<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 17, 1997
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
BROOKS FIBER PROPERTIES, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 43-1656187
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
------------------------------
425 WOODS MILL ROAD SOUTH, SUITE 300
TOWN & COUNTRY, MISSOURI 63017
(314) 878-1616
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
DAVID L. SOLOMON
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
BROOKS FIBER PROPERTIES, INC.
425 WOODS MILL ROAD SOUTH, SUITE 300
TOWN & COUNTRY, MO 63017
(314) 878-1616
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
------------------------------
Copies to:
JOHN P. DENNEEN, ESQ.
BRYAN CAVE LLP
211 N. BROADWAY, SUITE 3600
ST. LOUIS, MISSOURI 63102-2750
(314) 259-2000
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10% Senior Notes due June 1, 2007 $250,000,000 $100.00 $250,000,000 $75,758
==================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee under Rule
457(f).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2
SUBJECT TO COMPLETION, DATED JUNE 17, 1997
PROSPECTUS
OFFER TO EXCHANGE
10% SENIOR NOTES DUE JUNE 1, 2007
FOR ALL OUTSTANDING 10% SENIOR NOTES DUE JUNE 1, 2007
OF
BROOKS FIBER PROPERTIES, INC.
BROOKS FIBER PROPERTIES LOGO
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME ON JULY ,
1997 UNLESS EXTENDED.
Brooks Fiber Properties, Inc., a Delaware corporation (the "Company"), is
hereby offering (the "Exchange Offer"), upon the terms and subject to the
conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange $1,000 principal amount
of its 10% Senior Notes due June 1, 2007 (the "Exchange Notes"), which exchange
has been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a registration statement of which this Prospectus
is a part (the "Registration Statement"), for each $1,000 principal amount of
its outstanding 10% Senior Notes due June 1, 2007 (the "Private Notes"), of
which $250,000,000 in aggregate principal amount was issued on May 29, 1997 and
is outstanding as of the date hereof. The form and terms of the Exchange Notes
are identical in all material respects to those of the Private Notes, except for
certain transfer restrictions and registration rights relating to the Private
Notes and except for certain interest provisions related to such registration
rights. The Exchange Notes will evidence the same indebtedness as the Private
Notes (which they replace) and will be entitled to the benefits of an Indenture
dated as of May 29, 1997 governing the Private Notes and the Exchange Notes (the
"Indenture"). The Private Notes and the Exchange Notes are sometimes referred to
herein collectively as the "Notes." See "The Exchange Offer" and "Description of
the Notes."
The Exchange Notes will be redeemable at the option of the Company, in
whole or in part, at any time on or after June 1, 2002 at the redemption prices
set forth herein plus accrued and unpaid interest, if any, to the date of
redemption. In the event of a Strategic Equity Investment on or before June 1,
2000, up to a maximum of 33 1/3% of the aggregate principal amount of the Notes
originally issued will, at the option of the Company, be redeemable from the net
cash proceeds of such Strategic Equity Investment at a redemption price equal to
110% of the principal amount thereof. See "Description of the Notes -- Optional
Redemption." In the event of a Change of Control, holders of the Exchange Notes
will have the right to require the Company to purchase their Exchange Notes, in
whole or in part, at a price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, thereon to the date of purchase. See
"Description of the Notes -- Covenants -- Change of Control."
The Exchange Notes will be senior unsecured obligations of the Company,
will rank pari passu in right of payment with the Private Notes and all other
existing and future senior unsecured obligations of the Company and will rank
senior in right of payment to any future subordinated obligations of the
Company. The Notes will be effectively subordinated to all obligations,
including trade payables, of the Company's subsidiaries. As of March 31, 1997,
on a pro forma basis after giving effect to the sale of the Private Notes, (i)
the total amount of outstanding liabilities of the Company (parent only),
including trade payables, would have been approximately $841.5 million and (ii)
the total amount of outstanding liabilities of the Company's subsidiaries,
including trade payables, would have been $20.8 million. An aggregate of $50.1
million of such outstanding liabilities is represented by credit facilities
secured by assets of the Company and certain of its subsidiaries. See
"Description of Other Credit Facilities."
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 p.m., New York City time, on July , 1997,
unless the Exchange Offer is extended by the Company at its sole discretion (the
"Expiration Date"). Tenders of Private Notes may be withdrawn at any time prior
to the Expiration Date. Private Notes may be tendered only in integral multiples
of $1,000. The Exchange Offer is subject to certain customary conditions. See
"The Exchange Offer."
SEE "RISK FACTORS" ON PAGES 19 TO 24 FOR A DISCUSSION OF CERTAIN FACTORS
THAT INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is , 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
<PAGE> 3
[MAP OMITTED]
<PAGE> 4
NOTICE TO INVESTORS
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a holder thereof without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the holder is acquiring the Exchange Notes in the ordinary course of its
business, is not participating and has no arrangement or understanding with any
person to participate in the distribution of the Exchange Notes and is not an
"affiliate" of the Company within the meaning of Rule 405 of the Securities Act.
Holders of Private Notes wishing to accept the Exchange Offer must represent to
the Company that such conditions have been met. Each broker-dealer who holds
Private Notes acquired for its own account as a result of market-making or other
trading activities and who receives Exchange Notes for its own account in
exchange for such Private Notes pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Company believes that none of the registered holders of the Private
Notes is an "affiliate" as such term is defined in Rule 405 under the Securities
Act) of the Company.
This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Notes
received in exchange for Private Notes acquired by such broker-dealer as a
result of market-making or other trading activities. The Letter of Transmittal
states that by acknowledging that it will deliver a prospectus in connection
with any resale of such Exchange Notes, and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. The Company has agreed to make this Prospectus
(as it may be amended or supplemented) available to any such broker-dealer that
requests copies of such Prospectus in the Letter of Transmittal for use in
connection with any such resale for a period of up to 90 days after the
Expiration Date. See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the
Exchange Notes. There can be no assurance as to the liquidity of any markets
that may develop for the Exchange Notes, the ability of holders to sell the
Exchange Notes, or the price at which holders would be able to sell the Exchange
Notes. The Company does not intend to apply for listing of the Exchange Notes
for trading on any securities exchange or for inclusion of the Exchange Notes in
any automated quotation system. The National Association of Securities Dealers,
Inc. ("NASD") has designated the Private Notes as securities eligible for
trading in the Private Offerings, Resales and Trading through Automatic Linkages
("PORTAL") market of the NASD (see "Price Range of the Private Notes") and the
Company has been advised that Goldman, Sachs & Co., Salomon Brothers Inc and
Merrill Lynch, Pierce, Fenner & Smith Incorporated have heretofore acted as
market makers for the Private Notes. The Company has been advised by each of the
aforesaid market makers that it currently intends to make a market in the
Exchange Notes. Future trading prices of the Exchange Notes will depend on many
factors, including among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. Historically, the
market for securities similar to the Exchange Notes, including non-investment
grade debt, has been subject to disruptions that have caused substantial
volatility in the prices of such securities. There can be no assurance that any
market for the Exchange Notes, if such market develops, will not be subject to
similar disruptions. See "Risk Factors -- No Prior Public Market for Exchange
Notes; Possible Volatility of Market Price of Exchange Notes.'
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection with
the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
3
<PAGE> 5
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Exchange Notes offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus
omits certain information, exhibits and undertakings contained in the
Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or document filed
or incorporated by reference as an exhibit to the Registration Statement, each
such statement being qualified in all respects by such reference. For further
information with respect to the Company and the Exchange Notes offered hereby,
reference is made to the Registration Statement, including the exhibits thereto.
The Company is subject to the informational requirements of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Securities and Exchange Commission (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
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 Common
Stock, $0.01 par value per share (the "Common Stock"), are listed on the Nasdaq
National Market under the symbol "BFPT", and copies of the aforementioned
materials may also be inspected at the office of the National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, heretofore filed with the Commission by the
Company under the Exchange Act, are incorporated herein by reference:
(i) Annual Report on Form 10-K for the fiscal year ended December 31, 1996;
(ii) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1997; and
(iii) Current Reports on Form 8-K dated March 28, 1997, March 31, 1997, May
5, 1997 and May 29, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Exchange Offer shall be deemed to be incorporated in this
Prospectus by reference and to be a part hereof from the date of filing of such
documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon written or oral request of such person, a
copy of any documents incorporated herein by reference (other than exhibits to
such documents unless such exhibits are specifically incorporated by reference
in such documents). Such a request may be directed in writing to David L.
Solomon, Executive Vice President and Chief Financial Officer, Brooks Fiber
Properties, Inc., 425 Woods Mill Road South, Suite 300, Town & Country, Missouri
63017, telephone (314) 878-1616. See "Description of the Notes -- Reports."
4
<PAGE> 6
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this Summary is qualified in its
entirety by, the more detailed information, including the Company's consolidated
financial statements and notes thereto, contained herein. Unless otherwise
noted, references to the "Company" are to Brooks Fiber Properties, Inc., a
Delaware corporation, and its consolidated subsidiaries. Capitalized terms used
in this Prospectus, which are not otherwise defined herein, have the respective
meanings ascribed to them in the Glossary included as Annex A hereto.
