical delivery of
Depositary Shares in exchange therefor and will not be considered to be owners
or holders of such global Depositary Receipts or any Depositary Shares evidenced
thereby for any purpose under the Depositary Shares.
92
<PAGE> 94
MISCELLANEOUS
The Depositary will, with the approval of the Company, appoint a Registrar
for registration of the Depositary Receipts or Depositary Shares in accordance
with any requirements of the Nasdaq National Market or any applicable stock
exchange on which the Depositary Receipts or the Depositary Shares are listed.
The Registrar will maintain books at the Corporate Office for the registration
and registration of transfer of Depositary Receipts or at such other place as is
approved by the Company and of which the holders of Depositary Receipts are
given reasonable notice.
The Company will deliver to the Depositary and the Depositary will forward
to holders of Depositary Shares all notices and reports required by law, the
rules of the Nasdaq National Market or any national securities exchange upon
which the Securities, the Depositary Shares or the Depositary Receipts are
listed or by the Company's Restated Certificate of Incorporation or Bylaws to be
furnished by the Company to holders of the Securities.
Neither the Depositary nor the Company will be liable if either is by law
or certain other circumstances beyond its control prevented from or delayed in
performing its obligations under the Deposit Agreement. Neither the Depositary
nor the Company assumes any obligation or will be subject to any liability under
the Deposit Agreement to holders of Depositary Receipts other than to use its
best judgment and good faith in the performance of such duties as are
specifically set forth in the Deposit Agreement. The Depositary will not be
obligated to appear in, prosecute or defend any legal proceeding in respect of
any Depositary Shares or any Securities unless satisfactory indemnity is
furnished. The Company and the Depositary may rely on advice of counsel or
accountants, or information provided by persons presenting Securities for
deposit, holders of Depositary Shares or other persons believed to be authorized
or competent and on documents believed to be genuine.
The Depositary will act as transfer agent and registrar for, and paying
agent for the payment of dividends with respect to, the Depositary Shares.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the principal U.S. federal income tax consequences
relevant to the holding of the Securities, the conversion of the Securities into
Common Stock and the disposition of the Securities is based on the Internal
Revenue Code of 1986, as amended (the "Code"), regulations of the Treasury
Department, administrative rulings and pronouncements of the Internal Revenue
Service (the "IRS"), and judicial decisions, all as of the date hereof. The
Company does not intend to seek a ruling from the IRS with respect to any of
these tax consequences. The summary is presented for informational purposes only
and is limited to a summary of the U.S. federal income tax consequences to
investors who are citizens or residents of the United States or that are U.S.
corporations. State, local, and foreign tax consequences are not summarized, nor
are tax consequences to special classes of investors, including tax-exempt
organizations, insurance companies, banks, or dealers in securities. Tax
consequences may vary depending upon the particular status of an investor. The
summary is limited to taxpayers who will hold the Depositary Shares and any
Securities or Common Stock received in exchange therefor as "capital assets"
within the meaning of Section 1221 of the Code. There can be no assurance that
future changes in applicable law or administrative and judicial interpretations
thereof will not adversely affect the tax consequences summarized herein or that
there will not be differences of opinion as to the interpretation of applicable
law.
The following summary does not constitute, and should not be considered as,
legal or tax advice to prospective investors. Each potential investor should
consult with its own tax adviser before determining whether to purchase the
Depositary Shares.
93
<PAGE> 95
DEPOSITARY SHARES
The owners of the Depositary Shares will be treated for federal income tax
purposes as if they were the owners of the Securities represented thereby.
Accordingly, the tax treatment for the owners of the Depositary Shares will be
the same as the tax treatment for the owners of Securities described below. In
addition, no gain or loss will be recognized upon the withdrawal of Securities
in exchange for Depositary Shares pursuant to the Deposit Agreement, an owner's
tax basis in the withdrawn Securities will be the same as the tax basis in the
Depositary Shares surrendered therefor, and such owner's holding period of the
withdrawn Securities will include the period during which the owner held the
surrendered Depositary Shares.
DIVIDENDS
Dividends paid on Securities will be taxable as ordinary income to the
extent of the Company's current or accumulated earnings and profits. The Company
believes that it does not presently have any current or accumulated earnings and
profits. Consequently, distributions with respect to the Securities may not
qualify as dividends for federal income tax purposes. To the extent that the
amount of a distribution on the Securities exceeds the Company's current and
accumulated earnings and profits, such distributions will be treated as a
nontaxable return of capital and will be applied against and reduce the adjusted
tax basis of the Securities in the hands of each holder (but not below zero),
thus increasing the amount of any gain (or reducing the amount of any loss)
which would otherwise be realized by such holder upon the disposition of such
Securities. The amount of any such distribution which exceeds the adjusted tax
basis of the Securities in the hands of the holders will be treated as capital
gain and will be either long-term or short-term capital gain depending on the
holder's holding period for the Securities.
Corporate holders of the Securities should consider the 46-day holding
period required by Section 246(c) of the Code for the 70% (or 80%, if
applicable) dividends received deduction, the rules in Section 246A of the Code
that reduce the 70% (or 80%, if applicable) dividends received deduction for
dividends on certain debt-financed stock and the rules in Section 1059 of the
Code that reduce the basis of stock in respect of certain extraordinary
dividends.
On December 7, 1995, the Clinton Administration proposed to reduce the
dividends received deduction from 70% to 50% and to modify the holding period
required to be eligible for the deduction. These proposals have not yet been
introduced as legislation, but it is possible that they will be enacted into law
in the future.
DISPOSITIONS
A holder will generally recognize capital gain or loss on a sale or
exchange of Securities equal to the difference between the amount realized upon
the sale or exchange and the holder's tax basis in the Securities sold or
exchanged. Such capital gain or loss will be long-term capital gain or loss if
the holder has held the Securities for more than one year.
CONVERSION INTO COMMON STOCK
As a general rule, no gain or loss will be recognized by a holder on the
conversion of Securities into shares of Common Stock. Gain may be recognized
upon the receipt by a holder of cash in lieu of a fractional share of Common
Stock. In addition, if the conversion takes place when there is a dividend
arrearage on the Securities and at the time of the conversion the Company has
current or accumulated earnings and profits, the portion of the shares of Common
Stock, if any, received attributable to the dividend arrearage on the Securities
will be treated, in certain circumstances, as a taxable dividend.
The tax basis of the shares of Common Stock received upon conversion will
generally be equal to the tax basis of the Securities converted (adjusted to
reflect any income or gain recognized on
94
<PAGE> 96
the conversion). The holding period of the shares of such Common Stock will
generally include the holding period of the Securities converted.
CONSTRUCTIVE STOCK DISTRIBUTIONS
Treasury regulations issued under Section 305 of the Internal Revenue Code
of 1986, as amended, treat as taxable events certain constructive distributions
of stock with respect to stock and convertible securities. An adjustment in the
conversion price of the Preferred Stock to reflect taxable distributions on
Common Stock (but not stock splits or nontaxable stock dividends) may be treated
as a constructive distribution of stock that is taxable as a dividend to the
Preferred Stock holder to the extent that the Company has current and/or
accumulated earnings and profits.
BACKUP WITHHOLDING
Certain noncorporate holders may be subject to backup withholding at a rate
of 31 percent on dividends and certain consideration received upon the
conversion of the Securities. Generally, backup withholding applies only when
the taxpayer (i) fails to furnish or certify a proper Taxpayer Identification
Number, (ii) is notified by the IRS that the taxpayer has failed to report
payments of interest and dividends properly or (iii) under certain circumstances
fails to certify that the taxpayer has not been notified by the IRS that the
taxpayer is subject to backup withholding for failure to report interest and
dividend payments. Holders should consult their tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining any applicable exemption.
95
<PAGE> 97
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below (the "Underwriters"), and each of the Underwriters has severally agreed to
purchase, the respective number of Depositary Shares set forth opposite its name
below:
<TABLE>
<CAPTION>
NUMBER OF
PURCHASERS DEPOSITARY SHARES
--------------------------------------------------------- -----------------
<S> <C>
Goldman, Sachs & Co. ....................................
Salomon Brothers Inc.....................................
--------
Total.............................................
========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Depositary Shares
offered hereby, if any are taken.
The Underwriters propose to offer the Depositary Shares in part directly to
the public at the initial 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 Depositary Share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of $ per Depositary Share to
certain brokers and dealers. After the Depositary Shares are released for sale
to the public, the offering price and other selling terms may from time to time
be varied by the Underwriters.
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 Depositary Shares 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 Depositary Shares to be purchased
by each of them, as shown in the foregoing table, bears to the
Depositary Shares offered hereby. The Underwriters may exercise such option only
to cover over-allotments in connection with the sale of the Depositary Shares
offered hereby.
The Company has agreed not to offer, sell, contract to sell or otherwise
dispose of any shares of Preferred Stock or Depositary Shares representing the
same or 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 Securities, Depositary
Shares and shares of Common Stock and the related rights issuable upon
conversion of the Securities offered in connection with the Offering, (ii)
shares of Common Stock issued pursuant to existing employee benefit plans, (iii)
shares of Common Stock issued in acquisition transactions and (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.
The Depositary Shares will be a new issue of securities with no established
trading market. The Underwriters have advised the Company that they intend to
make a market in the Depositary Shares, but the Underwriters will not be
obligated to do so and may discontinue any market making at any time without
notice. No assurance can be given as to the liquidity of the trading market for
the Depositary Shares.
The Underwriting Agreement provides that the Company 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 ,
1997. Each of the Underwriters may serve as a financial advisor to the Company
from time to time in the future.
96
<PAGE> 98
LEGAL MATTERS
The validity of the Depositary Shares, the Securities and the Common Stock
issuable upon conversion thereof will be passed upon for the Company by Bryan
Cave LLP, St. Louis, Missouri and for the Underwriters by Sullivan & Cromwell,
New York, New York. John P. Denneen, Esq., a member of Bryan Cave LLP, is
Secretary of the Company and its subsidiaries. Mr. Denneen and two other members
of Bryan Cave LLP own an aggregate of 49,426 shares of Common Stock of the
Company, and one of such members owns an option to purchase 22,220 shares of
Common Stock at $11.35 per share.
INDEPENDENT AUDITORS
The consolidated financial statements of the Company as of December 31,
1995 and 1994 and for the period from November 10, 1993 to December 31, 1993 and
the years ended December 31, 1995 and 1994 included in this Prospectus have been
audited by KPMG Peat Marwick LLP,
independent certified public accountants, as stated in their report appearing
herein.
The consolidated financial statements of Brooks Telecommunications
Corporation as of December 31, 1995 and for the year then ended included in this
Prospectus have been audited by KPMG Peat Marwick LLP, independent certified
public accountants, as stated in their report herein.
The consolidated financial statements of City Signal, Inc. as of December
31, 1995 and 1994 and for the years then ended included in this Prospectus have
been audited by BDO Seidman, LLP, independent certified public accountants, as
stated in their report included herein.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports and other information with the
Commission. Such reports, proxy and information statements and other information
filed by the Company with the Commission, may be inspected and copied at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Room 1400, 75 Park Place, New York, New York 10007 and
Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60601-2511. Copies of such materials may be obtained from the Public Reference
Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and its public reference facilities in New York, New
York and Chicago, Illinois at the prescribed rates. The Commission maintains a
Web site (http://www.sec.gov.) that contains reports, proxy and information
statements and other information filed electronically by the Company with the
Commission through its Electronic Data Gathering, Analysis and Retrieval (EDGAR)
System. Shares of the Company's Voting Common Stock, $0.01 par value per share,
are listed on the Nasdaq National Market under the symbol "BFPT" and copies of
the aforementioned materials may be inspected at the office of the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C.
20006.
97
<PAGE> 99
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <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> 100
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> 101
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> 102
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA BFP
ADJUSTMENTS PRO FORMA
------------- COMBINED
BFP CITY SIGNAL CONSOLIDATED
------------ ------------- ------------
<S> <C> <C> <C>
Revenues..................................... $ 28,147,000 $ 450,000(11) $ 28,597,000
Expenses:
Service costs.............................. 12,585,000 183,000(11) 12,768,000
Selling, general and administrative
expenses................................ 25,504,000 444,000(11) 25,948,000
Depreciation and amortization.............. 9,859,000 293,000(11) 10,152,000
------------ ---------- ------------
47,948,000 920,000 48,868,000
------------ ---------- ------------
Loss from operations.................... (19,801,000) (470,000) (20,271,000)
Other income (expense):
Interest income............................ 11,074,000 -- 11,074,000
Interest expense........................... (19,250,000) (22,000)(11) (19,272,000)
------------ ---------- ------------
Net loss before minority interests........... (27,977,000) (492,000) (28,469,000)
Minority interests in share of loss.......... 1,590,000 -- 1,590,000
------------ ---------- ------------
Net loss................................ $(26,387,000) $(492,000) $(26,879,000)
============ ========== ============
Pro forma loss per common and common
equivalent share........................... $ (1.10) $ (1.12)
============ ============
Pro forma weighted average number of shares
outstanding................................ 24,071,672 24,071,674
============ ============
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-4
<PAGE> 103
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> 104
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> 105
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $203,034,000 $ 59,913,000
Marketable securities..................................... 126,634,000 --
Accounts receivable, net.................................. 10,349,000 2,003,000
Other current assets...................................... 6,639,000 1,183,000
------------ ------------
Total current assets................................... 346,656,000 63,099,000
------------ ------------
Networks and equipment, net................................. 210,874,000 50,042,000
------------ ------------
Investment in minority-owned venture........................ 5,000,000 --
------------ ------------
Other assets, net........................................... 74,820,000 33,469,000
------------ ------------
$637,350,000 $146,610,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 21,390,000 $ 5,186,000
------------ ------------
Total current liabilities.............................. $ 21,390,000 5,186,000
------------ ------------
Long-term debt.............................................. 314,440,000 43,977,000
------------ ------------
Minority interests.......................................... 10,761,000 3,992,000
------------ ------------
Common stock, subject to redemption, $.01 par value,
2,016,000 and 0 shares issued and outstanding............. 25,200,000 --
Shareholders' equity:
Preferred stock, 1,040,012 shares authorized:
Convertible preferred stock, Series A-1, $.01 par
value; 0 and 396,000 shares issued and outstanding... -- 39,600,000
Convertible preferred stock, Series A-2, $.01 par
value; 0 and 419,705 shares issued and outstanding... -- 65,596,000
Convertible preferred stock, Series B-1, $.01 par
value; 0 and 12,000 shares issued and outstanding.... -- 1,200,000
Convertible preferred stock, Series B-2, $.01 par
value; 4,545 shares authorized; 0 and 4,545 shares
issued and outstanding............................... -- 711,000
Common Stock, $.01 par value; 50,000,000 shares
authorized; 26,445,890 and 1,162,800 shares issued and
outstanding............................................ 264,000 12,000
Additional paid-in capital................................ 305,715,000 --
Accumulated deficit....................................... (40,420,000) (13,664,000)
------------ ------------
Total shareholders' equity............................. 265,559,000 93,455,000
------------ ------------
$637,350,000 $146,610,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 106
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> 107
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIOD ENDED SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK CONVERTIBLE PREFERRED STOCK
------------------------------------------------- ------------------------------------------
SERIES A-1 SERIES A-2 SERIES B-1 SERIES B-2
----------------------- ----------------------- --------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- ------------ -------- ------------ ------- ----------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996.... 396,000 $ 39,600,000 419,705 $ 65,596,000 12,000 $ 1,200,000 4,545 $ 711,000
Merger with BTC
-- issuance of common
stock.................... -- -- -- -- -- -- -- --
-- conversion of preferred
stock to common
stock.................... (6,350) (635,000) (6,061) (1,000,000) -- -- -- --
Issuance of Series A-2
Preferred Stock............ -- -- 6,060 997,000 -- -- -- --
Preferred Stock Warrants
Exercised.................. 9,940 109,000 -- -- -- -- -- --
Initial Public Offering
-- issuance of common
stock.................... -- -- -- -- -- -- -- --
-- common stock, subject to
redemption, exchanged for
common stock............. -- -- -- -- -- -- -- --
-- conversion of preferred
stock to common
stock.................... (399,590) (39,074,000) (419,704) (65,593,000) (12,000) (1,200,000) (4,545) (711,000)
Common Stock Options
Exercised.................. -- -- -- -- -- -- -- --
Common Stock Warrants
Exercised.................. -- -- -- -- -- -- -- --
Conversion of minority
interest in subsidiary to
common stock............... -- -- -- -- -- -- -- --
Net Loss.................... -- -- -- -- -- -- -- --
-------- ------------ -------- ------------ ------- ----------- ------ ---------
Balance, September 30, 1996.. -- $ -- -- $ -- -- $ -- -- $ --
======== ============ ======== ============ ======= =========== ====== =========
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- -------- ------------ ------------ -------------
<S> <<C> <C> <C> <C> <C>
Balance, January 1, 1996.... 1,162,800 $ 12,000 $ -- $(13,664,000) $ 93,455,000
Merger with BTC
-- issuance of common
stock.................... 756,340 8,000 9,447,000 -- 9,455,000
-- conversion of preferred
stock to common
stock.................... 248,220 2,000 1,633,000 -- --
Issuance of Series A-2
Preferred Stock............ -- -- -- -- 997,000
Preferred Stock Warrants
Exercised.................. -- -- -- -- 109,000
Initial Public Offering
-- issuance of common
stock.................... 7,385,331 74,000 185,119,000 -- 185,193,000
-- common stock, subject to
redemption, exchanged for
common stock............. 224,000 2,000 2,798,000 -- 2,800,000
-- conversion of preferred
stock to common
stock.................... 16,527,920 165,000 106,413,000 -- --
Common Stock Options
Exercised.................. 40,492 -- 192,000 -- 192,000
Common Stock Warrants
Exercised.................. 91,898 1,000 113,000 -- 114,000
Conversion of minority
interest in subsidiary to
common stock............... 8,889 -- -- (369,000 ) (369,000 )
Net Loss.................... -- -- -- (26,387,000 ) (26,387,000 )
---------- -------- ------------ ------------ ------------
Balance, September 30, 1996. 26,445,890 $264,000 $305,715,000 $(40,420,000) $265,559,000
========== ======== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 108
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> 109
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> 110
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> 111
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ASSETS, NET
Other assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Goodwill..................................... $51,925,000 $29,129,000
Debt issuance costs.......................... 13,744,000 3,070,000
Organization, development, and pre-operating
costs...................................... 13,347,000 2,922,000
----------- -----------
79,016,000 35,121,000
Less accumulated amortization................ 4,196,000 1,652,000
----------- -----------
$74,820,000 $33,469,000
=========== ===========
</TABLE>
7. SHAREHOLDERS' EQUITY
Effective January 2, 1996, the Company's Board of Directors authorized a
20-for-1 split for each share of common stock and adjusted all outstanding
common stock options and warrants accordingly. All share data presented within
the consolidated financial statements have been revised to reflect the 20-for-1
stock split.
