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FILED PURSUANT TO RULE 424(B)(4)
REGISTRATION NO. 333-16495
6,723,429 SHARES
BROOKS FIBER PROPERTIES, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
BROOKS LOGO ---------------------
Of the 6,723,429 shares of Common Stock offered, 5,378,743 shares are being
offered hereby in the United States and 1,344,686 shares are being offered in a
concurrent international offering outside the United States. The initial public
offering price and the aggregate underwriting discount per share will be
identical for both offerings. See "Underwriting."
All of the 6,723,429 shares of Common Stock offered hereby are being sold
by the Selling Stockholders. The Company will not receive any of the proceeds
from the sale of the shares being sold by the Selling Stockholders. See
"Principal and Selling Stockholders."
SEE "RISK FACTORS" ON PAGES 13 TO 18 FOR A DISCUSSION OF CERTAIN RISKS
ASSOCIATED WITH AN INVESTMENT IN THE COMMON STOCK.
The Common Stock is listed on the Nasdaq National Market under the symbol
"BFPT." On January 30, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $25.00 per share. See "Price Range of Common
Stock."
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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 SELLING
OFFERING PRICE DISCOUNT(1) STOCKHOLDERS(2)
-------------- ------------ -------------------
<S> <C> <C> <C>
Per Share.............................. $25.00 $1.25 $23.75
Total(3)............................... $168,085,725 $8,404,286 $159,681,439
</TABLE>
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Estimated expenses of $430,000 are payable by the Company.
(3) The Company has granted the U.S. Underwriters an option for 30 days to
purchase up to an additional 806,811 shares at the initial public offering
price, less the underwriting discount, solely to cover over-allotments.
Additionally, the Company has granted the International Underwriters a
similar option with respect to an additional 201,703 shares as part of the
concurrent international offering. If such options are exercised in full,
the total initial public offering price, underwriting discount and proceeds
to Company will be $25,212,850, $1,260,642 and $23,952,208, respectively.
See "Underwriting."
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The shares are offered severally by the U.S. Underwriters, as specified
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that certificates for the
shares will be ready for delivery in New York, New York on or about February 5,
1997 against payment therefor in immediately available funds.
Joint Lead Managers
GOLDMAN, SACHS & CO. SALOMON BROTHERS INC
Co-Managers
DEUTSCHE MORGAN GRENFELL LEHMAN BROTHERS
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The date of this Prospectus is January 30, 1997.
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[MAP OF THE UNITED STATES INDICATING LOCATIONS
OF THE REGISTRANT'S NETWORKS IN OPERATION
AND UNDER CONSTRUCTION.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934.
SEE "UNDERWRITING."
<PAGE> 3
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this Summary is qualified in its
entirety by, the more detailed information, including the Company's consolidated
financial statements and notes thereto, contained herein. Unless otherwise
noted, references to the "Company" are to Brooks Fiber Properties, Inc., a
Delaware corporation, and its consolidated subsidiaries. Capitalized terms used
in this Prospectus which are not otherwise defined herein have the respective
meanings ascribed to them in the Glossary included as Annex A hereto. Unless
otherwise indicated, the information in this Prospectus assumes no exercise of
the over-allotment options granted to the Underwriters.
THE COMPANY
The Company is a leading full service provider of competitive local
telecommunications services, commonly referred to as a competitive local
exchange carrier ("CLEC"), in selected markets within the United States (see
"The Competitive Local Telecommunications 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 additional financings 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 23 cities and under construction in seven 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 December 31, 1996, the Company had a
total of 20 digital telephone switches installed in its networks. Switches have
been deployed to serve
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substantially 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 December 31, 1996, the Company had a total of
1,059 route miles of optical fiber cable installed, 516,743 voice grade
equivalent (VGE) circuits in service, 21,013 CLEC lines installed and 883 on-net
and 1,238 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.
The Company currently has no agreement, understanding or arrangement for any
acquisition, but it is in discussions concerning pending proposals for (1) a
joint venture for the construction of three networks located in Maine and New
Hampshire and (2) the acquisition of three networks located in Utah, Nevada and
Idaho. See "-- Recent Developments." For a discussion of the steps the Company
takes in acquiring and developing new networks, see "Business of the Company --
Network Acquisition, Development and Design" and "-- Network Construction." 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
Industry" and "Regulatory Overview."
The Company's current annualized revenues, based on September 1996
revenues, are $60.1 million, as compared with total revenues in 1995 of $14.2
million ($23.1 million on a pro forma basis giving effect to the acquisition of
Brooks Telecommunications Corporation ("BTC") on January 2, 1996 and the
acquisition of City Signal, Inc. (the "City Signal Acquisition") on January 31,
1996) and total revenues of $2.8 million in 1994, the Company's first full year
of operation. Since inception, the Company's operations have resulted in
earnings (losses) before minority interests, interest, taxes, depreciation and
amortization (EBITDA) of ($204,000) for the period from November 10, 1993
through December 31, 1993, ($2.7) million for the year ended December 31, 1994,
($4.4) million for the year ended December 31, 1995 and ($9.9) million for the
nine months ended September 30, 1996. As of September 30, 1996, the Company had
an accumulated deficit of $40.4 million. As of September 30, 1996, on a pro
forma adjusted basis giving effect to (i) the receipt of $217.2 million pursuant
to the Company's 11 7/8% Senior Discount Note Offering, (ii) the exchange of
minority interests in the Company's subsidiaries for an aggregate of 1,192,980
shares of Common Stock since September 30, 1996 and (iii) the receipt of $7.7
million upon exercises of warrants and options to purchase an aggregate of
1,878,851 shares of Common Stock since September 30, 1996, the Company had cash,
cash equivalents and marketable securities of $554.5 million, total assets of
$870.2 million, long-term debt of $539.5 million and paid-in capital of $349.7
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."
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The Company has assembled an experienced management, sales and operations
team with extensive experience and strong contacts within the telecommunications
industry. See "Management."
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
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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. 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 21,013 at December 31, 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
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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 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
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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 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 transaction is subject to execution of
definitive agreements and regulatory approvals.
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.
The Company is discussing with a third party the acquisition by the Company
of networks in operation and under construction in Salt Lake City, Utah, Reno,
Nevada and Boise, Idaho. The proposal is subject to completion of appropriate
due diligence by the Company and the negotiation and execution of acquisition
agreements approved by the Boards of Directors of both parties.
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 $349.7 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 2,021,181 shares upon exercise of warrants and options, including
451,582 shares issued to members of senior management upon exercise of
stock options on January 1, 1997. See "Business of the Company -- Strategic
Relationships," "Capitalization," "Management -- Executive Compensation --
Stock Option Plan," "Certain Relationships and Related Transactions," and
"Unaudited Pro Forma Combined Consolidated Financial Information."
DEBT FINANCING. On November 7, 1996, the Company completed the
issuance and sale of the 11 7/8% Senior Discount Notes, for which the
Company received proceeds net of underwriting discounts of approximately
$217.2 million (the "11 7/8% Senior Discount Note Offering"). On February
26, 1996, the Company completed the issuance and sale of $425.0 million
aggregate principal amount of 10 7/8% Senior Discount Notes due March 1,
2006 (the "10 7/8% Senior Discount Notes" and, together with the 11 7/8%
Senior Discount Notes, the "Senior Discount Notes"), for which the Company
received proceeds net of underwriting discounts of approximately $241.0
million. The Company has also obtained secured financing under a line of
credit from AT&T Credit, which totals $50.0 million (the "AT&T Credit
Facility"), and a
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$10 million secured revolving line of credit for a subsidiary from Fleet
National Bank (the "Bank Credit Facility"). See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
Historically, the Company has funded in advance its expected capital needs
for network construction and acquisition, as well as its needs for the
development and expansion of its networks. Following initial market entry, the
Company's capital deployment plans for the development and expansion of its
networks have been largely demand driven, including capital spending necessary
to take full advantage of the opportunities presented in the switched services
portion of the marketplace. The Company recently revised its network development
plans to provide for the Company to (i) increase the geographic reach and
robustness of its networks to allow the Company to serve a significantly higher
percentage of the market by extending its networks to serve most, if not all, of
the ILEC's central offices in its markets and (ii) more rapidly deploy switches
with full capabilities for local dial tone and switched access termination and
origination services. The Company's previous estimate of capital spending during
1996 and 1997 to fund the development and expansion of the Company's initial 30
networks was $290 million, of which $134.3 million was spent through September
30, 1996. The Company now estimates that it will invest an additional $200
million associated with its initial 30 networks to fund these capital needs
during 1997 and 1998. The Company currently intends to use the net proceeds from
additional financings to be obtained in the future to fund the Company's
expansion from 30 to 40 networks by the end of 1997.
The Company's longer-term strategy contemplates that the Company will have
networks serving a total of 50 cities in operation or under construction by the
end of 1998, which will require substantial additional capital. The Company's
expansion into additional cities is expected to be accomplished by the
acquisition of existing networks as well as the development of new networks. The
Company will continue to evaluate additional revenue opportunities in each of
its markets and other strategic initiatives, and, as attractive additional
opportunities may develop, the Company plans to make additional capital
investments in its networks that might be required to pursue such opportunities,
such as costs required to extend a network or install additional electronics to
meet specific customer requirements. The Company expects to meet its additional
capital needs with the proceeds from the sale of additional equity securities,
additional borrowings under existing and future credit facilities and joint
ventures. However, there can be no assurance that the Company will be able to
generate or raise sufficient capital to enable it to fully realize all of its
strategic objectives.
The Company's expectations of required future capital expenditures are
based on the Company's current estimates. There can be no assurance that actual
expenditures will not be significantly higher or lower. See "Risk Factors --
Significant Future Capital Requirements; Substantial Indebtedness" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus which are not historical facts
are forward-looking statements that involve risks and uncertainties. Management
wishes to caution the reader that these forward-looking statements, such as the
Company's plans to have systems in operation or under construction in a total of
40 cities by the end of 1997 and 50 cities by the end of 1998 and its
expectations for the deployment of switches serving all of its operating
networks by the end of the second quarter of 1997, are only predictions; actual
events or results may differ materially as a result of risks facing the Company.
Such risks include, but are not limited to, the Company's ability to access
markets, identify, finance and complete suitable acquisitions, design fiber
optic backbone routes, install cable and facilities, including switching
electronics, and obtain rights-of-way, building access rights and any required
governmental authorizations, franchises and permits, all in a timely manner, at
reasonable costs and on satisfactory terms and conditions, as well as favorable
regulatory, legislative and judicial developments.
9
<PAGE> 10
THE OFFERING
Common Stock offered................ 6,723,429 shares
Common Stock outstanding(1)......... 31,533,721 shares
Nasdaq National Market symbol....... BFPT
- ---------------
(1) Excludes 3,287,000 shares of Common Stock issuable upon exercise of stock
options and warrants outstanding at January 9, 1997, of which 1,722,060
shares were subject to warrants and options exercisable within 60 days at a
weighted average exercise price of $14.31 per share. See "Description of
Capital Stock."
RISK FACTORS
Prospective investors should carefully consider the matters set forth under
"Risk Factors" on pages 13 through 18.
ADDRESS AND TELEPHONE NUMBER
The Company's principal executive offices are located at 425 Woods Mill
Road South, Suite 300, Town & Country, Missouri 63017, and its telephone number
is (314) 878-1616.
10
<PAGE> 11
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>
YEAR ENDED DECEMBER 31,
----------------------------------
PERIOD FROM THREE NINE
NOVEMBER 10, MONTHS MONTHS
1993(1) TO ENDED ENDED
DECEMBER 31, PRO FORMA SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1995 1996 1996
------------ ------- ---------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
(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
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, AS OF AS OF AS OF SEPTEMBER 30,
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, 1996
1994 1995 1996 1996 1996 PRO FORMA(5)
---- ---- --------- -------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT RATIOS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 8,795 $ 59,913 $253,796 $256,224 $203,034 $427,880
Marketable securities........................... -- -- 25,159 150,178 126,634 126,634
Working capital................................. 15,862 57,913 264,772 402,920 325,266 550,112
Total assets.................................... 71,325 146,610 449,135 633,825 637,350 870,176
Long-term debt, less current portion............ 29,403 43,977 298,529 306,391 314,440 539,548
Paid-in capital................................. -- -- 145,569(6) 330,963(6) 331,179(6) 349,658(6)
Total stockholders' equity(7)................... 36,699 93,455 125,264 300,535 290,759 309,238
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF AS OF AS OF AS OF
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
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 23
Cities under construction...................... 6 10 12 8 8 7
On-net buildings connected..................... 62 216 495 644 734 883
Route miles.................................... 107 262 506 705 787 1,059
Fiber miles.................................... 6,437 17,111 26,659 43,152 50,572 71,292
VGE circuits(8)................................ 59,208 122,617 165,122 243,171 358,640 516,743
Switches installed............................. -- 1 3 9 17 20
CLEC lines in service.......................... -- 3,187(9) 5,802 9,226 13,107 21,013
Employees...................................... 89 165 456 571 711 789
</TABLE>
- ---------------
(1) The Company was organized on November 10, 1993.
(2) Minority interests represent the ownership interests of minority investors
in certain of the Company's subsidiaries. Since September 30, 1996, the
Company has issued an aggregate of 1,192,980 shares of Common Stock in
exchange for all of the Company's then-existing minority interests.
(3) Pro forma net loss per share has been computed using the number of shares
of Common Stock and Common Stock equivalents outstanding. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, shares
issued at prices below the May 1996 initial public offering price of $27.00
per share, and stock options and warrants granted with exercise prices
below the initial public offering price during the twelve-month period
preceding the date of the initial filing of the Company's Registration
Statement relating to the IPO have been included in the calculation of
Common Stock equivalent shares for the nine months ended September 30,
1996, using the treasury stock method, as if such shares, options and
warrants were outstanding for all of 1995 and for the entire six-month
period ended June 30, 1996. For the three months ended September 30, 1996,
the weighted average number of shares was based on Common Stock outstanding
and does not include common stock equivalents as their inclusion would be
anti-dilutive.
(4) EBITDA consists of net income (loss) before minority interests, interest,
income taxes, depreciation and amortization. It is a measure commonly used
in the telecommunications industry and is presented to assist in
understanding the Company's operating results. However, it is not intended
to represent cash flow in accordance with generally accepted accounting
principles. See the Company's Consolidated Statements of Cash Flows
appearing elsewhere in this Prospectus.
(5) On a pro forma basis giving effect to (i) the sale of the 11 7/8% Senior
Discount Notes on November 7, 1996 and (ii) the exchange of minority
interests for shares of Common Stock and the exercise of warrants and
options since September 30, 1996. See "Capitalization."
(6) Amount represents the total of Common Stock, additional paid-in capital,
and Common Stock subject to redemption.
(7) Amount represents paid-in capital less accumulated deficit. See note (6)
above.
(8) Voice grade equivalent circuits.
(9) On a pro forma basis giving effect to the City Signal Acquisition.
12
<PAGE> 13
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the Company
and its businesses before purchasing the shares of Common Stock offered hereby.
LIMITED HISTORY OF OPERATIONS; NEGATIVE CASH FLOW AND OPERATING LOSSES
The Company was formed in November 1993. At January 1, 1996, only three of
the Company's networks that the Company acquired had been in operation for more
than 24 months. Prospective investors, therefore, have limited historical
financial information about the Company upon which to base an evaluation of the
Company's performance and an investment in shares of Common Stock of the
Company. Given the Company's limited operating history, there is no assurance
that it will be able to generate sufficient cash flow to service its debt and to
compete successfully in the telecommunications business.
The development of the Company's businesses and the acquisition,
installation and expansion of its networks require significant expenditures, a
substantial portion of which are made before any revenues may be realized. Such
capital expenditures are expected to increase as the Company decides to pursue
opportunities created by the accelerated pace of regulatory changes designed to
open local exchange markets to CLEC competition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Business of the Company -- CLEC Market Potential." These
expenditures, together with the associated early service costs, result in
negative cash flow and operating losses until an adequate revenue base may be
established. There can be no assurance that an adequate revenue base will be
established in each of the Company's systems. Since inception, the Company's
operations have resulted in earnings (losses) before minority interests,
interest, taxes, depreciation and amortization (EBITDA) of ($204,000) for the
period from November 10, 1993 through December 31, 1993, ($2.7) million for the
year ended December 31, 1994, ($4.4) million for the year ended December 31,
1995 and ($9.9) million for the nine months ended September 30, 1996. As of
September 30, 1996, the Company had an accumulated deficit of approximately
$40.4 million. On a pro forma basis, assuming the merger with BTC and the City
Signal Acquisition were completed on January 1, 1995, the Company would have had
EBITDA of ($8.5) million for the year ended December 31, 1995, and, assuming the
City Signal Acquisition was completed on January 1, 1996, the Company would have
had EBITDA of ($10.1) million on a pro forma basis for the nine months ended
September 30, 1996. EBITDA is a measure commonly used in the telecommunications
industry and is presented to assist in an understanding of the Company's
operating results. It is not intended to represent cash flow or results of
operations in accordance with generally accepted accounting principles. Certain
of the expenditures are expensed as incurred, while certain other expenditures
are capitalized. The Company will continue to incur expenditures in connection
with the acquisition, development and expansion of its networks, services and
customer base. There can be no assurance that the Company will achieve or
sustain profitability or generate sufficient positive cash flow to service its
debt.
SIGNIFICANT FUTURE CAPITAL REQUIREMENTS; SUBSTANTIAL INDEBTEDNESS
Expansion of the Company's existing networks and services, the acquisition
and development of new networks and services and the funding of initial
operating losses will require significant capital expenditures. The Company
plans to have systems in operation or under construction in a total of 40 cities
by the end of 1997 and 50 cities by the end of 1998. The Company 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
13
<PAGE> 14
such networks with full capabilities for local dial tone and switched access
termination and origination services, with the net proceeds from additional
financings to be obtained in the future. The Company's growth into 50 cities and
additional funds to support other strategic initiatives will require substantial
additional capital. The Company will continue to evaluate additional revenue
opportunities in each of its markets and, as attractive additional opportunities
may develop, the Company plans to make additional capital investments in its
networks that might be required to pursue such opportunities. The Company
expects to meet such additional capital needs with additional borrowings under
existing and future credit facilities, proceeds from the sale of additional
equity securities and joint ventures. There can be no assurance, however, that
the Company will be successful in raising sufficient additional debt or equity
capital on terms that it will consider acceptable or that the Company's
operations will produce positive consolidated cash flow in sufficient amounts.