THE COMPANY
The Company is a leading facilities-based 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 results from
the Company's entry into switched services, both in terms of lines connected and
revenues received, were substantially in excess of the Company's expectations.
As a result, the Company intends to continue aggressive capital deployment plans
for the development and expansion of its networks to allow for an increased
level of demand-driven capital spending to take full advantage of the
opportunities presented in the switched services portion of the marketplace. The
Company plans to continue to (i) increase the geographic reach and robustness of
its networks to allow the Company to serve a significant percentage of its
markets by extending its networks to serve most of the ILECs' central offices in
its markets and (ii) rapidly deploy switches with full capabilities for local
dial tone and switched access termination and origination services. Through its
equity and debt issuances to date, the Company has raised over $1 billion to
fund the Company's acquisition and development of its networks. The Company
intends to fund its continued expansion from the proceeds of the sale of the
Private Notes together with its existing cash balances and the net proceeds of
additional financings to be obtained in the future and through joint ventures.
See "Financing Plan" below.
The Company has increased the number of networks in operation or under
construction from 30 at December 31, 1996 to 44 at May 15, 1997, consisting of
systems in operation in 30 cities and under construction in 14 cities. All of
the Company's networks under construction are expected to become operational by
year-end 1997. Networks are considered operational when they are able to begin
providing services to customers. See "Business of the Company -- Cities Served."
The Company primarily 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, as well as
selected first tier markets. The Company's networks are generally designed to
access approximately 70% to 80% of the identified business, government and
institutional end user revenue base and the IXC facilities ("Points of Presence"
or "POPs") and most of the central offices of the ILECs within their markets. In
accordance with the pro-competitive provisions of the Telecommunications Act of
1996, as of May 15, 1997, the Company had established interconnection agreements
with ILECs for all of its operating networks, and the Company was also certified
as a CLEC in all of its operating networks. At March 31, 1997, the Company had a
total of 21 digital telephone switches installed serving a total of 25 of its
networks. Switches have been ordered and will be deployed to serve all of the
Company's networks by the end of the year. At December 31, 1996, the Company had
a total of 1,059 route miles of optical fiber
5
<PAGE> 7
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. As of March 31, 1997, on a pro forma basis after giving effect to the
Company's acquisition of Metro Access Networks, Inc. ("MAN") on May 5, 1997, the
Company had a total of 1,625 route miles installed, 732,814 VGE circuits in
service, 36,075 CLEC lines installed and 1,145 on-net and 1,809 off-net
buildings connected.
The Company plans to have systems in operation or under construction in a
total of 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. Since December 31, 1996, the
Company has concluded (i) a joint venture for the construction of three networks
located in Maine and New Hampshire, (ii) the acquisition of two networks located
in Utah and Nevada and (iii) the acquisition of seven networks located in Texas.
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's annualized revenues, based on the revenues for the quarter
ended March 31, 1997, are $82.2 million ($83.9 million on a pro forma basis
after giving effect to the acquisition of MAN), as compared with total revenues
in 1996 of $45.6 million, total revenues in 1995 of $14.2 million ($23.1 million
on a pro forma basis after 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.
The Company's operations have resulted in earnings (losses) before minority
interests, interest, taxes, depreciation and amortization (EBITDA) of ($2.7)
million for the year ended December 31, 1994, ($4.4) million for the year ended
December 31, 1995, ($14.5) million for the year ended December 31, 1996 and
($6.3) million for the three months ended March 31, 1997. As of March 31, 1997,
the Company had an accumulated deficit of $82.2 million. As of March 31, 1997,
the Company had cash, cash equivalents and marketable securities of $348.9
million, total assets of $923.0 million, long-term debt (net of current portion)
of $566.5 million and paid-in capital of $389.4 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. Following the deregulation of the local exchange market mandated by
the Telecommunications Act of 1996, the Company has aggressively pursued the
market for switched services, including local dial tone, centrex, switched
access origination and termination services and desk top products. The Company's
local exchange revenues increased to $5.3 million in the first quarter of 1997,
a 53% sequential growth from $3.4 million in the fourth quarter of 1996, and
total CLEC lines in service increased 72% sequentially to 36,075 at March 31,
1997, from 21,013 at December 31, 1996. The Company plans to continue to develop
and add to its capabilities to provide switched and other enhanced services,
such as high speed video conferencing, frame relay and ATM-based packet
transport services and Internet access products, in all of its operating
networks. See "Business of the Company -- Current Products and Services" and
"-- Planned Products and Services."
The Company has assembled an experienced management, sales and operations
team with extensive experience and strong contacts within the telecommunications
industry. See "Management."
6
<PAGE> 8
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, as a result of actions by
the FCC in 1992 and 1993 requiring ILECs to allow CLECs to connect their
networks to the ILECs' networks (the "Interconnection Decisions"), and the
deregulation of the local exchange market mandated by the Telecommunications Act
of 1996, CLECs have been permitted to compete in all portions of the local
exchange market. 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 August 1996, the FCC issued
its interconnection order under the Telecommunications Act of 1996, requiring
the ILECs, effective October 1, 1996, to grant CLECs, IXCs and other new
entrants into the local exchange market full interconnection to their
infrastructure of local loops, switches and other equipment. However, on October
15, 1996, the United States Court of Appeals for the Eighth Circuit issued a
partial stay, pending a hearing on the merits, on the portion of the order that
sets forth the amounts that ILECs can charge CLECs and other telecommunications
providers for access to the ILEC's networks and the so-called "pick and choose"
rules which allow CLECs and other new entrants to opt into portions of
interconnection agreements negotiated by ILECs with other parties on a most
favored customer basis. The Eighth Circuit is expected to issue a final ruling
by mid 1997. However, the Company does not expect the Eighth Circuit's ruling
will have any material effect on the Company's existing interconnection
agreements with ILECs or the pricing provisions thereof. On May 7, 1997, the FCC
adopted its Report and Order on access charges that will result in some
reductions in access charges as of July 1, 1997 and in future years and contains
changes in the rate structure under which switched access charges will be
collected that the Company believes will allow CLECs such as the Company to more
effectively compete with ILECs for certain types of business. See "Regulatory
Overview -- Federal Regulation." 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 providers of competitive local
telecommunications services.
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 approximately 70%
to 80% of identified business end-users in the market and most 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
7
<PAGE> 9
revenues in those markets. The Company is also pursuing opportunities in
selected first tier markets in conjunction with operating agreements with
the Company's major IXC customers (see "Build on strategic relationships"
below).
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. At March 31, 1997, the Company had a total of 21 digital
telephone switches installed serving a total of 25 of its operating
networks, and the Company plans to leverage its networks and customer
relationships by offering local dial tone, switched access termination and
origination services, centrex and desktop products in all of its networks.
The Company has increased the number of CLEC lines in service from 3,187 at
December 31, 1995 (on a pro forma basis after giving effect to the City
Signal Acquisition on January 31, 1996) to 36,075 at March 31, 1997, with
annualized CLEC revenues increasing from $2.5 million based on December
1995 revenues to $22.2 million based on March 1997 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 plans to offer such services
in all of its operating networks. 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
accelerated the expansion of its existing networks and 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 add to its
service offerings and establish the strong customer relationships necessary
to solidify its competitive position in its selected markets.
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 including joint ventures and
preferred vendor relationships with major IXCs. In accordance with this
strategy, (i) the Company and MCImetro Access Transmission Services, Inc.
("MCImetro"), a wholly-owned subsidiary of MCI Communications Corporation
("MCI"), have 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 has acquired 958,720 shares of the Company's Common Stock,
(ii) the Company has 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 has become
AT&T Communications' preferred supplier of local access services in most of
the Company's markets, and (iii) in February 1997, the Company concluded an
agreement with AT&T pursuant to which the Company will provide switched
access origination and termination of AT&T's long distance customer calls
through the Company's local networks in most of the Company's markets. The
Company believes preferred
8
<PAGE> 10
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."
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 Verio, Inc., formerly known as World-Net Access, Inc.
("Verio"), a consolidator of ISPs that is building a national network that
combines the strength of a high speed backbone with the service of local
and regional Internet providers. The Company has invested a total of $24
million for a 23.7% interest in Verio, and it is possible that the Company
may commit additional funds in furtherance of this strategic alliance. The
Company intends that both companies will seek ways to work together to
provide customer oriented Internet and Intranet communications solutions.
The Company plans to develop and offer a wide range of Internet-related
services to users of Verio's national ISP network, including various
dial-up and dedicated Internet access options.
See "Recent Developments" below for a description of the strategic
relationship established with Century Telephone Enterprises, Inc. ("Century
Telephone") on May 5, 1997.
CONTINUE TO INCREASE THE NUMBER OF CITIES SERVED. The Company has
exceeded its long-held strategic objective of having systems in operation
or under construction in a total of 30 cities by the end of 1996 and 40
cities by the end of 1997. The Company plans to have systems in operation
or under construction in 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.
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
On February 25, 1997, the Company acquired a 60% interest in a company
formed by MaineCom Services ("MaineCom"), a subsidiary of Central Maine Power
Co., for the purposes of constructing, owning, operating and developing networks
initially in Portland, Maine and Nashua and Manchester, New Hampshire and other
markets in Maine and New Hampshire as may be agreed upon by the Company and
MaineCom in the future. The Company has contributed approximately $5.2 million
for its 60% interest; MaineCom's investment of approximately $3.5 million is
reflected as a minority investment.