On May 2, 1996, the Company completed its initial public offering of
7,385,331 shares of Common Stock at a price of $27.00 per share, for gross
proceeds of approximately $199.4 million and proceeds net of underwriting
discounts, advisory fees and expenses of approximately $185.2 million.
8. STOCK OPTIONS AND WARRANTS
The Company's 1993 Stock Option Plan (the Plan) authorizes the granting of
options and stock appreciation rights covering up to 3,400,000 shares of common
stock. The options generally vest over a period of three years from the date of
grant.
Stock option activity for the Plan for the nine months ended September 30,
1996 is as follows:
<TABLE>
<CAPTION>
PRICE PER
NUMBER SHARE
--------- -------------
<S> <C> <C>
Balance, December 31, 1995........................ 1,651,660 $ 4.00-$ 6.60
Granted......................................... 1,226,000 $12.50-$33.75
Exercised....................................... 40,492 $ 4.00-$ 6.60
Cancelled....................................... 144,000 $ 6.00-$12.50
--------- ------------
Balance, June 30, 1996............................ 2,693,168 $ 4.00-$33.75
========= ============
</TABLE>
Also, in connection with the Agreement and Plan of Merger between the
Company and BTC, the Company issued options and warrants to certain of the
shareholders and employees of BTC for the purchase of 1,134,840 shares of the
Company's common stock at prices of $11.35 to $31.04 per share. The warrants
expire at various dates from March 31, 1997 to December 21, 1999. The options
generally vest over a three year period from the date of grant.
F-13
<PAGE> 112
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> 113
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> 114
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> 115
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> 116
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994 AND THE
PERIOD FROM INCEPTION TO DECEMBER 31, 1993
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK CONVERTIBLE PREFERRED STOCK
-------------------------------------------- ---------------------------------------
COMMON
SERIES A-1 SERIES A-2 SERIES B-1 SERIES B-2 STOCK
-------------------- --------------------- ------------------- ----------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------- ----------- ------- ----------- ------ ---------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock,
November 10, 1993...... -- $ -- -- $ -- -- $ -- -- $ -- 1,162,800
Issuance and subscription
of Series A preferred
stock.................. 396,000 39,600,000 -- -- -- -- -- -- --
Issuance and subscription
of Series B preferred
stock.................. -- -- -- -- 12,000 1,200,000 -- -- --
Subscriptions receivable,
payments and
reclassifications...... -- -- -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------ ---------- ---- -------- ---------
Balance, December 31,
1993................... 396,000 39,600,000 -- -- 12,000 1,200,000 -- -- 1,162,800
Subscriptions receivable,
payments and
reclassifications...... -- -- -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------ ---------- ---- -------- ---------
Balance, December 31,
1994................... 396,000 39,600,000 -- -- 12,000 1,200,000 -- -- 1,162,800
Issuance of Series A-2
preferred stock........ -- -- 419,705 65,596,000 -- -- -- -- --
Issuance of Series B-2
preferred stock........ -- -- -- -- -- -- 4,545 711,000 --
Net loss................. -- -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------ ---------- ---- -------- ---------
Balance, December 31,
1995................... 396,000 $39,600,000 419,705 $65,596,000 12,000 $1,200,000 4,545 $711,000 1,162,800
======= =========== ======= =========== ====== ========== ==== ======== =========
<CAPTION>
COMMON
STOCK TOTAL
------- SUBSCRIPTIONS ACCUMULATED SHAREHOLDERS'
AMOUNT RECEIVABLE DEFICIT EQUITY
------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Issuance of common stock,
November 10, 1993...... $12,000 -- (11,000) 1,000
Issuance and subscription
of Series A preferred
stock.................. -- (39,018,000) -- 582,000
Issuance and subscription
of Series B preferred
stock.................. -- (1,182,000) -- 18,000
Subscriptions receivable,
payments and
reclassifications...... -- 4,450,000 -- 4,450,000
Net loss................. -- -- (205,000) (205,000)
------- ----------- ----------- ----------
Balance, December 31,
1993................... 12,000 (35,750,000) (216,000) 4,846,000
Subscriptions receivable,
payments and
reclassifications...... -- 35,750,000 -- 35,750,000
Net loss................. -- -- (3,897,000) (3,897,000)
------- ----------- ----------- ----------
Balance, December 31,
1994................... 12,000 -- (4,113,000) 36,699,000
Issuance of Series A-2
preferred stock........ -- -- -- 65,596,000
Issuance of Series B-2
preferred stock........ -- -- -- 711,000
Net loss................. -- -- (9,551,000) (9,551,000)
------- ----------- ----------- ----------
Balance, December 31,
1995................... $12,000 -- (13,664,000) 93,455,000
======= =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 117
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> 118
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> 119
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> 120
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> 121
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> 122
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> 123
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> 124
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> 125
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> 126
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> 127
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> 128
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> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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> 135
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> 136
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> 137
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> 138
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> 139
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> 140
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> 141
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>
TOTAL
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> 142
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> 143
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> 144
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> 145
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> 146
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> 147
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> 148
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> 149
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> 150
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> 151
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> 152
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> 153
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> 154
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> 155
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> 156
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> 157
- ------------------------------------------------------
- ------------------------------------------------------
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 DEPOSITARY SHARES 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........................... 15
Use of Proceeds........................ 23
Capitalization......................... 24
Selected Historical and Pro Forma
Financial and Other Operating Data... 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 28
Business of the Company................ 37
The Competitive Local
Telecommunications Industry.......... 51
Competition............................ 55
Regulatory Overview.................... 58
Management............................. 64
Principal Stockholders................. 72
Certain Relationships and Related
Transactions......................... 75
Shares Eligible for Future Sale........ 76
Description of Capital Stock........... 78
Description of Securities.............. 84
Description of Depositary Shares....... 88
Certain Federal Income Tax
Considerations....................... 93
Underwriting........................... 96
Legal Matters.......................... 97
Independent Auditors................... 97
Additional Information................. 97
Index to Consolidated Financial
Statements........................... F-1
Glossary............................... A-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
SHARES
BROOKS FIBER
PROPERTIES, INC.
$ DEPOSITARY SHARES
---------------------------------------
BROOKS FIBER LOGO
---------------------------------------
GOLDMAN, SACHS & CO.
SALOMON BROTHERS INC
REPRESENTATIVES OF THE UNDERWRITERS
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 158
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......................................................... $50,868
-------
NASD Filing Fee.......................................................... 17,287
-------
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> 159
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> 160
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> 161
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.
II-4
<PAGE> 162
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to this Registration Statement to be signed
on its behalf by the undersigned thereunto duly authorized, in the City of Town
& Country, State of Missouri, on December 17, 1996.
BROOKS FIBER PROPERTIES, INC.
By: /s/ JAMES C. ALLEN
-------------------------------------
James C. Allen
Vice Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to this Registration Statement has been signed by the following persons in
the capacities indicated on December 17, 1996.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ------------------------------------- -----------------------------------------------------------
<S> <C>
* Director (Chairman of the Board)
- -------------------------------------
Robert A. Brooks
/s/ JAMES C. ALLEN Vice Chairman and Director (Chief Executive Officer)
- -------------------------------------
James C. Allen
* President and Director (Chief Operating Officer)
- -------------------------------------
D. Craig Young
/s/ DAVID L. SOLOMON Executive Vice President and Chief Financial Officer
- ------------------------------------- (Principal Financial and Accounting Officer)
David L. Solomon
* Director
- -------------------------------------
Robert F. Benbow
* Director
- -------------------------------------
William J. Bresnan
* Director
- -------------------------------------
Jonathan M. Nelson
* Director
- -------------------------------------
G. Jackson Tankersley, Jr.
Director
- -------------------------------------
Ronald H. Vander Pol
* Director
- -------------------------------------
Carol deB. Whitaker
*By: /s/ DAVID L. SOLOMON
--------------------------------
David L. Solomon,
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 163
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<C> <S>
</TABLE>
<TABLE>
<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) Form of 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 to 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 to 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 (incorporated by reference to Exhibit 4.6 to the Company's
Registration Statement on Form S-1 (File No. 333-16495) filed with the Commission
on November 20, 1996 (the "Secondary Offering Form S-1"))
4.7 Exchange and Registration Rights Agreement dated as of November 7, 1996 (incorpo-
rated by reference to Exhibit 4.7 to the Secondary Offering Form S-1)
*4.8 Amended and Restated Loan and Security Agreement dated as of October 1, 1996
among AT&T Credit Corporation, the Company and certain subsidiaries of the
Company
4.9 Form of Deposit Agreement (including form of Depositary Receipt) among the Com-
pany, the Depositary and all holders from time to time of Depositary Receipts
issued thereunder
*4.10 Form of Specimen Certificate for Series D Conversion Preferred Stock
---------------
* To be filed by amendment.
</TABLE>
II-6
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ---------------------------------------------------------------------------------
<C> <S>
</TABLE>
<TABLE>
<C> <S>
request.*5.1 Opinion of Bryan Cave LLP regarding the validity of the Depositary Shares
8.1 Tax Opinion of Bryan Cave LLP
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
12.1 Statement Re Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends (incorporated by reference to Exhibit 12.1 to the
Secondary Offering Form S-1)
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit 21.1 to the
Secondary Offering Form S-1)
*23.1 Consent of Bryan Cave LLP (included in Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of BDO Seidman, LLP
24.1 Power of Attorney (included on signature page)
---------------
* To be filed by amendment.
++ Previously filed.
</TABLE>
II-7
<PAGE> 1
EXHIBIT 3.1(d)
DRAFT 12/17/96
BROOKS FIBER PROPERTIES, INC.
CERTIFICATE OF DESIGNATIONS
SERIES D CONVERSION PREFERRED STOCK
(Pursuant to Section 151(g) of the
General Corporation Law of the State of Delaware)
Brooks Fiber Properties, Inc. (the "Corporation"), a
corporation organized and existing under the General Corporation Law of the
State of Delaware (the "DGCL"), in accordance with the Section 151(g) thereof,
hereby certifies:
That the Restated Certificate of Incorporation of the
Corporation ("Restated Certificate") authorizes the issuance of 1,040,012
shares of Preferred Stock, par value $.01 per share ("Preferred Stock"), of
which (a) 489,600 shares were heretofore designated as Series A-1 Voting
Convertible Preferred Stock ("Series A-1 Preferred Stock"), (b) 433,867 shares
were heretofore designated as Series A-2 Voting Convertible Preferred Stock
("Series A-2 Preferred Stock"), (c) 12,000 shares were heretofore designated as
Series B-1 Non-Voting Convertible Stock ("Series B-1 Preferred Stock"), (d)
4,545 shares were heretofore designated as Series B-2 Non-Voting Convertible
Preferred ("Series B-2 Preferred Stock") and (e) 50,000 shares are currently
designated as Series C Junior Participating Preferred Stock ("Series C
Preferred Stock");
That all of the 940,012 shares of the Preferred Stock
heretofore designated as Series A-1 Preferred Stock, Series A-2 Preferred
Stock, Series B-1 Preferred Stock and Series B-2 Preferred Stock have
heretofore been converted into shares of Voting Common Stock, par value $.01
per share, of the Corporation and, in accordance with the provisions of
subparagraph (iv)(c) of paragraph B of Article Fourth of the Restated
Certificate, upon such conversions such 940,012 shares of Preferred Stock have
automatically reverted to the status of authorized and unissued shares of
Preferred Stock; and
That the Finance Committee of the Board of Directors of the
Corporation, at a meeting duly convened and held on January __, 1997, pursuant
to authority expressly delegated by a resolution duly adopted by the Board of
Directors pursuant to the provisions of Section 141(c) of the DGCL and vested
in the Board of Directors by the Corporation's Restated Certificate of
Incorporation, adopted the following resolution creating a series of Fifty-One
Thousand Seven Hundred and Fifty (51,750) shares of the Preferred Stock
designated as the Series D Conversion Preferred Stock:
RESOLVED that, pursuant to the authority granted to and vested
in the Finance Committee of the Board of Directors by the Board of Directors
and the Corporation's Restated Certificate of Incorporation, the Board of
Directors hereby creates a series of the Corporation's Preferred Stock, par
value $.01 per share ("Preferred Stock"), and hereby states that the powers,
designation, preferences and number of shares thereof, and the relative,
participating, optional and other rights of the shares of such series and the
qualifications, limitations or restrictions thereof, are as follows:
<PAGE> 2
I. Designation and Number. The designation of the
series is Series D Conversion Preferred Stock (such series hereinafter the
"Series D Preferred Stock"). The number of shares of such series shall be
Fifty-One Thousand Seven Hundred Fifty (51,750). Such number of shares may be
increased or decreased by resolution of the Board of Directors; provided that
no decrease shall reduce the number of shares of the Series D Preferred Stock
to a number less than the number of shares then outstanding plus the number of
shares issuable upon exercise of then outstanding rights, options or warrants
or conversion of outstanding securities issued by the Corporation. .
II. Dividends.
(a) The holders of shares of the Series D
Preferred Stock, in preference to the holders of shares of Common
Stock, par value $.01 per share, of the Corporation ("Common Stock"),
shares of the Series C Junior Participating Preferred Stock, par value
$.01 per share, of the Corporation, and shares of any other series of
Preferred Stock ranking junior to the Series D Preferred Stock with
respect to dividends, shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for
the payment of dividends, annual dividends payable in cash in an
amount per share equal to, but no more than, $__________ . The
dividends provided above shall accrue from the date of original issue
of the Series D Preferred Stock and be payable quarterly in arrears on
the first day of _____________, ____________, ____________,
and ________________, commencing _____________, 1997 or, if any such
date is not a business day, on the next succeeding business day (each
such date being referred to herein as a "Quarterly Dividend Payment
Date"), to holders of record as they appear on the stock records of
the Corporation at the close of business on such record dates, not
exceeding 60 days preceding the payment dates thereof, as shall be
fixed by the Board of Directors. Dividends payable on the Series D
Preferred Stock for any period greater or less than a full quarterly
dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months. Dividends payable on the Series D
Preferred Stock for each full quarterly dividend period will be
computed by dividing the annual dividend rate by four.
(b) Dividends on shares of the Series D Preferred
Stock will accrue whether or not there are funds legally available for
the payment of such dividends and whether or not such dividends are
declared. Accrued but unpaid dividends on the Series D Preferred Stock
shall accumulate as of the Quarterly Dividend Payment Date on which
they become payable, but no interest shall accrue on any accumulated
but unpaid dividends. Dividends on shares of the Series D Preferred
Stock will cease to accrue on the Mandatory Conversion Date (as defined
below) or on the date of their earlier conversion.
(c) So long as any shares of the Series D
Preferred Stock are outstanding, the Corporation may not (a) declare or
pay any dividends (other than dividends payable in Common Stock or
other shares of the Corporation ranking junior to the Series D
Preferred Stock) to holders of Common Stock or shares of the
Corporation of any other class ranking on a parity with or junior to
the Series D
2
<PAGE> 3
Preferred Stock, or (b) make any distributions of assets (directly or
indirectly, by purchase, redemption or otherwise) to the holders of
Common Stock or shares of the Corporation of any other class ranking on
a parity with or junior to the Series D Preferred Stock unless all
accrued and unpaid dividends on the Series D Preferred Stock, including
the full dividends for the then next subsequent Quarterly Dividend
Payment Date, shall have been paid or declared and funds sufficient for
payment thereof set apart. No dividends may be paid upon or declared
or set apart for any shares of the Preferred Stock ranking on a parity
with the Series D Preferred Stock for any quarterly dividend period
unless at the same time a like proportionate dividend for the same
quarterly dividend period, ratably in proportion to the respective
annual dividend rates fixed therefor, shall be paid upon or declared or
set apart for the Series D Preferred Stock.
III. Conversion.
(a) Mandatory Conversion. Unless earlier
converted at the option of the holder in accordance with the
provisions of paragraph (b), on _____________, 2000 (the "Mandatory
Conversion Date"), each outstanding share of the Series D Preferred
Stock shall convert automatically (the "Automatic Conversion") into
(i) shares of authorized Common Stock at the Exchange Rate (as
hereinafter defined) in effect on the Mandatory Conversion Date and
(ii) the right to receive an amount in cash equal to any and all
accrued and unpaid dividends (other than dividends declared and
payable to holders of record on a prior date) on such share to the
Mandatory Conversion Date, whether or not declared, out of funds
legally available therefor. The "Exchange Rate" is equal to (a) if
the Current Market Price (as hereinafter defined) is greater than or
equal to $_______ per share (the "Threshold Price"), ________ shares
of Common Stock (the "Lower Exchange Rate"), (b) if the Current Market
Price is less than the Threshold Price but greater than $___________
per share (the "Initial Price"), the number of shares of Common Stock
having a value (determined at the Current Market Price) equal to 100
times the Initial Price (the "Middle Exchange Rate"), and (c) if the
Current Market Price is less than or equal to the Initial Price, 100
shares of Common Stock (the "Upper Exchange Rate") per share of the
Series D Preferred Stock, and, in each case, is subject to adjustment
as set forth in paragraph (c) below. Dividends on the shares of the
Series D Preferred Stock shall cease to accrue, and such shares of the
Series D Preferred Stock shall cease to be outstanding on the
Mandatory Conversion Date. The Corporation shall make such
arrangements as it deems appropriate for the issuance of certificates
representing shares of Common Stock and for the payment of cash in
respect of such accrued and unpaid dividends, if any, or cash in lieu
of fractional shares, if any, in exchange for and contingent upon
surrender of certificates representing the shares of the Series D
Preferred Stock, and the Corporation may defer the payment of
dividends on such shares of Common Stock and the voting thereof until,
and make such payment and voting contingent upon, the surrender of
such certificates representing the shares of the Series D Preferred
Stock, provided that the Corporation shall give the holders of the
shares of the Series D Preferred Stock such notice of any such actions
as the Corporation deems appropriate or is legally required, and, upon
such surrender, such holders shall be entitled to receive any
dividends declared and paid on such shares of Common Stock subsequent
to the Mandatory Conversion Date. Amounts payable in cash in respect
of the shares of the Series D Preferred Stock or in respect of such
shares of
3
<PAGE> 4
Common Stock shall not bear interest.
(b) Optional Conversion. Shares of the Series D
Preferred Stock are convertible, in whole or in part, at the option of
the holders thereof ("Optional Conversion"), at any time after
______________, 1997 and prior to the Mandatory Conversion Date, into
shares of Common Stock at a rate of _________ shares of Common Stock
for each share of Series D Preferred Stock (the "Optional Conversion
Rate"), subject to adjustment as set forth below.