Failure to raise and generate sufficient funds may require the Company to delay
or abandon some of its planned future expansion or expenditures, which could
have a material adverse effect on the Company's growth and its ability to
compete in the telecommunications services industry.
The Company's expectations of required future capital expenditures are
based on the Company's current estimates. There can be no assurance that actual
expenditures will not be significantly higher or lower.
At September 30, 1996, on a pro forma basis giving effect to the 11 7/8%
Senior Discount Note Offering and the conversion of $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 "-- No Dividends" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
RISKS ASSOCIATED WITH IMPLEMENTATION OF GROWTH STRATEGY
The expansion and development of the Company's operations will depend,
among other things, on the Company's ability to assess markets, identify,
finance and complete suitable acquisitions, design fiber optic network backbone
routes, install cable and facilities, including switches, and obtain
rights-of-way, building access rights and any required government
authorizations, franchises and permits, all in a timely manner, at reasonable
costs and on satisfactory terms and conditions. As a result, there can be no
assurance that the Company will be able successfully to expand its existing
networks or acquire or develop new networks in a timely manner in accordance
with its strategic objectives.
14
<PAGE> 15
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, completed a
merger on December 31, 1996. 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
15
<PAGE> 16
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 ILECs in all of its markets.
See "Regulatory Overview" for more detailed information on the regulatory
environment in which the Company operates.
16
<PAGE> 17
NEED TO OBTAIN AND MAINTAIN PERMITS AND RIGHTS-OF-WAY
In order to acquire and develop its networks, the Company must obtain local
franchises and other permits, as well as rights to utilize underground conduit
and pole space and other rights-of-way from entities such as ILECs and other
utilities, railroads, long distance providers, state highway authorities, local
governments and transit authorities. The Telecommunications Act of 1996 requires
that local governmental authorities treat telecommunications carriers in a
competitively neutral, non-discriminatory manner, and that most utilities,
including most ILECs and electric companies, afford CLECs access to their poles
and conduits and rights-of-way at reasonable rates on non-discriminatory terms
and conditions. There can be no assurance that the Company will be able to
maintain its existing franchises, permits and rights or to obtain and maintain
the other franchises, permits and rights needed to implement its business plan
on acceptable terms. Although the Company does not believe that any of the
existing arrangements will be cancelled, or will not be renewed, as needed,
cancellation or non-renewal of certain of such arrangements could materially
adversely affect the Company's business in the affected city. In addition, the
failure to enter into and maintain any such required arrangements for a
particular network, including a network which is already under construction, may
affect the Company's ability to develop that network. See "Business of the
Company -- Network Construction."
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. While the Company believes that for the foreseeable future these
changes will neither materially affect the continued use of optical fiber
telecommunications networks nor materially hinder the Company's ability to
acquire necessary technologies, the effect of technological changes on the
businesses of the Company cannot be predicted. Thus, there can be no assurance
that technological developments will not have a material adverse effect on the
Company.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a relatively small number of senior
management and operating personnel, the loss of certain of whom could have a
material adverse effect on the Company. See "Management." The Company believes
that its ability to manage its planned growth successfully will depend in large
part on its continued ability to attract and retain highly skilled and qualified
personnel. None of the Company's key executives has a written employment
agreement or non-compete agreement with the Company, nor does the Company
maintain key person life insurance on such persons. See "Management" for
detailed information on the Company's management and directors.
SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON
FUTURE MARKET PRICES
Sales of substantial numbers of shares of Common Stock in the public market
could adversely affect the market price of the Common Stock and make it more
difficult for the Company to raise funds through future equity offerings. At the
request of the representatives of the Underwriters, all shares of Common Stock
(including shares issuable upon exercise of outstanding options and warrants to
purchase shares of Common Stock) held by the Selling Stockholders, except with
respect to shares offered hereby, are subject to contractual agreements pursuant
to which such shares cannot be sold, offered for sale or otherwise disposed of
for a period of 180 days after the date of this Prospectus without the prior
written consent of the designated representative of the Underwriters, except in
certain non-public transactions in which the acquiror or acquirors agree(s) to
such restrictions. Such stockholders will hold an aggregate of approximately
22.43% of the outstanding Common Stock upon completion of the Offering (see
"Principal and Selling Stockholders"). As a result, notwithstanding possible
earlier eligibility for sale under the provisions of Rule 144 under the
Securities Act, shares subject to such restrictions will not be saleable until
such
17
<PAGE> 18
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, 6,994,337 restricted shares will become eligible for sale
pursuant to Rule 144, subject to the volume limitations thereof. See "Principal
and Selling Stockholders" and "Shares Eligible for Future Sale."
NO DIVIDENDS
The Company does not anticipate paying dividends on the Common Stock for
the foreseeable future, and the ability of the Company to pay dividends on the
Common Stock is restricted by certain covenants in the Senior Discount Notes.
The Company anticipates that it will reinvest its earnings, if any, in the
Company's businesses. See "Dividend Policy."
AUTHORIZED BUT UNISSUED STOCK; ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to
14,411,720 additional shares of Common Stock which have not been reserved for
outstanding warrants and employee stock plans and 990,012 shares of undesignated
preferred stock and to determine the price, rights, preferences and privileges
of those preferred shares without any further vote or action by the
stockholders. The issuance of such shares, while potentially providing desirable
flexibility in connection with possible future acquisitions, equity financings
and other corporate purposes, might have a dilutive effect on earnings per share
and on the equity ownership of holders of the Company's Common Stock and could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. At present, there are
no pending proposals for the issuance of any of such additional authorized
shares. In addition, the Company has adopted a Stockholders Protection Rights
Plan, and is subject to the anti-takeover provisions of Section 203 of the
General Corporation Law of the State of Delaware which prohibits the Company
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. Furthermore, the Company's Restated Certificate of
Incorporation provides that the Board of Directors is divided into three classes
with the directors serving staggered three-year terms. In addition, most of the
Company's existing indebtedness and employee stock plans are subject to
acceleration in the event of a change-in-control of the Company. Such agreements
and provisions could have the effect of delaying, deferring or preventing a
change-in-control of the Company by increasing the aggregate cost to potential
investors of an acquisition of the Company. See "Description of Capital Stock --
Authorized Stock," "-- Delaware Law and Certain Charter Provisions" and "--
Preferred Stock Purchase Rights."
18
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 and as adjusted to reflect (i) the sale of the 11 7/8% Senior
Discount Notes on November 7, 1996 and (ii) the exchange of minority interests
for shares of Common Stock and the exercise of warrants and options since
September 30, 1996:
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS..................................... $203,034,000 $427,880,000
MARKETABLE SECURITIES......................................... $126,634,000 $126,634,000
------------ ------------
TOTAL CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES..... $329,668,000 $554,514,000
============= =============
LONG-TERM DEBT
11 7/8% Senior Discount Notes due 2006...................... -- $225,108,000
10 7/8% Senior Discount Notes due 2006...................... 266,205,000 266,205,000
Other long-term debt........................................ 48,235,000 48,235,000
------------ ------------
Total.................................................... $314,440,000 $539,548,000
MINORITY INTERESTS(1)......................................... 10,761,000 --
------------ ------------
COMMON STOCK, SUBJECT TO REDEMPTION OPTION, 2,016,000
SHARES(2)................................................... 25,200,000 25,200,000
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value, 50,000,000 shares authorized,
26,445,890 issued and outstanding, actual; 29,517,721
issued and outstanding, as adjusted(1)(3)................ 264,000 295,000
Series C Junior Participating Preferred Stock, $0.01 par
value, 50,000 authorized, none issued or
outstanding(4)........................................... -- --
Additional paid-in capital(1)(3)(5)......................... 305,715,000 324,168,000
Accumulated deficit......................................... (40,420,000) (40,420,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY(6)................................. $290,759,000 $309,243,000
------------ ------------
TOTAL CAPITALIZATION.......................................... $615,960,000 $848,791,000
============= =============
</TABLE>
- ---------------
(1) Minority interests represented cash investments in certain of the Company's
subsidiaries from minority investors totaling approximately $13.2 million
through September 30, 1996 less the minority investors' interests in such
subsidiaries' respective operating losses. On October 10, 1996 and November
12, 1996, the Company issued 958,720 shares and 234,260 shares,
respectively, of Common Stock in exchange for such minority interests.
Common Stock outstanding, actual, does not include such shares.
(2) Shown as Common Stock, subject to redemption option, because the holder of
such shares has the option to require the Company to repurchase all or any
of such shares at a price of $12.50 per share on or before February 1, 1998.
The holder of such shares has not indicated to the Company that it has any
current intention to exercise such option. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
(3) Common Stock outstanding, actual, excludes 5,267,028 shares of Common Stock
issuable upon exercise of stock options and warrants outstanding at
September 30, 1996, of which 3,409,785 shares were subject to warrants and
options exercisable within 60 days. Common Stock outstanding, as adjusted,
includes 1,878,851 shares of Common Stock thereafter issued upon exercise of
such warrants and options, including 451,582 shares issued to members of
senior management upon exercise of stock options on January 1, 1997, at a
weighted average exercise price of $5.57 per share, and excludes 3,287,000
shares subject to warrants and options outstanding as of January 9, 1997.
See "Management -- Executive Compensation -- Stock Option Plan," "Certain
Relationships and Related Transactions" and "Description of Capital Stock."
19
<PAGE> 20
(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.............................................. 34.25 25.50
<CAPTION>
1997
- ------------------------------------------------------------
<S> <C> <C>
First Quarter (through January 30, 1997).................... 30.00 24.75
</TABLE>
On January 30, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $25.00. As of January 30, 1997, there were
approximately 276 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.
The Company currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends in the foreseeable
future. The ability of the Company to pay dividends is restricted by covenants
contained in the Senior Discount Notes.
The Company is a holding company whose principal assets are the stock of
its operating subsidiaries. The principal internal sources of funds for the
Company are distributions from its subsidiaries. The ability of the Company's
subsidiaries to make such payments will be subject to, among other things, the
availability of sufficient funds and restrictive covenants in debt agreements
applicable to certain of such subsidiaries. However, the Company does not
believe that any such restrictions have had or will have any material impact on
the Company's ability to meet its cash obligations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
20
<PAGE> 21
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,
PERIOD FROM ----------------------------------
NOVEMBER 10, THREE MONTHS NINE MONTHS ENDED
1993(1) TO ENDED -----------------------------
DECEMBER 31, PRO FORMA SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1995 1996 1995 1996
------------ ------- ---------- ----------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications service
revenue......................... $ 2 $ 2,809 $ 14,160 $ 23,072 $ 12,943 $ 10,309 $ 28,147
Costs and expenses:
Service costs................... -- 1,557 7,177 16,319 6,125 5,248 12,585
Selling, general and
administrative
expenses...................... 206 3,966 11,405 15,352 10,158 7,818 25,504
Depreciation and amortization... 3 663 4,118 8,018 4,265 2,873 9,859
------ ------- ---------- ---------- ----------- ----------- -----------
209 6,186 22,700 39,689 20,548 15,939 47,948
Loss from operations............. (207) (3,377) (8,540) (16,617) (7,605) (5,630) (19,801)
Interest and other income
(expense), net.................. 2 (598) (2,096) (2,142) (2,837) (1,933) (8,176)
------ ------- ---------- ---------- ----------- ----------- -----------
Net loss before minority
interests..................... (205) (3,975) (10,636) (18,759) (10,442) (7,563) (27,977)
Minority interests(2)........... -- 78 1,085 1,085 451 589 1,590
------ ------- ---------- ---------- ----------- ----------- -----------
Net loss........................ $ (205) $(3,897) $ (9,551) $ (17,674) $ (9,991) $ (6,974) $ (26,387)
====== ======= ========== ========== =========== =========== ===========
Pro forma net loss per
share(3)........................ -- -- $ (.49) $ (.84) $ (.35) $ (.36) $ (1.10)
====== ======= ========== ========== =========== =========== ===========
Pro forma weighted average number
of shares outstanding(3)........ -- -- 19,523,584 20,951,862 28,368,352 19,523,584 24,071,672
====== ======= ========== ========== =========== =========== ===========
OTHER DATA:
EBITDA(4)....................... $ (204) $(2,714) $ (4,422) $ (8,492) $ (3,340) $ (2,757) $ (9,942)
Capital expenditures, including
acquisitions of businesses,
net of cash................... -- 42,362 41,518 48,883 75,118 29,181 137,053
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, AS OF AS OF AS OF SEPTEMBER 30,
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, 1996
1994 1995 1996 1996 1996 PRO FORMA(5)
---- ---- --------- -------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT RATIOS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 8,795 $ 59,913 $253,796 $256,224 $203,034 $427,880
Marketable securities........................... -- -- 25,159 150,178 126,634 126,634
Working capital................................. 15,862 57,913 264,772 402,920 325,266 550,112
Total assets.................................... 71,325 146,610 449,135 633,825 637,350 870,176
Long-term debt, less current portion............ 29,403 43,977 298,529 306,391 314,440 539,548
Paid-in capital................................. -- -- 145,569(6) 330,963(6) 331,179(6) 349,658(6)
Total stockholders' equity(7)................... 36,699 93,455 125,264 300,535 290,759 309,238
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF AS OF AS OF AS OF
------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
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 23
Cities under construction........................ 6 10 12 8 8 7
On-net buildings connected....................... 62 216 495 644 734 883
Route miles...................................... 107 262 506 705 787 1,059
Fiber miles...................................... 6,437 17,111 26,659 43,152 50,572 71,292
VGE circuits(8).................................. 59,208 122,617 165,122 243,171 358,640 516,743
Switches installed............................... -- 1 3 9 17 20
CLEC lines in service............................ -- 3,187(9) 5,802 9,226 13,107 21,013
Employees........................................ 89 165 456 571 711 789
</TABLE>
- ---------------
(1) The Company was organized on November 10, 1993.
(2) Minority interests represent the ownership interests of minority investors
in certain of the Company's subsidiaries.
(3) Pro forma net loss per share has been computed using the number of shares
of Common Stock and Common Stock equivalents outstanding. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, shares
issued at prices below the May 1996 initial public offering price of $27.00
per share, and stock options and warrants granted with exercise prices
below the initial public offering price during the twelve-month period
preceding the date of the initial filing of the Company's Registration
Statement relating to the IPO have been included in the calculation of
Common Stock equivalent shares for the nine months ended September 30,
1996, using the treasury stock method, as if such shares, options and
warrants were outstanding for all of 1995 and for the entire six-month
period ended June 30, 1996. For the three months ended September 30, 1996,
the weighted average number of shares was based on Common Stock outstanding
and does not include common stock equivalents as their inclusion would be
anti-dilutive.
(4) EBITDA consists of net income (loss) before minority interests, interest,
income taxes, depreciation and amortization. It is a measure commonly used
in the telecommunications industry and is presented to assist in
understanding the Company's operating results. However, it is not intended
to represent cash flow in accordance with generally accepted accounting
principles. See the Company's Consolidated Statements of Cash Flows
appearing elsewhere in this Prospectus.
(5) On a pro forma basis giving effect to (i) the sale of the 11 7/8% Senior
Discount Notes on November 7, 1996 and (ii) the exchange of minority
interests for shares of Common Stock, and the exercise of warrants and
options since September 30, 1996. See "Capitalization."
(6) Amount represents the total of Common Stock, additional paid-in capital,
and Common Stock subject to redemption.
(7) Amount represents paid-in capital less accumulated deficit. See note (6)
above.
(8) Voice grade equivalent circuits.
(9) On a pro forma basis giving effect to the City Signal Acquisition.
22
<PAGE> 23
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 23 cities and under construction in seven 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."
23
<PAGE> 24
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
24
<PAGE> 25
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.
25
<PAGE> 26
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
26
<PAGE> 27
of the Company's acquisition and development activities as well as increased
utilization of the Company's network facilities arising from the sales of
additional services to current and new customers.
COSTS AND EXPENSES
Service costs increased from $1.6 million for the year ended December 31,
1994 to $7.2 million for the year ended December 31, 1995. Service costs consist
of costs associated directly with the operation of the Company's competitive
access networks and facilities management services.
Service costs for the year ended December 31, 1995 consist principally of
local and long distance service costs totaling $5.7 million, salaries and
benefits totaling $1.0 million and rights-of-way fees totaling $353,000. Service
costs as a percentage of telecommunications services revenues approximated 55%
for 1994 as compared to approximately 51% for 1995. Due to the fixed nature of
certain costs associated with the development of the Company's competitive
access networks, the Company expects that the ratio of service costs to network
revenues will decline as network usage increases.
The Company's SG&A expenses for the year ended December 31, 1995 were $11.4
million, as compared with SG&A expenses of $4.0 million for 1994. The increase
was principally due to the increasing number and continued expansion of the
Company's competitive access networks and related marketing activities; however,
such costs did not increase to the same degree as the Company's revenues. There
is typically a period of higher SG&A expenses and a lag time in the generation
of revenues following the acquisition and development of a competitive access
network. Management expects SG&A expenses to continue to increase during 1996 as
the Company continues to expand its networks, services and marketing activities.
Depreciation and amortization expense increased from $663,000 for the year
ended December 31, 1994 to $4.1 million for 1995 as a result of the Company's
acquisitions and the continued expansion of the Company's networks.
INTEREST INCOME (EXPENSE)
Interest expense totaling $3.7 million and $693,000 was recorded during
1995 and 1994, respectively, as a result of the incurrence of secured
indebtedness to finance the acquisition and development of certain of the
Company's operations. Under the AT&T Credit Facility, $3.8 million and $135,000
of the interest expense were added to the principal balance during 1995 and
1994, respectively. During the years ended December 31, 1995 and 1994, interest
income totaling $1.6 million and $95,000, respectively, was derived from the
Company's available cash balances.