9
<PAGE> 11
Effective in February 1997, the Company acquired 100% of the stock of
certain companies related to Phoenix FiberLink, Inc. ("Phoenix FiberLink"), a
provider of competitive access services. The acquired companies have assets and
networks in operation and under construction in Salt Lake City, Utah and Reno,
Nevada. The Salt Lake network interconnects locations in the greater Salt Lake
City, Utah area with approximately 66 route miles of optical fiber cable in
operation or under construction. The network in Reno interconnects locations in
the greater Reno, Nevada area with approximately 31 route miles of optical fiber
cable plant in operation or under construction. The Company has interconnected
the Reno network with the Company's existing 24-mile network in Reno. The
purchase price was paid through a combination of cash and the issuance by the
Company of an aggregate of 600,000 shares of the Company's Common Stock.
On May 5, 1997, the Company acquired MAN, an 89% owned subsidiary of
Century Telephone. Through its acquisition of MAN, the Company acquired networks
in operation or under development in seven Texas cities, including 326 route
miles of fiber optic cable (representing a 30% increase in the Company's route
miles nationwide) in operating networks in Austin, Dallas, Fort Worth and San
Antonio and networks under development in Corpus Christi, Houston and Waco. The
purchase price was paid through a combination of cash and the issuance by the
Company of 4,586,226 shares of its Common Stock. In addition, the Company and
Century Telephone formed a 50-50 joint venture to develop telecommunications
networks in new markets in the state of Michigan. Century Telephone will also be
able to purchase dedicated and switched network services in certain markets in
Texas and Michigan from the Company at favorable prices, and the Company will be
able to purchase a variety of operational or administrative services from
Century Telephone.
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"), its January 1997 secondary offering and two previous rounds of
private equity financing, the Company has raised approximately $315.5
million. Total contributed capital as of March 31, 1997 of $389.4 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, 2,211,125 shares upon exercise
of warrants and options and 600,000 shares in connection with the
acquisition of the Phoenix FiberLink assets and networks on March 28, 1997.
On a pro forma basis after giving effect to the issuance of 4,586,226
shares in the MAN transaction, contributed capital at March 31, 1997 would
have totalled $471.4 million. See "Business of the Company -- Strategic
Relationships" and "Capitalization."
DEBT FINANCING. On May 29, 1997, the Company completed the issuance
and sale of the Private Notes, for which the Company received proceeds net
of underwriting discounts of approximately $242.8 million. 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 (the "11 7/8% Senior Discount Notes") for which the Company received
proceeds net of underwriting discounts of approximately $217.2 million. On
February 26, 1996, the Company completed the issuance and sale of $425.0
million aggregate principal amount of 10 7/8% Senior Discount Notes due
March 1, 2006 (the "10 7/8% Senior Discount Notes" and, together with the
11 7/8% Senior Discount Notes, the "Senior Discount Notes") for which the
Company received proceeds net of underwriting discounts of approximately
$241.0 million. The Company has also obtained secured financing under a
line of credit from AT&T Credit, which totals $50.0 million (the "AT&T
Credit Facility"), and a $10 million secured revolving line of credit for a
subsidiary from Fleet National Bank (the "Bank Credit Facility"). The
Company is currently considering several proposals from financial
institutions to establish a $250 million bank revolving credit facility to
further expand the Company's working capital. See
10
<PAGE> 12
"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 plans to continue to (i) increase the
geographic reach and robustness of its networks to allow the Company to serve a
significant percentage of its markets by extending its networks to serve most of
the ILEC's central offices in its markets, (ii) rapidly deploy switches with
full capabilities for local dial tone and switched access termination and
origination services and (iii) add electronics to its operating networks to
provide other enhanced services, such as high speed video conferencing, frame
relay and ATM-based packet transport services and Internet access products. The
Company's estimate of capital spending during 1997 to fund the development and
expansion of the Company's existing networks (including expenditures on the
networks acquired in the MAN acquisition) is approximately $450 million. The
Company currently intends to fund such capital needs, including necessary
working capital, with the net proceeds from the sale of the Private Notes,
together with the Company's existing cash resources.
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 additional capital. The Company's expansion into
additional cities is expected to be accomplished by the acquisition of existing
networks as well as the construction of new networks. 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 the Private Notes, together with the issuance and sale
of additional debt or 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
50 cities by the end of 1998, its plans to offer switched and enhanced services
in all of its markets by the end of 1997 and its expectations for required
future capital expenditures, 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.
11
<PAGE> 13
THE EXCHANGE OFFER
THE EXCHANGE OFFER......... The Company is hereby offering to exchange $1,000
principal amount of Exchange Notes for each $1,000
principal amount of Private Notes that are properly
tendered and accepted. The Company will issue
Exchange Notes on or as promptly as practicable
after the Expiration Date. As of the date hereof,
there is $250,000,000 aggregate principal amount of
Private Notes outstanding. See "The Exchange
Offer."
Based on interpretations by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Private Notes may be offered
for resale, resold and otherwise transferred by a
holder thereof without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that the holder is
acquiring Exchange Notes in the ordinary course of
its business, is not participating and has no
arrangement or understanding with any person to
participate in the distribution of the Exchange
Notes and is not an "affiliate" of the Company
within the meaning of Rule 405 under the Securities
Act. Each broker-dealer who holds Private Notes
acquired for its own account as a result of
market-making or other trading activities and who
receives Exchange Notes pursuant to the Exchange
Offer for its own account in exchange therefor must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
This Prospectus, as it may be amended or
supplemented from time to time, may be used by a
broker-dealer in connection with resales of
Exchange Notes received in exchange for Private
Notes acquired by such broker-dealer as a result of
market-making activities or other trading
activities. The Letter of Transmittal that
accompanies this Prospectus states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. Any holder of Private Notes who
tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating,
in a distribution of the Exchange Notes could not
rely on the above-referenced position of the staff
of the commission and, in the absence of an
exemption therefrom, would have to comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any resale
transaction. Failure to comply with such
requirements in such instance could result in such
holder incurring liability under the Securities Act
for which the holder is not indemnified by the
Company. See "The Exchange Offer -- Resale of the
Exchange Notes."
REGISTRATION RIGHTS
AGREEMENT................ The Private Notes were sold by the Company on May
29, 1997 to Goldman, Sachs & Co., Salomon Brothers
Inc and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (collectively, the "Initial
Purchasers") pursuant to a Purchase Agreement,
dated May 23, 1997, by and among the Company and
the Initial Purchasers (the "Purchase Agreement").
Pursuant to the Purchase Agreement,
12
<PAGE> 14
the Company and the Initial Purchasers entered into
an Exchange and Registration Rights Agreement,
dated as of May 29, 1997 (the "Registration Rights
Agreement"), which grants the holders of the
Private Notes certain exchange and registration
rights. The Exchange Offer is intended to satisfy
such rights, which will terminate upon the
consummation of the Exchange Offer. The holders of
the Exchange Notes will not be entitled to any
exchange or registration rights with respect to the
Exchange Notes. See "The Exchange Offer --
Termination of Certain Rights." The Company will
not receive any proceeds from, and has agreed to
bear the expenses of, the Exchange Offer.
EXPIRATION DATE............ The Exchange Offer will expire at 5:00 p.m., New
York City time, on July , 1997, unless the
Exchange Offer is extended by the Company in its
sole discretion, in which case the term "Expiration
Date" shall mean the latest date and time to which
the Exchange Offer is extended. See "The Exchange
Offer -- Expiration Date; Extensions; Amendments."
PROCEDURES FOR TENDERING
PRIVATE NOTES............ Each holder of Private Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with such Private Notes and any other required
documentation to The Bank of New York, as exchange
agent (the "Exchange Agent"), at the address set
forth herein. By executing the Letter of
Transmittal, the holder will represent to and agree
with the Company that, among other things, (i) the
Exchange Notes to be acquired by such holder of
Private Notes in connection with the Exchange Offer
are being acquired by such holder in the ordinary
course of its business, (ii) such holder has no
arrangement or understanding with any person to
participate in a distribution of the Exchange Notes
and (iii) such holder is not an "affiliate," as
defined in Rule 405 under the Securities Act, of
the Company. If the holder is a broker-dealer that
will receive Exchange Notes for its own account in
exchange for Private Notes that were acquired as a
result of market-making or other trading
activities, such holder will be required to
acknowledge in the Letter of Transmittal that such
holder will deliver a prospectus in connection with
any resale of such Exchange Notes; however, by so
acknowledging and by delivering a prospectus, such
holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities
Act. See "The Exchange Offer -- Procedures for
Tendering."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS........ Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender such Private Notes in the
Exchange Offer should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and
13
<PAGE> 15
executing the Letter of Transmittal and delivering
such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private
Notes in such owner's name or obtain a properly
completed bond power from the registered holder.
The transfer of registered ownership may take
considerable time and may not be able to be
completed prior to the Expiration Date. See "The
Exchange Offer -- Procedures for Tendering."
GUARANTEED DELIVERY
PROCEDURES............... Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any
other documentation required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Private Notes
according to the guaranteed delivery procedures set
forth under "The Exchange Offer -- Guaranteed
Delivery Procedures."