Optional Conversion of shares of the Series D
Preferred Stock may be effected by delivering certificates evidencing
such shares, together with written notice of conversion and a proper
assignment of such certificates to the Corporation or in blank (and,
if applicable, payment of an amount equal to the dividend payable on
such shares), to the office of any transfer agent for the Series D
Preferred Stock or to any other office or agency maintained by the
Corporation for that purpose and otherwise in accordance with Optional
Conversion procedures established by the Corporation. Each Optional
Conversion shall be deemed to have been effected immediately prior to
the close of business on the date on which the foregoing requirements
shall have been satisfied. The Optional Conversion shall be at the
Optional Conversion Rate in effect at such time and on such date.
Holders of shares of the Series D Preferred Stock at
the close of business on a record date for any payment of dividends
shall be entitled to receive the dividend payable on such shares on
the corresponding Quarterly Dividend Payment Date notwithstanding the
Optional Conversion of such shares following such record date and
prior to such Quarterly Dividend Payment Date. However, shares of the
Series D Preferred Stock surrendered for Optional Conversion after the
close of business on a record date for any payment of dividends and
before the opening of business on the next succeeding Quarterly
Dividend Payment Date must be accompanied by payment in cash of an
amount equal to the proportionate amount of the dividend payable on
such shares on such Quarterly Dividend Payment Date accruing between
the date of conversion and such Quarterly Dividend Payment Date.
Except as provided above, upon any Optional Conversion of shares of
the Series D Preferred Stock, the Corporation shall make no payment or
allowance for unpaid dividends, whether or not in arrears, on such
shares of the Series D Preferred Stock as to which Optional Conversion
has been effected or for dividends or distributions on the shares of
Common Stock issued upon such Optional Conversion.
(c) Adjustments to the Exchange Rate and the
Optional Conversion Rate. The Exchange Rate and the Optional
Conversion Rate shall each be subject to adjustment from time to time
as provided below in this paragraph (c).
(i) If the Corporation shall pay or make
a dividend or other distribution with respect to its Common
Stock in shares of Common Stock (including by way of
reclassification of any shares of its Common Stock), the
Exchange Rate and the Optional Conversion Rate in effect at
the opening of business on the day following the date fixed
for the determination of stockholders entitled to receive such
dividend or other distribution shall each be increased by
4
<PAGE> 5
multiplying such Exchange Rate and Optional Conversion Rate by
a fraction of which the numerator shall be the sum of the
number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination plus the
total number of shares of Common Stock constituting such
dividend or other distribution, and of which the denominator
shall be the number of shares of Common Stock outstanding at
the close of business on the date fixed for such
determination, such increase to become effective immediately
after the opening of business on the business day following
the date fixed for such determination.
(ii) In case outstanding shares of Common
Stock shall be subdivided into a greater number of shares of
Common Stock, the Exchange Rate and the Optional Conversion
Rate in effect at the opening of business on the business day
following the day upon which such subdivision becomes
effective shall each be proportionately increased, and,
conversely, in case outstanding shares of Common Stock shall
be combined into a smaller number of shares of Common Stock,
the Exchange Rate and the Optional Conversion Rate in effect
at the opening of business on the business day following the
day upon which such combination becomes effective shall each
be proportionately reduced, such increases or reductions, as
the case may be, to become effective immediately after the
opening of business on the business day following the day upon
which such subdivision or combination becomes effective.
(iii) If the Corporation shall, after the
date hereof, issue rights or warrants, in each case other than
the Rights, to all holders of its Common Stock entitling them
(for a period not exceeding 45 days from the date of such
issuance) to subscribe for or purchase shares of Common Stock
at a price per share less than the Closing Price of the Common
Stock on the record date for the determination of stockholders
entitled to receive such rights or warrants, then in each case
the Exchange Rate and the Optional Conversion Rate shall each
be adjusted by multiplying the Exchange Rate and the Optional
Conversion Rate in effect on such record date, by a fraction
of which the numerator shall be the number of shares of Common
Stock outstanding on the date of issuance of such rights or
warrants, immediately prior to such issuance, plus the number
of additional shares of Common Stock offered for subscription
or purchase pursuant to such rights or warrants, and of which
the denominator shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights or
warrants, immediately prior to such issuance, plus the number
of shares of Common Stock which the aggregate offering price
of the total number of shares of Common Stock so offered for
subscription or purchase pursuant to such rights or warrants
would purchase at such Closing Price (determined by
multiplying such total number of shares by the exercise price
of such rights or warrants and dividing the product so
obtained by such Closing Price). Shares of Common Stock owned
by the Corporation or by another company of which a majority
of the shares entitled to vote in the election of directors
are held, directly or indirectly, by the Corporation shall not
be deemed to be outstanding for purposes of such computation.
Such adjustment shall become effective at the opening of
5
<PAGE> 6
business on the business day next following the record date
for the determination of stockholders entitled to receive such
rights or warrants. To the extent that shares of Common Stock
are not delivered after the expiration of such rights or
warrants, the Exchange Rate and the Optional Conversion Rate
shall each be readjusted to the Exchange Rate and the Optional
Conversion Rate which would then be in effect had the
adjustments made upon the issuance of such rights or warrants
been made upon the basis of the issuance of rights or warrants
in respect of only the number of shares of Common Stock
actually delivered.
(iv) If the Corporation shall pay a
dividend or make a distribution to all holders of its Common
Stock consisting of evidences of its indebtedness or other
assets (including shares of capital stock of the Corporation
other than Common Stock but excluding any cash dividends or
any dividends or other distributions referred to in clauses
(i) and (ii) above), or shall issue to all holders of its
Common Stock rights or warrants to subscribe for or purchase
any of its securities (other than those referred to in clause
(iii) above), then in each such case the Exchange Rate and the
Optional Conversion Rate shall each be adjusted by multiplying
the Exchange Rate and the Optional Conversion Rate in effect
on the record date for such dividend or distribution or for
the determination of stockholders entitled to receive such
rights or warrants, as the case may be, by a fraction of which
the numerator shall be the Fair Market Value per share of the
Common Stock on such record date, and of which the denominator
shall be such Fair Market Value per share of Common Stock less
the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive) as of such
record date of the portion of the assets or evidences of
indebtedness so distributed, or of such subscription rights or
warrants, applicable to one share of Common Stock. Such
adjustment shall become effective on the opening of business
on the business day next following the record date for such
dividend or distribution or for the determination of
stockholders entitled to receive such rights or warrants, as
the case may be.
(v) Any shares of Common Stock issuable
in payment of a dividend or other distribution shall be deemed
to have been issued immediately prior to the close of business
on the record date for such dividend or other distribution for
purposes of calculating the number of outstanding shares of
Common Stock under this paragraph (c) above.
(vi) Anything in this Section III
notwithstanding, the Corporation shall be entitled to make
such upward adjustments in the Exchange Rate and the Optional
Conversion Rate, in addition to those required by this Section
III, as the Corporation in its sole discretion shall determine
to be advisable, in order that any stock dividends,
subdivision of shares, distribution of rights to purchase
stock or securities, or distribution of securities convertible
into or exchangeable for stock (or any transaction which could
be treated as any of the foregoing transactions pursuant to
Section 305 of the Internal Revenue Code of 1986, as amended)
hereafter made by the Corporation to its stockholders shall
not
6
<PAGE> 7
be taxable.
(vii) In any case in which this paragraph
(c) shall require that an adjustment as a result of any event
become effective at the opening of business on the business
day next following a record date and the date fixed for
conversion pursuant to paragraph (a) occurs after such record
date, but before the occurrence of such event, the Corporation
may in its sole discretion elect to defer the following until
after the occurrence of such event: (A) issuing to the holder
of any shares of the Series D Preferred Stock surrendered for
conversion the number of shares of Common Stock issuable upon
such conversion in excess of the number of the shares of
Common Stock issuable before giving effect to such adjustment;
and (B) paying to such holder any amount in cash in lieu of a
fractional share of Common Stock pursuant to paragraph (g).
(viii) For purposes hereof, an "adjustment
in the Exchange Rate" means, and shall be implemented by, an
adjustment of the nature and amount specified, effected in the
manner specified, in each of the Upper Exchange Rate, the
Middle Exchange Rate and the Lower Exchange Rate. If an
adjustment is made to the Exchange Rate pursuant to this
paragraph (c), an adjustment shall also be made to the
Current Market Price solely to determine which of clauses
(a),(b) or (c) of the definition of Exchange Rate in paragraph
(a) will apply on the Mandatory Conversion Date. Such
adjustment shall be made by multiplying the Current Market
Price by a fraction of which the numerator shall be the
Exchange Rate immediately after such adjustment pursuant to
paragraph (c) and the denominator shall be the Exchange Rate
immediately before such adjustment. All adjustments to the
Exchange Rate and the Optional Conversion Rate shall be
calculated to the nearest 1/100th of a share of Common Stock.
No adjustment in the Exchange Rate or in the Optional
Conversion Rate shall be required unless such adjustment would
require an increase or decrease of at least one percent in the
Lower Exchange Rate; provided, however, any adjustments which
by reason of this subparagraph are not required to be made
shall be carried forward and taken into account in any
subsequent adjustment. All adjustments to the Exchange Rate
and the Optional Conversion Rate shall be made successively.
(ix) Before taking any action that would
cause an adjustment increasing the Exchange Rate or the
Optional Conversion Rate such that the conversion price (for
purposes of this paragraph (c), an amount equal to the
liquidation value per share of the Series D Preferred Stock
divided by the Optional Conversion Rate, respectively, as in
effect from time to time) would be below the then par value of
the Common Stock, the Corporation will take any corporate
action which may, in the opinion of its counsel, be necessary
in order that the Corporation may validly and legally issue
fully paid and nonassessable shares of Common Stock at the
Optional Conversion Rate as so adjusted.
(d) Adjustment for Certain Consolidations or
Mergers. In case of any consolidation or merger to which the
Corporation is a party (other than a merger or consolidation in which
the Corporation is the continuing corporation and in which the Common
Stock outstanding immediately prior to the merger or consolidation
remains unchanged), or in case of any sale or transfer to another
entity of the property of the Corporation as an entirety or
substantially as an entirety, or in case or any statutory exchange of
securities with another entity (other than in connection with a merger
or acquisition), proper provision shall be made so that each share of
the Series D Preferred Stock shall, after consummation of such
transaction, be subject to (i) conversion at the
7
<PAGE> 8
option of the holder into the kind and amount of securities, cash or
other property receivable upon consummation of such transaction by a
holder of the number of shares of Common Stock into which such share
of the Series D Preferred Stock might have been converted immediately
prior to consummation of such transaction, and (ii) conversion on the
Mandatory Conversion Date into the kind and amount of securities, cash
or other property receivable upon consummation of such transaction by
a holder of the number of shares of Common Stock into which such share
of the Series D Preferred Stock would have been converted if the
conversion on the Mandatory Conversion Date had occurred immediately
prior to the date of consummation of such transaction; assuming in
each case that such holder of Common Stock failed to exercise rights
of election, if any, as to the kind or amount of securities, cash or
other property receivable upon consummation of such transaction
(provided that if the kind or amount of securities, cash or other
property receivable upon consummation of such transaction is not the
same for each nonelecting share, then the kind and amount of
securities, cash or other property receivable upon consummation of
such transaction for each nonelecting share shall be deemed to be the
kind and amount so receivable per share by a plurality of the
nonelecting shares). The kind and amount of securities into which the
shares of the Series D Preferred Stock shall be convertible after
consummation of such transaction shall be subject to adjustment as
described in paragraph (c) following the date of consummation of such
transaction. The Corporation may not become a party to any such
transaction unless the terms thereof are consistent with the
foregoing.
(e) Notice of Adjustment. Whenever the Exchange
Rate and Optional Conversion Rate are adjusted as provided in
paragraphs (c) or (d) above, the Corporation shall:
(i) Forthwith compute the adjusted
Exchange Rate and Optional Conversion Rate and prepare a
certificate signed by the Chief Financial Officer, any Vice
President, the Treasurer or the Controller of the Corporation
setting forth the adjusted Exchange Rate and Optional
Conversion Rate, the method of calculation thereof in
reasonable detail and the facts requiring such adjustment and
upon which such adjustment is based, which certificate shall
be prima facie evidence of the correctness of the adjustment,
and file such certificate forthwith with the Transfer Agent;
(ii) Make a prompt public announcement
stating that the Exchange Rate and Optional Conversion Rate
have been adjusted and setting forth the adjusted Exchange
Rate and Optional Conversion Rate; and
(iii) Promptly mail a notice stating that
the Exchange Rate and Optional Conversion Rate have been
adjusted, the facts requiring such adjustment and upon which
such adjustment is based and setting forth the adjusted
Exchange Rate and Optional Conversion Rate, to the holders of
record of the outstanding shares of the Series D Preferred
Stock at or prior to the time the Corporation mails an interim
statement to its stockholders covering the fiscal quarter
period during which the facts requiring such adjustment
occurred but in any event within
8
<PAGE> 9
45 days of the end of such fiscal quarter period.
(f) Notices of Proposed Actions. In case, at any
time while any of the shares of the Series D Preferred Stock are
outstanding,
(i) the Corporation shall declare a
dividend (or any other distribution) on the Common Stock,
(other than in cash out of profits or surplus and other than
the Rights), or
(ii) the Corporation shall authorize the
issuance to all holders of the Common Stock of rights or
warrants (other than the Rights) to subscribe for or purchase
shares of the Common Stock or of any other subscription rights
or warrants, or
(iii) the Board of Directors of the
Corporation shall propose any reclassification of the Common
Stock (other than a subdivision or combination thereof) or any
consolidation or merger to which the Corporation is a party
and for which approval of any stockholders of the Corporation
is required (except for a merger of the Corporation into one
of its subsidiaries solely for the purpose of changing the
corporate domicile of the Corporation to another state of the
United States and in connection with which there is no
substantive change in the rights or privileges of any
securities of the Corporation other than changes resulting
from differences in the corporate statutes of the then
existing and the new state of domicile), or the sale or
transfer of all or substantially all of the assets of the
Corporation,
then the Corporation shall cause to be filed at each office or agency
maintained for the purpose of conversion of the shares of the Series D
Preferred Stock, and shall cause to be mailed to the holders of shares of the
Series D Preferred Stock at their last addresses as they shall appear on the
stock register, as promptly as possible, but at least ten (10) days before the
date hereinafter specified (or the earlier of the dates hereinafter specified,
in the event that more than one date is specified), a notice stating (A) the
date on which a record is to be taken for the purpose of any such dividend,
distribution, or issuance of rights or warrants, or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to be
entitled to any such dividend, distribution, rights or warrants are to be
determined or (B) the date on which any such reclassification, consolidation,
merger, sale, transfer or exchange is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities or other property
(including cash), if any, deliverable upon any such reclassification,
consolidation, merger, sale, transfer or exchange. The failure to give or
receive the notice required by this paragraph (f) or any defect therein shall
not affect the legality or validity of any such dividend, distribution, right
or warrant or other action.
(g) No Fractional Shares. No fractional shares
of Common Stock shall be issued upon the conversion of any shares of
the Series D Preferred Stock. In lieu of any fraction of a share of
Common Stock which would otherwise be issuable in respect
9
<PAGE> 10
of the aggregate number of shares of the Series D Preferred Stock
surrendered by the same holder upon Automatic Conversion or Optional
Conversion, such holder shall have the right to receive an amount in
cash (computed to the nearest cent) equal to the same fraction of the
Closing Price of the Common Stock determined (A) as of the fifth
Trading Day immediately preceding the Mandatory Conversion Date, in
the case of Automatic Conversion, or (B) as of the second Trading Day
immediately preceding the effective date of conversion, in the case of
an Optional Conversion by a holder. If more than one share of the
Series D Preferred Stock shall be surrendered for conversion at one
time by or for the same holder, the number of full shares of Common
Stock issuable upon conversion thereof shall be computed on the basis
of the aggregate number of shares of the Series D Preferred Stock so
surrendered.
(h) Treasury Shares. For the purposes of this
Section III, the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the
Corporation but shall include shares issuable in respect of scrip
certificates issued in lieu of fractions of shares of Common Stock.
The Corporation will not pay any dividend or make any distribution on
shares of Common Stock held in the treasury of the Corporation.
(i) Other Action. If the Corporation shall take
any action affecting the Common Stock, other than action described in
this Section III, that in the opinion of the Board of Directors would
materially adversely affect the conversion rights of the holders of
the shares of the Series D Preferred Stock, the Exchange Rate and/or
the Optional Conversion Rate for the Series D Preferred Stock may be
adjusted, to the extent permitted by law, in such manner, if any, and
at such time, as the Board of Directors may, in good faith, determine
to be equitable in the circumstances.
(j) Conversion. The Corporation covenants that
it will at all times reserve and keep available, free from preemptive
rights, out of the aggregate of its authorized but unissued shares of
Common Stock or its issued shares of Common Stock held in its
treasury, or both, for the purpose of effecting conversion of the
Series D Preferred Stock, the full number of shares of Common Stock
deliverable upon the conversion of all outstanding shares of the
Series D Preferred Stock not theretofore converted at the Upper
Exchange Rate. For purposes of this paragraph (j), the number of
shares of Common Stock that shall be deliverable upon the conversion
of all outstanding shares of the Series D Preferred Stock shall be
computed as if at the time of computation all such outstanding shares
were held by a single holder.
The Corporation covenants that any shares of Common
Stock issued upon conversion of the Series D Preferred Stock shall be
validly issued, fully paid and non-assessable.
The Corporation shall endeavor to list the shares of
Common Stock required to be delivered upon conversion of the Series D
Preferred Stock, prior to such delivery, upon each national securities
exchange or other market, if any, upon which the outstanding Common
Stock is listed at the time of such delivery.
Prior to the delivery of any securities that the
Corporation shall be
10
<PAGE> 11
obligated to deliver upon conversion of the Series D Preferred Stock,
the Corporation shall endeavor to comply with all federal and state
laws and regulations thereunder requiring the registration of such
securities with, or any approval of or consent to the delivery thereof
by, any governmental authority.
(k) Taxes. The Corporation will pay any and all
documentary stamp or similar issue or transfer taxes payable in
respect of the issuance or delivery of shares of Common Stock or other
securities or property on conversion of the Series D Preferred Stock
pursuant hereto; provided, however, that the Corporation shall not be
required to pay any tax that may be payable in respect of any transfer
involved in the issuance or delivery of shares of Common Stock or
other securities or property in a name other than that of the holder
of the Series D Preferred Stock to be converted, and no such issuance
or delivery shall be made unless and until the person requesting such
issuance or delivery has paid to the Corporation the amount of any of
such tax or established, to the reasonable satisfaction of the
Corporation, that such tax has been paid.
IV. Voting Rights.
(a) Rights Following Defaults in Payment of
Dividends. In the event of default in the payment, in whole or in
part, of six quarterly dividends on the Series D Preferred Stock or on
the Preferred Stock of any other series ranking on a parity with the
Series D Preferred Stock, whether or not consecutive, the holders of
shares of the Series D Preferred Stock and such series of Preferred
Stock, voting as a single class, will be entitled to elect two
directors of the Corporation, to serve in addition to the directors
otherwise elected. Such right to elect additional directors is in
lieu of any other rights of such holders to vote for directors, and
will remain in effect until no such quarterly dividend is in default.