NET LOSS
For the reasons stated above, the Company's net loss before minority
interest increased from $4.0 million in 1994 to $10.6 million in 1995. Minority
interests in net losses, representing minority investors' interests in certain
of the Company's subsidiaries, totaled $1.1 million and $78,000 for the years
ended December 31,1995 and 1994, respectively. As a result, the Company's net
loss for 1995 was $9.5 million as compared to a net loss of $3.9 million for
1994.
EBITDA
EBITDA decreased from ($2.7) million for the year ended December 31, 1994
to ($4.4) million for the year ended December 31, 1995, a decrease of $1.7
million. The decrease reflects the increasing operating and SG&A expenses noted
above resulting from the acquisition, development and expansion of the Company's
networks. On a pro forma basis, EBITDA for 1995 was ($8.5) million. EBITDA is a
measure commonly used in the telecommunications industry and is presented
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to assist in an understanding of the Company's operating results and is not
intended to represent cash flow or results of operations in accordance with
generally accepted accounting principles.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO THE PERIOD FROM NOVEMBER 10, 1993 TO
DECEMBER 31, 1993
The Company commenced operations on November 10, 1993, and it does not
believe that a comparison of results for the period ended December 31, 1993 with
the year ended December 31, 1994 is meaningful.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased from $146.6 million as of December 31,
1995 to $637.4 million at September 30, 1996. The Company's current assets of
$346.7 million at September 30, 1996, including cash and cash equivalents and
marketable securities of $329.7 million, exceeded current liabilities of $21.4
million, providing working capital of $325.3 million. Network and equipment
totaled $222.0 million at September 30, 1996 as compared to $53.2 million at
December 31, 1995. Other assets, principally goodwill, net of accumulated
amortization, increased to $74.8 million at September 30, 1996 from $33.5
million at December 31, 1995, primarily as a result of the Company's
acquisitions of both City Signal, Inc. and BTC, and debt issuance costs
associated with the 10 7/8% Senior Discount Note Offering.
In connection with the City Signal Acquisition, the seller received an
option to require the Company to repurchase any or all of the 2,240,000 shares
of the Company's Common Stock issued in the City Signal Acquisition at a price
of $12.50 per share on or before February 1, 1998. In conjunction with the
Company's IPO (see below), ten percent (10%) of such shares were sold.
Accordingly, shares subject to redemption totalled 2,016,000 shares at September
30, 1996.
On February 26, 1996, the Company sold $425.0 million aggregate principal
amount of its 10 7/8% Senior Discount Notes, providing gross proceeds of
approximately $250 million, and proceeds net of underwriting fees of
approximately $241 million. No cash payments of interest are required on the
10 7/8% Senior Discount Notes until September 1, 2001.
On May 2, 1996, the Company sold 7,385,331 shares of the Company's Common
Stock in its IPO at a price of $27.00 per share. Gross proceeds from this
offering totaled approximately $199.4 million and proceeds net of underwriting
discounts and advisory fees and expenses totalled approximately $185.2 million.
In June 1996, the Company and MCImetro entered into an agreement pursuant
to which MCImetro acquired a minority interest in the Company's Sacramento,
California network and made an additional investment in the San Jose joint
venture company. In connection with these agreements, MCImetro 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.
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Effective in September 1996, the Company acquired 100% of the stock of
Bittel, a switch-based reseller of long distance services, with such services
provided primarily to customers in the San Francisco and Los Angeles, California
areas.
On October 24, 1996, the Company and MaineCom, a subsidiary of Central
Maine Power Company, entered into a letter of intent to form a joint venture
company, to be owned 60% by the Company and 40% by MaineCom, for the purposes of
constructing, owning, operating and developing networks initially in Portland,
Maine and Nashua and Manchester, New Hampshire, and other markets in Maine and
New Hampshire as may be agreed upon by the Company and MaineCom in the future.
The transaction is subject to execution of definitive agreements and regulatory
approvals.
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.
The Company is discussing with a third party the acquisition by the Company
of networks in operation and under construction in Salt Lake City, Utah, Reno,
Nevada and Boise, Idaho. The proposal is subject to completion of appropriate
due diligence by the Company and the negotiation and execution of acquisition
agreements approved by the Boards of Directors of both parties.
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
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guaranteed by intermediate subsidiaries of the Company. The facility is further
secured by the stock of such subsidiaries and such guarantors. The AT&T Credit
Facility contains covenants substantially the same as the covenants in the
Senior Discount Notes and also contains covenants applicable to such
subsidiaries and such guarantors which place certain additional limitations on
the ability of such entities to incur indebtedness, create liens, engage in new
businesses, dispose of assets, issue additional capital stock, and effect
mergers and consolidations.
The Bank Credit Facility provides the subsidiary operating the Company's
Tulsa, Oklahoma network the ability to borrow amounts up to $10 million from
time to time prior to June 30, 1997, with a final maturity of all loans no later
than June 30, 2002, with interest only payment through August 31, 1997 and a 4.5
year principal payout period thereafter. The Bank Credit Facility is secured by
the assets and stock of the subsidiary. The loan agreement contains certain
restrictive covenants, including limitations on the ability of the subsidiary to
declare and pay dividends to the Company, to incur additional indebtedness, to
make loans and advances and to engage in transactions with the Company (except
for reimbursement for services rendered on arms-length terms and repayment of up
to $10 million of subordinated debt prior to June 30, 1997 in the absence of a
default under the Bank Credit Facility). The Bank Credit Facility contains
financial covenants, including limitations on the ratios of the subsidiary's
annualized operating cash flow to its outstanding debt, interest expense and
debt service costs and requirements for the maintenance of a 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 additional financings 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
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which could affect the amount of capital that will be required for such
purposes, the Company cannot provide a reasonable estimate of such additional
capital needs. For example, the size of a particular network to be developed or
acquired and the types of electronics installed can impact significantly the
amount of capital required. Similarly, the potential cost of acquiring
additional networks is not determinable, and it is possible that the Company
could acquire existing networks using a variety of financing alternatives. The
Company expects to meet such additional capital needs with the proceeds from
existing and future credit facilities and other borrowings, and the proceeds
from sales of additional equity securities and joint ventures. The Company's
expectations of required future capital expenditures are based on the Company's
current estimates and the current state and federal regulatory environment.
There can be no assurance that actual expenditures will not be significantly
higher or lower. In addition, there can be no assurance that the Company will be
able to raise or generate sufficient funds to enable it to meet its strategic
objectives or that such funds, if available at all, will be available on a
timely basis or on terms that are acceptable to the Company.
EFFECT OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of, which will require the Company to review for the
impairment of long-lived assets and certain identifiable intangibles to be held
and used by the Company whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. As of the adoption
date of January 1, 1996, the Company had no long-lived assets considered
impaired and no identifiable intangibles or goodwill related to assets to be
disposed of.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which establishes a fair value based method for financial
accounting and reporting for stock-based employee compensation plans. However,
the new standard allows compensation to continue to be measured by using the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, but requires
expanded disclosures. SFAS No. 123 is effective in fiscal year 1996. The Company
has elected to continue to use the intrinsic value based method of accounting.
Accordingly, there will be no effect on the Company's consolidated financial
statements.
INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
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BUSINESS OF THE COMPANY
OVERVIEW OF THE COMPANY
The Company, founded in November 1993, is a leading full service provider
of competitive local telecommunications services to IXCs, ISPs, wireless
carriers and business, government and institutional end users in selected second
and third tier cities within the United States. The Company is organized as a
holding company with individual operating subsidiaries which focus on specific
market segments. Through its operating subsidiaries, the Company acquires and
constructs its own state-of-the-art digital optical fiber telecommunications
networks and facilities and leases network capacity from others to provide IXCs,
ISPs, wireless carriers and business, government and institutional end users
with an alternative source for a broad array of high quality voice, data and
other telecommunications services. Certain of the Company's subsidiaries located
in California currently provide single source integrated local and long distance
telecommunications services and facilities management for medium and small
businesses utilizing the facilities of other providers. GLA, acquired in the
merger with BTC on January 2, 1996, provides a full range of consulting, network
engineering and construction, strategic planning, infrastructure planning and
design and information system services and solutions for the Company and a wide
variety of other telecommunications providers. The Company believes that its
strategic alliance with World-Net Access, Inc., a company founded to form a
national Internet Service Provider network, will enable the Company to provide
its customers with solutions to their needs for Internet and Intranet
communications services.
The Company's networks are organized to take advantage of ongoing
technological, competitive and regulatory changes. The Company sells its
services primarily to IXCs, ISPs, wireless carriers and business, government and
institutional customers who are high volume users of telecommunications
services. Expenditures by IXCs for access connections to their customers
represent their largest single expense and are estimated by industry sources to
represent as much as 45% of the revenues generated by long distance calls.
Through the deployment of state-of-the-art fiber optic networks and switches,
the Company is able to provide the IXCs served by its networks with high
quality, reliable services at prices less than those the regulated ILECs
currently charge. The Company can expand its capabilities to offer these
services beyond the locations served by its networks by interconnecting its
facilities with the facilities of the ILECs, IXCs and other providers of
telecommunications services.
For financial information regarding the Company, see the financial
statements and related notes listed under "Index to Consolidated Financial
Statements."
CORPORATE STRATEGY
The Company's goal is to become the primary full service provider of
competitive local telecommunications services to IXCs, ISPs, wireless carriers
and business, government and institutional end users in selected cities by
offering superior products with excellent customer service at prices below those
charged by the ILECs. The principal elements of the Company's strategy include:
TARGET SECOND AND THIRD TIER MARKETS. The Company believes that
continuing pro-competitive regulatory changes and the broadening range of
services that can be offered by CLECs present attractive opportunities for
new CLEC entrants in second and third tier cities where there are typically
fewer CLEC competitors than in first tier markets and where the ILECs
generally have placed a lower priority on installing fiber optic systems
comparable to those being installed by the Company. As an early entrant in
selected second and third tier cities, the Company believes it can attain a
leadership position by securing needed franchises and rights-of-way,
installing robust state-of-the-art CLEC networks and facilities (i.e.,
networks which are capable of reaching at least 70% to 80% of identified
business end users in the market and
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most, if not all, of the ILEC's central offices) and establishing customer
relationships with IXCs, ISPs, wireless carriers and business, government
and institutional end users that will enable it to take advantage of the
attractive potential growth rates for local exchange service revenues in
those markets.
AGGRESSIVELY PURSUE SWITCHED SERVICES OPPORTUNITY. The
Telecommunications Act of 1996 mandates that ILECs throughout the U.S.
enter into arrangements with competitors such as the Company for central
office collocation and unbundling of local services. The Company believes
that implementation of these and other pro-competitive policies creates
favorable opportunities to pursue more aggressively the provision of local
switched services. The Company has a total of 20 digital telephone switches
installed in its operating networks and plans to leverage its networks and
customer relationships by offering local dial tone, switched access
termination and origination services, centrex and desktop products. The
Company currently offers such services and products in substantially all of
its operating networks and expects to offer such services and products in
all of its operating networks by the end of the second quarter of 1997. See
"-- Current Products and Services."
EXPAND ENHANCED SERVICE OFFERINGS. Consistent with its strategy of
aggressively pursuing switched services opportunities, the Company is
expanding its capabilities to provide enhanced services that complement its
switch-based services. Such enhanced services include, among others, high
speed video conferencing, frame relay and ATM-based packet transport
services and Internet access products. The Company is currently offering
such services in certain markets and expects to offer such services in all
of its operating networks by the end of 1997. The Company also plans to
continue to upgrade and add to its systems and services as technology and
regulations permit. See "-- Planned Products and Services."
CONTINUE TO BUILD OUT EXISTING SYSTEMS. The Company strives to build a
sufficient revenue base in each of its systems to generate the cash flow
necessary to enable it to devote more resources to developing and expanding
its systems as opposed to funding initial operating losses. As a result of
favorable regulatory developments and the Company's initial favorable
experiences with the provision of local switched services, the Company has
determined to more rapidly develop and expand its systems. Its plans
include increasing the number of cities served, expansion of its existing
networks and accelerating the deployment of switches and ILEC central
office collocations. The Company believes that its access to significant
capital and technical resources and its ongoing efforts to develop close
working relationships with its IXC customers (see "-- Build on strategic
relationships" below) will enable it to more rapidly develop and expand its
systems, add to its service offerings and establish the strong customer
relationships necessary to solidify its competitive position in its
selected markets.
CONTINUE TO INCREASE THE NUMBER OF CITIES SERVED. The Company recently
achieved its long-stated goal of having systems in operation or under
construction in a total of 30 cities by the end of 1996. The Company plans
to have systems in operation or under construction in a total of 40 cities
by the end of 1997 and a total of 50 cities by the end of 1998. The
Company's expansion into additional cities is expected to be accomplished
by the acquisition of existing networks as well as the development of new
networks. See "Business of the Company -- Network Acquisition, Development
and Design" and "-- Network Construction." By adding networks, the Company
believes it can increase revenues and obtain economies of scale in its
operating costs.
BUILD ON STRATEGIC RELATIONSHIPS. In order to capitalize on the
competitive dynamics of the changing IXC/ILEC relationships, the Company
has established close business alliances with major IXCs, including joint
ventures and preferred vendor relationships. In accordance with this
strategy, (1) in September 1995, the Company and MCImetro formed a joint
venture company to operate and expand the Company's existing networks in
San Jose, California and its environs, and in May and June 1996, the
Company and MCImetro entered into agreements
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which provide that, until September 30, 2001, the Company will be
MCImetro's preferred provider of certain local access services in a number
of the Company's markets and pursuant to which MCImetro acquired a 15%
interest in the Company's Sacramento, California network for $4.5 million,
and MCImetro invested an additional $3.5 million in the San Jose joint
venture company (see "-- Strategic Relationships" below), and (2) in
December 1995, the Company concluded a national preferred vendor agreement
with AT&T Communications, pursuant to which the Company expects to become
AT&T Communications' preferred supplier of local access services in most of
the Company's markets. The Company believes preferred vendor relationships
with IXCs provide opportunities to leverage its partners' sales channels
and market support to sell the Company's products and services and expand
the Company's potential revenue base. In addition, the Company believes
that relationships with IXCs facilitate its entry into new markets by
providing access between the IXCs and their customers. The Company has
organized a national account marketing organization to manage such
relationships. The Company believes this marketing effort, along with its
number of cities served, financial resources and telecommunications
expertise, position it well to develop and maintain these strategic
relationships. See "-- Strategic Relationships."
LEVERAGE UPON GLA'S SIGNIFICANT TELECOMMUNICATIONS INFRASTRUCTURE
CAPABILITIES. GLA, a wholly-owned subsidiary of the Company, offers a full
range of consulting, management, engineering and information system
solutions for telecommunications companies. GLA provides a full range of
network engineering, construction, design and strategic planning services,
as well as financial and management software products, including
specifically designed software for billing systems, toll rating, plant
records and financial applications. GLA's capabilities also serve as an
internal source for the telecommunications infrastructure support needed
for the Company's CLEC business.
CLEC MARKET POTENTIAL
DEVELOPMENT OF LOCAL EXCHANGE SERVICES. The first CAPs, which were the
predecessors of today's CLECs, were established in the mid-1980's to serve the
increasing demand for telecommunication services by the IXCs and business,
finance, government, education and healthcare entities by providing competitive
alternatives to the ILECs in non-switched special access and private line
services. The deregulation of the U.S. telecommunications industry, rapid
changes in technology and the increasingly information intensive nature of the
U.S. economy have significantly expanded the role of telecommunications for
these entities. Industry sources estimate that voice traffic of such end users
is growing at a rate of approximately seven percent per year, while data
communications are growing at three to five times this rate due to the increase
in computerized transactions processing and video applications, the movement to
distributed data processing, the rise of decentralized management structures and
the growing demand for Internet access services, which require the transmission
of large amounts of information with speed, accuracy and reliability.
The present structure of the telecommunications industry has evolved
largely as a result of increased market demand, deregulation, the implementation
of new technologies and increased competition. The rapid development of fiber
optic and digital electronics technologies has encouraged the growth of cost
effective alternatives to the monopolistic position of the ILECs in many of the
local exchange markets. In particular, the IXCs, which industry sources estimate
may pay as much as 45% of their total revenues in local access charges, have
supported competition in the local exchange markets.
Initially, CAPs were permitted to provide only non-switched special access
and private line services. The FCC's Interconnection Decisions in 1992 and 1993
granted CAPs the right to interconnect their private networks to the ILEC
networks to provide collocated special access and switched access transport
services, which enabled CAPs to access new customers and new markets without
physically expanding their networks.
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The pace of regulatory change in the telecommunications industry has
continued to accelerate with the adoption of the Telecommunications Act of 1996
which provides, among other things, for a national template under which, when
implemented, CLECs will be able to provide competitive services on a more equal
basis with the ILECs by further opening local exchange markets to competition
and pre-empting anti-competitive state laws. The Company believes the following
attributes of the Telecommunications Act of 1996 will have certain positive
effects on the Company's operations:
- Market access. Opening all U.S. markets to local competition.
- Network interconnections. Enabling the Company to more fully interconnect
its networks with ILECs and other carriers to allow the Company to reach
customers not physically connected to its own networks in a more cost
effective manner.
- Number portability. Enabling customers to retain their existing phone
numbers in the event they choose to switch local service providers. The
Company considers number portability to be a significant factor which can
positively influence a customer's decision to purchase service from the
Company.
- Reciprocal compensation. Ensuring fair and reciprocal rates under which
other carriers and the Company compensate one another for calls made to
their customers or, in the alternative, not charge one another for calls
made by customers from one network to the other. The Company expects such
reciprocal compensation arrangements to improve its operating margins over
time.