ACCEPTANCE OF THE PRIVATE
NOTES AND DELIVERY OF THE
EXCHANGE NOTES........... Subject to the satisfaction or waiver of the
conditions to the Exchange Offer, the Company will
accept for exchange any and all Private Notes that
are properly tendered in the Exchange Offer prior
to the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered on
the earliest practicable date following the
Expiration Date. See "The Exchange Offer -- Terms
of the Exchange Offer."
WITHDRAWAL RIGHTS.......... Tenders of Private Notes may be withdrawn at any
time prior to the Expiration Date. See "The
Exchange Offer -- Withdrawal of Tenders."
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS........... For a discussion of certain federal income tax
considerations relating to the exchange of the
Exchange Notes for the Private Notes, see "Certain
Federal Income Tax Considerations."
EXCHANGE AGENT............. The Bank of New York is serving as the Exchange
Agent in connection with the Exchange Offer. The
Bank of New York also serves as trustee under the
Indenture.
14
<PAGE> 16
THE NOTES
The Exchange Offer applies to $250,000,000 aggregate principal amount of
the Private Notes. The form and terms of the Exchange Notes are identical in all
material respects to the form and terms of the Private Notes except that the
exchange will have been registered under the Securities Act, and, therefore, the
Exchange Notes will not bear legends restricting the transfer thereof, and
holders of the Exchange Notes will not be entitled to any of the registration
rights of holders of the Private Notes under the Registration Rights Agreement,
which rights will terminate upon consummation of the Exchange Offer. The
Exchange Notes will evidence the same indebtedness as the Private Notes (which
they replace) and will be issued under, and be entitled to the benefits of, the
Indenture. For further information and for definitions of certain capitalized
terms used below, see "Description of the Notes."
SECURITIES OFFERED......... $250,000,000 principal amount of 10% Senior Notes
due June 1, 2007.
MATURITY DATE.............. June 1, 2007
INTEREST RATE.............. The Notes bear interest at the rate of 10% per
annum, payable semi-annually on June 1 and December
1 of each year, commencing December 1, 1997.
Interest on the Notes accrues from May 29, 1997.
RANKING.................... The Notes are senior unsecured obligations of the
Company, rank pari passu in right of payment with
all existing and future senior unsecured
obligations of the Company at the parent level and
rank senior in right of payment to any future
subordinated obligations of the Company at the
parent level. Holders of secured obligations of the
Company (including obligations under the AT&T
Credit Facility) will, however, have claims that
are prior to the claims of holders of the Notes
with respect to the assets securing such
obligations. The Notes are effectively subordinated
to all debt and other liabilities and commitments
(including trade payables) of the Company's
subsidiaries (including obligations under the Bank
Credit Facility). As of March 31, 1997, on a pro
forma basis after giving effect to the sale of the
Private Notes, (i) the total amount of outstanding
liabilities of the Company (parent only), including
trade payables, would have been approximately
$841.5 million, and (ii) the total amount of
outstanding liabilities of the Company's
subsidiaries, including trade payables, would have
been $20.8 million. An aggregate of $50.1 million
of such outstanding liabilities is represented by
credit facilities secured by assets of the Company
and certain of its subsidiaries. See "-- Covenants"
below and "Description of Existing Debt."
OPTIONAL REDEMPTION........ The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or
after June 1, 2002 at the redemption prices set
forth herein plus accrued and unpaid interest, if
any, to the date of redemption. In the event of a
Strategic Equity Investment on or before June 1,
2000 up to a maximum of 33 1/3% of the aggregate
principal amount of the Notes originally issued
will, at the option of the Company, be redeemable
from the net cash proceeds of such Strategic Equity
Investment at a redemption price equal to 110% of
the principal amount thereof plus accrued interest
to the date of redemption.
CHANGE OF CONTROL.......... In the event of a Change of Control, the holders of
the Notes will have the right to require the
Company to purchase their Notes at a
15
<PAGE> 17
price equal to 101% of the principal amount thereof
plus accrued interest to the date of purchase.
COVENANTS.................. The indenture governing the Notes (the "Indenture")
contains certain covenants that, among other
things, limit the ability of the Company and its
subsidiaries to incur additional indebtedness,
issue stock in subsidiaries, pay dividends or make
other distributions, repurchase equity interests or
subordinated indebtedness, engage in sale and
leaseback transactions, create certain liens, enter
into certain transactions with affiliates, sell
assets of the Company and its subsidiaries, and
enter into certain mergers and consolidations. The
Indenture will permit the Company and its
subsidiaries to incur additional secured
indebtedness, including under bank facilities and
purchase money indebtedness.
REPORTED PRICE RANGE....... The Private Notes were designated for trading in
the PORTAL market of the NASD effective May 29,
1997. During the period ended June 11, 1997, the
range of reported high and low bid quotations for
the Private Notes in the PORTAL market was $102.75
to $100.75, respectively. Such reported quotations
may not reflect actual transactions. See "Price
Range of the Private Notes."
SETTLEMENT, BOOK-ENTRY,
FORM AND DENOMINATION...... It is expected that delivery of the Exchange Notes
will be made in book-entry form as described below.
The Notes will be issued only in registered form
without coupons and in minimum denominations of
$1,000 and any integral multiples of $1,000 in
excess thereof.
Exchange Notes issued in exchange for Private Notes
currently evidenced by one or more fully registered
global notes will be evidenced by a Note in global
form (the "Global Notes"), which will be deposited
with a custodian for, and registered in the name of
the nominee of The Depository Trust Company ("DTC")
in New York, New York. Beneficial interests in such
global Notes will be shown on, and transfers
thereof will be effected only through, records
maintained by DTC and its participants. Such
interests will trade in DTC's Same-Day Funds
Settlement System, and secondary market trading
activity in such interests will therefore settle in
immediately available funds, subject in all cases
to the rules and procedures of DTC and its
participants.
Beneficial interests in a Global Note may not be
exchanged for Notes issued in certificated form
except in the limited circumstances described
herein.
For additional information regarding the Notes, see "Notice to Investors,"
"Description of the Notes" and "Certain United States Tax Consequences to
Foreign Holders."
RISK FACTORS
Prospective investors should carefully consider the matters set forth below
under "Risk Factors."
ADDRESS AND TELEPHONE NUMBER
The Company's principal executive offices are located at 425 Woods Mill
Road South, Suite 300, Town & Country, Missouri 63017, and its telephone number
is (314) 878-1616.
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<PAGE> 18
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER OPERATING DATA
The summary financial data presented below (other than the pro forma data)
as of and for the years ended December 31, 1996, 1995 and 1994 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, 1996, 1995 and 1994, and for each of the years in the three-year
period ended December 31, 1996, have been audited by KPMG Peat Marwick LLP,
independent auditors. The summary financial data (other than the pro forma data)
as of and for the three months ended March 31, 1997 have been derived from the
unaudited consolidated financial statements of the Company, which have been
prepared on the same basis as the audited consolidated financial statements of
the Company and, in the opinion of management, reflect all normal recurring
adjustments necessary for a fair presentation of the financial position and
results of operations as of the end of and for such period. The results for the
three months ended March 31, 1997 are not necessarily indicative of the
operating results to be expected for the entire year. The unaudited pro forma
financial data give effect to the merger of the Company with MAN 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, 1996, that the
merger was consummated on January 1, 1996 and (ii) for purposes of the pro forma
balance sheet as of March 31, 1997 that the merger was consummated on March 31,
1997. 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 and MAN and notes thereto contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------ --------------------------
PRO FORMA MARCH 31, MARCH 31,
1994 1995 1996 1996 1996 1997
---- ---- ---- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications service revenue........ $ 2,809 $14,160 $ 45,574 $ 49,573 $ 6,795 $ 20,550(4)
Costs and expenses:
Service costs........................... 1,557 7,177 21,468 25,550 2,868 11,003
Selling, general and administrative
expenses.............................. 3,966 11,405 38,596 43,459 6,621 15,852
Depreciation and amortization........... 663 4,118 16,296 19,616 2,427 8,736
------- ------- -------- -------- ------- --------
6,186 22,700 76,360 88,625 11,916 35,591
Loss from operations...................... (3,377) (8,540) (30,786) (39,052) (5,121) (15,041)
Interest and other income (expense),
net..................................... (598) (2,096) (14,647) (14,647) (2,042) (9,633)
------- ------- -------- -------- ------- --------
Net loss before minority interests...... (3,975) (10,636) (45,433) (53,699) (7,163) (24,674)(4)
Minority interests(1)................... 78 1,085 1,590 1,590 523 8
------- ------- -------- -------- ------- --------
Net loss................................ $(3,897) $(9,551) $(43,843) $(52,109) $(6,640) $(24,666)
======= ======= ======== ======== ======= ========
OTHER DATA:
EBITDA (2).............................. $(2,714) $(4,422) $(14,490) $(19,436) $(2,694) $ (6,305)
Capital expenditures.................... 6,693 27,577 217,230 241,109 15,577 82,505
Acquisitions of businesses, net of
cash.................................. 35,669 13,941 4,290 4,290 (1,285) 46,273
Ratio of earnings to fixed charges(3)... -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
AS OF DECEMBER 31, ---------------------------------------------
------------------- PRO FORMA
1995 1996 PRO FORMA AS ADJUSTED
---- ---- ----------- --------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents........................ $ 59,913 $261,880 $192,169 $ 185,677 $ 378,490
Marketable securities............................ -- 182,304 156,705 156,705 156,705
Working capital.................................. 57,913 435,225 328,484 318,965 512,403
Total assets..................................... 146,610 879,581 922,988 1,009,276 1,209,276
Long-term debt, less current portion............. 43,977 552,810 566,510 566,510 767,135
Paid-in capital.................................. -- 349,341(5) 389,412(5) 471,391(5) 471,391(5)
Total stockholders' equity....................... 93,455 291,834(6) 307,239(6) 389,218(6) 389,218(6)
Ratio of total debt to paid-in capital........... N/A 1.58 1.45 1.20 1.63
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------- AS OF PRO FORMA
MARCH 31, AS OF
1994 1995 1996 1997 MARCH 31, 1997
---- ---- ---- --------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NETWORK DATA:
Cities in operation............................ 5 11 23 26 30
Cities under construction...................... 6 10 7 11 14
On-net buildings connected..................... 62 216 883 1,071 1,145
Route miles.................................... 107 262 1,059 1,253 1,625
Fiber miles.................................... 6,437 17,111 71,292 97,200 120,114
VGE circuits(7)................................ 59,208 122,617 516,743 668,494 732,814
Switches installed............................. -- 1 20 21 22
CLEC lines in service.......................... -- 3,187(8) 21,013 36,075 36,075
Employees...................................... 89 165 789 1,054 1,122
</TABLE>
- ---------------
(1) Minority interests for 1994 through 1996 represent the ownership interests
of minority investors in certain of the Company's subsidiaries, all of
which were exchanged for an aggregate of 1,192,980 shares of Common Stock
during the fourth quarter of fiscal 1996. Minority interests in 1997
represent the ownership interest in one of the Company's subsidiaries.