(b) Certain Changes. The vote or written consent
of at least two-thirds of the outstanding shares of the Series D
Preferred Stock is necessary to effect (i) any amendment or repeal of
any of the provisions of the Restated Certificate of Incorporation or
the By-laws of the Corporation which affects the voting powers,
rights, privileges or preferences of the holders of the Series D
Preferred Stock, (ii) the authorization or issuance of any stock, or
any security convertible into any stock, ranking prior to the Series D
Preferred Stock, (iii) the purchase of less than all the shares of the
Series D Preferred Stock then outstanding (except in accordance with a
stock purchase offer made to all holders of the Series D Preferred
Stock) when any dividends on the Series D Preferred Stock are in
arrears, or (iv) the sale, lease or conveyance by the Corporation of
all or substantially all of its property or business, its voluntary
liquidation or dissolution, or its consolidation with or merger into
any other entity, unless the resulting entity will have no shares
authorized or outstanding ranking prior to or on a parity with the
Series D Preferred Stock except the same number of shares with the
same rights and preferences as those of the Corporation authorized and
outstanding immediately preceding such consolidation or merger, and
unless each holder of the Series D Preferred Stock immediately prior
thereto receives the same number of shares, with the same rights and
preferences, of the resulting entity.
11
<PAGE> 12
V. Reacquired Shares. Any shares of the Series D
Preferred Stock purchased or otherwise acquired by the Corporation in
any manner whatsoever shall be retired and cancelled promptly after
the acquisition thereof. The Corporation shall cause all such shares
upon their cancellation to be authorized but unissued shares of
Preferred Stock which may be reissued as part of a new series of
Preferred Stock.
VI. Liquidation, Dissolution or Winding Up.
(a) Upon any liquidation (voluntary or
otherwise), dissolution or winding up of the Corporation, no
distribution shall be made to the holders of shares of stock ranking
junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series D Preferred Stock unless, prior thereto, the
holders of shares of the Series D Preferred Stock shall have received
$______________ per share, plus an amount equal to any and all accrued
and unpaid dividends thereon, whether or not declared, to the date of
such payment (the "Series D Liquidation Preference"). Following the
payment of the full amount of the Series D Liquidation Preference, no
additional distributions shall be made to the holders of shares of the
Series D Preferred Stock.
(b) Ratable Payment. In the event there are not
sufficient assets available to permit payment in full of the Series D
Liquidation Preference and the liquidation preferences of all other
series of Preferred Stock, if any, which rank on a parity with the
Series D Preferred Stock, then such remaining assets shall be
distributed ratably to the holders of such parity shares in proportion
to their respective liquidation preferences.
VII. Redemption. The shares of the Series D Preferred
Stock shall not be redeemable.
VIII. Ranking. The Series D Preferred Stock shall rank
senior to the Series C Junior Participating Preferred Stock and on
a parity with all other series of Preferred Stock as to the payment of
dividends and the distribution of assets upon liquidation, dissolution
or winding up, unless the terms of any such series shall provide
otherwise.
IX. Fractional Shares. The Series D Preferred Stock may
be issued in fractions of a share which shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting
rights, receive dividends, participate in distributions and to have
the benefit of all other rights of holders of the Series D Preferred
Stock.
X. Definitions. For purposes of the Series D Preferred
Stock, the following terms shall have the meanings indicated:
"business day" shall mean any day other than a Saturday,
Sunday or a day on which banking institutions in the State of New York
are authorized or obligated by law or
12
<PAGE> 13
executive order to close.
"Current Market Price" per share of the Common Stock shall
mean the average Closing Price per share of the Common Stock of the
Corporation on the twenty (20) Trading Days immediately prior to, but
not including, the Mandatory Conversion Date.
"Closing Price" of a share of Common Stock on any date of
determination shall mean the closing sale price (or, if no closing
sale price is reported, the last reported sale price) of such share on
the Nasdaq National Market ("Nasdaq") on such date or, if the Common
Stock is not listed for trading on Nasdaq on any such date, as
reported in the composite transactions for the principal United States
securities exchange on which the Common Stock is so listed, or if it
is not so listed on a United States national or regional securities
exchange, the last quoted bid price for the Common Stock in the
over-the-counter market as reported by the National Quotation Bureau
or similar organization, or, if such bid price is not available, the
market value of a share of Common Stock on such date as determined by
a nationally recognized independent investment banking firm retained
for this purpose by the Corporation.
"Fair Market Value" on any day shall mean the average of the
daily Closing Prices of a share of Common Stock of the Corporation on
the five (5) consecutive Trading Days selected by the Corporation
commencing not more than twenty (20) Trading Days before, and ending
not later than, the earlier of the day in question and the day before
the "ex" date with respect to the issuance or distribution requiring
such computation; and the term "'ex' date", when used with respect to
any issuance or distribution, means the first day on which the Common
Stock trades regular way, without the right to receive such issuance
or distribution, on the exchange or in the market, as the case may be,
used to determine that day's Closing Price.
"Rights" shall mean the rights of the Corporation which are
issuable under the Corporation's Stockholder Protection Rights Plan
adopted on February 23, 1996 and as amended from time to time, or
rights to purchase any capital stock of the Corporation under any
successor shareholder rights plan or plan adopted in replacement of
the Corporation's Stockholder Protection Rights Plan.
"Trading Day" shall mean a day on which the Common Stock (a)
is not suspended from trading on any national or regional securities
exchange or association or over-the-counter market at the close of
business and (b) has traded at least once on the national or regional
securities exchange or association or over-the-counter market that is
the primary market for the trading of such security.
"Transfer Agent" means The Boatmen's Trust Company or such
other agent or agents of the Corporation as may be designated by the
Board of Directors as the transfer agent for the Series D Preferred
Stock.
IN WITNESS WHEREOF, this Certificate of Designation is
executed on behalf of the Corporation by its _____________________________ and
attested by its Secretary this _____ day of _________________
13
<PAGE> 14
_____________________, 1997.
BROOKS FIBER PROPERTIES, INC.
By:______________________________
Name:
Title:
ATTEST:
By:______________________________
Name: John P. Denneen
Title: Secretary
14
<PAGE> 1
EXHIBIT 4.9
DRAFT 12/13/96
DEPOSIT AGREEMENT
dated as of January , 1997
among
BROOKS FIBER PROPERTIES, INC.
a Delaware corporation,
THE BOATMEN'S TRUST COMPANY,
a Missouri corporation,
AND THE HOLDERS FROM TIME TO TIME
OF THE RECEIPTS DESCRIBED HEREIN.
WHEREAS, it is desired to provide, as hereinafter set forth in
this Deposit Agreement, for the deposit of shares of Series D Conversion
Preferred Stock, par value $0.01 per share (the "Stock"), of Brooks Fiber
Properties, Inc. with the Depositary (as hereinafter defined) for the purposes
set forth in this Deposit Agreement and for the issuance hereunder of Receipts
(as hereinafter defined) by the Depositary evidencing Depositary Shares (as
hereinafter defined) in respect of the Stock so deposited; and
WHEREAS, the Receipts are to be substantially in the form of
Exhibit A annexed hereto, with appropriate insertions, modifications and
omissions as hereinafter provided in this Deposit Agreement;
NOW, THEREFORE, in consideration of the premises contained
herein and such other good and valuable consideration, receipt of which is
hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
The following definitions shall for all purposes, unless
otherwise indicated, apply to the respective capitalized terms used in this
Deposit Agreement and the Receipts:
"Automatic Conversion" shall mean the automatic conversion of
each outstanding share of Stock into shares of Common Stock on the Mandatory
Conversion Date, as provided in the Certificate.
"Certificate" shall mean the Certificate of Designations filed
with the Secretary of State of the State of Delaware establishing the Stock as a
series of preferred stock of the Company, as it may be amended from time to time
in accordance with its terms and with the Restated Certificate of Incorporation
of the Company.
1
<PAGE> 2
"Common Stock" shall mean the Company's Common Stock, par
value $0.01 per share.
"Company" shall mean Brooks Fiber Properties, Inc., a Delaware
corporation, and its successors.
"Deposit Agreement" shall mean this Deposit Agreement, as
amended or supplemented from time to time in accordance with the terms hereof.
"Depositary" shall mean The Boatmen's Trust Company, a
Missouri corporation, and any successor Depositary hereunder.
"Depositary Shares" shall mean the $______ Depositary Shares,
each representing a one-one hundredth (1/100) interest in a share of Stock and
evidenced by a Receipt.
"Depositary's Agent" shall mean any agent appointed by the
Depositary pursuant to Section 7.05.
"Depositary's Office" shall mean the principal office of the
Depositary at which at any particular time its depositary business shall be
administered.
"Mandatory Conversion Date" shall mean _____________, 2000.
"Receipt" shall mean one of the depositary receipts, whether
in definitive or temporary form, issued hereunder by the Depositary, each
representing any number of whole Depositary Shares. If the context so requires,
the term "Receipt" shall be deemed to include the DTC Receipt (as defined in
Section 2.01 hereof).
"Record Holder" or "Holder" with respect to a Receipt shall
mean the individual, entity or person in whose name a Receipt is registered on
the books of the Depositary or any register of any Registrar maintained for such
purpose at a given time.
"Registrar" shall mean any bank or trust company that shall be
appointed by the Depositary to register ownership and transfers of Receipts as
herein provided and may include the Depositary.
ARTICLE II
BOOK-ENTRY FORM; FORM OF RECEIPTS; DEPOSIT OF STOCK;
EXECUTION AND DELIVERY; TRANSFER AND SURRENDER OF RECEIPTS
SECTION 2.01. Book-Entry Form; Form and Transfer of Receipts.
The Company and the Depositary shall make application to The Depository Trust
Company ("DTC") for acceptance of all or a portion of the Receipts for its
book-entry settlement system. The Company
2
<PAGE> 3
hereby appoints the Depositary acting through any authorized officer thereof as
its attorney-in-fact, with full power to delegate, for purposes of executing any
agreements, certifications or other instruments or documents necessary or
desirable in order to effect the acceptance of such Receipts for DTC
eligibility, including but not limited to, the FAST Balance Certificate
Agreement between the Depositary and DTC (the "FAST Agreement"), a copy of which
is attached as Exhibit B. So long as the Receipts are eligible for book-entry
settlement with DTC, except as provided in Section 2.10 of this Deposit
Agreement or unless otherwise required by law, all Depositary Shares to be
traded on the Nasdaq National Market with book-entry settlement through DTC
shall be represented by a single receipt (the "DTC Receipt") which shall be
deposited with DTC (or its designee) evidencing all such Depositary Shares and
registered in the name of the nominee of DTC (initially Cede & Co.). The
Depositary or such other entity as is agreed to by DTC may hold the DTC Receipt
as custodian for DTC. During any period in which any Depositary Shares are
evidenced by the DTC Receipt, except as expressly provided in Section 2.10 of
this Deposit Agreement, no person acquiring Depositary Shares traded on the
Nasdaq National Market with book-entry settlement through DTC shall receive or
be entitled to receive physical delivery of the Receipts evidencing such
Depositary Shares. Ownership of beneficial interests in the DTC Receipt shall be
shown on, and the transfer of such ownership shall be effected through, records
maintained by (i) DTC or its nominee for such DTC Receipt or (ii) institutions
that have accounts with DTC.
If DTC subsequently ceases to make its book-entry settlement
system available for the Receipts, the Company may instruct the Depositary
regarding making other arrangements for book-entry settlement. In the event that
the Receipts are not eligible for, or it is no longer necessary to have the
Receipts available in, book-entry form, the Depositary shall provide written
instructions to DTC to deliver to the Depositary for cancellation the DTC
Receipt, and the Company shall instruct the Depositary (which instructions the
Depositary undertakes to comply with) to deliver to the beneficial owners of the
Depositary Shares previously evidenced by the DTC Receipt definitive Receipts in
physical form evidencing such Depositary Shares. Such definitive Receipts shall
be in the form annexed hereto as Exhibit A with appropriate insertions,
modifications and omissions, as hereafter provided.
The beneficial owners of Depositary Shares shall, except as
stated above with respect to Depositary Shares in book-entry form represented by
the DTC Receipt, be entitled to receive Receipts in physical, certificated form
as herein provided.
The Receipts may be typewritten, in the case of the DTC
Receipt, and otherwise shall, upon notice by the Company to the Depositary, be
definitive Receipts which shall be engraved, printed or typewritten and shall be
substantially in the form set forth in Exhibit A annexed to this Deposit
Agreement, with appropriate insertions, modifications and omissions, as
hereinafter provided. The DTC Receipt shall bear such legend or legends as may
be required by DTC in order for it to accept the Depositary Shares for its
book-entry settlement system. Pending the preparation of definitive Receipts,
the Depositary, upon the written order of the Company delivered in compliance
with Section 2.02, shall execute and deliver temporary Receipts, which shall be
printed, lithographed, typewritten, mimeographed or otherwise substantially of
the tenor of the definitive Receipts in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the persons executing such Receipts may determine,
3
<PAGE> 4
as evidenced by their execution of such Receipts. If temporary Receipts are
issued, the Company and the Depositary will cause definitive Receipts to be
prepared without unreasonable delay. After the preparation of definitive
Receipts, the temporary Receipts shall be exchangeable for definitive Receipts
upon surrender of the temporary Receipts at the Depositary's Office, without
charge to the holder. Upon surrender for cancellation of any one or more
temporary Receipts, the Depositary shall execute and deliver in exchange
therefor definitive Receipts representing the same number of Depositary Shares
as represented by the surrendered temporary Receipt or Receipts registered in
the name (and only the name) of the holder of the temporary Receipt. Such
exchange shall be made at the Company's expense and without any charge therefor
to the holder. Until so exchanged, the temporary Receipts shall in all respects
be entitled to the same benefits under this Deposit Agreement, and with respect
to the Stock, as definitive Receipts.
Receipts shall be executed by the Depositary by the manual
signature of a duly authorized officer of the Depositary; provided, however,
that such signature may be a facsimile if a Registrar for the Receipts (other
than the Depositary) shall have been appointed and such Receipts are
countersigned by manual signature of a duly authorized officer of the Registrar.
No Receipt shall be entitled to any benefits under this Deposit Agreement or be
valid or obligatory for any purpose unless it shall have been executed manually
by a duly authorized officer of the Depositary or, if a Registrar for the
Receipts (other than the Depositary) shall have been appointed, by facsimile
signature of a duly authorized officer of the Depositary and countersigned
manually by a duly authorized officer of such Registrar. The Depositary shall
record on its books each Receipt so signed and delivered as hereinafter
provided. The manual or facsimile signatures of individuals who were at any time
proper officers of the Depositary or the Registrar, as the case may be, shall
constitute adequate signatures hereunder, notwithstanding that such individuals
or any of them have ceased to hold such offices prior to the delivery of
Receipts bearing such signatures or did not hold such offices on the date of
delivery of such Receipts.
Receipts shall be in denominations of any number of whole
Depositary Shares.
Receipts may be endorsed with or have incorporated in the text
thereof such legends or recitals or changes not inconsistent with the provisions
of this Deposit Agreement as may be required by the Depositary and approved by
the Company or required to comply with any applicable law or regulation or with
the rules and regulations of any securities exchange or other market on which
the Stock, the Depositary Shares or the Receipts may be listed or to conform
with any usage with respect thereto, or to indicate any special limitations or
restrictions to which any particular Receipts are subject.
Title to any Receipt (and to the Depositary Shares evidenced
by such Receipt) that is properly endorsed, or accompanied by a properly
executed instrument of transfer, shall be transferable by delivery of such
Receipt with the same effect as if such Receipt were a negotiable instrument;
provided, however, that until transfer of a Receipt shall be registered on the
books of the Registrar, on behalf of the Depositary, as provided in Section
2.03, the Depositary may, notwithstanding any notice to the contrary, treat the
record holder as the absolute owner thereof for the purpose of determining the
person entitled to distributions of dividends or other distributions with
respect to the Stock, the exchange of Depositary Shares for Stock, the right to
exchange
4
<PAGE> 5
Receipts pursuant to Section 2.10 or to any notice provided for in this Deposit
Agreement and for all other purposes.
The Depositary shall not lend any Stock deposited hereunder.
SECTION 2.02. Deposit of Stock; Execution and Delivery of
Receipts in Respect Thereof. Subject to the terms and conditions of this Deposit
Agreement, the Company or any other person authorized under the Underwriting
Agreement, dated January , 1997, between the Company and the underwriters with
respect to the Stock (the "Other Persons"), may from time to time deposit shares
of Stock with the Depositary under this Deposit Agreement by delivery to the
Depositary of a certificate or certificates representing the Stock to be
deposited; provided, however, that, other than in the case of splits,
combinations or other reclasssifications affecting the Stock, or in the case of
dividends or other distributions of Stock, if any, there shall be deposited with
the Depositary hereunder not more than 51,750 shares of Stock. Such certificate
or certificates representing the Stock shall be properly endorsed or
accompanied, if required by the Depositary, by a duly executed instrument of
transfer or endorsement, in form satisfactory to the Depositary, together with a
written order of the Company directing the Depositary to execute and deliver to
the person or persons named in such order a Receipt or Receipts evidencing in
the aggregate the number of Depositary Shares representing such deposited Stock.
All Stock deposited by the Company or the Other Persons, as
the case may be, with the Depositary shall be held by the Depositary at the
Depositary's Office or at such other place or places as the Depositary shall
determine.
If required by the Depositary, Stock presented for deposit at
any time (except for the initial deposit of Stock by the Company or the Other
Persons and any subsequent deposit by the Company or the Other Persons of Stock
acquired by such Other Persons pursuant to such Other Persons' overallotment
option), whether or not the register of stockholders of the Company is closed,
shall also be accompanied by an agreement or assignment, or other instrument
satisfactory to the Depositary, that will provide for the prompt transfer to the
Depositary or its nominee of any dividend or right to subscribe for additional
Stock or to receive other property that any person in whose name the Stock is or
has been registered may thereafter receive upon or in respect of such deposited
Stock, or in lieu thereof such agreement of indemnity or other agreement as
shall be satisfactory to the Depositary.