ENTRY INTO SWITCHED SERVICES. The Company believes that the CLEC business
is positioned for dramatic growth. Of the $32 billion of access fees paid by
IXCs to the ILECs in 1994, CLECs accounted for only $294 million or less than
1%. The Company expects that the entry of the ILECs into the long distance
business will increase these penetration rates as IXCs may seek alternatives to
the ILECs as sources of access to their customers. Most states have taken
regulatory and legislative action to open local communications markets to local
exchange competition and co-carrier status. The Company also expects continuing
pro-competitive regulatory changes, including those mandated by the
Telecommunications Act of 1996, together with increasing customer demand, will
create more opportunities for CLECs to introduce additional services, expand
their networks and address a larger customer base. These changes permit CLECs to
offer local dial tone, centrex, desk top and other enhanced services. The
Company believes that these changes afford CLECs the potential to grow
significantly over the next several years. However, there is no assurance that
such regulatory and other industry trends will continue or that future
regulatory developments will be favorable to CLECs.
Until recently, the Company's capital expenditure programs were directed
primarily toward the construction and acquisition of new networks and the
purchase of related equipment. While the Company intends to continue these
activities, it is also accelerating the expansion of its existing networks,
including more rapid deployment of switches and ILEC central office
interconnections, in order to take advantage of its developing demand-based
opportunities in those networks. Accordingly, the Company has increased the
number of CLEC lines in service from 3,187 at December 31, 1995 (on a pro forma
basis giving effect to the City Signal Acquisition) to 21,013 at December 31,
1996, with annualized CLEC revenues increasing from $2.5 million based on
December 1995 revenues to $10.2 million based on September 1996 revenues.
See "The Competitive Local Telecommunications Industry," "Competition" and
"Regulatory Overview" below.
CURRENT PRODUCTS AND SERVICES
SPECIAL AND SWITCHED ACCESS AND PRIVATE LINE SERVICES. The Company
currently provides several types of special and switched access and private line
services to its IXC and end-user
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customers. Historically, CAPs such as the Company were able to offer only
non-switched special access and private line services which involved the
installation of dedicated lines to provide the following types of communications
links:
- POP-to-POP Special Access -- Telecommunications lines linking the POPs of
one IXC or the POPs of different IXCs in a market, allowing these POPs to
exchange transmissions for transport to their final destinations.
- End-User/IXC Special Access -- Telecommunications lines between an end
user, such as a large business, and the local POP of its selected IXC.
- Private Line -- Telecommunications lines connecting various locations of
one or more customers' operations, suitable for transmitting voice and
data traffic internally.
The Interconnection Decisions allowed CAPs to provide a broader range of
services by enabling them to access additional customers through connections
with the ILECs' networks. These services include:
- Collocated Special Access -- A dedicated line carrying switched
transmissions from the IXC POP, through the ILEC's central office to the
end user.
- Collocated POP-to-ILEC Switched Access Transport -- A dedicated line
carrying switched transmissions from the ILEC's central office to an IXC's
POP.
To provide these services, the Company offers various types of highly
reliable, dedicated fiber optic lines that operate at different speeds and
handle varying amounts of traffic to provide tailor-made solutions to its
customers' needs.
- DS-0 -- A dedicated line service that meets the requirements of everyday
business communications, with transmission capacity of up to 64 kilobits
of bandwidth per second (a voice grade equivalent circuit). This service
offers a basic low capacity dedicated digital channel for connecting
telephones, fax machines, personal computers and other telecommunications
equipment.
- DS-1 -- A high speed channel typically linking high volume customer
locations to IXCs or other customer locations. Used for voice
transmissions as well as the interconnection of Local Area Networks
("LANs"), DS-1 service accommodates transmission speeds of up to 1.544
megabits per second, the equivalent of 24 voice-grade equivalent circuits.
The Company offers this high-capacity service for customers who need a
larger communications pipeline.
- DS-3 -- This service provides a very high capacity digital channel with
transmission capacity of 45 megabits per second, which is equivalent to 28
DS-1 circuits or 672 voice grade equivalent circuits. This is a digital
service used by IXCs for central office connections and by some large
commercial users to link multiple sites.
SWITCH-BASED SERVICES. The Company has added and is continuing to add
capabilities to provide local dial tone and switched access termination and
origination services to its networks. The Company has installed 20 advanced,
state-of-the-art switches. In addition, pursuant to the City Signal Acquisition
and its acquisition of Bittel, the Company acquired three installed
state-of-the-art switches.
Most states have taken regulatory and legislative action to open local
communications markets to various degrees of local exchange competition and
co-carrier status. The Company has established interconnection arrangements with
ILECs for 26 of its 30 networks. The Company expects that continuing
pro-competitive regulatory changes, including those mandated by the
Telecommunications Act of 1996, together with increasing customer demand, will
create more opportunities to introduce additional services and expand the
Company's networks to address a
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larger customer base. See "-- CLEC Market Potential," "-- Planned Products and
Services" and "Regulatory Overview."
CENTREX AND LONG-DISTANCE RESALE. Retail business customers in LATAs served
by the Company's subsidiaries in California can acquire centrex and
long-distance services direct from the Company. The Company's subsidiaries
purchase those services in bulk from the ILEC and the IXCs and provide their
retail customers with a single source of integrated local and long distance
telecommunications services and facilities management at a discount from the
published retail ILEC tariff rates. By using centrex service instead of a
private branch exchange ("PBX") to direct their telecommunications traffic,
customers can avoid the large investment in equipment required and the fixed
costs associated with maintaining a PBX network infrastructure. The Company's
centrex service allows medium to small business customers who lack the size or
resources to support their own PBX to benefit from a sophisticated
telecommunications system. The Company's acquisitions of ALD, TNS and Bittel in
1996 have complemented its long-distance resale services directed to such
customers.
CONSULTING SERVICES. Through GLA, the Company provides a full range of
consulting, management, engineering and information system solutions for
telephone, cable television and power companies, wireless providers and other
telecommunications infrastructure owners and operators in the United States and
elsewhere. GLA significantly expanded its capabilities through the acquisition
of Design Extenders, Inc. in January 1994 and its acquisition of Graphic Data
Solutions, a telecommunications software and mapping firm, in January 1995.
Following is a brief description of the services offered by each of GLA's
divisions:
CONSULTING SERVICES. Provides specialized consulting services to
telephone, cable television and other telecommunications providers. GLA
consulting professionals combine extensive experience in telecommunications
and cable network technology for support of a wide variety of assignments
that include engineering planning, network design, strategic planning,
opportunity and technical assessments, plus project management and due
diligence initiatives. In addition to its management consulting services,
GLA also provides field services that support outside plant design,
engineering and construction management. Efforts include field survey and
design, project engineering and engineering project management, plus
central office equipment and outside plant installation services.
DESIGN EXTENDER. One of the industry's leaders in providing
engineering, design and mapping services for hybrid fiber-coax systems,
serving large cable television systems operators. Services include systems
design and analysis, as-built and strand mapping, and digitizing.
TELEDATA. Provides engineering and CAD services for the conversion of
telecommunications systems, maps and drawings for use with applications on
clients' automated mapping/ facilities management/geographical information
systems (AM/FM/GIS).
TELEMAP. Designs AM/FM/GIS software products for clients engaged in
designing telecommunications networks.
TELESYSTEMS. Designs and installs financial and management software
products for telecommunications companies. Products include software for
billing systems, toll rating, plant records and financial applications.
PLANNED PRODUCTS AND SERVICES
The Company is expanding its capabilities to provide enhanced services,
such as high speed video conferencing, Internet access, frame relay and
ATM-based packet transport services. The Company is currently offering such
services in certain markets and expects to have such capabilities in all of its
operating networks by the end of 1997. These capabilities will enable the
Company to offer a variety of enhanced services where the transport function is
combined with a specific
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<PAGE> 38
application to provide an integrated turnkey solution to its customer's voice,
data and video transmission requirements. These enhanced services include
applications such as LAN-to-LAN interconnect services, packet transport
services, high speed video conferencing, Internet access, frame relay, remote
database access and backup services, and fractional bandwidth services,
utilizing both the Company's networks and switching as well as facilities and
services provided by others. This will enable the Company to provide a customer
with all of its business lines and offer a wide range of switched-based
value-added services, such as directory and operator assistance, audio and video
conferencing, calling cards, 800-numbers, voice mail, Internet access and other
enhanced services.
STRATEGIC RELATIONSHIPS
From time to time, the Company has held discussions with other
communications entities concerning the establishment of possible strategic
relationships, including transactions involving preferred vendor relationships
and equity investments in the Company and one or more of its subsidiaries.
Effective September 1995, a subsidiary of the Company formed a
majority-owned joint venture with MCImetro to operate and significantly expand
the Company's existing network in San Jose, California and its environs. The
joint venture company operates the network and provides the Company and MCImetro
with the network services needed for their respective customers.
On May 30, 1996, the Company and MCImetro entered into an amendment to the
Company's master service agreement with MCImetro which provides that, until
September 30, 2001, the Company will be MCImetro's preferred provider of certain
local access services in a number of the Company's markets at a discount to
prevailing optimized ILEC rates for comparable circuits. Under the amended
master service agreement, MCImetro has agreed to purchase from the Company, with
certain provisos, all of MCImetro's required local access in specified markets
for new end-user services (and, at MCImetro's election, existing end user
services), and has given the Company a right of first refusal on a
circuit-by-circuit basis to provide other access services required by MCImetro
in such markets. The Company and MCImetro also entered into a subscription
agreement on June 24, 1996 pursuant to which MCImetro 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. 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 1997. Based on the plans currently being implemented
by the Company and AT&T Communications and the level of services that the
Company provided 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
existing services in any additional markets and additional services is subject
to the mutual agreement of the Company and AT&T Communications with respect to
each market, including satisfactory completion of network validation tests. As a
result, there is no assurance that the national vendor agreement will be
extended to cover additional markets and services. See "Risk Factors --
Dependence on Business from IXCs."
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The Company believes that Internet and Intranet products and services
complement the Company's existing telecommunications services and present the
Company with potential revenue opportunities, through both the retention of
existing customers and the addition of new customers. To pursue such
opportunities, on June 25, 1996 the Company formed a strategic alliance with
World-Net, a privately-held development stage company founded to form a national
Internet Service Provider network. Through the Company's prior investment and a
recent commitment, the Company has committed a total of $20 million for a 25.5%
fully-diluted interest in World-Net and it is possible that the Company will
decide to commit additional funds in furtherance of this strategic alliance. The
Company intends that both companies will seek ways to work together to provide
customer-oriented Internet and Intranet communications solutions. The Company
plans to develop and offer a wide range of Internet-related services to users of
World-Net's national ISP network, including various dial-up and dedicated
Internet access options.
CITIES SERVED
In January 1994, the Company completed its first acquisition, an operating
system in Springfield, Massachusetts and rights of way for the development of
networks in Hartford, Connecticut and Providence, Rhode Island, where networks
have been constructed by the Company and are operational. In October 1994, the
Company acquired an operating system serving Sacramento, a system under
construction in San Jose, and a local and long distance resale operation based
in San Francisco, California that serves small to medium sized businesses in the
San Francisco Bay area. The San Jose network was activated during December 1994
and has been expanded into Sunnyvale and Santa Clara, California. A 37-mile
expansion of the San Jose network is being completed, which will extend the
current 32-mile network into Milpitas and Palo Alto, California. See "--
Strategic Relationships" above.
During 1994, the Company also developed business plans and obtained
right-of-way agreements and the necessary operating rights to construct networks
in Oklahoma City, Oklahoma, and Little Rock, Arkansas. These networks, which
added a total of 46 route miles to the Company's networks, became operational
during the first half of 1995.
During March 1995, the Company acquired the assets of a 105-mile CAP
network in Tulsa, Oklahoma. Also during 1995, the Company commenced the
construction of networks in Bakersfield, Fresno and Stockton, California,
Albuquerque, New Mexico, Knoxville, Tennessee, Jackson, Mississippi, Reno,
Nevada and Tucson, Arizona, all of which are now operational.
Effective January 31, 1996, the Company acquired the business of City
Signal, a CLEC with a 208 mile network in Grand Rapids, Michigan, an operating
network in Lansing, Michigan and networks under construction in Ann Arbor,
Michigan and Toledo, Ohio. Also during 1996, the Company commenced the
construction of networks in White Plains, New York, Stamford, Connecticut,
Kansas City, Missouri, Springfield, Missouri and San Mateo, California, all of
which are expected to be operational by the end of the second quarter of 1997.
Subsidiaries of the Company currently have systems in operation or under
construction in the following cities:
<TABLE>
<CAPTION>
OTHER CLEC
NETWORKS OF THE COMPANY NETWORKS IN CITY
- ----------------------- -----------------------
CITY SERVED CURRENT ANNOUNCED
----------- ------- ---------
<S> <C> <C>
EASTERN REGION
Springfield, Massachusetts........................ 0 0
Providence, Rhode Island.......................... 1 0
Hartford, Connecticut............................. 3 0
Grand Rapids, Michigan............................ 0 0
Lansing, Michigan................................. 0 1
Traverse City, Michigan........................... 0 0
</TABLE>
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<PAGE> 40
<TABLE>
<CAPTION>
OTHER CLEC
NETWORKS OF THE COMPANY NETWORKS IN CITY
---------------------------------------------------- ----------------------
CITY SERVED CURRENT ANNOUNCED
---------------------------------------------------- ------- ---------
Toledo, Ohio(1)................................... 0 1
<S> <C> <C>
White Plains, New York(1)......................... 1 0
Stamford, Connecticut(1).......................... 1 0
CENTRAL REGION
Oklahoma City, Oklahoma........................... 2 0
Tulsa, Oklahoma................................... 0 1
Little Rock, Arkansas............................. 1 1
Tucson, Arizona................................... 2 0
Albuquerque, New Mexico........................... 2 0
Knoxville, Tennessee.............................. 0 2
Jackson, Mississippi.............................. 1 1
Kansas City, Missouri(1).......................... 1 1
Springfield, Missouri(1).......................... 0 1
WESTERN REGION
Sacramento, California............................ 1 1
San Jose, California.............................. 2 0
Sunnyvale, California............................. 2 0
Santa Clara, California........................... 2 0
Stockton, California.............................. 0 0
Fresno, California................................ 0 1
Bakersfield, California........................... 0 1
Milpitas, California.............................. 2 0
Palo Alto, California............................. 2 0
San Mateo, California(1).......................... 2 0
Reno, Nevada(1)................................... 0 1
San Francisco, California(2)...................... N/A N/A
</TABLE>
- ---------------
(1) Networks under construction.
(2) Facilities management operations serving the San Francisco Bay area.
On October 24, 1996, the Company and MaineCom, a subsidiary of Central
Maine Power Company, entered into a letter of intent to form a joint venture
company, to be owned 60% by the Company and 40% by MaineCom, for the purposes of
constructing, operating and developing networks initially in Portland, Maine and
Nashua and Manchester, New Hampshire and other markets in Maine and New
Hampshire as may be agreed upon in the future. The transaction is subject to
execution of definitive agreements and regulatory approvals.
The Company is discussing with a third party the acquisition by the Company
of networks in operation and under construction in Salt Lake City, Utah, Reno,
Nevada and Boise, Idaho. The proposal is subject to completion of appropriate
due diligence by the Company and the negotiation and execution of acquisition
agreements approved by the Boards of Directors of both parties.
The Company believes its regional aggregation strategy will yield economies
of scale in service costs and allow service-affecting decisions to occur closer
to its customers.
NETWORK ACQUISITION, DEVELOPMENT AND DESIGN
Before determining to acquire or construct a network in a particular city,
the Company's corporate development staff reviews the demographic, economic,
competitive and telecommunications demand characteristics of the city, including
its location, the concentration of potential business, government and
institutional end user customers, the economic prospects for the area, available
data regarding IXC and end user demand and actual and potential CLEC
competitors. Market demand is estimated on the basis of market research
performed by Company personnel and others, utilizing a variety of data including
estimates of the number of interstate access and intrastate private lines in the
city based primarily on FCC reports and commercial data bases.
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If a particular city targeted for development is deemed to have
sufficiently attractive demographic, economic, competitive and
telecommunications demand characteristics, the Company's network planning and
design personnel design a network targeted to provide access to 70% to 80% of
the identified business, government and institutional end user revenue base, to
the IXC POPs and the ILEC's principal central office(s) in the city, utilizing a
"self-healing" optical fiber ring architecture (build-out to 100% of the
identified end users is not considered to be cost-effective in most cases
because a portion of the demand is located in low density areas). Concurrently,
the Company's corporate development personnel visit the location of the proposed
network to begin discussions with city officials, right-of-way providers, IXCs
and potential end user customers.
Based on the data developed during these preliminary studies and visits, in
connection with either an acquisition or the construction of a network,
including estimates of the costs for fiber optic cable, transmission and other
electronic equipment, engineering, distribution and construction, building
entrance requirements and right-of-way acquisition, the Company develops
detailed financial estimates based on the anticipated demand for the Company's
current services (at present, the financial estimates prepared by the Company
for this purpose generally do not include potential future revenues for certain
enhanced products and services, which the Company plans to offer in all of its
operating networks by the end of 1997; see "-- Planned Products and Services").
If the financial estimates meet or exceed the Company's minimum rate of return
thresholds using a discounted cash flow analysis, the Company's corporate
development personnel prepare a detailed business and financial plan for the
proposed network, including competitive, regulatory and right-of-way analyses.
In the case of acquisitions, Company personnel perform due diligence in
order to determine if the city and network involved meet the foregoing
development and construction criteria. The ability of the Company to acquire
suitable additional systems will be subject to competition for acquisition
candidates.
NETWORK CONSTRUCTION
When the Company decides to build a network, the Company's corporate
development staff obtains any needed city authorizations. In some cities, a
construction permit is all that is required. In other cities, a license
agreement or franchise may also be required. Such licenses and franchises are
generally for a term of limited duration. The Telecommunications Act of 1996
requires that local governmental authorities treat telecommunications carriers
in a competitively neutral, non-discriminatory manner. The Company's current
licenses and franchises expire in different years, ranging from 2000 to 2010.
City franchises often require payment of franchise taxes which in some cases can
be included as part of customer charges for use of the network. The Company's
corporate development staff also finalizes arrangements for needed
rights-of-way. The Company strives to obtain rights-of-way on favorable terms
that afford the opportunity to expand the networks as business develops.