(2) 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.
(3) For purposes of calculating the ratio of earnings to fixed charges: (i)
earnings consist of loss before income taxes and minority interest, plus
fixed charges excluding capitalized interest, and (ii) fixed charges
consist of interest expensed and capitalized, plus amortization of deferred
financing costs, plus the portion of rent expense under operating leases
deemed by the Company to be representative of the interest factor. For the
years ended December 31, 1994, December 31, 1995 and December 31, 1996 and
the three months ended March 31, 1997, the Company's earnings were
insufficient to cover fixed charges by $3,975,000, $10,636,000, $45,433,000
and $24,674,000, respectively. On a pro forma basis, for the year ended
December 31, 1996, the Company's earnings would have been insufficient to
cover fixed charges by $53,699,000.
(4) Giving effect to the merger with MAN using the purchase method of
accounting and assuming such transaction was consummated on January 1,
1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
------------------
<S> <C>
Telecommunications service revenue.......................... $ 21,780,000
Net loss before minority interest........................... $(29,592,000)
</TABLE>
(5) Amount represents the total of Common Stock, additional paid-in capital,
and Common Stock subject to redemption.
(6) Amount represents paid-in capital less accumulated deficit. See note (5)
above.
(7) Voice grade equivalent circuits.
(8) On a pro forma basis giving effect to the City Signal Acquisition.
18
<PAGE> 20
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be carefully considered in evaluating the Company
and its businesses before purchasing the Notes offered hereby.
LIMITED HISTORY OF OPERATIONS; NEGATIVE CASH FLOW AND OPERATING LOSSES
The Company was formed in November 1993. Accordingly, prospective investors
have limited historical financial information about the Company upon which to
base an evaluation of the Company's performance and an investment in the Notes.
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. The Company's operations have
resulted in earnings (losses) before minority interests, interest, taxes,
depreciation and amortization (EBITDA) of ($2.7) million for the year ended
December 31, 1994, ($4.4) million for the year ended December 31, 1995, ($14.5)
million for the year ended December 31, 1996 and ($6.3) million for the three
months ended March 31, 1997. As of March 31, 1997, the Company had an
accumulated deficit of approximately $82.2 million. On a pro forma basis,
assuming the merger with MAN was completed on January 1, 1996, the Company would
have had EBITDA of ($19.4) million for the year ended December 31, 1996, and,
assuming the merger with MAN was completed on January 1, 1997, the Company would
have had EBITDA of ($10.5) million for the three months ended March 31, 1997.
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 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 plans to
offer such services in all of its operating networks. The Company currently
intends to fund the expansion of its networks and the deployment of switches in
all of such networks with full capabilities for local dial tone and switched
access termination and origination services with the proceeds from the sale of
the Private Notes, together with its existing cash balances and the net proceeds
of additional financings to be obtained in the future and through joint
ventures. See "Use of Proceeds." The Company's growth into 50 cities and
19
<PAGE> 21
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 debt
or 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 March 31, 1997, (i) the total amount of outstanding liabilities of the
Company (parent only), including trade payables, was $591.5 million, and (ii)
the total amount of outstanding liabilities of the Company's subsidiaries,
including trade payables, was $20.8 million. An aggregate of $50.1 million of
such outstanding liabilities is represented by credit facilities secured by
assets of the Company and certain of its subsidiaries. The Company's outstanding
Senior Discount Notes with an aggregate principal amount at maturity of $825
million will mature in 2006 and be payable prior to the maturity of the Notes.
See "Description of Existing Debt." The Company expects to fund at least a
portion of its capital needs through additional borrowings, and there can be no
assurance as to the Company's ability to service its existing or future
indebtedness. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION OF THE EXCHANGE NOTES
The Company is a holding company which derives substantially all of its
revenues from its subsidiaries. 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The Exchange Notes are not secured by any of the assets of the Company. The
Indenture permits certain indebtedness of the Company to be secured, including,
among other things, purchase money indebtedness, which the Indenture permits the
Company to incur in unlimited amounts, and indebtedness up to $160 million under
secured credit facilities. Holders of any secured indebtedness of the Company
will have claims that are prior to the claims of the holders of the Exchange
Notes with respect to the assets securing such other indebtedness. In addition,
the Exchange Notes will be effectively subordinated to indebtedness and other
liabilities and commitments (including trade payables) of the Company's
subsidiaries. See "Description of the Notes -- Covenants -- Limitation on
Consolidated Debt" and "-- Limitation on Debt and Preferred Stock of
Subsidiaries."
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,
20
<PAGE> 22
design fiber optic network backbone routes, install cable and facilities,
including switches, and obtain rights-of-way, building access rights and any
required government authorizations, franchises and permits, all in a timely
manner, at reasonable costs and on satisfactory terms and conditions. As a
result, there can be no assurance that the Company will be able successfully to
expand its existing networks or acquire or develop new networks in a timely
manner in accordance with its strategic objectives.
The Company expects to continue to enhance its systems in order to offer
its customers switched access termination and origination services and local
dial tone, centrex and desk top products, as well as other enhanced services in
all of its systems as quickly as practicable and as permitted by applicable
regulations. The Company believes its ability to offer, market and sell these
additional products and services will be important to the Company's ability to
meet its long term strategic growth objectives, but is dependent on the
Company's ability to obtain the needed capital, favorable regulatory,
legislative and judicial developments and the acceptance of such products and
services by the Company's customers. No assurance can be given that the Company
will be able to obtain such capital or that such developments or acceptance will
occur.
RISKS ASSOCIATED WITH POSSIBLE ACQUISITIONS
The Company expects that a portion of its future growth may 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.
ILECs can also adversely impact the pace by which CLECs can add new
customers by prolonging the process of providing unbundled network elements,
collocations, intercompany trunks, and operations support system (OSS)
interfaces, which allow the electronic transfer between ILECs and CLECs of
needed information about customer accounts, service orders and repairs. Although
the Telecommunications Act of 1996 requires ILECs to provide the unbundled
network elements, interconnections and OSS interfaces needed to allow the
customers of CLECs and other new entrants to the local exchange market to obtain
service comparable to that provided by the ILECs in terms of installation time,
repair response time, billing and other administrative functions, in many cases
the ILECs have not complied with the mandates of the new act.
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"),
21
<PAGE> 23
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 and IXCs, 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, as a result of various legislative and
regulatory initiatives, including the Telecommunications Act of 1996, the
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.
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" and "Regulatory Overview" for more detailed information
on the competitive and regulatory environment faced by the Company.
DEPENDENCE ON BUSINESS FROM IXCS
For the three months ended March 31, 1997, approximately 21% of the
Company's consolidated revenues were attributable to access services provided to
IXCs. Approximately 9% 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
22
<PAGE> 24
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 ability to compete in the segments of the
local exchange market recently opened to CLEC competition depends upon continued
favorable pro-competitive regulatory changes and 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 access
pricing and "pick and choose" rules 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 interconnection
agreements with the ILECs for all of its operating networks. See "Regulatory
Overview" for more detailed information on the regulatory environment in which
the Company operates.