Upon receipt by the Depositary of a certificate or
certificates representing Stock deposited with the Depositary by the Company or
the Other Persons, as the case may be, in accordance with the provisions of this
Section, together with the other documents required as above specified, and upon
recordation of the Stock so deposited on the books of the Company in the name of
the Depositary, the Depositary shall execute and deliver, to the person or
persons named in the written order delivered to the Depositary referred to in
the first paragraph of this Section 2.02, a Receipt or Receipts evidencing in
the aggregate the number of Depositary Shares relating to the Stock so
deposited. Such Receipt or Receipts shall be registered by the Depositary or the
Registrar in such name or names as may be requested by the person or persons
named in the written order of the Company delivered to the Depositary. The
Depositary shall execute and deliver such Receipts
5
<PAGE> 6
at the Depositary's Office or such other offices, if any, as such person may
designate. Delivery at other offices shall be at the risk and expense of the
person requesting such delivery. In each case, delivery will be made only upon
payment by the Company to the Depositary of all taxes and other governmental
charges and any fees payable in connection with such deposit and the transfer of
the deposited Stock. The DTC Receipt shall provide that it shall evidence the
aggregate number of Depositary Shares from time to time indicated in the records
of the Depositary and that the aggregate number of Depositary Shares evidenced
thereby may from time to time be increased or decreased by making adjustments on
such records of the Depositary.
The Company shall deliver to the Depositary from time to time
such quantities of blank Receipts as the Depositary may request to enable it to
perform its obligations under this Deposit Agreement.
SECTION 2.03. Registration of Transfer of Receipt. Subject to
the terms and conditions of this Deposit Agreement, the Registrar, on behalf of
the Depositary, shall register on its books transfers of Receipts from time to
time upon notice to the Registrar by the Depositary of the surrender of a
Receipt for transfer by the holder in person or by duly authorized attorney,
which Receipt in each case must be properly endorsed or accompanied by a
properly executed instrument of transfer or endorsement together with evidence
of the payment of any transfer taxes as may be required by law. Upon surrender
of a properly endorsed Receipt or a Receipt accompanied by an instrument of
transfer or endorsement, the Depositary shall execute a new Receipt or Receipts
evidencing the same aggregate number of Depositary Shares as those evidenced by
the Receipt or Receipts to or upon the order of the transferee named in the
endorsement or instrument of transfer.
SECTION 2.04. Split-ups and Combinations of Receipts;
Surrender of Receipts and Withdrawal of Stock. Upon surrender of a Receipt or
Receipts at the Depositary's Office or at such other office as it may designate
for the purpose of effecting a split-up or combination of such Receipt or
Receipts, the Depositary shall execute and deliver a new Receipt or Receipts to
the holder thereof or to such holder's order in the denomination requested,
evidencing the aggregate number of Depositary Shares evidenced by the Receipt or
Receipts surrendered. The Depositary shall give prompt notice of such action and
the certificate numbers to the Registrar for the purpose of recording such
split-up or consolidation.
Any holder of at least one hundred (100) Depositary Shares may
withdraw the number of whole shares of Stock underlying such Depositary Shares
and all money and other property, if any, represented thereby by surrendering
such Receipt or Receipts at the Depositary's Office or at such other offices as
the Depositary may designate for such withdrawals. If such holder's Depositary
Shares are being held by DTC or its nominee pursuant to Section 2.01, such
holder may request, in accordance with Section 2.10, withdrawal from the
book-entry system of the number of Depositary Shares specified in the preceding
sentence. Thereafter, without unreasonable delay, the Depositary shall deliver
to such holder, or to the person or persons designated by such holder as
hereinafter provided, the number of whole shares of Stock and all money and
other property, if any, represented by the Receipt or Receipts so surrendered
for withdrawal, but holders of such whole shares of Stock will not thereafter be
entitled to deposit such Stock hereunder or to receive Depositary Shares
therefor. If the Receipt or Receipts delivered by the holder to the
6
<PAGE> 7
Depositary in connection with such withdrawal shall evidence in the aggregate a
number of Depositary Shares in excess of the number of Depositary Shares
representing the number of whole shares of Stock to be so withdrawn, the
Depositary shall at the same time, in addition to such number of whole shares of
Stock and such money and other property, if any, to be so withdrawn, deliver to
such holder, or (subject to Sections 2.02, 2.03 and 3.02) upon his order, a new
Receipt evidencing such excess number of Depositary Shares. Delivery of the
Stock and the money and other property being withdrawn may be made by the
delivery of such certificates, documents of title and other instruments as the
Depositary may deem appropriate.
Stock delivered pursuant to the preceding paragraph may be
endorsed with or have incorporated in the text thereof such legends or recitals
or changes not inconsistent with the provisions of this Deposit Agreement as may
be required by the Depositary or required to comply with any applicable law or
any regulation thereunder or with the rules and regulations of any securities
exchange or other market on which the Stock may be listed or to conform with any
usage with respect thereto, or to indicate any special limitations or
restrictions to which any particular shares of Stock are subject.
Subject to Section 2.10, if the Stock and the money and other
property being withdrawn are to be delivered to a person or persons other than
the record holder of the Receipt or Receipts being surrendered for withdrawal of
Stock, such holder shall execute and deliver to the Depositary a written order
so directing the Depositary and the Depositary may require that the Receipt or
Receipts surrendered by such holder for withdrawal of such shares of Stock be
properly endorsed in blank or accompanied by a properly executed instrument of
transfer in blank.
Delivery of the Stock and the money and other property, if
any, represented by Receipts surrendered for withdrawal shall be made by the
Depositary at the Depositary's Office, except that, at the request, risk and
expense of the holder surrendering such Receipt or Receipts and for the account
of the holder thereof, such delivery may be made at such other place as may be
designated by such holder.
SECTION 2.05. Limitations on Execution and Delivery, Transfer,
Surrender and Exchange of Receipts. As a condition precedent to the execution
and delivery, registration of transfer, split-up, combination, surrender or
exchange of any Receipt, the Depositary, any of the Depositary's Agents or the
Company may require payment to it of a sum sufficient for the payment (or, in
the event that the Depositary or the Company shall have made such payment, the
reimbursement to it) of any taxes, charges or expenses payable by the holder of
a Receipt pursuant to Sections 3.02 and 5.07, may require the production of
evidence satisfactory to it as to the identity and genuineness of any signature
and may also require compliance with the rules and regulations of any
governmental body, any securities exchange or any applicable self-regulatory
body, including, without limitation, the Securities Transfer Association, Inc.
(the "STA"), the National Association of Securities Dealers, Inc. (the "NASD")
or such procedures, if any, as the Depositary or the Company may establish
consistent with the provisions of this Deposit Agreement.
The delivery of Receipts against Stock deposited with the
Depositary may be suspended, the registration of transfer of Receipts may be
refused and the registration of transfer,
7
<PAGE> 8
surrender, exchange, split-up or combination of outstanding Receipts may be
suspended and the deposit or withdrawal of Stock may be refused (i) during any
period when the register of stockholders of the Company is closed or (ii) if any
such action is deemed necessary by the Depositary, any of the Depositary's
Agents or the Company at any time or from time to time because of any
requirement of law or of any government, governmental body or commission,
securities exchange or the NASD.
SECTION 2.06. Lost Receipts, etc. If any mutilated Receipt is
surrendered to the Depositary, the Depositary shall execute and deliver in
exchange therefor a new Receipt of like form and tenor in exchange and
substitution for such mutilated Receipt. In case any Receipt shall be destroyed,
lost or stolen, the Depositary shall execute and deliver a Receipt to the holder
thereof of like form and tenor in exchange and substitution for such destroyed,
lost or stolen Receipt, upon (i) the filing by the holder thereof with the
Depositary of evidence satisfactory to the Depositary of such destruction or
loss or theft of such Receipt, of the authenticity thereof and of such holder's
ownership thereof and (ii) the holder's furnishing the Depositary with
reasonable indemnification satisfactory to such Depositary and (iii) payment of
any expenses, including fees, charges and expenses of the Depositary in
connection with such execution and delivery (which may include the customary
premium payable to its insurance carrier in connection therewith). Every new
Receipt issued pursuant to this Section in lieu of any mutilated, destroyed,
lost or stolen Receipt shall constitute an original additional contractual
obligation under this Deposit Agreement, whether or not the mutilated,
destroyed, lost or stolen Receipt shall be at any time enforceable by anyone.
SECTION 2.07. Cancellation and Destruction of Surrendered
Receipts. All Receipts surrendered to the Depositary or any Depositary's Agent
shall be cancelled by the Depositary. Except as prohibited by applicable law or
regulation, the Depositary is authorized to destroy all Receipts so cancelled.
Any Receipt evidenced in book-entry form shall be deemed cancelled when the
Depositary has caused the amount of Depositary Shares evidenced by the DTC
Receipt to be reduced in proportion to the number of Depositary Shares evidenced
by the surrendered Receipt.
SECTION 2.08. Stock Purchase Plans. Upon receipt of
instructions from the Company, the Depositary shall take such action as shall be
reasonable to permit the record holders of the Depositary Shares to participate
in any dividend reinvestment or other stock purchase plan sponsored by the
Company that permits the participation by such holders on such terms and
conditions as the Company may determine.
SECTION 2.09. Optional Conversion of Stock into Common Stock.
Receipts may be surrendered with written instructions to the Depositary to
instruct the Company to cause the conversion of any specified number of whole or
fractional shares of Stock represented by the Depositary Shares evidenced
thereby into whole shares of Common Stock at the conversion rate then in effect
for the Stock (and, therefore, for the Depositary Shares) specified in the
Certificate, as such conversion rate may be adjusted by the Company from time to
time as provided in the Certificate. Subject to the terms and conditions of this
Deposit Agreement and the Certificate, a holder of a Receipt or Receipts
evidencing Depositary Shares representing whole or fractional shares of Stock
may surrender such Receipt or Receipts at the Depositary's Office
8
<PAGE> 9
or to such office or to such Depositary's Agents as the Depositary may designate
for such purpose, together with a notice of conversion duly completed and
executed, thereby directing the Depositary to instruct the Company to cause the
conversion of the number of shares or fractions thereof of underlying Stock
specified in such notice of conversion into shares of Common Stock, and an
assignment of such Receipt or Receipts to the Company or in blank, duly
completed and executed. To the extent that a holder delivers to the Depositary
for conversion a Receipt or Receipts which in the aggregate are convertible into
less than one whole share of Common Stock, the holder shall receive payment in
cash in lieu of such fractional shares of Common Stock otherwise issuable. If
more than one Receipt shall be delivered for conversion at one time by the same
holder, the number of whole shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of Receipts so
delivered.
Upon receipt by the Depositary of a Receipt or Receipts,
together with notice of conversion, duly completed and executed, directing the
Depositary to instruct the Company to cause the conversion of a specified number
of shares or fractions thereof of Stock and an assignment of such Receipt or
Receipts to the Company or in blank, duly completed and executed, the Depositary
shall instruct the Company (i) to cause the conversion of the Depositary Shares
evidenced by the Receipts so surrendered for conversion as specified in the
written notice to the Depositary and (ii) to cause the delivery to the holders
of such Receipts of a certificate or certificates evidencing the number of whole
shares of Common Stock and the amount of money, if any, to be delivered to the
holders of Receipts surrendered for conversion in payment of any accrued and
unpaid dividends and in lieu of fractional shares of Common Stock otherwise
issuable. The Company shall as promptly as practicable after receipt thereof
cause the delivery of (i) a certificate or certificates evidencing the number of
whole shares of Common Stock into which the Stock represented by the Depositary
Shares evidenced by such Receipt or Receipts has been converted and (ii) any
money or other property to which the holder is entitled. Upon such conversion,
the Depositary (i) shall deliver to the holder a Receipt evidencing the number
of Depositary Shares, if any, which such holder has elected not to convert and
evidencing the number of Depositary Shares, if any, in excess of the number of
Depositary Shares representing Stock which has been so converted, (ii) shall
cancel the Depositary Shares evidenced by Receipts surrendered for conversion
and (iii) shall deliver to the Company or its transfer agent for the Stock for
cancellation the shares of Stock represented by the Depositary Shares evidenced
by the Receipts so surrendered and so converted.
The aggregate number of Depositary Shares evidenced by the DTC
Receipt may from time to time be decreased to reflect conversion of Stock
underlying Depositary Shares evidenced by such DTC Receipt.
The record holder of Depositary Shares on any dividend payment
record date established by the Depositary pursuant to Section 4.04 shall be
entitled to receive the dividend payable with respect to such Depositary Shares
on the corresponding dividend payment date notwithstanding the subsequent
conversion of the shares of Stock to which such Depositary Shares relate. If a
share of Stock is converted between the record date with respect to any dividend
payment on the Stock and the next succeeding dividend payment date, any holder
of Receipts surrendered with instructions to the Depositary for conversion of
the underlying Stock shall pay to
9
<PAGE> 10
the Depositary an amount equal to the proportionate amount of the dividend
payable on such dividend payment date on the Depositary Shares represented by
the Receipts being surrendered for conversion accruing between the date of
conversion and such dividend payment date, as instructed by the Depositary. Any
holder of Receipts on a dividend payment record date who (or whose transferee)
surrenders the Receipts with instructions to the Depositary for conversion of
the underlying Stock on the corresponding dividend payment date will receive the
dividend payable with respect to the Depositary Shares underlying such Receipts
and will not be required to include payment of the amount of such dividend upon
surrender of the Receipts for conversion.
Upon the conversion of any shares of Stock for which a request
for conversion has been made by the holder of Depositary Shares representing
such shares, all dividends in respect of such Depositary Shares shall cease to
accrue, such Depositary Shares shall be deemed no longer outstanding, all rights
of the holder of the Receipt with respect to such Depositary Shares (except the
right to receive the Common Stock, any cash payable with respect to any
fractional shares of Common Stock as provided herein and any cash payable on
account of accrued dividends and any Receipts evidencing Depositary Shares not
so converted) shall terminate, and the Receipt evidencing such Depositary Shares
shall be cancelled in accordance with Section 2.07 hereof.
No fractional shares of Common Stock shall be issuable upon
conversion of Stock underlying the Depositary Shares. If any holder of Receipts
surrendered with instructions to the Depositary for conversion of the underlying
Stock would be entitled to a fractional share of Common Stock upon such
conversion, the Company shall cause to be delivered to such holder an amount in
cash for such fractional share as provided in the Certificate.
Section 2.10. Interchangeability of Book-Entry Receipts and
Receipts in Physical, Certificated Form. Subject to the terms and conditions of
this Deposit Agreement, upon receipt by the Depositary of written instructions
from a DTC participant on behalf of any person having a beneficial interest in
Depositary Shares evidenced by the DTC Receipt for the purpose of directing the
Depositary to execute and deliver a Receipt in physical, certificated form
evidencing such Depositary Shares, the Depositary shall follow the procedures
set forth in the FAST Agreement for the purpose of reducing the number of
Depositary Shares evidenced by the DTC Receipt and, following such reduction,
shall execute and deliver to or upon the order of the person or persons named in
such order a Receipt or Receipts registered in the name or names requested by
such person and evidencing in the aggregate the number of Depositary Shares
equal to the reduction in the number evidenced by the DTC Receipt. The
Depositary may require in such written instructions any certification or
representation as it shall deem necessary to comply with applicable law.
Subject to the terms and conditions of this Deposit Agreement,
upon receipt by the Depositary of a Receipt or Receipts in physical,
certificated form, duly endorsed or accompanied by appropriate instruments of
transfer, in form satisfactory to the Depositary, including any required
certifications, and together with written instructions directing the Depositary
to adjust its records to reflect an increase in the aggregate amount of
Depositary Shares evidenced by the DTC Receipt (including, without limitation,
information regarding the DTC participant account to be credited with such
increase), and upon payment of the fees and expenses of the Depositary, the
Depositary
10
<PAGE> 11
shall cancel such Receipt or Receipts in physical, certificated form and shall
follow the procedures set forth in the FAST Agreement for the purpose of
reflecting such increase in the number of Depositary Shares evidenced by the DTC
Receipt.
SECTION 2.11. Automatic Conversion of Stock. On the Mandatory
Conversion Date, provided that the Company shall then have delivered to the
Depositary the shares of Common Stock and the aggregate amount of cash required
to pay any accrued and unpaid dividends and for fractional share interests
issuable and payable upon Automatic Conversion of the Stock then deposited with
the Depositary, the Depositary shall convert (using such shares of Common Stock
and cash so delivered to it) each holder's Depositary Shares into the
proportionate number of whole shares of Common Stock and the proportionate
amount of such cash to which such holder is thereby entitled.
The Depositary, as directed by the Company, shall mail, first
class postage prepaid, notice of such Automatic Conversion of Stock and the
proposed simultaneous Automatic Conversion of the Depositary Shares, not less
than five and not more than 15 days prior to the Mandatory Conversion Date. Such
notice shall be mailed to each holder at the address of such holder as the same
appears on the records of the Depositary at the close of business on the second
business day immediately preceding the date on which the mailing of such notices
is commenced; but neither failure to mail any such notice to one or more holders
nor any defect in any notice shall affect the sufficiency of the proceedings for
Automatic Conversion. The Company shall provide the Depositary with such notice,
and each such notice shall state: the Mandatory Conversion Date; that all
outstanding Depositary Shares on the Mandatory Conversion Date will be
automatically converted into shares of Common Stock and the conversion rate at
which such Automatic Conversion shall occur; the amount of accrued and unpaid
dividends, if any, payable with respect to each Depositary Share to be so
converted; the place or places where Receipts to be so converted are to be
surrendered for conversion; that dividends in respect of the Stock represented
by Depositary Shares to be so converted shall cease to accrue on the Mandatory
Conversion Date; and such additional information as the Company in its
discretion deems appropriate.
From and after the Mandatory Conversion Date, the Depositary
Shares automatically converted into shares of Common Stock shall be deemed no
longer to be outstanding and all rights of the holders of Receipts evidencing
such Depositary Shares (except the right to receive the shares of Common Stock
and any cash payable upon Automatic Conversion) shall, to the extent of such
Depositary Shares, cease and terminate. Upon surrender, in accordance with the
notice specified in the preceding paragraph, of the Receipts evidencing such
Depositary Shares (properly endorsed or assigned for transfer, if the Depositary
shall so require), the holders of such Receipts shall receive for each such
Depositary Share a number of shares of Common Stock equal to 1/100th of the
number of shares of Common Stock, and an amount of cash equal to 1/100th of the
cash for accrued and unpaid dividends, if any, delivered in respect of each
share of automatically converted Stock. The foregoing shall be subject further
to the terms and conditions of the Certificate.
ARTICLE III
11
<PAGE> 12
CERTAIN OBLIGATIONS OF THE HOLDERS
OF RECEIPTS AND THE COMPANY
SECTION 3.01. Filing Proofs, Certificates and Other
Information. Except for the initial deposit of Stock by the Company or the Other
Persons and any subsequent deposit by the Company or the Other Persons of Stock
acquired by such Other Persons pursuant to such Other Persons' overallotment
option, any person presenting Stock for deposit or any holder of a Receipt may
be required from time to time to file such proof of residence, or other matters
or other information, to obtain such guaranties of signature, to execute such
certificates and to make such customary representations and warranties
consistent with the terms of the Stock as the Depositary or the Company may
reasonably deem necessary or proper. The Depositary or the Company may withhold
the delivery, or delay the registration of transfer, conversion or exchange, of
any Receipt or the distribution of any dividend or other distribution or the
sale of any rights or of the proceeds thereof until such proof or other
information is filed or such certificates are executed or such representation
and warranties are made.