Rights-of-way are typically leased under multi-year agreements with renewal
options and are generally non-exclusive. The Company leases underground conduit
and pole space and other rights-of-way from entities such as ILECs and other
utilities, railroads, long distance providers, state highway authorities, local
governments and transit authorities. The Telecommunications Act of 1996 requires
most utilities, including most ILECs and electric companies, to afford CLECs
access to their poles and conduits and rights-of-way at reasonable rates on
non-discriminatory terms and conditions.
The Company's networks are constructed to cost-effectively access areas of
significant end user telecommunications traffic, as well as the POPs of most
IXCs and the principal ILEC central offices in the city. The Company establishes
general requirements for network design which are then provided to an
engineering firm that renders drawings of the contemplated network and the
required deployment. Construction and installation services are provided by
independent contractors selected through a competitive bidding process. Company
personnel provide project management services, including contract negotiation
and supervision of the construction, testing and
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certification of all facilities. The construction period for a new network
varies depending upon the number of route miles to be installed, the initial
number of buildings targeted for connection to the network, the general
deployment of the network and other factors. Networks that the Company has
installed to date generally have become operational within four to six months
after the beginning of construction.
EQUIPMENT SUPPLY
The Company purchases fiber optic cable and transmission and other
electronic equipment from Lucent Technologies, Inc. (formerly AT&T Network
Systems) and other suppliers at prevailing market prices. The Company expects
that fiber optic cable, equipment and supplies for the construction and
development of its networks will continue to be readily available from Lucent
Technologies, Inc. and other suppliers as required. In August 1995, the Company
entered into an agreement with Lucent Technologies, Inc. under which, as of
December 31, 1996, it has accepted delivery of 16 state-of-the-art 5ESS(R)-2000
switches.
CONNECTIONS TO CUSTOMER LOCATIONS
Office buildings are connected by network backbone extensions to one of a
number of physical rings of fiber optic cable, which originate and terminate at
the Company's central node. Signals are sent through a network backbone to the
central node simultaneously on both primary and alternate protection paths. Most
buildings served have a discreet Company presence (referred to as a "remote
node") located in the building. Within each building, Company-owned internal
wiring connects the Company's remote node to the customer premises. Customer
equipment is connected to Company-provided electronic equipment generally
located in the remote node where customer transmissions are digitized, combined
and converted to an optical signal. The traffic is then transmitted through the
network backbone to the Company's central node where originating traffic can be
reconfigured for routing to its ultimate destination on the network.
The Company locates its remote node electronic equipment either in a room
leased from the building owner or on a customer's premises. Leasing space from a
building owner enables the Company to share electronic equipment among multiple
customers, causes little interruption for customers during installation and
maintenance and allows the Company to introduce new services rapidly and at low
incremental cost. For these reasons, the Company believes that leasing or
otherwise controlling equipment rooms in buildings served is desirable and has
therefore chosen to establish such arrangements where possible. When the Company
is unable to lease space from the building owner, the Company generally utilizes
space provided by the customer at no cost to the Company.
SALES AND MARKETING
The Company seeks to leverage its networks through sales and marketing
activities targeted at two separate customer groups: wholesale and retail.
Wholesale customers consist of IXCs and information service providers such as
commercial data processing service providers and ISPs. Retail customers are
composed primarily of businesses, government and institutional
telecommunications users that have high volume dedicated telecommunications
requirements and, to a lesser extent, include residential customers for switched
services. Services are offered in accordance with tariffs filed with the FCC for
interstate services and state regulatory authorities for intrastate services.
Since they are classified by the FCC as non-dominant carriers, the Company's
subsidiaries do not have to cost-justify their rates and in certain cases may
enter into customer and product specific arrangements.
WHOLESALE CUSTOMERS. The Company currently targets the major IXCs, such as
AT&T, MCI, Sprint, WorldCom and Frontier, and major information service
providers on a national basis. The Company believes that it can effectively
compete to provide access products (i.e., DS-1, DS-3,
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<PAGE> 43
frame relay, ATM and Internet hub servers) to these target customers in the
cities in which it operates based on price, reliability, state-of-the-art
technology, route diversity, ease of ordering and customer service. The Company
provides POP-to-POP and POP-to-end user non-switched access services and
switched access termination and origination services at prices below those the
regulated ILECs currently charge. The Company strives to establish close working
relationships with its IXC customers through "electronic bonding" of its
operations with those of the IXCs. Electronic bonding provides a seamless
integration of the Company's networks with the IXC's network which enables the
IXC to access service, billing and other data direct from the Company's networks
and permits the IXC to enter automated service requests (ASRs) electronically
through the integrated network.
Wholesale customers are currently marketed by national account
representatives since the major IXCs and information service providers have
established national or regional groups to manage and coordinate their
purchasing of access services. These groups assess CLECs not only upon price,
quality, service and ease of provisioning in a particular market, but also upon
size, scope of operations and financial stability in order to maximize the
leverage of their CLEC relationships. The Company focuses on serving its IXC
customers in all of the Company's cities with a view to establishing national
preferred vendor relationships.
For the three months ended September 30, 1996, approximately 21% of the
Company's consolidated revenues were attributable to access services provided to
IXCs pursuant to numerous individual service orders. Approximately 12% of such
consolidated revenues were attributable to services provided to MCI and its
affiliates pursuant to more than 200 individual service orders. The loss of
access revenues from IXCs in general or the loss of MCI as a customer could have
a material adverse effect on the Company's business.
IXC customers typically place individual service orders for specific
circuits for the Company to provide private line or local access services under
master service agreements which do not obligate the customer to any level of
business. Most of such current service orders can be terminated by the customer
on 60 days or less notice, subject, in certain cases, to specified termination
liabilities. However, as indicated above under "-- Strategic Relationships," the
Company has recently entered into a national preferred vendor agreement with
AT&T Communications under which, subject to mutual agreement, the Company
expects to become AT&T Communications' preferred supplier of certain specified
services in certain specified markets, and has recently entered into an
amendment to its master service agreement with MCImetro which provides that,
until September 30, 2001, the Company will be MCImetro's preferred supplier of
local access services in a number of the Company's markets. Information service
providers typically commit to a service agreement for a term of up to three to
five years which is either renegotiated or, with certain contracts,
automatically renewed for successive one-year periods or converted to a
month-to-month arrangement at the end of the contract term. The Company's
wholesale rates are sometimes based on published tariffs, which are subject to
revision from time to time, based upon changes in the published tariffs. The
Company believes that it is well positioned to serve the IXCs and information
service providers and generally has good relationships with its IXC and
information service provider customers.
RETAIL CUSTOMERS. The Company primarily targets four retail customer
segments -- government, finance, health care and education -- all of which have
high volume telecommunications requirements. The Company is currently providing
these customers private line services such as point-to-point communications,
dedicated DS-Os, DS-1s and DS-3s, dedicated high-speed Internet access, local
dial tone and switched access termination and origination services. The Company
is currently introducing frame relay and ATM-based packet transport capabilities
and will have the capability to offer a wide range of switch-based, value added
services, such as directory and operator assistance, audio and video
conferencing, calling cards, 800-numbers, voice mail and enhanced fax, Internet
access and a variety of native speed LAN-to-LAN and FDDI transport services, as
well as high quality video transport. These services provide customers with cost
effective data transmission and access to services such as the Internet.
ATM-based packet
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transport capabilities will also provide a vehicle for launching future services
such as ultra high speed data and compressed video transport.
The Company believes that it can effectively compete for business,
government, institutional and other end user customers based upon price,
reliability, product diversity, service and custom solutions to the customer's
needs. The Company offers such services to retail customers at prices below
those currently offered by the regulated ILECs. In addition, the Company's
self-healing optical rings ("SONET") provide reliability which the Company
believes is generally superior to the reliability provided by many of the ILECs
in second and third tier cities.
Retail customers are currently marketed through Company direct sales
representatives in each city. The national sales organization also provides
support for the local sales groups and develops new product offerings and
customized telecommunications applications and solutions which address the
specific requirements of particular customers. In addition, the Company markets
its products through advertisements, trade journals, media relations, direct
mail and participation in trade conferences.
Retail customers typically commit to a service agreement for a term of
three to five years which is either renegotiated or automatically converted to a
month-to-month arrangement at the end of the contract term. Retail contracts are
generally at fixed rates. The Company believes that it has generally good
relationships with its retail customers.
CONSULTING CUSTOMERS. GLA's sales and marketing efforts are directed
towards a wide variety of telephone, cable television and power companies,
wireless providers and other telecommunications infrastructure owners and
operators in the United States and elsewhere. GLA offers multi-faceted solutions
to customers' telecommunications infrastructure requirements utilizing its
varied technical and engineering expertise to offer a complete package of
consulting, field service and information systems support. GLA's engineering and
technical personnel include professionals who have significant technical and
engineering expertise in most of the critical voice, video, data and wireless
telecommunications technologies.
NETWORK OPERATIONS
The Company's networks consist of fiber optic digitally-based
communications paths which allow for high-speed, high quality transmission of
voice, data and video communications. The Company typically installs backbone
fiber optic cables containing either 96 or 144 fiber strands, which have
significantly greater bandwidth carrying capacity than traditional analog copper
cables. Using current electronic transmitting devices, a single pair of glass
fibers on the Company's networks can transmit up to 32,256 simultaneous voice
conversations, whereas a typical pair of wires in a traditional analog copper
cable installed in many current ILEC networks can currently carry only a maximum
of 24 simultaneous voice conversations. The Company expects that continuing
developments in compression technology and multiplexing equipment will increase
the capacity of each fiber, thereby providing more bandwidth carrying capacity
at relatively low incremental cost.
The Company offers end-to-end fully protected fiber services utilizing
SONET ring architecture which routes customer traffic simultaneously in both
directions around the ring to provide protection against fiber cuts. Back-up
electronics for high-speed circuits become operational in the event of failure
of the primary components adding further redundancy to the Company's systems.
The Company's networks are monitored seven days per week, 24 hours per day
by the Company's NOC Centers (Network Operations Control Centers) in St. Louis,
Missouri and Grand Rapids, Michigan. The NOC Centers provide a single point of
contact for network monitoring, troubleshooting and dispatching, as well as
capabilities for "electronic bonding" with customers.
With full time monitoring, service problems are detected, diagnosed and, in
most cases, repaired remotely from the NOC Centers, typically before they
adversely affect the Company's
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customer and often before the customer even notices a problem. The NOC Centers
provide real-time alarm status and performance information for each of the
Company's networks around the country. They also afford improved disaster
recovery to customers through remote circuit provisioning and cross-connect
features.
CORPORATE OFFICE
The Company's principal executive offices are located at 425 Woods Mill
Road South, Suite 300, Town & Country, Missouri 63017, and its telephone number
at those offices is (314) 878-1616.
NETWORK FACILITIES AND OFFICES
The Company leases network hub sites and other facility locations and sales
and administrative offices in each of the cities in which it has operations.
During the nine months ended September 30, 1996, rental expense for such
locations and offices totaled $1.5 million. At September 30, 1996, minimum
future rental payments under noncancelable leases covering the Company's
locations and offices totaled $17.1 million. The Company owns a 23 acre parcel
of land in Town & Country, Missouri, on which it is constructing its new
corporate headquarters building. A wholly-owned subsidiary of the Company owns a
42,000 square foot office building in Grand Rapids, Michigan that houses a
switch, NOC Center and office facilities.
EMPLOYEES
At December 31, 1996, the Company had approximately 789 full-time
employees. None of the Company's employees is represented by a union or covered
by a collective bargaining agreement. The Company believes it has a highly
capable and motivated work force with whom relations are good. In connection
with the construction and maintenance of its fiber optic networks, the Company
uses third-party contractors, some of whose employees may be represented by
unions or covered by collective bargaining agreements.
LEGAL PROCEEDINGS
On September 22, 1995, GST Tucson Lightwave, Inc. ("Lightwave") was
permitted to intervene in litigation originally filed by Brooks Fiber
Communications of Tucson, Inc., a wholly-owned subsidiary of the Company ("BFC
Tucson"), styled Brooks Fiber Communications of Tucson, Inc. v. City of Tucson,
cause No. CIV 95-655-TUC-RMB, U.S. District Court, District of Arizona. On
October 2, 1995, Lightwave filed a counterclaim against BFC Tucson, the Company
and Tucson Electric Power Company ("TEP"), charging BFC Tucson, the Company and
TEP with violations of antitrust laws, all of which alleged violations stem from
an agreement between BFC Tucson and TEP that allowed BFC Tucson exclusive
rights, for one year, to utilize certain of TEP's rights of way. The original
causes of action have been settled; however, the counterclaim by Lightwave is
currently still pending. The counterclaim seeks treble damages, attorneys' fees,
costs (all in an unspecified amount) and such other relief as the court deems
proper. The Company believes the claims are without merit and intends to defend
vigorously against this action. The Company believes that resolution of the
matter will not have a material adverse effect on the consolidated financial
condition or results of operations of the Company.
From time to time the Company or a subsidiary of the Company is named as a
defendant in routine lawsuits incidental to its business. Based on the
information currently available, the Company believes that none of such current
proceedings, individually or in the aggregate, will have a material adverse
effect on the Company.
45
<PAGE> 46
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]
46
<PAGE> 47
[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
47
<PAGE> 48
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 $102 billion total U.S. market may be
open to competition as CLECs deploy switches capable of providing the full array
of local exchange services and as state public utility commissions ("PUCs")
authorize CLECs to provide full local telecommunications services.
48
<PAGE> 49
The following chart illustrates the potential CLEC revenue opportunities,
based on the total 1995 local exchange revenues, both before and after a CLEC
deploys a switch in its local network.
CLEC POTENTIAL REVENUE OPPORTUNITIES*
<TABLE>
<CAPTION>
TOTAL 1995 U.S. LOCAL
EXCHANGE MARKET
($ 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.
49
<PAGE> 50
COMPETITION
As noted above, the regulatory environment continues to promote competition
as the FCC has set the industry on an open competition course with its
Interconnection Decisions. Most state regulatory authorities have followed the
FCC's lead by requiring co-carrier status for CLECs and ILEC open network
scenarios. In addition, the Company believes that the recently enacted
Telecommunications Act of 1996 and regulatory and court orders at the federal
level may further accelerate the open competition process.
ILECS
In each city served by its networks, the Company faces, and expects to
continue to face, significant competition from the ILECs, which currently
dominate their local telecommunications markets. As competition in the local
exchange market proceeds, the Company believes that a fundamental division
between the needs of business/governmental/institutional end users and
residential end users will drive the creation of differentiated
telecommunications services and service providers. The Company believes that the
IXCs, ISPs, wireless carriers and business, governmental and institutional end
users on which it focuses will have distinct requirements including maximum
reliability, consistent high quality transmissions, capacity for high speed data
transmissions, diverse routing, responsive customer service and continuous
attention to service enhancement and new service development.
The Company competes with the ILECs for these customers in its markets on
the basis of price, reliability, state-of-the-art technology, product offerings,
route diversity, ease of ordering and customer service. However, the ILECs have
long-standing relationships with their customers and provide those customers
with various transmission and switching services that the Company, in some
cases, is not currently allowed by regulators to offer. The Company has sought,
and will continue to seek, to achieve parity with the ILECs in order to become
able to provide a full range of local telecommunications services. The CLEC
industry continues to challenge, before federal and state regulators, many
advantages which exist because of the ILECs' historical status, but there can be
no assurance that the CLEC industry will succeed in these endeavors. See
"Regulatory Overview" for additional information concerning the regulatory
environment in which the Company operates.
Existing competition for private line, special access and local exchange
services is based primarily on quality, capacity and reliability of network
facilities, customer service, response to customer needs, service features and
price, and is not based on any proprietary technology. As a result of the
comparatively recent installation of the Company's fiber optic networks, its
dual path architectures and the state-of-the-art technology used in its
networks, the Company may have cost and service quality advantages over some
currently available ILEC networks. Moreover, because of its customer service
orientation and its focus on business, governmental and institutional customers,
the Company believes that, in general, it provides more attention and
responsiveness to its customers than do its ILEC competitors. The Company also
believes it will be able to successfully compete with the ILECs in the cities
served by its networks because the Company believes the ILECs have generally
been less focused on competition in second and third tier cities and,
accordingly, place a lower priority on replacing their existing copper cable
systems in those cities.
Although the ILECs generally are subject to greater pricing and regulatory
constraints than CLECs, ILECs are achieving increased pricing flexibility for
their services as a result of, among other things, the Interconnection
Decisions. The Telecommunications Act of 1996 also provides further regulatory
flexibility for ILECs to allow them to respond to competition. If the ILECs
continue to lower rates and/or engage in substantial volume and term discount
pricing practices for their customers, there would be downward pressure on
certain rates which the Company charges, which pressure could adversely affect
the Company's profitability. If regulatory decisions permit the ILECs to charge
CLECs substantial fees for interconnection to the ILECs' networks or afford
ILECs other
50
<PAGE> 51
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.
On January 2, 1997, Ameritech filed an application with the FCC for authority to
provide inter-LATA long distance services in Michigan which the FCC must grant
or deny within 90 days of filing.
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
completed a merger on December 31, 1996 which will enable WorldCom to offer a
"one-stop shopping" combination of long distance and local exchange services.
51
<PAGE> 52
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 possessed certain
advantages over other CLECs in the provision of competitive access services
resulting from certain rights in favor of the cable television companies to use
third-party rights-of-way and to obtain building access at advantageous costs,
and possible cost advantages as a result of statutorily-prescribed limits on the
amounts that electric utilities and ILECs may charge cable companies for use of
utility-owned poles and conduits. However, the Telecommunications Act of 1996
contains provisions that require most utilities, including most ILECs and
electric companies, to afford CLECs access to their poles and conduits and
rights-of-way at reasonable rates on non-discriminatory terms and conditions.
Recent court decisions invalidating the FCC's prohibition of cross-ownership of
cable companies and telephone companies in the same local service territory
could permit ILECs to compete with cable television companies in the provision
of cable television service in residential markets. However, the Company
believes that the convergence of these industries will not be a direct threat
because their focus is oriented on residential customers rather than the
business customers which the Company targets.