NEED TO OBTAIN AND MAINTAIN PERMITS AND RIGHTS-OF-WAY
In order to acquire and develop its networks, the Company must obtain local
franchises and other permits, as well as rights to utilize underground conduit
and pole space and other rights-of-way from entities such as ILECs and other
utilities, railroads, long distance providers, state highway authorities, local
governments and transit authorities. The Telecommunications Act of 1996 requires
that local governmental authorities treat telecommunications carriers in a
competitively neutral, non-discriminatory manner, and that most utilities,
including most ILECs and electric companies, afford CLECs access to their poles
and conduits and rights-of-way at reasonable rates on non-discriminatory terms
and conditions. There can be no assurance that the Company will be able to
maintain its existing franchises, permits and rights or to obtain and maintain
the other franchises, permits and rights needed to implement its business plan
on acceptable terms. Although the Company does not believe that any of the
existing arrangements will be cancelled, or will not be renewed, as needed,
cancellation or non-renewal of certain of such arrangements could materially
adversely affect the Company's business in the affected city. In addition, the
failure to enter into and maintain any such required arrangements for a
particular network, including a network which is already under construction, may
affect the Company's ability to develop that network. See "Business of the
Company -- Network Construction."
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. While the Company believes that for the foreseeable future these
changes will neither materially affect the continued use of optical fiber
telecommunications networks nor materially hinder the Company's ability to
acquire necessary technologies, the effect of technological changes on the
businesses of the Company cannot be predicted. Thus, there can be no assurance
that technological developments will not have a material adverse effect on the
Company.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a relatively small number of senior
management and operating personnel, the loss of certain of whom could have a
material adverse effect on the Company. See "Management." The Company believes
that its ability to manage its planned growth successfully will depend in large
part on its continued ability to attract and retain highly skilled and qualified
personnel. See "Management" for detailed information on the Company's management
and directors.
23
<PAGE> 25
ABSENCE OF A PUBLIC MARKET FOR THE EXCHANGE NOTES; POSSIBLE VOLATILITY OF MARKET
PRICE OF EXCHANGE NOTES
The NASD has designated the Private Notes as securities eligible for
trading in the PORTAL market of the NASD (see "Price Range of the Private
Notes"). However, the Exchange Notes are new securities for which there is
currently no market. The Company does not intend to apply for listing of the
Exchange Notes on any securities exchange or for inclusion of the Exchange Notes
in any automated quotation system. Although the Company has been advised by each
of the Initial Purchasers that they currently intend to make a market in the
Exchange Notes following completion of the Exchange Offer, they are not
obligated to do so, and any such market making activities may be discontinued at
any time without notice. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Exchange Notes. If a market for
the Exchange Notes were to develop, the Exchange Notes could trade at prices
that may be higher or lower than their principal amount depending upon many
factors, including prevailing interest rates, the Company's operating results
and the markets for similar securities. Historically, the market for
non-investment grade debt has been subject to disruptions that have caused
substantial volatility in the prices of securities similar to the Notes. There
can be no assurance that, if a market for the Exchange Notes were to develop,
such a market would not be subject to similar disruptions.
FAILURE TO EXCHANGE PRIVATE NOTES
The Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly completed
and duly executed Letter of Transmittal and all other required documentation.
Therefore, holders of Private Notes desiring to tender such Private Notes in
exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. Neither the Exchange Agent nor the Company is under any duty to give
notification of defects or irregularities with respect to tenders of Private
Notes for exchange. Private Notes that are not tendered or are tendered but not
accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. In addition, any
holder of Private Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer who holds Private
Notes acquired for its own account as a result of market-making or other trading
activities and who receives Exchange Notes for its own account in exchange for
such Private Notes pursuant to the Exchange Offer, must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. To
the extent that Private Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Private Notes
could be adversely affected due to the limited amount, or "float," of the
Private Notes that are expected to remain outstanding following the Exchange
Offer. Generally, a lower "float" of a security could result in less demand to
purchase such security and could, therefore, result in lower prices for such
security. For the same reason, to the extent that a large amount of Private
Notes are not tendered or are tendered and not accepted in the Exchange Offer,
the trading market for the Exchange Notes could be adversely affected. See "Plan
of Distribution" and "The Exchange Offer."
24
<PAGE> 26
NO CASH PROCEEDS TO THE COMPANY
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the Exchange Notes offered hereby and has
agreed to pay the expenses of the Exchange Offer. In consideration for issuing
the Exchange Notes as contemplated in this Prospectus, the Company will receive,
in exchange, Private Notes in like principal amount. The form and terms of the
Exchange Notes are identical in all material respects to the form and terms of
the Private Notes, except as otherwise described herein under "The Exchange
Offer -- Terms of the Exchange Offer." The Private Notes surrendered in exchange
for the Exchange Notes will be retired and cancelled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any increase in
the outstanding debt of the Company.
PRICE RANGE OF THE PRIVATE NOTES
The Private Notes were designated for trading in the PORTAL market of the
NASD effective May 29, 1997. The following table sets forth, for the period
indicated, the range of reported high and low bid quotations for the Private
Notes in the PORTAL market as reported by Goldman, Sachs & Co., a market maker:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Period beginning May 29, 1997 and ending June 11, 1997...... $102.75 $100.75
</TABLE>
Such reported quotations may not reflect actual transactions. On June 11,
1997, the closing bid quotation for the Private Notes was $102.75. As of June
11, 1997, Cede & Co., as nominee for the Depository Trust Company, New York, New
York, was the only record holder of the Private Notes, holding the Private Notes
for its participants.
25
<PAGE> 27
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
March 31, 1997, (ii) on a pro forma basis after giving effect to the MAN
acquisition on May 5, 1997 and (iii) on such pro forma basis as adjusted to
reflect the sale of the Private Notes and repayment of existing secured
indebtedness:
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS....................... $192,169,000 185,677,000 378,490,000(7)
MARKETABLE SECURITIES........................... $156,705,000 156,705,000 156,705,000
------------ ----------- -------------
TOTAL CASH AND CASH EQUIVALENTS AND MARKETABLE
SECURITIES.................................... $348,874,000 342,382,000 535,195,000
============ =========== =============
CURRENT PORTION OF LONG-TERM DEBT............... 628,000 628,000 3,000(7)
LONG-TERM DEBT:
10% Senior Notes due 2007..................... -- -- 250,000,000
11 7/8% Senior Discount Notes due 2006........ $235,792,000 235,792,000 235,792,000
10 7/8% Senior Discount Notes due 2006........ 280,684,000 280,684,000 280,684,000
Other long-term debt (less current portion)... 50,034,000 50,034,000 659,000(7)
------------ ----------- -------------
Total...................................... $566,510,000 566,510,000 767,135,000
MINORITY INTERESTS(1)........................... 3,452,000 3,452,000 3,452,000
COMMON STOCK, SUBJECT TO REDEMPTION OPTION,
2,016,000 SHARES(2)........................... 25,200,000 25,200,000 25,200,000
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value, 50,000,000
shares authorized, 31,316,179 issued and
outstanding (35,902,405 shares issued and
outstanding, pro forma and pro forma as
adjusted)(3)............................... 313,000 359,000 359,000
Series C Junior Participating Preferred Stock,
$0.01 par value, 50,000 shares authorized,
none issued or outstanding(3)(4)........... -- -- --
Additional paid-in capital(5)................. 363,899,000 445,832,000 445,832,000
Accumulated deficit........................... (82,173,000) (82,173,000) (82,173,000)
------------ ----------- -------------
TOTAL STOCKHOLDERS' EQUITY(6)................... $307,239,000 389,218,000 389,218,000
------------ ----------- -------------
TOTAL CAPITALIZATION............................ $877,829,000 959,808,000 1,159,808,000
============ =========== =============
</TABLE>
- ---------------
(1) Minority interests represent a minority investment interest in one of the
Company's subsidiaries.
(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 excludes 3,185,221 shares of Common Stock issuable
upon exercise of stock options and warrants outstanding at March 31, 1997,
of which 1,646,022 shares were subject to warrants and options exercisable
within 60 days. As of April 29, 1997, the number of authorized shares of
Common Stock increased to 150,000,000 shares, and the Series C Junior
Participating Preferred Stock was redesignated as Series A Junior
Participating Preferred Stock.
(4) Reserved for issuance upon the exercise of the Company's Preferred Stock
Purchase Rights pursuant to the terms set forth in the Company's Rights
Agreement dated as of February 29, 1996.
(5) Additional paid-in capital represents the amount of capital in excess of par
value.
(6) Total stockholders' equity includes Common Stock subject to redemption.
(7) A portion of the proceeds of the sale of the Private Notes will be used to
repay $50 million of the Company's secured indebtedness.
26
<PAGE> 28
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on May 29, 1997 (the "Closing
Date") to the Initial Purchasers pursuant to the Purchase Agreement. The Initial
Purchasers subsequently sold the Private Notes to "qualified institutional
buyers" ("QIBs"), as defined in Rule 144A under the Securities Act ("Rule
144A"), in reliance on Rule 144A under the Securities Act. As a condition to the
sale of the Private Notes, the Company and the Initial Purchasers entered into
the Registration Rights Agreement on May 29, 1997. Pursuant to the Registration
Rights Agreement, the Company agreed that it would (i) use its best efforts to
file with the Commission within 60 days after the Closing Date a registration
statement under the Securities Act with respect to the Exchange Notes and (ii)
use its reasonable best efforts to cause such Registration Statement to become
effective under the Securities Act within 90 days after the Closing Date. The
Company agreed to issue and exchange Exchange Notes for all Private Notes
validly tendered and not withdrawn before the expiration of the Exchange Offer.
A copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The Registration
Statement is intended to satisfy certain of the Company's obligations under the
Registration Rights Agreement and the Purchase Agreement.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date.
The Company will issue $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of outstanding Private Notes validly
tendered pursuant to the Exchange Offer and not withdrawn prior to the
Expiration Date. Private Notes may be tendered only in integral multiples of
$1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) holders of the Exchange Notes will not
be entitled to any of the registration rights of holders of Private Notes under
the Registration Rights Agreement, which rights will terminate upon the
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Private Notes (which they replace) and will be issued under,
and be entitled to the benefits of, the Indenture, which also authorized the
issuance of the Private Notes, such that both series of Notes will be treated as
a single class of debt securities under the Indenture.
As of the date of this Prospectus, $250,000,000 in aggregate principal
amount of the Private Notes is outstanding, all of which is registered in the
name of Cede & Co., as nominee for The Depository Trust Company (the
"Depository"). Only a registered holder of the Private Notes (or such holder's
legal representative or attorney-in-fact) as reflected on the records of the
Trustee under the Indenture may participate in the Exchange Offer. Solely for
reasons of administration, the Company has fixed the close of business on June
17, 1997 as the record date for the Exchange Offer for purposes of determining
the persons to whom this Prospectus and the Letter of Transmittal will be mailed
initially. There will be no fixed record date for determining registered holders
of the Private Notes entitled to participate in the Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of the State of Delaware or the
Indenture in connection with the Exchange Offer. The Company intends to conduct
the Exchange Offer in accordance with the provisions of the Registration Rights
Agreement and the applicable requirements of the Securities Act and the rules
and regulations of the Commission thereunder.
27
<PAGE> 29
The Company shall be deemed to have accepted validly tendered Private Notes
when, and if, the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time on July
, 1997, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, (ii) mail to the
registered holders an announcement thereof and (iii) issue a press release or
other public announcement which shall include disclosure of the approximate
number of Private Notes deposited to date, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if, in
the opinion of counsel, for the Company, the consummation of the Exchange Offer
would violate any applicable law, rule or regulation or any applicable
interpretation of the staff of the Commission, to terminate or amend the
Exchange Offer by giving oral or written notice of such delay, extension,
termination or amendment to the Exchange Agent. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral or written notice thereof to the registered holders. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
INTEREST ON THE EXCHANGE NOTES
The Private Notes and the Exchange Notes bear interest from May 29, 1997 at
a rate of 10%, payable semi-annually in arrears on June 1 and December 1 of each
year, commencing December 1, 1997.
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon interpretations by the staff
of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder who exchanges Private Notes for
Exchange Notes in the ordinary course of business, who is not participating,
does not intend to participate, and has no arrangement with any person to
participate in a distribution of the Exchange Notes, and who is not an
"affiliate" of the Company within the meaning of Rule 405 of the Securities Act,
will be allowed to resell Exchange Notes to the public without further
registration under the Securities Act and without delivering to the purchasers
of the Exchange Notes a prospectus that satisfies the requirements of Section 10
of the Securities Act.
28
<PAGE> 30
However, if any holder acquires Exchange Notes in the Exchange Offer for the
purpose of distributing or participating in the distribution of the Exchange
Notes, such holder cannot rely on the position of the staff of the Commission
enumerated in certain no-action letters issued to third parties and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction, unless an exemption from registration
is otherwise available. Each broker-dealer that receives Exchange Notes for its
own account in exchange for Private Notes acquired by such broker-dealer as a
result of market-making or other trading activities must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of any Exchange Notes received in exchange for
Private Notes acquired by such broker-dealer as a result of market-making or
other trading activities. Pursuant to the Registration Rights Agreement, the
Company has agreed to make this Prospectus, as it may be amended or supplemented
from time to time, available to any such broker-dealer that requests copies of
such Prospectus in the Letter of Transmittal for use in connection with any such
resale for a period of up to 90 days after the Expiration Date. See "Plan of
Distribution."
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile to
the Exchange Agent at the address set forth below under "-- Exchange Agent" for
receipt prior to the Expiration Date. In addition, either (i) certificates for
such Private Notes must be received by the Exchange Agent along with the Letter
of Transmittal, (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Private Notes, if such procedure is
available, into the Exchange Agent's account at the Depository pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date or (iii) the holder must comply with
the guaranteed delivery procedures described below.
The tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. DO NOT SEND THE LETTER OF TRANSMITTAL OR ANY PRIVATE
NOTES TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name or
obtain a properly completed bond power from the registered holder. The transfer
of registered ownership may take considerable time.
29
<PAGE> 31
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see " -- Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes tendered
pursuant thereto are tendered (i) by a registered holder who has not completed
the box titled "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be made by a member firm of a
registered national securities exchange or of the NASD, a commercial bank or
trust company having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act which is a member of one of the recognized signature guarantee
programs identified in the Letter of Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Private Notes listed therein, such Private Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered holder exactly as such registered holder's name appears on such
Private Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Private
Notes not properly tendered or any Private Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The Company
also reserves the right to waive any defects, irregularities or conditions of
tender as to particular Private Notes. The Company's interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Private Notes must be
cured within such time as the Company shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Private Notes, neither the Company, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Private Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any Private Notes that are not tendered pursuant to the Exchange
Offer, the Company reserves the right in its sole discretion to purchase or make
offers for any Private Notes that remain outstanding subsequent to the
Expiration Date and, to the extent permitted by applicable law, purchase Private
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering Private Notes pursuant to the Exchange Offer, each holder of
Private Notes will represent to the Company that, among other things, (i) the
Exchange Notes to be acquired by such holder of Private Notes in connection with
the Exchange Offer are being acquired by such holder in the ordinary course of
business of such holder, (ii) such holder has no arrangement or understanding
with any person to participate in the distribution of the Exchange Notes, (iii)
such holder acknowledges and agrees that any person who is a broker-dealer
registered under the Exchange Act or is participating in the Exchange Offer for
the purposes of distributing the Exchange Notes must comply with the
registration and prospectus delivery requirements of the Securities Act in
30
<PAGE> 32
connection with a secondary resale transaction of the Exchange Notes acquired by
such person and cannot rely on the position of the staff of the Commission set
forth in certain no-action letters, (iv) such holder understands that a
secondary resale transaction described in clause (iii) above and any resales of
Exchange Notes obtained by such holder in exchange for Private Notes acquired by
such holder directly from the Company should be covered by an effective
registration statement containing the selling securityholder information
required by Item 507 or Item 508, as applicable of Regulation S-K of the
Commission and (v) such holder is not an "affiliate," as defined in Rule 405
under the Securities Act, of the Company. If the holder is a broker-dealer that
will receive Exchange Notes for such holder's own account in exchange for
Private Notes that were acquired as a result of market-making activities or
other trading activities, such holder will be required to acknowledge in the
Letter of Transmittal that such holder will deliver a prospectus in connection
with any resale of such Exchange Notes; however, by so acknowledging and by
delivering a prospectus, such holder will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are withdrawn
or are submitted for a greater principal amount than the holders desire to
exchange, such unaccepted, withdrawn or non-exchanged Private Notes will be
returned without expense to the tendering holder thereof (or, in the case of
Private Notes tendered by book-entry transfer into the Exchange Agent's account
at the Depository pursuant to the book-entry transfer procedures described
below, such Private Notes will be credited to an account maintained with the
Depository) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depository for purposes of the Exchange Offer within
two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's systems may make
book-entry delivery of Private Notes by causing the Depository to transfer such
Private Notes into the Exchange Agent's account at the Depository in accordance
with the Depository's procedures for transfer. However, although delivery of
Private Notes may be effected through book-entry transfer at the Depository, the
Letter of Transmittal or facsimile thereof, with any required signature
guarantees any other required documents, must, in any case, be transmitted to
and received by the Exchange Agent at the address set forth below under "--
Exchange Agent" on or prior to the Expiration Date or pursuant to the guaranteed
delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided by the Company (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder, the certificate number(s) of such Private Notes and the principal amount
of Private Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or a facsimile thereof), together
with the certificate(s) representing the Private Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) Such properly executed Letter of Transmittal (or facsimile thereof), as
well as the certificate(s) representing all tendered Private Notes in proper
form for transfer and all other
31
<PAGE> 33
documents required by the Letter of Transmittal are received by the Exchange
Agent within five New York Stock Exchange trading days after the Expiration
Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers and principal
amount of such Private Notes) and (iii) be signed by the holder in the same
manner as the original signature on the Letter of Transmittal which such Private
Notes were tendered (including any required signature guarantees). All questions
as to the validity, form and eligibility (including time of receipt) of such
notices will be determined by the Company, in its sole discretion, whose
determination shall be final and binding on all parties. Any Private Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer, and no Exchange Notes will be issued with respect thereto unless
the Private Notes so withdrawn are validly retendered. Properly withdrawn
Private Notes may be retendered by following one of the procedures described
above under "The Exchange Offer -- Procedures for Tendering" at any time prior
to the Expiration Date.