SECTION 3.02. Payment of Taxes of Other Governmental Charges.
Holders of Receipts shall be obligated to make payments to the Depositary of
certain charges and expenses as provided in Section 5.07. Registration of
transfer of any Receipt and delivery of all money or other property, if any,
represented by the Depositary Shares evidenced by such Receipt may be refused
until any such payment due is made, and any dividends, interest payments or
other distributions may be withheld or all or any part of the Stock or other
property represented by the Depositary Shares evidenced by such Receipt and not
theretofore sold may be sold for the account of the holder thereof (after
attempting by reasonable means to notify such holder prior to such sale), and
such dividends, interest payments or other distributions or the proceeds of any
such sale may be applied to any payment of such charges or expenses, the holder
of such Receipt remaining liable for any deficiency.
SECTION 3.03. Warranty as to Stock. The Company hereby
represents and warrants to the Depositary that the Stock, when issued, will be
validly issued, fully paid and nonassessable. Such representation and warranty
shall survive the deposit of the Stock and the issuance of Receipts.
SECTION 3.04. Covenants and Warranties as to Common Stock. The
Company covenants that it will keep reserved or otherwise available a sufficient
number of authorized and unissued shares of Common Stock or its issued shares of
Common Stock held in its treasury, or both, to meet conversion requirements in
respect of the Stock and that it will give written notice to the Depositary of
any adjustments in the conversion rate as set forth in the Certificate. The
Company represents and warrants that the Common Stock issued upon conversion of
Stock, when issued, will be validly issued, fully paid and nonassessable. Such
representation and warranty shall survive the conversion of the Stock into such
Common Stock.
ARTICLE IV
THE DEPOSITED SECURITIES; NOTICES
12
<PAGE> 13
SECTION 4.01. Cash Distributions. Whenever the Depositary
shall receive any cash dividend or other cash distribution with respect to the
Stock, the Depositary shall, subject to Section 3.02, distribute to record
holders of Receipts on the record date fixed pursuant to Section 4.04 such
amounts, as nearly as practicable, of such dividend or distribution as are
applicable to the number of Depositary Shares evidenced by the Receipts held by
such holders; provided, however, that if the Company or the Depositary shall be
required to withhold and shall withhold any monies from any cash dividend or
other cash distribution in respect of the Stock on account of taxes or as
otherwise required by law, regulation or court order, the distribution in
respect of Depositary Shares shall be reduced accordingly. The Depositary shall
distribute or make available for distribution, as the case may be, only such
amount, however, as can be distributed without attributing to any holder of
Depositary Shares a fraction of one cent, and any balance not so distributable
shall be held by the Depositary (without liability for interest thereon) and
shall be added to and be treated as part of the next succeeding distribution to
record holders of Receipts then outstanding.
SECTION 4.02. Distributions Other than Cash. Whenever the
Depositary shall receive any property (including securities) for distribution in
a form other than cash with respect to the Stock, the Depositary shall, subject
to Section 3.02, distribute to record holders of Receipts on the record date
fixed pursuant to Section 4.04 such amounts, as nearly as practicable, of such
property (including securities) received by it as are applicable to the number
of Depositary Shares evidenced by the Receipts held by such holders, in any
manner that the Depositary may deem equitable and practicable for accomplishing
such distribution. If, in the opinion of the Depositary, such distribution
cannot be made proportionately among such record holders, or if for any other
reason (including any requirement that the Company or the Depositary withhold an
amount on account of taxes or as otherwise required by law, regulation or court
order) the Depositary deems, after consultation with the Company, such
distribution not to be feasible, the Depositary may, with the approval of the
Company, adopt such method as it deems equitable and practicable for the purpose
of effecting such distribution, including the sale of the property thus
received, or any part thereof, in a commercially reasonable manner. The net
proceeds of any such sale shall, subject to Section 3,02, be distributed or made
available for distribution, as the case may be, by the Depositary to record
holders of Receipts in accordance with the provisions of Section 4.01 for a
distribution received in cash.
SECTION 4.03. Subscription Rights, Preferences or Privileges.
If the Company shall at any time offer or cause to be offered to the persons in
whose names Stock is recorded on the books of the Company any rights,
preferences or privileges to subscribe for or to purchase any securities or any
rights, preferences or privileges of any other nature, such rights, preferences
or privileges shall in each such instance be made available by the Depositary to
the record holders of Receipts in such manner as the Depositary may determine,
either by the issue to such record holders of warrants representing such rights,
preferences or privileges or by such other method as may be approved by the
Depositary in its discretion with the approval of the Company; provided,
however, that (i) if at the time of issue or offer of any such rights,
preferences or privileges the Depositary determines that it is not lawful or
(after consultation with the Company) not feasible to make such rights,
preferences or privileges available to holders of Receipts by the issue of
warrants or otherwise or (ii) if and to the extent so instructed by holders of
Receipts who do not desire to
13
<PAGE> 14
exercise such rights, preferences or privileges, then the Depositary, in its
discretion (with the approval of the Company, in any case where the Depositary
has determined that it is not feasible to make such rights, preferences or
privileges available), may, if applicable laws or the terms of such rights,
preferences or privileges permit such transfer, sell such rights, preferences or
privileges at public or private sale, at such place or places and upon such
terms as it may deem proper. The net proceeds of any such sales shall be
distributed by the Depositary to the record holders of Receipts entitled thereto
as provided by Section 4.01 in the case of a distribution received in cash.
If any action under the laws of any jurisdiction or any
governmental or administrative authorization, consent or permit is required in
order for such rights, preferences or privileges to be made available to holders
of Receipts, the Company agrees with the Depositary that the Company will use
its best efforts to take such action or obtain such authorization, consent or
permit sufficiently in advance of the expiration of such rights, preferences or
privileges to enable such holders to exercise such rights, preferences or
privileges.
SECTION 4.04. Notice of Dividends, etc.; Fixing of Record Date
for Holders of Receipts. Whenever any cash dividend or other cash distribution
shall become payable or any distribution of property (including securities)
other than cash shall be made, or if rights, preferences or privileges shall at
any time be offered, with respect to Stock, or whenever the Depositary shall
receive notice of any meeting at which holders of Stock are entitled to vote or
of which holders of Stock are entitled to notice, the Depositary, in each such
instance, shall fix a record date (which shall be the same date as the record
date fixed by the Company with respect to the Stock) for the determination of
the holder of Receipts who shall be entitled hereunder to receive a distribution
in respect of such dividend, distribution, rights, privileges or the net
proceeds of the sale thereof, or to give instructions for the exercise of voting
rights at any such meeting, or to receive notice of such meeting.
SECTION 4.05. Voting Rights. Upon receipt of notice of any
meeting at which the holders of Stock are entitled to vote, the Depositary
shall, as soon as practicable thereafter, mail to the record holders of Receipts
a notice which shall be provided by the Company and which shall contain (i) such
information as is contained in such notice of meeting and (ii) a statement that
the holders of record at the close of business on the specified record date
fixed pursuant to Section 4.04 will be entitled to instruct the Depositary as to
the exercise of the voting rights pertaining to the amount of Stock (or portion
thereof) underlying their respective Depositary Shares and (iii) a brief
statement as to the manner in which such instructions may be given. Upon the
written request of the holder of Receipts on the applicable record date, the
Depositary shall endeavor, insofar as practicable, to vote or cause to be voted,
in accordance with the instructions set forth in such requests, the votes
relating to the shares of Stock (or portion thereof) underlying the Depositary
Shares evidenced by all Receipts as to which any particular voting instructions
are received. The Company hereby agrees to take all necessary action in order to
enable the Depositary to vote such Stock (or portion thereof) or cause such
Stock (or portion thereof) to be voted. Absent specific instructions from the
holder of a Receipt, the Depositary will abstain from voting (but, at its
discretion, not from appearing at any meeting with respect to such Stock unless
directed to the contrary by the holders of all the Receipts) to the extent of
the Stock (or portion thereof) underlying the Depositary Shares evidenced by
such Receipt.
14
<PAGE> 15
SECTION 4.06. Changes Affecting Deposited Securities and
Reclassification, Recapitalizations, etc. Upon any change in par or stated
value, split-up, combination or any other reclassification of the Stock, or upon
any recapitalization, reorganization, merger, amalgamation or consolidation to
which the Company is a party or sale of all or substantially all of the
Company's assets (each of the foregoing being referred to herein as a
"Transaction"), the Depositary may with the approval of, and shall upon the
instructions of, the Company, and (in either case) in such manner as to retain
as nearly as possible the percentage ownership interest in Stock of holders of
Receipts immediately prior to such event, (i) make such adjustments in (a) the
fraction of an interest in one share of Stock underlying one Depositary Share
and (b) the ratio of the conversion rate per Depositary Share to the conversion
rate per share of Stock, in each case as may be necessary fully to reflect the
effects of such Transaction, and (ii) treat any securities received by the
Depositary in exchange for, or upon conversion or in respect of, the Stock as
new deposited securities so received in exchange for, or upon conversion or in
respect of the Stock. In any such case, the Depositary may, with the approval of
the Company, execute and deliver additional Receipts, or may call for surrender
of all outstanding Receipts to be exchanged for new Receipts specifically
describing such new deposited securities.
Anything to the contrary herein or in the Receipt
notwithstanding, holders of Receipts shall have the right from and after the
effective date of any such Transaction, to the extent that holders of Stock had
the right, prior to or on the applicable effective date, to convert, exchange or
surrender shares of Stock into or for other stock, securities, property or cash,
to surrender such Receipts to the Depositary with instructions to convert,
exchange or surrender the Stock represented thereby only into or for, as the
case may be, the kind and amount of shares of stock and other securities and
property and cash into which the Stock represented by such Receipts has been
converted or for which such Stock might have been exchanged or surrendered
immediately prior to the effective date of such transaction.
SECTION 4.07. Inspection of Reports. The Depositary shall make
available for inspection by holders of Receipts during normal business hours at
the Depositary's office, and at such other places as it may from time to time
deem advisable, any reports and communications received from the Company that
are both received by the Depositary as the holder of Stock and made generally
available to the holders of Stock.
SECTION 4.08. List of Receipt Holders. Promptly upon request
by, and at the expense of, the Company, the Depositary shall furnish to it a
list, as of a specified date, of the names and addresses of all persons in whose
names Receipts are registered on the books of the Depositary and the amount of
Stock represented thereby.
ARTICLE V
THE DEPOSITARY, THE DEPOSITARY'S AGENTS,
THE REGISTRAR AND THE COMPANY
15
<PAGE> 16
SECTION 5.01. Maintenance of Offices, Agencies and Transfer
Books by the Depositary; Registrar. Upon execution of this Deposit Agreement,
the Depositary shall maintain, at the Depositary's Office, facilities for the
execution and delivery, registration and registration of transfer, surrender and
exchange of Receipts, and at the offices of the Depositary's Agents, if any,
facilities for the delivery, registration of transfer, surrender and exchange of
Receipts, all in accordance with the provisions of this Deposit Agreement.
The Depositary shall, with the approval of the Company,
appoint a Registrar for registration of such Receipts or Depositary Shares in
accordance with any requirements of any applicable securities exchange or other
market on which the Receipts or the Depositary Shares are listed. Such Registrar
(which may be the Depositary if so permitted by the requirements of such
exchange or other market) may be removed and a substitute Registrar appointed by
the Depositary upon the request or with the approval of the Company. If the
Receipts, the Depositary Shares or the Stock are listed on one or more other
stock exchanges, the Depositary will, at the request of the Company, arrange
such facilities for the delivery, registration, registration of transfer,
surrender and exchange of such Receipts, such Depositary Shares or such Stock as
may be required by law or applicable stock exchange regulation.
The Registrar shall maintain books at the Depositary's Office
for the registration and registration of transfer of Receipts or at such other
place as shall be approved by the Company and of which the holders of Receipts
shall have reasonable notice, which books at all reasonable times during normal
business hours shall be open for inspection by the record holders of Receipts;
provided, that any such holder requesting to exercise such right shall certify
in writing to the Registrar that such inspection shall be for a proper purpose
reasonably related to such person's interest as an owner of Depositary Shares
evidenced by the Receipts.
The Depositary may cause the Registrar to close the books with
respect to the Receipts, at any time or from time to time, when the register of
stockholders of the Company is closed with respect to the Stock or when such
action is deemed necessary or advisable by the Depositary, any Depositary's
Agent or the Company because of any requirement of law or of any government,
governmental body or commission, securities exchange or any applicable
self-regulatory body, including, without limitation, the NASD.
SECTION 5.02. Prevention of or Delay in Performance by the
Depositary, the Depositary's Agents, the Registrar or the Company. Neither the
Depositary nor any Depositary's Agent nor any Registrar nor the Company shall
incur any liability to any holder of any Receipt if by reason of any provision
of any present or future law, or regulation thereunder, or by reason of any
provision, present or future, of the Company's Restated Certificate of
Incorporation (including the Certificate) or by reason of any act of God, war or
civil disorder, failure of power, fire or other casualty damage or governmental
requirements or restrictions, the Depositary, the Depositary's Agent, the
Registrar or the Company shall be prevented or forbidden from doing or
performing any act or thing that the terms of this Deposit Agreement provide
shall be done or performed; nor shall the Depositary, any Depositary's Agent,
any Registrar or the Company incur any liability or be subject to any obligation
(i) by reason of any nonperformance or delay, caused as aforesaid, in the
performance of any act or thing that the terms of this Deposit Agreement provide
shall or may be
16
<PAGE> 17
done or performed or (ii) by reason of any exercise of, or failure to exercise,
any discretion provided for in this Deposit Agreement, except in the event of
the gross negligence or willful misconduct of the party charged with such
exercise or failure to exercise.
SECTION 5.03. Obligations of the Depositary, the Depositary's
Agents, the Registrar and the Company. Neither the Depositary nor any
Depositary's Agent nor any Registrar shall be under any obligation to appear in,
prosecute or defend any action, suit or other proceeding in respect of the
Stock, the Depositary Shares or the Receipts that in its opinion may involve it
in expense or liability unless indemnity satisfactory to such party against all
such expense and liability be furnished as often as required.
Neither the Depositary nor any Depositary's Agent nor the
Company assumes any obligation or shall be subject to any liability under this
Deposit Agreement to holders of Receipts other than to use its best judgment and
good faith in the performance of such duties as are specifically set forth in
this Deposit Agreement. Neither the Depositary nor any Depositary's Agent nor
any Registrar nor the Company shall be liable to any party hereto for any action
or any failure to act by it with respect to this Deposit Agreement in reliance
upon the written advice of legal counsel or accountants or information from any
person presenting Stock for deposit or any holder of a Receipt. The Depositary,
any Depositary's Agent, any Registrar and the Company may each rely and shall
each be protected in acting upon any written notice, request, direction or other
document believed by it to be genuine and to have been signed or presented by
the proper party or parties.
The Depositary undertakes, and shall cause any Registrar to
undertake, to perform such duties and only such duties as are specifically set
forth in this Deposit Agreement using its best efforts and in good faith. The
parties hereto acknowledge that no implied covenants or obligations shall be
read into this Deposit Agreement against the Depositary or any Registrar or
against the Company with respect to the Depositary and any Registrar.
The Depositary, its parent, affiliates, or subsidiaries, any
Depositary's Agent and the Company (to the extent permitted by law) may own,
buy, sell or deal in any class of securities of the Company and its affiliates
and in Receipts or Depositary Shares. The Depositary, its parent, affiliates, or
subsidiaries, and any Depositary's Agent may become pecuniarily interested in
any transaction in which the Company or its affiliates may be interested or
contract with or lend money to the Company or its affiliates or otherwise act as
fully or as freely as if it were not the Depositary or the Depositary's Agent
hereunder. The Depositary may also act as transfer agent or registrar of any of
the securities of the Company and its affiliates or act in any other capacity
for the Company or its affiliates. Neither the Depositary (or its officers,
directors, employees or agents) nor any Depositary's Agent makes any
representation or has any responsibility as to the validity of the Registration
Statement pursuant to which the Depositary Shares are registered under the
Securities Act, the Stock, the Depositary Shares, the Receipts (except its
counter signature thereon) or any instruments referred to therein or herein, or
as to the correctness of any statement made therein except the number of
Depositary Shares represented by such Receipts.
17
<PAGE> 18
The Depositary assumes no responsibility for the correctness
of the description that appears in the Receipts, which can be taken as a
statement of the Company summarizing certain provisions of this Deposit
Agreement. Notwithstanding any other provision herein or in the Receipts, the
Depositary makes no warranties or representations as to the validity,
genuineness or sufficiency of any Stock at any time deposited with the
Depositary hereunder or of the Depositary Shares or as to the value of the
Depositary Shares. The Depositary shall not be accountable for the use or
application by the Company of the Depositary Shares or the Receipts or the
proceeds thereof.
SECTION 5.04. Resignation and Removal of the Depositary;
Appointment of Successor Depositary. The Depositary may at any time resign as
Depositary hereunder by written notice of its election so to resign delivered to
the Company, such resignation to take effect upon the appointment of a successor
Depositary and its acceptance of such appointment as hereinafter provided.
The Depositary may at any time be removed by the Company by
notice of such removal delivered to the Depositary, such removal to take effect
upon the appointment of a successor Depositary and its acceptance of such
appointment as hereinafter provided.
If the Depositary acting hereunder shall at any time resign or
be removed, the Company shall, within 45 days after the delivery of the notice
of resignation or removal, as the case may be, appoint a successor Depositary,
which shall be a bank or trust company having its principal office in the United
States of America and having a combined capital and surplus of at least
$50,000,000. Every successor Depositary shall execute and deliver to its
predecessor and to the Company an instrument in writing accepting its
appointment hereunder and agreeing to become a party to this Deposit Agreement,
and thereupon such successor Depositary, without any further act or deed, shall
become fully vested with all the rights, powers, duties and obligations of its
predecessor and for all purposes shall be the Depositary under this Deposit
Agreement, and such predecessor, upon payment of all sums due it and on the
written request of the Company, shall execute and deliver an instrument
transferring to such successor all rights and powers of such predecessor
hereunder, shall duly assign, transfer and deliver all right, title and interest
in the Stock and any moneys or property held hereunder to such successor and
shall deliver to such successor a list of the record holders of all outstanding
Receipts. Any successor Depositary shall promptly mail notice of its appointment
to the record holders of Receipts.
Any corporation or other entity into or with which the
Depositary may be merged, consolidated or converted, or to which the Depositary
may sell all or substantially all its assets, shall be the successor of such
Depositary without the execution or filing of any document or any further act.
Such successor Depositary may authenticate the Receipts in the name of the
predecessor Depositary or in the name of the successor Depositary.