Electric utilities may install fiber optic telecommunications cable to
allow remote meter reading, peak load monitoring, customer service and
interactive billing. The Telecommunications Act of 1996 facilitates the
provision of telecommunications services by electric utilities over those
networks.
Cellular and PCS providers may also be a source of competitive local
telephone service. However, the Company believes wireless operators will be
large users of CLEC access services to transport their calls among their radio
transmitter/receiver sites through networks that avoid the ILECs with whom they
compete.
The Company also competes with equipment vendors and installers, and
telecommunications management companies, with respect to certain portions of its
business.
Many of the Company's existing and potential competitors have financial,
personnel and other resources significantly greater than those of the Company.
However, the Company believes that its strategy of targeting second and third
tier cities, its capital, technical and management resources and its orientation
toward IXCs and other commercial telecommunications users will enable it to
achieve its strategic objectives.
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<PAGE> 53
REGULATORY OVERVIEW
OVERVIEW
The Company's services are subject to varying degrees of federal, state and
local regulation. The FCC exercises jurisdiction over all facilities of, and
services offered by, telecommunications common carriers to the extent those
facilities are used to provide, originate or terminate interstate or
international communications. The state regulatory commissions retain
jurisdiction over the same facilities and services to the extent they are used
to originate or terminate intrastate communications. Local governments sometimes
impose franchise or licensing requirements on CLECs and regulate street opening
and construction activities. The Company actively supports additional regulatory
reform at all levels to further open telecommunications markets to competition.
THE TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996, which is comprehensive federal
telecommunications legislation affecting all aspects of the telecommunications
industry. The Telecommunications Act of 1996 establishes a national policy that
promotes local exchange competition. At the heart of the Telecommunications Act
of 1996 is the requirement that local and state barriers to entry into the local
exchange market be removed. The Telecommunications Act of 1996 establishes
uniform standards under which the FCC and state commissions are to implement
local competition and co-carrier arrangements in the local exchange market. The
Telecommunications Act of 1996 also imposes significant obligations on the RBOCs
and other ILECs, including the obligation to interconnect their networks with
the networks of competitors. Each ILEC would be required not only to open its
network but also to unbundle their network elements and services in order that
competitors may purchase only those elements and services that they require. The
pricing of these unbundled network elements and services, which is uncertain and
will depend, among other things, upon regulatory and judicial developments, will
determine whether it is economically attractive for CLECs, IXCs and others to
use these elements and services. ILECs will be required to make available for
resale to new entrants all services they offer end user customers on a retail
basis. The Telecommunications Act of 1996 also imposes requirements on ILECs to
provide reciprocal call termination and telephone number portability.
The Telecommunications Act of 1996 also provides, among other things, that
the RBOCs and other ILECs satisfy a competitive checklist, providing the Company
and other competitors the services and facilities necessary to offer local
switched services. Under the Telecommunications Act of 1996, the FCC is directed
to interpret and clarify these terms. The FCC has engaged in rulemaking
proceedings to establish these arrangements, which will ultimately be
implemented by the state telecommunications or regulatory commissions (see
"State Regulation" below). The following table summarizes the key factors of the
legislatively mandated competitive checklist, often referred to as "co-carrier
status," being pursued by the Company with the FCC and with state regulators and
the anticipated effect of these factors on the Company's ability to provide
fully competitive services on an economically efficient and technically feasible
basis.
<TABLE>
<CAPTION>
CHECKLIST ITEM DEFINITION ANTICIPATED EFFECT
- ----------------------------- ------------------------------ ------------------------------
<S> <C> <C>
Interconnection.............. Efficient network Allows CLECs to service
interconnection to transfer customers not directly
calls back and forth between connected to their networks
ILECs and competitive networks
(including 911, 0+, directory
assistance, etc.)
</TABLE>
53
<PAGE> 54
<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. On January 2, 1997,
Ameritech filed an application with the FCC for authority to provide inter-LATA
long distance service in Michigan under the Telecommunications Act of 1996,
which the FCC must grant or deny within 90 days of filing.
While state-by-state regulatory activity has to date brought co-carrier
arrangements or initiatives to various degrees of completion in most states, the
Telecommunications Act of 1996 is intended to accelerate the process and create
a competitive environment in all markets, eliminating state and local statutory
and regulatory barriers to entry. This preemption of state laws barring local
competition and the relaxation of regulatory restraints should enhance the
Company's ability to expand its service offerings nationwide.
The Company, as a facilities-based, multi-market competitive provider
already active in emerging co-carrier environments, stands to benefit from the
Telecommunications Act of 1996. In addition to providing the Company with a
national framework to achieve co-carrier status in local exchange markets, the
Telecommunications Act of 1996 permits CLECs with less than 5% of nationwide
prescribed access lines to offer single source combined packages of local and
long distance services. AT&T, MCI and Sprint may not bundle in a RBOC's
territory their local services resold from a RBOC and long distance service
until the RBOC is authorized to enter the inter-LATA long distance market or for
three years, whichever event occurs earlier.
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<PAGE> 55
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 by the FCC in September 1992 and August
1993 (the "Interconnection Decisions"), 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 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 charged by ILECs to CLECs
55
<PAGE> 56
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 which it claims were a violation of its Fifth Amendment
rights under the U.S. Constitution and not allowed by the FCC.
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 issued on December 24, 1996 a Notice of Proposed Rule Making (NPRM)
regarding future changes to access charges and a Report and Order implementing
changes to the ILEC price cap rules. The NPRM generally asked for comments on
two approaches for a transition of access charges to cost-based levels -- a
"market-based" approach with a phase-in of ILEC deregulation depending upon the
level of local competition, and a "prescriptive" approach under which the FCC
would specify the timing and nature of changes to existing rate levels. The NPRM
also asked for comments on changes to the access charge rate structure as well.
The Report and Order eliminated the price cap's lower service band indices and
substantially eased the requirements necessary for the introduction of new
services. 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.
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<PAGE> 57
The Company envisions that the FCC will initiate many additional
proceedings, as a result of the enactment of federal legislation, defining and
construing the terms and conditions of the various components necessary for
local competition. Many, if not all, of the FCC orders under the federal
legislation will likely be appealed by one or more affected parties to the U.S.
Court of Appeals and U.S. Supreme Court. In addition, the Telecommunications Act
of 1996 may be amended in 1997 or subsequent years. Accordingly, the Company is
unable to determine the final form and impact of existing and future
legislation, and the regulatory and judicial actions under such legislation.
COURT APPEALS
Various parties, including ILECs and state PUCs, filed appeals from the
FCC's August 8, 1996 order to various U.S. Courts of Appeal, and several parties
petitioned the FCC and the courts to stay the effectiveness of the FCC rules
included in the FCC's order, pending a ruling on the appeals. Many of the
appeals were transferred to the Eighth Circuit U.S. Court of Appeals. On
November 18, 1996, several members of Congress filed an amicus curiae brief in
support of the appeals of the FCC order. On December 30, 1996, several other
members of Congress filed an amicus curiae brief supporting 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 Company believes 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 early 1997, 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
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<PAGE> 58
basis and with the same rights as the ILECs, sometimes referred to as
"co-carrier status." As of December 31, 1996, most states have taken regulatory
and legislative action to open local communications markets to local exchange
competition and co-carrier status. When co-carrier status is granted in a
particular state, CLECs would expect to realize lower costs for providing
intrastate switched local exchange services in that state.
The Company has established interconnection agreements with ILECs for 26 of
its 30 networks. The Telecommunications Act of 1996 requires ILECs to enter into
interconnection agreements with CLECs and other competitors and requires state
PUCs to arbitrate such agreements within certain time frames. US West in New
Mexico is the only RBOC in the Company's operating markets with which the
Company does not have an interconnection agreement, and the Company is in
binding arbitration with US West in New Mexico which is scheduled to be
completed by early 1997. While the Telecommunications Act of 1996 mandates the
implementation of interconnection arrangements, there can be no assurance that
such negotiations will enable the Company to secure its desired co-carrier
arrangements in a timely fashion or for appropriate rates and terms.
LOCAL GOVERNMENT AUTHORIZATIONS
In certain locations, the Company is required to obtain local franchises,
licenses or other operating rights and street opening and construction permits
to install and expand its fiber optic networks. In some of the areas where the
Company provides network services, the Company's subsidiaries pay license or
franchise fees based on a percent of gross revenues or on a per linear foot
basis. There is no assurance that certain cities that do not impose fees will
not seek to impose fees, nor is there any assurance that, following the
expiration of existing franchises, fees will remain at their current levels.
The Telecommunications Act of 1996 prohibits local governmental authorities
from discriminating among telecommunications carriers and mandates competitively
neutral treatment.
If any of the Company's existing franchise or license agreements were
terminated prior to its expiration date and the Company were forced to remove
its fiber from the streets or abandon its network in place, such termination
would have a material adverse effect on the Company's subsidiary in that
metropolitan area and could have a material adverse effect on the Company.
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<PAGE> 59
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
Mark W. Senda...................... 38 Senior Vice President, Operations
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
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<PAGE> 60
of BTC. Mr. Allen has 25 years experience as an entrepreneur, business planner
and developer, cable system operator, financier, expert witness and advisor in
cable television and broadband telecommunications. Mr. Allen was a founder and
President, CFO and COO of Cencom Cable Associates, Vice President of Operations
of Telcom Engineering, Inc., a telecommunications engineering and consulting
firm with clients in both the telephone and cable television industries, Vice
President of Operations of United Cable Television, Divisional Manager of
Continental Telephone Corporation, and Vice President for Finance of National
Communications Service Corporation. He served as Chief Financial and Chief
Operating Officer of David Lipscomb University, from which he holds a B.S.
degree.
D. CRAIG YOUNG, PRESIDENT, COO. Mr. Young has served as President and COO
of the Company since April 1995. Mr. Young has 16 years experience in the
telecommunications industry. He served as Vice President-Sales Operations,
Custom Business Services of Ameritech, Inc. from 1993 to 1995; Vice
President-Sales and Service, Business and Government Services of U.S. West
Communications, Inc. from 1992 to 1993; Vice President-Sales, Large Business
Service from 1989 to 1992; and Vice President and General Manager-U.S. West
Information Systems from 1986 to 1988. Mr. Young's responsibilities at
Ameritech, Inc. and U.S. West Communications, Inc. included the management of
all voice and data sales, engineering and pricing activities for large
commercial and government end users, and full P&L responsibility for more than
$650 million in revenue and direction of a work force of more than 400
employees. Prior to that he served as President of Executone Information
Systems, a franchise distributor of voice products. He joined the Company in
1995. He has a B.S., Business Administration/Marketing degree from California
State University and has attended the Executive Management Program at Columbia
University.
JOHN C. SHAPLEIGH, EXECUTIVE VICE PRESIDENT, REGULATORY AND CORPORATE
DEVELOPMENT. Mr. Shapleigh has been Executive Vice President in charge of the
Company's regulatory and corporate development activities since its formation in
November 1993. Mr. Shapleigh has 22 years of entrepreneurial, management,
regulatory, government policy and legal experience. He is the immediate 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.
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<PAGE> 61
He was Vice President of Operations of Cencom Cable Associates, Inc. from 1983
until Cencom was acquired by a subsidiary of Hallmark Cards, Inc. in 1991.
Previous positions with Cencom included Corporate Vice President - Operations;
Regional Vice President - Operations; Corporate Vice President - Government and
Public Relations; Assistant Vice President - Marketing and Programming; and
South Carolina State Manager - Cable Operations. Mr. Brooks has also been
involved in cable system acquisition due diligence, financing and franchise
negotiations. He holds a B.A. in Political Science from the University of
Missouri and is a former officer and director of the Missouri Cable Television
Association. Mr. Brooks served as Senior Vice President of Corporate Development
of BTC from 1992 to 1994, as Executive Vice President of Operations of the
Company from 1994 to 1995, and as President of JB Telecom, Inc. (formerly a
subsidiary of BTC, which became a subsidiary of the Company in January 1996)
from 1995 to present. He has served as Senior Vice President of the Company
since February 1996.
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
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<PAGE> 62
Vice President-Financial Planning, Western Region; and five years as corporate
chief accountant. Mr. Moffit also spent four years on the audit staff of Arthur
Andersen. He holds a B.S., Accounting degree, with honors, from Northeast
Missouri State University and an MBA from Washington University. Mr. Moffit also
has a CPA and is licensed to practice accounting in Missouri. He was named as
one of the telecommunications industry's "Rising Stars" by Telephony Magazine in
1989. He has served the Company in various positions since its formation in 1993
and was an executive officer of BTC from 1991 to 1993.
MARK W. SENDA, SENIOR VICE PRESIDENT, OPERATIONS. Mr. Senda joined the
Company as Senior Vice President, Operations, effective January 1, 1997, and has
over 13 years experience in the telecommunications industry. From September 1995
until December 1996, he served as Vice President, North American Operations, of
MFS Global Network Services, Inc., where he was responsible for the installation
and maintenance of all products, services and infrastructure covering five
regions. Mr. Senda was also Senior Vice President, Network Services, from 1994
to September 1995, Vice President, Operations, from 1993 to 1994, and Regional
Director, Operations, from 1992 to 1993, of MFS Telecom, Inc. From 1983 to 1992,
Mr. Senda held various operations and project management positions with MCI. He
received a B.S. from the State University of New York and an M.A. from Rutgers
University.
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, FINANCE, 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
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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, Inc., a company that operates cable systems and/or
provides telephony services in five U.S. states as well as Poland and Chile. He
has been involved in the telecommunications industry since 1958. Mr. Bresnan was
president of Teleprompter Corporation, which at one time was the nation's
largest cable television company, and later was Chairman and Chief Executive
Officer of Group W Cable, Inc., a subsidiary of Westinghouse Electric
Corporation. He is a director of United Video Satellite Group, Inc., which is a
publicly traded company. Mr. Bresnan also serves as a director of numerous
organizations, including National Cable Television Association, C-Span, Cable in
the Classroom, Cable Television Laboratories, the Foundation for Minority
Interests in Media, the National Cable Television Center and Museum, and the
Cable Television Advertising Bureau.
JONATHAN M. NELSON, DIRECTOR. Mr. Nelson is a managing general partner of
Providence Ventures, L.P., which is the general partner of the general partner
of Providence Media Partners L.P. ("PMP"). Mr. Nelson is Co-Chairman of
Providence Ventures Inc. ("Providence"), which is the management company for
PMP. He joined that firm in 1990. Mr. Nelson is also a Managing Director of
Narragansett Capital, Inc. ("Narragansett"), the management company for three
separate equity investment funds. Affiliates of Providence and Narragansett have
equity investments in cellular telephone, paging, wireless data, ESMR, PCS,
cable television and broadcast businesses. Mr. Nelson is currently a director of
Wellman, Inc., and numerous privately-held companies affiliated with Providence
or Narragansett, including, Cellnet Data Systems Inc., Interep National Radio
Sales, Inc., Powerfone Holdings, Inc. and Western Wireless Corporation. Mr.
Nelson received a Master of Business Administration from the Harvard Business
School in 1983 and a Bachelor of Arts from Brown University in 1977.
G. JACKSON TANKERSLEY, JR., DIRECTOR. Mr. Tankersley is a co-founder and
General Partner of The Centennial Funds ("Centennial"). He joined that firm in
1981. He also serves as the President and Chief Executive Officer of Centennial
Holdings, Inc., which manages Centennial. Since the formation of Centennial in
1981, it has specialized its investment activities in the electronic
communications industries. Previously, Mr. Tankersley served as a vice president
of Continental Illinois Venture Corporation and Continental Illinois Equity
Corporation, the private equity investment arms of Continental Illinois Corp. He
has served on a number of the boards of directors of various public and private
portfolio investments of Centennial. Mr. Tankersley received a B.A. degree (high
honors) from Denison University and an M.B.A. from The Amos Tuck School of
Business Administration at Dartmouth College.
RONALD H. VANDER POL, DIRECTOR. Mr. Vander Pol has been a participant in
the telecommunications industry for the last 16 years. In 1982, he founded
Teledial America, Inc., a long distance reseller. He started Digital Signal,
Inc., a fiber optic provider, in 1986 and City Signal, Inc., a competitive
access provider, in 1989 (see "Summary -- Recent Developments" and "Certain
Relationships and Related Transactions"). Since then, Mr. Vander Pol has started
two additional long distance companies, Teledial of North Carolina and ATS
Network Services in Tennessee. He holds a bachelor's degree from Calvin College
in Grand Rapids, Michigan.
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.
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-------------------------
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 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
years ended December 31, 1996 and 1995 concerning the compensation earned by 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............ 1996 $300,000 $120,000 -- 100,000 $ --
Chairman of the Board 1995 250,000(1) 50,000 -- 60,000 --
James C. Allen.............. 1996 $275,000 $110,000 -- 100,000 $4,750
Vice Chairman & Chief 1995 225,000(1) 50,000 -- 60,000 4,500
Executive Officer
D. Craig Young.............. 1996 $200,000 $ 80,000 -- 20,000 $2,000
President & Chief Operating 1995 129,619(6) 50,000 -- 200,000 --
Officer
David L. Solomon............ 1996 $180,000 $ 72,000 -- 100,000 $4,638
Executive Vice President & 1995 165,000 45,000 -- 60,000 3,300
Chief Financial Officer
John C. Shapleigh........... 1996 $152,000 $ 50,000 -- 80,000 $3,172
Executive Vice President- 1995 146,000 25,000 -- 0 2,920
Regulatory and Corporate
Development
</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. During the period from
January 2, 1996 to August 31, 1996, the
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Company made 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 the reported year, which were paid in the
following year. 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 during 1996 and 1995 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 1996 and 1995.
(5) Represents contributions made by the Company on behalf of the executive
officers under the Company's 401(k) Plan during 1996 and 1995.
(6) Hired on April 5, 1995.
STOCK OPTION PLAN. Pursuant to the Company's 1993 Stock Option Plan, the
Board of Directors is authorized to grant options and stock appreciation rights
covering up to 3,400,000 shares of Common Stock of the Company. As of January 9,
1997, options for an aggregate of 733,516 shares at $4.00 per share, 316,336
shares at $6.60 per share, 700,000 shares at $12.50 per share, 483,308 shares at
$25.50 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 under the Company's 1993 Stock Option Plan and an
aggregate of 199,980 shares at $11.35 per share were outstanding under the Stock
Option Plan of BTC assumed 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 -- 100,000 shares
at $12.50 and 93,441 shares at $25.50; Mr. Allen -- 100,000 shares at $12.50 and
106,309 shares at $25.50; Mr. Young -- 133,333 shares at $4.00, 20,000 shares at
$12.50 and 35,752 shares at $25.50; Mr. Shapleigh -- 80,000 shares at $12.50 and
70,787 shares at $25.50; and Mr. Solomon -- 13,333 shares at $4.00, 40,000
shares at $6.60, 100,000 shares at $12.50 and 39,019 shares at $25.50. All
options become fully vested upon a change-in-control of the Company, as defined
in such options. The following table presents certain information concerning
stock options granted to the CEO and each of the other named executive officers
during 1996. The exercise price for all of the grants of stock options was the
fair market value of the Common Stock on the date of grant as determined by the
Compensation Committee of the Board of Directors.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
TOTAL PRICE APPRECIATION
NUMBER OF OPTIONS FOR OPTION TERM(1)
SECURITIES UNDERLYING GRANTED TO EXERCISE OR ---------------------
OPTIONS GRANTED EMPLOYEES IN BASE PRICE EXPIRATION 5% 10%
NAME (#) FISCAL YEAR ($/SH) DATE(2) ($) ($)
- ---------------------- --------------------- ------------ ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Brooks...... 100,000 7.64% $ 12.50 02/19/06 $786,118 $1,992,178
James C. Allen........ 100,000 7.64 12.50 02/19/06 786,118 1,992,178
D. Craig Young........ 20,000 1.53 12.50 02/19/06 157,223 398,435
John C. Shapleigh..... 80,000 6.11 12.50 02/19/06 628,895 1,593,742
David L. Solomon...... 100,000 7.64 12.50 02/19/06 786,118 1,992,178
</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) All options vest in one-third increments on the first, second and third
anniversaries of the date of initial grant.
65
<PAGE> 66
The following table sets forth certain information with respect to the CEO
and each of the other named executive officers regarding the value of their
unexercised options held as of December 31, 1996. No options were exercised
during 1996.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT DECEMBER IN-THE-MONEY OPTIONS AT
31, 1996(1) DECEMBER 31, 1996(2)
-------------------------------- -------------------------------
NAME EXERCISABLE(3) UNEXERCISABLE EXERCISABLE(3) UNEXERCISABLE
- ------------------------------------- --------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Robert A. Brooks..................... 157,020 100,000 $2,947,933 $ 1,300,000
James C. Allen....................... 175,540 100,000 3,209,891 1,300,000
D. Craig Young....................... 66,667 153,333 1,433,341 3,126,660
John C. Shapleigh.................... 129,260 80,000 2,711,029 1,040,000
David L. Solomon..................... 65,187 153,333 1,213,399 2,324,660
</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 $25.50 per share.
(3) All of such options were exercised as of January 1, 1997.
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.
66
<PAGE> 67
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 and Selling Stockholders" below 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 and
Selling 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 as of
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
67
<PAGE> 68
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 Holdings IV, L.P. ("Holdings IV") and Centennial Holdings, Inc.
("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.
68
<PAGE> 69
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding Common Stock as of January 9, 1997 by (i)
each person or entity who is known by the Company to beneficially own 5% or more
of the Company's Common Stock, (ii) each of the executive officers named in the
Summary Compensation Table, (iii) each of the Company's directors, (iv) all of
the Company's directors and executive officers as a group and (v) the other
Selling Stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR BENEFICIALLY OWNED
TO OFFERING NUMBER AFTER OFFERING
------------------------- OF SHARES ----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT(1) OFFERED NUMBER PERCENT(1)
------------------------ ------ ---------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
5% Stockholders and Affiliated Directors
The Centennial Funds..................... 2,070,931(2) 6.55% 600,000 1,470,871 4.65%
G. Jackson Tankersley, Jr. (Director)
1428 Fifteenth Street
Denver, CO 80202
Centennial Fund IV, L.P. .............. 1,194,520(2) 3.79% 350,000 844,520 2.68%
Centennial Fund III, L.P. ............. 843,670(2) 2.67% 250,000 593,670 1.88%
Ronald H. Vander Pol (Director).......... 2,056,000(3) 6.52% 0 2,056,000 6.52%
7228 Kenowa Ave., S.W.
Byron Center, MI 49315
Media Communications Partners II Limited
Partnership............................ 2,009,208(4) 6.37% 1,889,208 120,000 *
75 State Street
Boston, MA 02109
Putnam Investment Management, Inc. ...... 1,814,950(5) 5.76% 0 1,814,950 5.76%
One Post Office Square
Boston, MA 02109
Other Directors and Named Executives
Jonathan M. Nelson (Director)............ 1,426,638(6) 4.52% 498,269 928,369 2.94%
Providence Media Partners L.P.......... 1,423,638(6) 4.51% 498,269 925,369 2.93%
Robert F. Benbow (Director).............. 1,063,638(7) 3.37% 0 1,063,638 3.37%
Robert A. Brooks (Named Executive and
Director).............................. 1,029,526(8) 3.24% 175,860 853,666 2.69%
The Brooks Foundation.................. 27,800(8) * 15,860 11,940 *
James C. Allen (Named Executive and
Director).............................. 413,549(9) 1.31% 25,000 388,549 1.23%
John C. Shapleigh (Named Executive)...... 328,437(10) 1.04% 0 328,437 1.04%
David L. Solomon (Named Executive)....... 143,607(11) * 0 143,607 *
D. Craig Young (Named Executive and
Director).............................. 103,651(12) * 10,000 93,651 *
William J. Bresnan (Director)............ 51,634(13) * 0 51,634 *
Carol deB. Whitaker (Director)........... 20,000(14) * 0 20,000 *
Directors and executive officers as a
group (18 persons)..................... 7,072,004(15) 21.88% 734,129(16) 6,337,875 19.60%
OTHER SELLING STOCKHOLDERS
The AB III, LLC.......................... 32,580 * 12,000 20,580 *
ABS Employees Venture Fund Limited
Partnership............................ 58,680 * 35,470 23,210 *
Alex Brown & Sons Incorporated........... 192,340 * 192,340 0 --
Amberbrook LLC........................... 36,400 * 3,600 32,800 *
Reiko Anderson........................... 15,000 * 15,000 0 --
Franklin Antonio......................... 30,320 * 15,000 15,320 *
</TABLE>
69
<PAGE> 70
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR BENEFICIALLY OWNED
TO OFFERING NUMBER AFTER OFFERING
------------------------- OF SHARES ----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT(1) OFFERED NUMBER PERCENT(1)
------------------------ ------ ---------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
Susan E. Arndt........................... 1,980 * 500 1,480 *
Jesse and Lillian Beim Revocable Trust
Dated 1/11/89 (Jesse and Lillian Beim
Trustees).............................. 30,320 * 30,320 0 --
Boston Capital Ventures III Limited
Partnership............................ 261,518 * 70,000 191,518 *
James A. Brasunas........................ 83,040(17) * 3,040 80,000 *
Taylor R. Briggs......................... 30,320 * 30,320 0 --
John K. Brooks........................... 180,573(18) * 15,000 165,573 *
Matthew Q. Brooks Gift Trust -- 1996..... 1,170 * 400 770 *
Richard E.T. Brooks (IRA)................ 10,618(19) * 4,000 6,618 *
Richard E.T. Brooks Jr. Irrevocable
Trust - 1983........................... 1,672 * 1,200 472 *
Tracy A. Brooks Irrevocable
Trust - 1983........................... 2,341 * 1,500 841 *
The Brooks Family Trust.................. 8,550 * 3,000 5,550 *
Brooks GST Trust......................... 4,050 * 1,500 2,550 *
Chestnut Street Partners, Inc............ 18,160(20) * 18,160 0 --
Chisholm Partners II, L.P. .............. 159,339 * 159,339 0 --
Frank M. Drendel......................... 18,558 * 10,000 8,558 *
EOS Partners SBIC, L.P................... 109,080 * 55,000 54,080 *
Equity-Linked Investors, L.P............. 545,454 1.73% 545,454 0 --
Equity-Linked Investors - II............. 545,454 1.73% 54,545 490,909 1.56%
FG - BRKS................................ 30,320 * 12,642 17,678 *
Fiber Fund............................... 242,420 * 75,000 167,420 *
Fleet Equity Partners V, L.P............. 289,281 * 289,281 0 --
Fleet Growth Resources, Inc.............. 31,989 * 31,989 0 --
Fleet Venture Resources, Inc............. 645,898 2.05% 645,898 0 --
Gilde Investment Fund B.V................ 12,612 * 3,153 9,459 *
Thomas F. Gillett........................ 68,900(21) * 10,300 58,600 *
The Goldman Sachs Group, L.P. ........... 958,729(22) 3.02% 143,750 814,979 2.57%
GPA VIE.................................. 120,000 * 50,000 70,000 *
HCC Investments, Inc..................... 545,454 1.73% 109,090 436,364 1.38%
U/A/T Dated August 28, 1968 for Audrey
Hilliard Hillman (C.G. Grefenstette and
Thomas G. Bigley, Trustees)............ 54,540 * 10,908 43,632 *
Henry L. Hillman Trust U/A Dated November
18, 1985 (Henry L. Hillman, Elsie
Hilliard Hillman and C.G. Grefenstette,
Trustees).............................. 163,638 * 32,728 130,910 *
U/A/T Dated August 28, 1968 for Henry Lea
Hillman, Jr. (C.G. Grefenstette and
Thomas G. Bigley, Trustees)............ 54,540 * 10,908 43,632 *
U/A/T Dated August 28, 1968 for Juliet
Lea Hillman (C.G. Grefenstette and
Thomas G. Bigley, Trustees)............ 54,558 * 10,908 43,650 *
U/A/T Dated August 28, 1968 for William
Talbot Hillman (C.G. Grefenstette and
Thomas G. Bigley, Trustees)............ 54,540 * 10,908 43,632 *
</TABLE>
70
<PAGE> 71
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR BENEFICIALLY OWNED
TO OFFERING NUMBER AFTER OFFERING
------------------------- OF SHARES ----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT(1) OFFERED NUMBER PERCENT(1)
------------------------ ------ ---------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
Kane & Co., nominee for SMALL CAP World
Fund, Inc.............................. 980,000 3.11% 400,000 580,000 1.84%
Lipitz Family Foundation................. 30,320 * 30,320 0 --
Richard W. Loftus........................ 112,983(23) * 50,000 62,983 *
Robert E. McIlvane....................... 6,509 * 500 6,009 *
Media/Communications Investors Limited
Partnership............................ 55,736(24) * 55,736 0 --
Jim A. Moffit............................ 213,613(25) * 10,000 203,613 *
Morgan Holland Fund II, L.P.............. 482,414 1.53% 120,605 361,809 1.15%
James Morrison IRA....................... 4,689 * 2,003 2,686 *
Osiris Investments Ltd. Partnership...... 27,270 * 10,000 17,270 *
Quince Associates, L.P................... 27,288 * 27,288 0 --
Rainbow Trading Partners, Ltd............ 24,260 * 12,000 12,260 *
Rainbow Trading Systems, Inc............. 18,200 * 9,000 9,200 *
Rainbow Venture.......................... 18,200 * 6,000 12,200 *
John K. Reinke (Rollover IRA)............ 1,170 * 400 770 *
Mary L. Staudenmaier (IRA)............... 2,246 * 650 1,596 *
Strauch/Kulhanjian Family Trust.......... 30,320 * 30,000 320 *
Von Graffenreid AG, Private Bank......... 30,320 * 12,120 18,200 *
Westminster Telecom Investors, Inc. ..... 8,889 * 8,889 0 --
Willou & Co.............................. 54,540 * 15,430 39,110 *
</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 Holdings
IV, (iv) 5,400 shares beneficially owned by CHI, (v) 298 shares held by The
Tankersley Family Limited Partnership ("Tankersley LP") and (vi) 1,833
shares of Common Stock and 3,700 shares of Common Stock subject to an
option which is exercisable within 60 days owned by G. Jackson Tankersley,
Jr.
Mr. Tankersley is (i) an individual General Partner of each of Centennial
Holdings III, L.P. ("Holdings III") and Holdings IV which serves as the
sole General Partner of Centennial III and Centennial IV, respectively,
(ii) an executive officer and director of CHI and (iii) an individual
General Partner of Tankersley LP. As the sole General Partner of Centennial
III, Holdings III may be deemed to be the indirect beneficial owner of
Centennial III's shares by virtue of its authority to make investment
decisions regarding the voting and disposition of shares directly
beneficially owned by Centennial III (such decisions are made by the
majority decision of a three member Investment Committee of Holdings III on
which Mr. Tankersley serves). As the sole General Partner of Centennial IV,
Holdings IV may be deemed to be the indirect beneficial owner of Centennial
IV's shares by virtue of its authority to make investment decisions
regarding the voting and disposition of shares directly beneficially owned
by Centennial IV (such decisions are made by the majority decision of a
seven member Investment Committee of Holdings IV on which Mr. Tankersley
serves). Holdings III does not own directly any shares of Common Stock.
71
<PAGE> 72
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 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) 767,752 shares of Common Stock, warrants to purchase 107,200
shares of Common Stock and 126,774 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.
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(9) Represents 273,277 shares of Common Stock, warrants to purchase 260 shares
of Common Stock, 139,642 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) 188,911 shares of Common Stock and 97,454 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 57,902 shares of Common Stock, warrants to purchase 20 shares of
Common Stock and 85,685 shares of Common Stock subject to options which are
exercisable within 60 days.
(12) Includes (i) 58,629 shares of Common Stock and 42,419 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 2,065,398 shares beneficially owned directly by Centennial IV,
Centennial III, Holdings IV, CHI and Tankersley LP, as set forth in
footnote (2), above.
(16) Represents shares offered by Providence Media Partners L.P., Robert A.
Brooks, James C. Allen, D. Craig Young, John K. Brooks and Jim A. Moffit.
(17) Represents 3,040 shares of Common Stock and 80,000 shares of Common Stock
subject to options which are exercisable within 60 days. Mr. Brasunas is an
employee of the Company.
(18) Represents 108,600 shares of Common Stock, warrants to purchase 120 shares
of Common Stock and 71,853 shares of Common Stock subject to options which
are exercisable within 60 days. Mr. John K. Brooks is an executive officer
of the Company.
(19) Represents shares of Common Stock. Mr. Richard E.T. Brooks was a founding
director of BTC and was a member of the BTC Board of Directors until the
merger of BTC with the Company.
(20) See footnote (4), above.
(21) Represents 10,300 shares of Common Stock, warrants to purchase 8,600 shares
of Common Stock and 50,000 shares of Common Stock subject to options which
are exercisable within 60 days. Mr. Gillett is an employee of the Company.
(22) Includes (i) 626,290 shares of Common Stock, warrants to purchase 185,100
shares of Common Stock and 3,700 shares of Common Stock subject to an
option held by The Goldman Sachs Group, L.P. ("GS Group") and (ii) as of
January 7, 1997, 14,139 shares of Common Stock owned by Goldman, Sachs &
Co. which were acquired in the ordinary course of business and 129,500
shares of Common Stock held in Managed Accounts ("Managed Accounts") for
which Goldman, Sachs & Co. exercises voting or investment authority, or
both. GS Group disclaims beneficial ownership of the shares held in Managed
Accounts. GS Group is affiliated with Goldman, Sachs & Co., which is one of
the Joint Lead Managers of this Offering (see "Underwriting").
(23) Represents shares of Common Stock. Mr. Loftus was a director and officer of
BTC until September 1993.
(24) See footnote (4), above.
(25) Includes (i) 98,688 shares of Common Stock and 73,453 shares of Common
Stock subject to options which are exercisable within 60 days held by Jim
A. Moffit and (ii) 40,952 shares of Common Stock and warrants to purchase
520 shares of Common Stock held by the Jim A. Moffit IRA. Mr. Moffit is an
executive officer of the Company.
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DESCRIPTION OF CAPITAL STOCK
The Company is incorporated under the laws of the State of Delaware.
Accordingly, the rights of holders of the Company's Common Stock, Preferred
Stock, warrants and options are governed by the General Corporation Law of the
State of Delaware (the "DGCL") and by the Company's Restated Certificate of
Incorporation and By-laws. The following summary of such rights is qualified in
its entirety by reference to the DGCL and the Restated Certificate of
Incorporation and By-laws of the Company. Copies of such documents will be
provided to any stockholder upon request.
AUTHORIZED STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, par
value $0.01 per share ("Common Stock"), and 1,040,012 shares of Preferred Stock,
par value $0.01 per share ("Preferred Stock"). Of the Common Stock, 49,669,100
shares are designated Voting Common Stock and 330,900 Shares are designated
Non-Voting Common Stock. No shares of Non-Voting Common Stock are currently
outstanding. Of the Preferred Stock, 50,000 shares are designated Series C
Junior Participating 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 January 9, 1997, the 31,533,721 outstanding shares of the Company's
Common Stock were held of record by 265 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) 2,877,140 shares of Common Stock were subject to
outstanding options at a weighted average exercise price of $12.22 per share and
(iii) warrants and options to purchase 1,722,060 shares were exercisable within
60 days at a weighted average exercise price of $14.31 per share.
The warrants and options are subject to adjustment from time to time in
order to prevent dilution of the exercise rights granted thereunder resulting
from (i) any subdivision or combination of the stock subject thereto, (ii) any
reorganization, reclassification, consolidation or merger of the Company or any
sale of the Company's assets, (iii) certain other dilutive events determined by
the Board of Directors of the Company to be dilutive in nature and of the type
for which adjustment should be made and (iv) in the case of the warrants, the
issuance of options, convertible securities or rights to purchase stock,
warrants, securities or other property to the holders of Common Stock, at prices
below the exercise prices thereof.