SECTION 5.05. Corporate Notices and Reports. The Company
agrees that it will deliver to the Depositary and the Depositary will, promptly
after receipt thereof, transmit to the record holders of Receipts, in each case
at the address furnished to it pursuant to Section 4.08, all notices and reports
(including, without limitation, financial statements) required by law, the rules
of any national securities exchange or other market on which the Stock, the
Depositary Shares or the
18
<PAGE> 19
Receipts are listed or by the Company's Restated Certificate of Incorporation
(including the Certificate) or By-Laws to be furnished by the Company to holders
of Stock. Such transmission will be at the Company's expense and the Company
will provide the Depositary with such number of copies of such documents as the
Depositary may reasonably request. In addition, the Depositary will transmit to
record holders of Receipts at the Company's expense such other documents as may
be requested by the Company.
SECTION 5.06. Indemnification by the Company. The Company
shall indemnify the Depositary, any Depositary's Agent and any Registrar
against, and hold each of them harmless from, any loss, liability or expense
(including the reasonable costs and expenses of defending itself) that may arise
out of (i) acts performed or omitted in connection with this Deposit Agreement
and the Receipts (a) by the Depositary, any Registrar or any of their respective
agents (including any Depositary's Agent) except for any liability arising out
of gross negligence or willful misconduct on the respective parts of any such
person or persons or (b) by the Company or any of its agents, or (ii) the offer,
sale or registration of the Depositary Shares, Receipts or the Stock pursuant to
the provisions hereof. This indemnification does not extend in favor of holders
of Depositary Shares, Receipts or Stock.
SECTION 5.07. Charges and Expenses. The Company shall pay all
transfer and other taxes and governmental charges arising solely from the
existence of the Depositary arrangements. The Company shall pay all charges of
the Depositary in connection with the initial deposit of the Stock and the
initial issuance of the Depositary Shares, withdrawals of the Stock and the
issuance of shares of Common Stock upon the conversion of the Stock. All other
transfer and other taxes and governmental charges shall be at the expense of
holders of Depositary Shares. If, at the request of a holder of Receipts, the
Depositary incurs charges or expenses for which it is not otherwise liable
hereunder, such holder will be liable for such charges and expenses. All other
charges and expenses of the Depositary and any Depositary's Agent hereunder and
of any Registrar (including, in each case, reasonable fees and expenses of
counsel) incident to the performance of their respective obligations hereunder
will be payable by the Company only after prior consultation and agreement
between the Depositary and the Company and consent by the Company to the
incurrence of such expenses, which consent shall not be unreasonably withheld.
The Depositary shall present any statement for charges and expenses to the
Company promptly, unless the Company shall agree otherwise.
ARTICLE VI
AMENDMENT AND TERMINATION
SECTION 6.01. Amendment. The form of the Receipts and any
provisions of this Deposit Agreement may at any time and from time to time be
amended by agreement between the Company and the Depositary in any respect which
they may deem necessary or desirable; provided, however, that no such amendment
that shall materially and adversely alter the rights of the holders of Receipts
shall be effective unless such amendment shall have been approved by the holders
of at least 66-2/3% of the Depositary Shares then outstanding. Every holder of
an outstanding Receipt at the time any amendment becomes effective shall be
deemed, by continuing to hold such Receipt, to
19
<PAGE> 20
consent and agree to such amendment and to be bound by the Deposit Agreement as
amended thereby. In no event shall any amendment impair the right, subject to
the provisions of Sections 2.04 and 2.05 hereof, of any owner of any Depositary
Shares to surrender any Receipt evidencing such Depositary Shares to the
Depositary with instructions to cause the conversion of such Receipt into Common
Stock or to deliver to the holder the Stock and all money, and other property,
if any, represented thereby, except in order to comply with mandatory provisions
of applicable law or the rules and regulations of any governmental body, agency
or commission, the NASD or any applicable stock exchange.
SECTION 6.02. Termination. This Agreement may be terminated by
the Company or the Depositary only after (i) there shall have been made a final
distribution in respect of the Stock in connection with any liquidation,
dissolution or winding up of the Company, and such distribution shall have been
distributed to the holders of Depositary Shares pursuant to Section 4.01 or
4.02, as applicable, or (ii) each share of Stock shall have been converted into
shares of Common Stock.
Upon the termination of this Deposit Agreement, the parties
hereto shall be discharged from all obligations under this Deposit Agreement
except for their respective obligations under Sections 5.03, 5.06 and 5.07.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. Counterparts. This Deposit Agreement may be
executed in any number of counterparts, and by each of the parties hereto on
separate counterparts, each of which counterparts, when so executed and
delivered, shall be deemed an original, but all of which counterparts taken
together shall constitute one and the same instrument.
SECTION 7.02. Exclusive Benefit of Parties. This Deposit
Agreement is for the exclusive benefit of the parties hereto, and their
respective successors hereunder, and shall not be deemed to give any legal or
equitable right, remedy or claim to any other person whatsoever.
SECTION 7.03. Invalidity of Provisions. If any one or more of
the provisions contained in this Deposit Agreement or in the Receipts should be
or become invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein or
therein shall in no way be affected, prejudiced or modified thereby.
SECTION 7.04. Notices. Any and all notices to be given to the
Company hereunder or under the Receipts shall be in writing and shall be deemed
to have been duly given if personally delivered or sent by mail or telegram,
telecopy or telex confirmed by letter, addressed to the Company at Brooks Fiber
Properties, Inc., 425 Woods Mill Road South, Suite 300, Town & Country, Missouri
63017, telephone (314) 878-1616, facsimile (314) 579-4654, attention: Chief
Financial Officer, or at any other address and to the attention of any other
person of which the Company shall have notified the Depositary in writing.
20
<PAGE> 21
Any and all notices to be given to the Depositary hereunder or
under the Receipts shall be in writing and shall be deemed to have been duly
given if personally delivered or sent by mail or by telegram, telecopy or telex
confirmed by letter, addressed to the Depositary at the Depositary's Office, The
Boatmen's Trust Company, 510 Locust Street - 2nd Floor, Corporate Trust
Department, St. Louis, Missouri 63101, telephone (314) 466-6000, facsimile (314)
466-2469or at any other address and to the attention of any other person of
which the Depositary shall have notified the Company in writing.
Any and all notices to be given to any record holder of a
Receipt hereunder or under the Receipts shall be in writing and shall be deemed
to have been duly given if personally delivered or sent by mail or by telegram,
telecopy or telex confirmed by letter, addressed to such record holder at the
address of such record holder as it appears on the books of the Depositary, or
if such holder shall have timely filed with the Depositary a written request
that notices intended for such holder be mailed to some other address, at the
address designated in such request.
Delivery of a notice sent by mail or by telegram, telecopy or
telex shall be deemed to be effected at the time when a duly addressed letter
containing the same (or a confirmation thereof in the case of a telegram or
telex message) is deposited, first class postage prepaid, in a post office
letter box or sent by overnight courier service. The Depositary or the Company
may, however, act upon any telegram or telecopy message received by it from the
other or from any holder of a Receipt, notwithstanding that such telegram or
telecopy message shall not subsequently be confirmed by letter or as aforesaid.
SECTION 7.05. Depositary's Agents. The Depositary may from
time to time appoint any Depositary's Agent to act in any respect for the
Depositary for the purposes of this Deposit Agreement and may at any time
appoint additional Depositary's Agents and vary or terminate the appointment of
such Depositary's Agents. The Depositary will promptly notify the Company of any
such action.
SECTION 7.06. Holders of Receipts Are Parties. By acceptance
of delivery of the Receipts, any holder of such Receipt from time to time shall
be deemed to have agreed to become a party to this Deposit Agreement and to be
bound by all of the terms and conditions hereof and of the Receipts to the same
extent as though such person executed this Agreement.
SECTION 7.07. Governing Law. THIS DEPOSIT AGREEMENT AND THE
RECEIPTS AND ALL RIGHTS HEREUNDER AND THEREUNDER AND PROVISIONS HEREOF AND
THEREOF SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF DELAWARE (WITHOUT REFERENCE TO APPLICABLE CONFLICTS OF LAW PROVISIONS).
SECTION 7.08. Inspection of Deposit Agreement. Copies of this
Deposit Agreement shall be filed with the Depositary and the Depositary's Agents
and shall be open to inspection during business hours at the Depositary's Office
and the respective offices of this Depositary's Agents, if any, by any holder of
a Receipt.
21
<PAGE> 22
SECTION 7.09. Headings. The headings of articles and sections
in this Deposit Agreement and in the form of the Receipt set forth in Exhibit A
hereto and the FAST Agreement set forth in Exhibit B hereto have been inserted
for convenience only and are not to be regarded as a part of this Deposit
Agreement or the Receipts or to have any bearing upon the meaning or
interpretation of any provision contained herein or in the Receipts.
22
<PAGE> 23
IN WITNESS WHEREOF, the Company and the Depositary have caused
their duly authorized officers to execute and deliver this Deposit Agreement as
of the day and year first above set forth, and all holders of Receipts shall
become parties hereto by and upon acceptance by them of delivery of Receipts
issued in accordance with the terms hereof.
BROOKS FIBER PROPERTIES, INC.
By:
-------------------------------------
Authorized Officer
THE BOATMEN'S TRUST COMPANY
By:
-------------------------------------
Authorized Officer
<PAGE> 24
EXHIBIT A
DEPOSITARY RECEIPT
FOR
DEPOSITARY SHARES,
EACH REPRESENTING AN INTEREST IN ONE ONE-HUNDREDTH (1/100)
OF
A SHARE OF SERIES D CONVERSION PREFERRED
STOCK
(PAR VALUE $0.01 PER SHARE)
OF
BROOKS FIBER PROPERTIES, INC.
(INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE)
------------------------------
GDR __
-----------------
CUSIP 114399-20-7 DEPOSITARY SHARES
5,175,000 Depositary Shares (each Depositary Share represents an interest in
one one-hundredth (1/100) of a share of Series D Conversion Preferred Stock,
par value $0.01 per share)
The Boatmen's Trust Company, a corporation duly organized and
existing under the laws of the State of Missouri, with an office at the time of
the execution of the Deposit Agreement (as defined below) at 510 Locust Street,
St. Louis, Missouri 63101, as Depositary (the "Depositary"), hereby certifies
that ____________________________________ is the registered owner of
__________________________ _________________ Depositary Shares ("Depositary
Shares"), each Depositary Share representing an interest in one one-hundredth
(1/100) of a share of Series D Conversion Preferred Stock, par value $0.01(the
"Stock"), of Brooks Fiber Properties, Inc. a corporation duly organized and
existing under the laws of the State of Delaware (the "Company"). Subject to
the terms of the Deposit Agreement, each owner of a Depositary Share is
entitled, proportionately, through the Depositary to all the rights and
preferences of the Stock relating thereto, including dividend, voting,
conversion and liquidation rights and preferences contained in the Certificate
of Designations (the "Certificate") adopted by the Company's Board of
Directors pursuant to the Restated Certificate of Incorporation of the Company
setting forth the number, terms, powers, designations, rights, preferences,
qualifications, restrictions and limitations of the Stock, copies of which are
on file at the Depositary's Office.
<PAGE> 25
The Company will furnish to any holder of a Receipt without
charge, upon request addressed to its executive office or the office of its
transfer agent, a full statement of the powers, designations, preferences and
relative, participating, optional, or other special rights of each authorized
class of stock or series thereof and the qualifications, limitations, or
restrictions of such preferences and/or rights.
REFERENCE IS HEREBY MADE TO THE PROVISIONS SET FORTH UNDER THE
CAPTION "TERMS AND CONDITIONS CONTINUED" ENDORSED ON THE REVERSE HEREOF. SUCH
PROVISIONS SHALL FOR ALL PURPOSES HAVE THE SAME EFFECT AS THOUGH FULLY SET
FORTH AT THIS PLACE.
This Receipt shall not be entitled to any benefits under the
Deposit Agreement or be valid or obligatory for any purpose unless this Receipt
shall have been authenticated manually by, or, if a Registrar for the Receipts
(other than the Depositary) shall have been appointed, by facsimile signature
of, a duly authorized officer of the Depositary and, if authenticated by
facsimile signature of the Depositary, shall have been countersigned manually
by such Registrar by the signature of a duly authorized officer.
THE DEPOSITARY IS NOT RESPONSIBLE FOR THE VALIDITY OF ANY DEPOSITED STOCK. THE
DEPOSITARY ASSUMES NO RESPONSIBILITY FOR THE CORRECTNESS OF THE FOREGOING
DESCRIPTION, WHICH CAN BE TAKEN AS A STATEMENT OF THE COMPANY SUMMARIZING
CERTAIN PROVISIONS OF THE DEPOSIT AGREEMENT THAT APPEAR IN THE DEPOSITARY
RECEIPTS. THE DEPOSITARY MAKES NO WARRANTIES OR REPRESENTATIONS AS TO THE
VALIDITY, GENUINENESS OR SUFFICIENCY OF ANY STOCK AT ANY TIME DEPOSITED WITH
THE DEPOSITARY HEREUNDER OR OF THE DEPOSITARY SHARES, OR AS TO THE VALUE OF THE
DEPOSITARY SHARES.
Dated:
THE BOATMEN'S TRUST COMPANY
By:_____________________________
Authorized Officer
A-2
<PAGE> 26
[Form of Reverse Side]
TERMS AND CONDITIONS CONTINUED
1. The Deposit Agreement. Depositary Receipts (the
"Receipts"), of which this Receipt"), of which this Receipt is one, are made
available upon the terms and conditions set forth in the Deposit Agreement,
dated as of January ____, 1997 (the "Deposit Agreement"), among the Company,
the Depositary and all holders from time to time of Receipts. The Deposit
Agreement (copies of which are on file at the Depositary's Office) sets forth
the rights of holders of Receipts and the rights and duties of the Depositary
and the Company in respect of the Stock deposited, and any and all other
property and cash deposited from time to time thereunder. The statements made
on the face and the reverse of this Receipt are summaries of certain provisions
of the Deposit Agreement and are subject to the detailed provisions thereof, to
which reference is hereby made. Unless otherwise expressly herein provided,
all capitalized and undefined terms used herein shall have the meaning ascribed
thereto in the Deposit Agreement.
2. Transfer, Split-up, Combinations. This Receipt is
transferable on the books of the Depositary upon surrender of this Receipt to
the Depositary, properly endorsed or accompanied by a properly executed
instrument of transfer or endorsement, and upon such transfer the Depositary
shall execute a new Receipt to or upon the order of the person entitled
thereto, as provided in the Deposit Agreement. This Receipt may be split into
other Receipts or combined with other Receipts into one Receipt, representing
the same aggregate number of Depositary Shares as the Receipt or Receipts
surrendered. Any holder of at least one hundred (100) Depositary Shares may
withdraw the number of whole shares of Stock underlying such Depositary Shares
and all money and other property, if any, represented thereby by surrendering
such Receipt or Receipts at the Depositary's Office or at such other offices as
the Depositary may designate for such withdrawals. If such holder's Depositary
Shares are being held by DTC or its nominee pursuant to Section 2.01 of the
Deposit Agreement, such holder may request, in accordance with Section 2.10 of
the Deposit Agreement, withdrawal from the book-entry system of the number of
Depositary Shares specified in the preceding sentence. Thereafter, holders of
such whole shares will not be entitled to deposit such Stock and receive
Depositary Shares therefor.
3. Conversion Rights. This Receipt may be surrendered
with written instructions to the Depositary to instruct the Company to cause
the conversion of any specified number of whole or fractional shares of Stock
represented by the Depositary Shares evidenced thereby into whole shares of
Common Stock at the conversion rate then in effect for the Stock (and,
therefore, for the Depositary Shares) specified in the Certificate, as such
conversion rate may be adjusted by the Company from time to time as provided in
the Certificate. Subject to the terms and conditions of the Deposit Agreement
and the Certificate, a holder of a Receipt or Receipts evidencing Depositary
Shares representing whole or fractional shares of Stock may surrender such
Receipt or Receipts at the Depositary's Office or to such office or to such
Depositary's Agents as the Depositary may designate for such purpose, together
with a notice of conversion duly completed and executed, thereby directing the
Depositary to instruct the Company to cause the conversion of the number of
shares or fractions thereof of underlying
A-3
<PAGE> 27
Stock specified in such notice of conversion into shares of Common Stock, and
an assignment of such Receipt or Receipts to the Company or in blank, duly
completed and executed. To the extent that a holder delivers to the Depositary
for conversion a Receipt or Receipts which in the aggregate are convertible
into less than one whole share of Common Stock, the holder shall receive
payment in cash in lieu of such fractional share of Common Stock otherwise
issuable.
Upon receipt by the Depositary of a Receipt or Receipts,
together with notice of conversion, duly completed and executed, directing the
Depositary to instruct the Company to cause the conversion of a specified
number of shares or fractions thereof of Stock and an assignment of such
Receipt or Receipts to the Company or in blank, duly completed and executed,
the Depositary shall instruct the Company (i) to cause the conversion of the
Depositary Shares evidenced by the Receipts so surrendered for conversion as
specified in the written notice to the Depositary and (ii) to cause the
delivery to the holders of such Receipts of a certificate or certificates
evidencing the number of whole shares of Common Stock, and the amount of money,
if any, to be delivered to the holders of Receipts surrendered for conversion
in payment of any accrued and unpaid dividends or in lieu of fractional shares
of Common Stock otherwise issuable. The Company shall as promptly as
practicable after receipt thereof cause the delivery of (i) a certificate
evidencing the number of whole shares of Common Stock into which the Stock
represented by the Depositary Shares evidenced by such Receipt or Receipts has
been converted, and (ii) any money or other property to which the holder is
entitled. Upon such conversion, the Depositary (i) shall deliver to the holder
a Receipt evidencing the number of Depositary Shares, if any, which such holder
has elected not to convert and evidencing the number of Depositary Shares, if
any, in excess of the number of Depositary Shares representing Stock which has
been so converted, (ii) shall cancel the Depositary Shares evidenced by
Receipts surrendered for conversion and (iii) shall deliver to the Company or
its transfer agent for the Stock for cancellation the shares of Stock
represented by the Depositary Shares evidenced by the Receipts so surrendered
and so converted.
The aggregate amount of Depositary Shares evidenced by the DTC
Receipt may from time to time be decreased to reflect conversion of Stock
underlying Depositary Shares evidenced by such DTC Receipt.