REDEMPTION
There are no redemption or sinking fund provisions applicable to the Common
Stock.
LIQUIDATION
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata the assets of the Company which
are legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of holders of any Preferred Stock
then outstanding.
NO CUMULATIVE VOTING
There is no cumulative voting. Therefore, the holders of a majority of the
shares of Common Stock voted in an election of directors will be able to elect
all of the directors then standing for election, subject to any rights of the
holders of any outstanding Preferred Stock.
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DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
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 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.
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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
As of the date of this Prospectus, 14,411,720 additional authorized shares
of Common Stock which have not been reserved for issuance upon exercise of
outstanding warrants and options and under employee stock plans and 990,012
authorized shares of Preferred Stock are 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 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.
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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.
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
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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
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
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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.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering and assuming (i) the Underwriters'
over-allotment options are exercised in full and (ii) no exercise of outstanding
warrants and options, the Company will have outstanding 32,542,235 shares of
Common Stock. Of these shares, 16,436,145 shares will have been sold in
underwritten public offerings, 522,057 shares were issued upon exercise of stock
options granted under the Company's Stock Option Plans and all of such
16,958,202 shares 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 15,584,033 shares of Common Stock
("Restricted Shares") held by existing stockholders were issued and sold by the
Company in reliance on exemptions from the registration requirements of the
Securities Act. These shares may be sold in the public market only if registered
or pursuant to an exemption from registration such as those afforded by Rules
144, 144A, 701 and Regulation S under the Securities Act, which are summarized
below.
Upon completion of this Offering, 2,765,369 Restricted 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 additional amounts of
Restricted Shares will become eligible for sale in the public market subject to
the volume limitations under Rule 144 discussed below: 6,994,337 shares
immediately; and 5,824,327 shares from January 1, 1998 through November 15,
1998.
Options and warrants to purchase 1,312,200 and 409,860 shares of Common
Stock, respectively, were outstanding as of January 9, 1997 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 325,422 shares immediately after the Offering, if the
Underwriters' over-allotment options are exercised in full) or (ii) the average
weekly trading volume of the Company's Common Stock on the Nasdaq National
Market during the four calendar weeks immediately preceding the date on 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
80
<PAGE> 81
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 Company's Stock Option Plans and the 1996
Employee Stock Purchase Plan will be available for sale in the open market,
subject to Rule 144 volume limitations applicable to Affiliates, except to the
extent such shares are subject to vesting restrictions with the Company or are
subject to the 180 day public sale restrictions described below (see
"Underwriting").
Future sales of substantial amounts of Common Stock in the public market
could adversely affect market prices prevailing from time to time. As described
herein, only a limited number of Restricted Shares will be available for sale
shortly after the Offerings because of certain contractual and legal
restrictions on resale. Sales of substantial amounts of Common Stock of the
Company in the public market after the restrictions lapse could adversely affect
the prevailing market price and the ability of the Company to raise equity
capital in the future.
81
<PAGE> 82
VALIDITY OF COMMON STOCK
The validity of the Common Stock offered hereby 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.
82
<PAGE> 83
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION OF BROOKS FIBER
PROPERTIES, INC.
(a) Pro Forma Combined Consolidated Statement of Operations for the year ended
December 31, 1995............................................................. F-3
(b) Pro Forma Combined Consolidated Statement of Operations for the nine months
ended September 30, 1996...................................................... F-4
(c) Notes to Pro Forma Combined Consolidated Financial Statements................. F-5
CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS OF BROOKS FIBER PROPERTIES, INC.
(a) Consolidated Balance Sheets at September 30, 1996 and December 31, 1995....... F-7
(b) Consolidated Statements of Operations for the three months and nine months
ended September 30, 1996 and 1995............................................. F-8
(c) Consolidated Statements of Changes in Shareholders' Equity for the nine months
ended September 30, 1996...................................................... F-9
(d) Consolidated Statements of Cash Flows for the nine months ended September 30,
1996 and 1995................................................................. F-10
(e) Notes to Unaudited Consolidated Financial Statements.......................... F-11
CONSOLIDATED AUDITED FINANCIAL STATEMENTS OF BROOKS FIBER PROPERTIES, INC.
(a) Independent Auditors' Report.................................................. F-15
(b) Consolidated Balance Sheets at December 31, 1995 and 1994..................... F-16
(c) Consolidated Statements of Operations for the years ended December 31, 1995
and 1994 and the period from inception to December 31, 1993................... F-17
(d) Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1995 and 1994 and the period from inception to December 31,
1993.......................................................................... F-18
(e) Consolidated Statements of Cash Flows for the years ended December 31, 1995
and 1994 and the period from inception to December 31, 1993................... F-19
(f) Notes to Consolidated Financial Statements.................................... F-20
CONSOLIDATED FINANCIAL STATEMENTS OF CITY SIGNAL, INC.
(a) Independent Auditors' Report.................................................. F-29
(b) Consolidated Balance Sheets at December 31, 1995 and 1994..................... F-30
(c) Consolidated Statements of Operations for the years ended December 31, 1995
and 1994...................................................................... F-31
(d) Consolidated Statements of Shareholder's Equity (Deficit) for the years ended
December 31, 1995 and 1994.................................................... F-32
(e) Consolidated Statements of Cash Flows for the years ended December 31, 1995
and 1994...................................................................... F-33
(f) Notes to Consolidated Financial Statements.................................... F-34
CONSOLIDATED FINANCIAL STATEMENTS OF BROOKS TELECOMMUNICATIONS CORPORATION
(a) Independent Auditors' Report.................................................. F-40
(b) Consolidated Balance Sheet at December 31, 1995............................... F-41
(c) Consolidated Statement of Operations for the year ended December 31, 1995..... F-42
(d) Consolidated Statement of Changes in Shareholders' Equity for the year ended
December 31, 1995............................................................. F-43
(e) Consolidated Statement of Cash Flows for the year ended December 31, 1995..... F-44
(f) Notes to Consolidated Financial Statements.................................... F-45
</TABLE>
F-1
<PAGE> 84
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> 85
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> 86
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> 87
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> 88
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> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994 AND THE
PERIOD FROM INCEPTION TO DECEMBER 31, 1993
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK CONVERTIBLE PREFERRED STOCK
-------------------------------------------- ---------------------------------------
COMMON
SERIES A-1 SERIES A-2 SERIES B-1 SERIES B-2 STOCK
-------------------- --------------------- ------------------- ----------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------- ----------- ------- ----------- ------ ---------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock,
November 10, 1993...... -- $ -- -- $ -- -- $ -- -- $ -- 1,162,800
Issuance and subscription
of Series A preferred
stock.................. 396,000 39,600,000 -- -- -- -- -- -- --
Issuance and subscription
of Series B preferred
stock.................. -- -- -- -- 12,000 1,200,000 -- -- --
Subscriptions receivable,
payments and
reclassifications...... -- -- -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------ ---------- ---- -------- ---------
Balance, December 31,
1993................... 396,000 39,600,000 -- -- 12,000 1,200,000 -- -- 1,162,800
Subscriptions receivable,
payments and
reclassifications...... -- -- -- -- -- -- -- -- --
Net loss................. -- -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------ ---------- ---- -------- ---------
Balance, December 31,
1994................... 396,000 39,600,000 -- -- 12,000 1,200,000 -- -- 1,162,800
Issuance of Series A-2
preferred stock........ -- -- 419,705 65,596,000 -- -- -- -- --
Issuance of Series B-2
preferred stock........ -- -- -- -- -- -- 4,545 711,000 --
Net loss................. -- -- -- -- -- -- -- -- --
------- ----------- ------- ----------- ------ ---------- ---- -------- ---------
Balance, December 31,
1995................... 396,000 $39,600,000 419,705 $65,596,000 12,000 $1,200,000 4,545 $711,000 1,162,800
======= =========== ======= =========== ====== ========== ==== ======== =========
<CAPTION>
TOTAL
SUBSCRIPTIONS ACCUMULATED SHAREHOLDERS'
AMOUNT RECEIVABLE DEFICIT EQUITY
------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Issuance of common stock,
November 10, 1993...... $12,000 -- (11,000) 1,000
Issuance and subscription
of Series A preferred
stock.................. -- (39,018,000) -- 582,000
Issuance and subscription
of Series B preferred
stock.................. -- (1,182,000) -- 18,000
Subscriptions receivable,
payments and
reclassifications...... -- 4,450,000 -- 4,450,000
Net loss................. -- -- (205,000) (205,000)
------- ----------- ----------- ----------
Balance, December 31,
1993................... 12,000 (35,750,000) (216,000) 4,846,000
Subscriptions receivable,
payments and
reclassifications...... -- 35,750,000 -- 35,750,000
Net loss................. -- -- (3,897,000) (3,897,000)
------- ----------- ----------- ----------
Balance, December 31,
1994................... 12,000 -- (4,113,000) 36,699,000
Issuance of Series A-2
preferred stock........ -- -- -- 65,596,000
Issuance of Series B-2
preferred stock........ -- -- -- 711,000
Net loss................. -- -- (9,551,000) (9,551,000)
------- ----------- ----------- ----------
Balance, December 31,
1995................... $12,000 -- (13,664,000) 93,455,000
======= =========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 101
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> 102
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> 103
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> 104
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 19,523,584. 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> 105
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> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
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> 113
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> 114
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> 115
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> 116
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> 117
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> 118
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> 119
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> 120
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> 121
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> 122
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> 123
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> 124
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> 125
BROOKS TELECOMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-------------------------------------------------------------------------------------------------
SERIES SERIES SERIES SERIES SERIES SERIES SERIES SERIES
A-1 A-2 B-1 B-2 B-3 C D E
---------- ------- --------- --------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.... $1,400,000 500,000 3,000,006 2,000,000 500,000 2,500,000 -- --
Issuance of stock............. -- -- -- -- -- -- 1,999,094 5,000,000
Net loss...................... -- -- -- -- -- -- -- --
Purchase of treasury stock.... -- -- -- -- -- -- -- --
---------- ------- --------- --------- ------- --------- --------- ---------
Balance, December 31, 1995.... $1,400,000 500,000 3,000,006 2,000,000 500,000 2,500,000 1,999,094 5,000,000
========== ======= ========= ========= ======= ========= ========= =========
<CAPTION>
CONVERTIBLE
PREFERRED TOTAL
STOCK ACCUMU- SHARE-
----------- COMMON PAID-IN LATED TREASURY HOLDERS'
TOTAL STOCK CAPITAL DEFICIT STOCK EQUITY
----------- ------ --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994.... 9,900,006 6,211 4,433,035 (6,372,190) (12,700) 7,954,362
Issuance of stock............. 6,999,094 806 3,051,055 -- -- 10,050,955
Net loss...................... -- -- -- (3,051,919) -- (3,051,919)
Purchase of treasury stock.... -- -- -- -- (107,695) (107,695)
---------- ----- --------- ---------- -------- ----------
Balance, December 31, 1995.... 16,899,100 7,017 7,484,090 (9,424,109) (120,395) 14,845,703
========== ===== ========= ========== ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-43
<PAGE> 126
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> 127
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> 128
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> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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> 135
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> 136
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> 137
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> 138
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> 139
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.
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<PAGE> 140
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> 141
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Selling Stockholders have agreed to sell to each of the
Underwriters named below (the "U.S. Underwriters"), and each of the U.S.
Underwriters, for whom Goldman, Sachs & Co., Salomon Brothers Inc, Deutsche
Morgan Grenfell Inc. and Lehman Brothers Inc. are acting as representatives, has
severally agreed to purchase, the respective number of shares of Common Stock
set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co. ....................................... 1,063,916
Salomon Brothers Inc........................................ 1,063,915
Deutsche Morgan Grenfell Inc. .............................. 530,456
Lehman Brothers Inc. ....................................... 530,456
Bear, Stearns & Co., Inc. .................................. 169,000
Alex. Brown & Sons Incorporated............................. 169,000
A.G. Edwards & Sons, Inc. .................................. 169,000
EVEREN Securities, Inc. .................................... 169,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 169,000
Montgomery Securities....................................... 169,000
J.P. Morgan Securities Inc. ................................ 169,000
Oppenheimer & Co., Inc. .................................... 169,000
PaineWebber Incorporated.................................... 169,000
Smith Barney Inc. .......................................... 169,000
Huntleigh Securities Corporation............................ 100,000
Edward D. Jones & Co., L.P. ................................ 100,000
Brad Peery Inc. ............................................ 100,000
Stephens Inc. .............................................. 100,000
Stifel, Nicolaus & Company, Incorporated.................... 100,000
---------
Total................................................ 5,378,743
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the 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 $.70 per share. The U.S. Underwriters may allow, and
such dealers may reallow, a concession not in excess of $.10 per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
The Company and the Selling Stockholders have entered into an underwriting
agreement (the "International Underwriting Agreement") with the underwriters of
the International Offering (the "International Underwriters") providing for the
concurrent offer and sale of 1,344,686 shares of Common Stock in an
international offering outside the United States (the "International Offering"
and, together with the U.S. Offering, the "Offerings"). The offering price and
aggregate underwriting discounts and commissions per share for the two Offerings
are identical. The closing of the U.S. Offering is conditioned upon the closing
of the International Offering, and vice versa. The representatives of the
International Underwriters are Goldman Sachs International, Salomon Brothers
International Limited, Morgan Grenfell & Co., Limited and Lehman Brothers
International (Europe).
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two Offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares in the U.S. Offering and subject to certain exceptions, it will
offer, sell or deliver the shares of Common Stock, directly or indirectly, only
in the
U-1
<PAGE> 142
United States of America (including the States thereof and the District of
Columbia), its territories, its possessions and other areas subject to its
jurisdiction (the "United States") and to U.S. persons, which term shall mean,
for purposes of this paragraph: (a) any individual who is a resident of the
United States or (b) any corporation, partnership or other entity organized in
or under the laws of the United States or any political subdivision thereof and
whose office most directly involved with the purchase is located in the United
States. Each of the International Underwriters has agreed pursuant to the
Agreement Between that, as a part of the distribution of the shares offered as a
part of the International Offering, and subject to certain exceptions, it will
(i) not, directly or indirectly, offer, sell or deliver shares of Common Stock
(a) in the United States or to any U.S. persons or (b) to any person who it
believes intends to reoffer, resell or deliver the shares in the United States
or to any U.S. persons and (ii) cause any dealer to whom it may sell such shares
at any concession to agree to observe a similar restriction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall be
the initial public offering price, less an amount not greater than the selling
concession.
The Company has granted the Underwriters an option exercisable for 30
calendar days after the date of this Prospectus to purchase up to an aggregate
of an additional 806,811 shares of Common Stock to cover over-allotments, if
any. If the Underwriters exercise their over-allotment option, the Underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof that the number of the shares to be purchased by
each of them, as shown in the foregoing table, bears to the 5,378,743 shares of
Common Stock offered hereby. The Company has also granted the International
Underwriters a similar option to purchase up to an aggregate of an additional
201,703 shares of Common Stock. The Underwriters may exercise such option only
to cover over-allotments in connection with the sale of the shares offered
hereby.
The Selling Stockholders have agreed not to offer, sell, contract to sell
or otherwise dispose of any shares of Common Stock or any rights to purchase or
other securities convertible into or any securities of the Company substantially
similar to any such shares for a period of 180 days after the date of this
Prospectus without the prior written consent of the designated representative of
the Underwriters, except for shares of Common Stock (i) offered or sold in
connection with the concurrent U.S. and International Offerings or (ii) offered,
sold or otherwise disposed of in certain non-public transactions in which the
acquiror or acquirors of such shares agree(s) to such restrictions. The Company
has agreed that, for a period of 90 days after the date of this Prospectus, it
will not offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities which are convertible or exchangeable into Common
Stock without the prior written consent of the designated representative of the
Underwriters, except for shares of Common Stock (i) offered or sold in
connection with the concurrent U.S. and International Offerings, (ii) issued
pursuant to any employee stock plan in effect on the date of this Prospectus or
(iii) issued upon exercise of warrants outstanding on the date of this
Prospectus.
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of Common Stock, including shares initially sold in the
International Offering, to persons located in the United States.
The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including certain liabilities
under the Securities Act of 1933.
In connection with this Offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualifying registered
market makers on NASDAQ, may engage in passive market making transactions in the
Common Stock of the Company on NASDAQ in accordance with Rule 10b-6A under the
Securities Exchange Act of 1934 during the two business day period before
commencement of offers or sales of the Common Stock. The passive market making
transactions must comply with applicable volume and price limits and be
identified as such. In general, a passive market maker may display its bid at a
price not in excess of the highest
U-2
<PAGE> 143
independent bid for the security; if all independent bids are lowered below the
passive market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
An affiliate of Goldman, Sachs & Co. owns approximately 2.34% of the
capital stock of the Company, on a fully diluted basis as of January 7, 1997 and
is offering 143,750 shares of Common Stock offered hereby. Each of the
representatives has served, and may in the future serve, as a financial advisor
to the Company from time to time.
U-3
<PAGE> 144
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT
CONSTITUTE AN OFFER TO SELL TO, OR THE SOLICITATION OF ANY OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED HEREBY OR TO ANY PERSON
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 13
Capitalization............................. 19
Selected Historical and Pro Forma Financial
and Other Operating Data................. 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 23
Business of the Company.................... 32
The Competitive Local Telecommunications
Industry................................. 46
Competition................................ 50
Regulatory Overview........................ 53
Management................................. 59
Certain Relationships and Related
Transactions............................. 67
Principal and Selling Stockholders......... 69
Description of Capital Stock............... 74
Shares Eligible for Future Sale............ 80
Validity of Common Stock................... 82
Independent Auditors....................... 82
Additional Information..................... 82
Index to Consolidated Financial
Statements............................... F-1
Glossary................................... A-1
Underwriting............................... U-1
</TABLE>
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6,723,429 SHARES
BROOKS FIBER
PROPERTIES, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
---------------------------------------
LOGO
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GOLDMAN, SACHS & CO.
SALOMON BROTHERS INC
DEUTSCHE MORGAN GRENFELL
LEHMAN BROTHERS
REPRESENTATIVES OF THE UNDERWRITERS
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