The holder of Depositary Shares on any dividend payment record
date established by the Depositary shall be entitled to receive the dividend
payable with respect to such Depositary Shares on the corresponding dividend
payment date notwithstanding the subsequent conversion of the shares of Stock
to which such Depositary Shares relate. If a share of Stock is converted
between the record date with respect to any dividend payment on the Stock and
the next succeeding dividend payment date, any holder of Receipts surrendered
with instructions to the Depositary for conversion of the underlying Stock
shall pay to the Depositary an amount equal to the proportionate amount of the
dividend payable on such dividend payment date on the Depositary Shares
represented by the Receipts being surrendered for conversion accruing between
the date of conversion and such dividend payment date, as instructed by the
Depositary. Any holder of Receipts on a dividend payment record date who (or
whose transferee) surrenders the Receipts with instructions to the Depositary
for conversion of the underlying Stock on the corresponding dividend payment
date will receive the dividend payable with respect to the
A-4
<PAGE> 28
Depositary Shares underlying such Receipts and will not be required to include
payment of the amount of such dividend upon surrender of the Receipts for
conversion.
Upon the conversion of any shares of Stock for which a request
for conversion has been made by the holder of Depositary Shares representing
such shares, all dividends in respect of such Depositary Shares shall cease to
accrue, such Depositary Shares shall be deemed no longer outstanding, all
rights of the holder of the Receipt with respect to such Depositary Shares
(except the right to receive the Common Stock, any cash payable with respect to
any fractional shares of Common Stock as provided herein and any cash payable
on account of accrued dividends and any Receipts evidencing Depositary Shares
not so converted) shall terminate, and the Receipt evidencing such Depositary
Shares shall be canceled.
4. Interchangeability of Book-Entry Receipts and
Receipts in Physical, Certificated Form. Subject to the terms and conditions
of the Deposit Agreement, upon receipt by the Depositary of written
instructions from a DTC participant on behalf of any person having a beneficial
interest in Depositary Shares evidenced by the DTC Receipt for the purpose of
directing the Depositary to execute and deliver a Receipt in physical,
certificated form evidencing such Depositary Shares, the Depositary shall
follow the procedures set forth in the FAST Agreement for the purpose of
reducing the number of Depositary Shares evidenced by the DTC Receipt and,
following such reduction, shall execute and deliver to or upon the order of the
person or persons named in such order a Receipt or Receipts registered in the
name or names requested by such person and evidencing in the aggregate the
number of Depositary Shares equal to the reduction in the number evidenced by
the DTC Receipt. The Depositary may require in such written instructions any
certification or representation as it shall deem necessary to comply with
applicable law.
Subject to the terms and conditions of the Deposit Agreement,
upon receipt by the Depositary of a Receipt or Receipts in physical,
certificated form, duly endorsed or accompanied by appropriate instruments of
transfer, in form satisfactory to the Depositary, including any required
certifications, and together with written instructions directing the Depositary
to adjust its records to reflect an increase in the aggregate amount of
Depositary Shares evidenced by the DTC Receipt (including, without limitation,
information regarding the DTC participant account to be credited with such
increase), and upon payment of the fees and expenses of the Depositary, the
Depositary shall cancel such Receipt or Receipts in physical, certificated form
and shall follow the procedures set forth in the FAST Agreement for the purpose
of reflecting such increase in the number of Depositary Shares evidenced by the
DTC Receipt.
5 Automatic Conversion of Stock. On the Mandatory
Conversion Date, provided that the Company shall then have delivered to the
Depositary the shares of Common Stock and the aggregate amount of cash required
to pay any accrued and unpaid dividends and for fractional share interests
issuable and payable upon Automatic Conversion of the Stock then deposited with
the Depositary, the Depositary shall convert (using such shares of Common Stock
and cash so delivered to it) each holder's Depositary Shares into the
proportionate number of whole shares of Common Stock and the proportionate
amount of such cash to which such holder is thereby entitled.
A-5
<PAGE> 29
The Depositary shall, as directed by the Company, mail, first
class postage prepaid, notice of such Automatic Conversion of Stock and the
proposed simultaneous Automatic Conversion of the Depositary Shares, not less
than five and not more than 15 days prior to the Mandatory Conversion Date.
Such notice shall be mailed to each holder at the address of such holder as the
same appears on the records of the Depositary at the close of business on the
second business day immediately preceding the date on which the mailing of such
notice is commenced; but neither failure to mail any such notice to one or more
holders nor any defect in any notice shall affect the sufficiency of the
proceedings for Automatic Conversion. The Company shall provide the Depositary
with such notice, and each such notice shall state: the Mandatory Conversion
Date; that all outstanding Depositary Shares on the Mandatory Conversion Date
will be automatically converted into shares of Common Stock and the conversion
rate at which such Automatic Conversion shall occur; the amount of accrued and
unpaid dividends, if any, payable with respect to each Depositary Share to be
so converted; the place or places where Receipts to be so converted are to be
surrendered for conversion; that dividends in respect of the Stock represented
by Depositary Shares to be so converted shall cease to accrue on the Mandatory
Conversion Date; and such additional information as the Company in its
discretion deems appropriate.
From and after the Mandatory Conversion Date, the Depositary
Shares automatically converted into shares of Common Stock shall be deemed no
longer to be outstanding and all rights or the holders of Receipts evidencing
such Depositary Shares (except the right to receive the shares of Common Stock
and any cash payable upon Automatic Conversion) shall, to the extent of such
Depositary Shares, cease and terminate. Upon surrender, in accordance with the
notice specified in the preceding paragraph, of the Receipts evidencing such
Depositary Shares (properly endorsed or assigned for transfer, if the
Depositary shall so require), the holders of such Receipts shall receive for
each such Depositary Share a number of shares of Common Stock equal to 1/100th
of the number of shares of Common Stock, and an amount of cash equal to 1/100th
of the cash for accrued and unpaid dividends, if any, delivered in respect of
each share of automatically converted Stock. The foregoing shall be subject
further to the terms and conditions of the Certificate.
6. Suspension of Delivery, Transfer, etc. The transfer,
surrender, exchange, split-up or combination of this Receipt may be suspended
and except as otherwise provided in the Deposit Agreement, the deposit or
withdrawal of Stock may be refused during any period when the register of
stockholders of the Company is closed, or if any such action is deemed
necessary or advisable by the Depositary, any agent of the Depositary or the
Company at any time or from time to time because of any requirement of law or
of any government or governmental body or commission, or under any provision of
the Deposit Agreement.
7. Warranty by Company. The Company has warranted that
the Stock, when issued, and any shares of Common Stock issuable upon conversion
of the Stock, will be validly issued, fully paid and nonassessable.
A-6
<PAGE> 30
8. Amendment. The form of the Receipts and any
provisions of the Deposit Agreement may at any time and from time to time be
amended by agreement between the Company and the Depositary in any respect
which they may deem necessary or desirable; provided, however, that no such
amendment that shall materially and adversely alter the rights of the holders
of Receipts shall be effective unless such amendment shall have been approved
by the holders of at least 66 2/3% of the Depositary Shares then outstanding.
A holder of a Receipt at the time any amendment so becomes effective shall be
deemed, by continuing to hold such Receipt, to consent and agree to such
amendment and to be bound by the Deposit Agreement as amended thereby.
9. Charges of Depositary. The Company will pay all
transfer and other taxes and governmental charges arising solely from the
existence of the Depositary arrangements, all charges of the Depositary in
connection with the initial deposit of the Stock and the initial issuance of
the Depositary Shares, withdrawal of the Stock and the issuance of shares of
Common Stock upon the surrender of Receipts for conversion. All other transfer
and other taxes and other governmental charges shall be at the expense of
holders of Depositary Shares.
10. Title to Receipts. This Receipt (and the Depositary
Shares evidenced hereby), when properly endorsed or accompanied by a properly
executed instrument of transfer, is transferable by delivery with the same
effect as in the case of a negotiable instrument; provided, however, that until
transfer of a Receipt shall be registered on the books of the Registrar, on
behalf of the Depositary, the Depositary may, notwithstanding any notice to the
contrary, treat the record holder hereof at such time as the absolute owner
hereof for the purpose of determining the person entitled to distributions of
dividends or other distributions with respect to the Stock, the exchange of
Depositary Shares for Stock or the right to exchange Receipts or to any notice
provided for in the Deposit Agreement, and for all other purposes.
11. Dividends and Distributions. Whenever the Depositary
receives any cash dividend or other cash distribution on the Stock, the
Depositary will, subject to the provisions of the Deposit Agreement, make such
distribution to the Receipt holders as nearly as practicable in proportion to
the number of Depositary Shares held by them; provided, however, that the
amount distributed will be reduced by any amounts required to be withheld by
the Company or the Depositary on account of taxes as otherwise required
pursuant to law, regulations or court order. Other distributions received on
the Stock may be distributed to holders of Receipts as provided in the Deposit
Agreement.
12. Fixing of Record Date. Whenever any cash dividend or
other cash distribution shall become payable or any distribution other than
cash shall be made, or if rights, preferences or privileges shall at any time
be offered with respect to the Stock, or whenever the Depositary shall receive
notice of any meeting at which holders of Stock are entitled to vote or of
which holders of Stock are entitled to notice, the Depositary shall in each
instance fix a record date (which shall be the record date fixed by the Company
with respect to the Stock) for the determination of the holders of Receipts who
shall be entitled to receive such dividend, distribution, rights, preferences,
privileges or the net proceeds of the sale thereof, or to give
A-7
<PAGE> 31
instructions for the exercise of voting rights at any such meeting, or who
shall be entitled to notice of such meeting.
13. Voting Rights. Upon receipt of notice of any meeting
at which holders of Stock are entitled to vote, the Depositary shall, as soon
as practicable thereafter, mail to the record holders of Receipts a notice
which shall be provided by the Company and which shall contain (i) such
information as is contained in such notice of meeting, (ii) a statement that
holders of record at the close of business on a specified record date may
instruct the Depositary as to the exercise of the voting rights pertaining to
the amount of Stock (or portion thereof) relating to their respective
Depositary Shares and (iii) a brief statement as to the manner in which such
instructions may be given. Upon the written request of a holder of a Receipt
on such record date, the Depositary shall endeavor insofar as practicable to
vote or cause to be voted the amount of Stock (or portion thereof) relating to
such Receipt in accordance with the instructions set forth in such request.
Absent specific instructions from the holder of a Receipt, the Depositary will
abstain from voting (but at its discretion, not from appearing at any meeting
with respect to such Stock unless directed to the contrary by the holders of
all the Receipts) to the extent of the Stock (or portion thereof) underlying
the Depositary Shares evidenced by such Receipt.
14. Changes Affecting Deposited Securities. Upon any
change in par or stated value, split-up, combination or any other
reclassification of the Stock or upon any recapitalization, reorganization,
merger, amalgamation or consolidation to which the Company is a party, or upon
the sale of all or substantially all the Company's assets, the Depositary may
in its discretion with the approval of, and shall upon the instructions of, the
Company, and (in either case) in such manner as to retain as nearly as possible
the percentage ownership interest in Stock of holders of Receipts immediately
prior to such event, (i) make such adjustments in (a) the fraction of an
interest in one share of Stock underlying one Depositary Share and (b) the
ratio of the Optional Conversion Rate and Exchange Rate per Depositary Share to
the Optional Conversion Rate and Exchange Rate of a share of Stock, in each
case as may be necessary fully to reflect the effects of such change, and (ii)
treat any securities received by the Depositary in exchange for, or upon
conversion or in respect of, the Stock as new deposited securities so received
in exchange for, or upon conversion or in respect of, such Stock. In any such
case the Depositary may in its discretion, with the approval of the Company,
execute and deliver additional Receipts, or may call for the surrender of
outstanding Receipts to be exchanged for new Receipts specifically describing
such new deposited securities.
Anything to the contrary herein or in the Depositary Agreement
notwithstanding, holders of Receipts shall have the right from and after the
effective date of any such transaction, to the extent that holders of Stock had
the right, prior to or on the applicable effective date, to convert, exchange
or surrender shares of Stock into or for other stock, securities, property or
cash, to surrender such Receipts to the Depositary with instructions to
convert, exchange or surrender the Stock represented thereby only into or for,
as the case may be, the kind and amount of shares of stock and other securities
and property and cash into which the Stock represented by such Receipts has
been converted or for which such Stock might have been exchanged or surrendered
immediately prior to the effective date of such transaction.
A-8
<PAGE> 32
15. Liability and Obligations of the Depositary, the
Depositary's Agents, the Registrar and the Company. Neither the Depositary nor
any Depositary's Agent nor any Registrar nor the Company shall incur any
liability to any holder of any Receipt if by reason of any provision of any
present or future law, or regulation thereunder, or by reason of any provision,
present or future, of the Company's Restated Certificate of Incorporation
(including the Certificate) or by reason of any act of God, war or civil
disorder, failure of power, fire or other casualty damage or governmental
requirements or restrictions, the Depositary, the Depositary's Agent, the
Registrar or the Company shall be prevented or forbidden from doing or
performing any act or thing that the terms of the Deposit Agreement provide
shall be done or performed; nor shall the Depositary, any Depositary's Agent,
any Registrar or the Company incur any liability or be subject to any
obligation (i) by reason of nonperformance or delay, caused as aforesaid, in
performance of any act or thing that the terms of the Deposit Agreement provide
shall or may be done or performed, or (ii) by reason of any exercise of, or
failure to exercise, any discretion provided for in the Deposit Agreement,
except in the event of the gross negligence or willful misconduct of the party
charged with such exercise or failure to exercise. Neither the Depositary nor
any Depositary's Agent nor the Company assumes any obligation or shall be
subject to any liability under the Deposit Agreement to holders of Receipts
other than to use its best judgment and good faith in the performance of such
duties as are specifically set forth in the Deposit Agreement. Neither the
Depositary nor any Depositary's Agent nor any Registrar shall be under any
obligation to appear in, prosecute or defend any action, suit or other
proceeding in respect to the Stock, the Depositary Shares or the Receipts that
in its opinion may involve it in expense or liability, unless indemnity
satisfactory to it against all expense and liability be furnished. The Deposit
Agreement contains various other exculpatory, indemnification and related
provisions, to which reference is hereby made.
16. Resignation and Removal of Depositary. The
Depositary may at any time (i) resign by written notice of its election so to
resign delivered to the Company, such resignation to take effect upon the
appointment of a successor Depositary and its acceptance of such appointment,
or (ii) be removed by the Company, such removal to take effect upon the
appointment of a successor Depositary and its acceptance of such appointment.
17. Termination of Deposit Agreement. The Deposit
Agreement may be terminated by the Company or the Depositary upon or after the
occurrence of any of the following events: (i) there shall have been made a
final distribution in respect of the Stock in connection with any liquidation,
dissolution or winding up of the Company and such distribution shall have been
distributed to the holders of Receipts; or (ii) each share of Stock shall have
been converted into shares of Common Stock.
18. Governing Law. THIS RECEIPT AND THE DEPOSIT
AGREEMENT AND ALL RIGHTS HEREUNDER AND THEREUNDER AND PROVISIONS HEREOF AND
THEREOF SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF DELAWARE (WITHOUT REFERENCE TO APPLICABLE CONFLICTS OF LAW
PROVISIONS).
A-9
<PAGE> 33
NOTICE OF CONVERSION
The undersigned hereby irrevocably exercises the option to
convert this Receipt or a portion hereof below designated into shares of Common
Stock of Brooks Fiber Properties, Inc. in accordance with the terms of the
Certificate referred to in this Receipt, and directs the Depositary to instruct
the Company that the shares of Common Stock issuable and deliverable upon the
conversion, together with any check in payment of accrued and unpaid dividends
or in lieu of fractional shares, and any Receipts representing any unconverted
Depositary Shares be issued and delivered to the undersigned unless, in the
case of such shares of Common Stock or Receipts, a different name has been
indicated below. If shares of Common Stock or Receipts are to be issued in the
name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto.
Dated:___________________________ ___________________________
Signature of Holder (must
conform in all respects to
the name of the Holder
appearing on the face
hereof.)
Signature Guaranteed By:
Number of Depositary Shares to be ___________________________
Converted
___________________________
A-10
<PAGE> 34
Fill in for registration of shares of Common Stock and/or Receipts if to be
issued otherwise than to Holder.
______________________________ Social Security or Other Taxpayer
(Name) Identifying Number
______________________________ ______________________________
(Address)
______________________________
Please print name and address
(including zip code number)
A-11
<PAGE> 1
EXHIBIT 8.1
[BRYAN CAVE LETTERHEAD]
December 18, 1996
Brooks Fiber Properties, Inc.
425 Woods Mill Road South, Suite 300
Town & Country, Missouri 63017
Gentlemen:
We have acted as counsel to Brooks Fiber Properties, Inc., a
Delaware corporation (the "Company"), in connection with the offering (the
"Offering") of up to 5,175,000 depository shares, each representing 1/100 of a
share of Series D Conversion Preferred stock of the Company as described in the
Registration Statement (Form S-1) filed with the Securities & Exchange
Commission on November 25, 1996 (the "Registration Statement"). In connection
therewith, you have requested our opinion regarding whether the discussion of
the federal income tax consequences set forth in the Registration Statement
under the caption "Certain Federal Income Tax Considerations" fairly describes
the material federal income tax consequences of the Offering. Except as
otherwise indicated herein, all capitalized terms used in this letter have the
same meaning assigned to them in the Registration Statement.
In rendering our opinion, we have examined the Registration
Statement and such other documents as we have considered relevant for purposes
of this opinion. We have assumed that the Registration Statement reflects all
the material facts and our opinion is expressly conditioned on, among other
things, the accuracy as of the date hereof, and the continuing accuracy, of all
of such facts, information, covenants, statements and representations through
and as of the effective date of the Offering. Any material changes in the facts
referred to, set forth or assumed herein or in the Registration Statement may
affect the conclusions stated herein.
We have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified or photostatic copies and the authenticity of the originals
of such documents.
<PAGE> 2
BRYAN CAVE LLP
Brooks Fiber Properties, Inc.
December 18, 1996
Page 2
In rendering our opinion, we have considered the applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations promulgated thereunder by the Treasury Department (the
"Regulations"), pertinent judicial authorities, rulings of the Internal Revenue
Service (the "Service") and such other authorities as we have considered
relevant. It should be noted that such laws, Code, Regulations, judicial
decisions and administrative interpretations are subject to change at any time
and, in some circumstances, with retroactive effect. A material change in any of
the authorities upon which our opinion is based could affect our conclusions
herein.
Based solely upon and subject to the foregoing, we are of the
opinion that the statements in the Registration Statement under the caption
"Certain Federal Income Tax Considerations" fairly describes the material
federal income tax consequences of the Offering.
Except as expressly set forth above, we express no other
opinion. This opinion is for your benefit and is not to be used, circulated,
quoted or otherwise referred to for any purpose except that we consent to the
filing of this opinion as Exhibit 8.1 of the Registration Statement. In giving
such consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
/s/ BRYAN CAVE LLP
--------------------------
Bryan Cave LLP
JPB/bmr
<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
December 20, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
City Signal, Inc.
Grand Rapids, Michigan
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of Brooks Fiber Properties, Inc. of our report dated
February 29, 1996, relating to the consolidated financial statements of City
Signal, Inc.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Grand Rapids, Michigan
December 19, 1996