TERMINATION OF CERTAIN RIGHTS
All registration rights under the Registration Rights Agreement accorded to
holders of the Private Notes (and all rights to receive additional interest in
the event of a Registration Default as defined therein) will terminate upon
consummation of the Exchange Offer except with respect to the Company's
continuing obligation for a period of up to 90 days after the Expiration Date to
keep the Registration Statement effective and to provide copies of the latest
version of the Prospectus to any broker-dealer that requests copies of such
Prospectus in the Letter of Transmittal for use in connection with any resale by
such broker-dealer of Exchange Notes received for its own account pursuant to
the Exchange Offer in exchange for Private Notes acquired for its own account as
a result of market-making or other trading activities.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Hand/Overnight Delivery:
The Bank of New York The Bank of New York
One Wall Street -- 27 One Wall Street -- 27
Corporate Trust & Agency Services Window
Ground Level
New York, New York 10286 New York, New York 10286
Attn.: Reorganization Section Attn.: Reorganization Section
(For Eligible Institutions Only) By Facsimile:
Confirm by Telephone: (212) 571-3080
(212) 815-2742
</TABLE>
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<PAGE> 34
The Bank of New York also serves as Trustee under the Indenture.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, facsimile transmission, telephone or in person by
officers and regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable, out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$200,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees, and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of the Private Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
CONSEQUENCE OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their own
decisions on what action to take.
Private Notes that are not exchanged for the Exchange Notes pursuant to the
Exchange Offer will remain "restricted securities" within the meaning of Rule
144(a)(3)(iv) of the Securities Act. Accordingly, such Private Notes may not be
offered, sold, pledged or otherwise transferred except (i) to a person whom the
seller reasonably believes is a "qualified institutional buyer" within the
meaning of Rule 144A under the Securities Act purchasing for its own account or
for the account of a qualified institutional buyer in a transaction meeting the
requirements of Rule 144A, (ii) in an offshore transaction complying with Rule
903 or Rule 904 of Regulation S under the Securities Act, (iii) pursuant to an
exemption from registration under the Securities Act provided by Rule 144
thereunder (if available), (iv) pursuant to an effective registration statement
under the Securities Act or (v) to institutional accredited investors in a
transaction exempt from the registration requirements of the Securities Act,
and, in each case, in accordance with all other applicable securities laws.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the remaining term of the Notes.
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<PAGE> 35
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 years ended December 31, 1996, 1995 and 1994 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, 1996, 1995 and 1994, and for each of the years in the three-year
period ended December 31, 1996, have been audited by KPMG Peat Marwick LLP,
independent auditors. The summary financial data (other than the pro forma data)
as of and for the three months ended March 31, 1997 have been derived from the
unaudited consolidated financial statements of the Company, which have been
prepared on the same basis as the audited consolidated financial statements of
the Company and, in the opinion of management, reflect all normal recurring
adjustments necessary for a fair presentation of the financial position and
results of operations as of the end of and for such period. The results for the
three months ended March 31, 1997 are not necessarily indicative of the
operating results to be expected for the entire year. The unaudited pro forma
financial data give effect to the merger of the Company with MAN 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, 1996, that the
merger was consummated on January 1, 1996 and (ii) for purposes of the pro forma
balance sheet as of March 31, 1997 that the merger was consummated on March 31,
1997. 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 and MAN and notes thereto contained elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
--------------------------------------------- --------------------------
PRO FORMA MARCH 31, MARCH 31,
1994 1995 1996 1996 1996 1997
---- ---- ---- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Telecommunications service revenue.......... $ 2,809 $14,160 $ 45,574 $ 49,573 $ 6,795 $ 20,550(4)
Costs and expenses:
Service costs............................. 1,557 7,177 21,468 25,550 2,868 11,003
Selling, general and administrative
expenses................................ 3,966 11,405 38,596 43,459 6,621 15,852
Depreciation and amortization............. 663 4,118 16,296 19,616 2,427 8,736
------- ------- -------- -------- ------- --------
6,186 22,700 76,360 88,625 11,916 35,591
Loss from operations........................ (3,377) (8,540) (30,786) (39,052) (5,121) (15,041)
Interest and other income (expense), net.... (598) (2,096) (14,647) (14,647) (2,042) (9,633)
------- ------- -------- -------- ------- --------
Net loss before minority interests........ (3,975) (10,636) (45,433) (53,699) (7,163) (24,674)(4)
Minority interests(1)..................... 78 1,085 1,590 1,590 523 8
------- ------- -------- -------- ------- --------
Net loss.................................. $(3,897) $(9,551) $(43,843) $(52,109) $(6,640) $(24,666)
======= ======= ======== ======== ======= ========
OTHER DATA:
EBITDA(2)................................. $(2,714) $(4,422) $(14,490) $(19,436) $(2,694) $ (6,305)
Capital expenditures...................... 6,693 27,577 217,230 241,109 15,577 82,505
Acquisitions of businesses, net of cash... 35,669 13,941 4,290 4,290 (1,285) 46,273
Ratio of earnings to fixed charges(3)..... -- -- -- -- -- --
</TABLE>
34
<PAGE> 36
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
AS OF DECEMBER 31, -----------------------------------------
-------------------- PRO FORMA
1995 1996 PRO FORMA AS ADJUSTED
---- ---- --------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.................. $ 59,913 $261,880 $192,169 $ 185,677 $ 378,490
Marketable securities...................... -- 182,304 156,705 156,705 156,705
Working capital............................ 57,913 435,225 328,484 318,965 512,403
Total assets............................... 146,610 879,581 922,988 1,009,276 1,209,276
Long-term debt, less current portion....... 43,977 552,810 566,510 566,510 767,135
Paid-in capital............................ -- 349,341(5) 389,412(5) 471,391(5) 471,391(5)
Total stockholders' equity................. 93,455 291,834(6) 307,239(6) 389,218(6) 389,218(6)
Ratio of total debt to paid-in capital..... N/A 1.58 1.45 1.20 1.63
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF PRO FORMA
---------------------------------------- MARCH 31, AS OF
1994 1995 1996 1997 MARCH 31, 1997
---- ---- ---- --------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NETWORK DATA:
Cities in operation............................ 5 11 23 26 30
Cities under construction...................... 6 10 7 11 14
On-net buildings connected..................... 62 216 883 1,071 1,145
Route miles.................................... 107 262 1,059 1,253 1,625
Fiber miles.................................... 6,437 17,111 71,292 97,200 120,114
VGE circuits(7)................................ 59,208 122,617 516,743 668,494 732,814
Switches installed............................. -- 1 20 21 22
CLEC lines in service.......................... -- 3,187(8) 21,013 36,075 36,075
Employees...................................... 89 165 789 1,054 1,122
</TABLE>
- ---------------
(1) Minority interests for 1994 through 1996 represent the ownership interests
of minority investors in certain of the Company's subsidiaries, all of
which were exchanged for an aggregate of 1,192,980 shares of Common Stock
during the fourth quarter of fiscal 1996. Minority interests in 1997
represent the ownership interest in one of the Company's subsidiaries.
(2) 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.
(3) For purposes of calculating the ratio of earnings to fixed charges: (i)
earnings consist of loss before income taxes and minority interest, plus
fixed charges excluding capitalized interest, and (ii) fixed charges
consist of interest expensed and capitalized, plus amortization of deferred
financing costs, plus the portion of rent expense under operating leases
deemed by the Company to be representative of the interest factor. For the
years ended December 31, 1994, December 31, 1995 and December 31, 1996 and
the three months ended March 31, 1997, the Company's earnings were
insufficient to cover fixed charges by $3,975,000, $10,636,000, $45,433,000
and $24,674,000, respectively. On a pro forma basis, for the year ended
December 31, 1996, the Company's earnings would have been insufficient to
cover fixed charges by $53,699,000.
(4) Giving effect to the merger with MAN using the purchase method of
accounting and assuming such transaction was consummated on January 1,
1997:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, 1997
--------------
<S> <C>
Telecommunications service revenue.......................... $ 21,780,000
Net loss before minority interest........................... $(29,592,000)
</TABLE>
(5) Amount represents the total of Common Stock, additional paid-in capital,
and Common Stock subject to redemption.
(6) Amount represents paid-in capital less accumulated deficit. See note (5)
above.
(7) Voice grade equivalent circuits.
(8) On a pro forma basis giving effect to the City Signal Acquisition.
35
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and the notes thereto appearing
elsewhere in this Prospectus.
OVERVIEW
The Company is a leading facilities-based provider of competitive local
telecommunications services, commonly referred to as a competitive local
exchange carrier (CLEC), in selected markets within the United States. The
Company competes with local exchange carriers by providing high quality,
integrated local telecommunications services over fiber optic digital networks
to meet the voice, data and video transmission needs of its customers. The
Company's customers are principally inter-exchange carriers (IXCs), Internet
service providers (ISPs), wireless carriers, telecommunications-intensive
business, government, and institutional end users, and residential customers.
The Company offers these customers technologically advanced local
telecommunications services as well as superior customer service, flexible
pricing and route diversity.
The Company's goal is to become the primary full-service provider of
competitive local telecommunications services to its customers in selected
cities by offering superior products with excellent customer service at prices
below those charged by the incumbent local exchange carriers (ILECs). The
principal elements of the Company's strategy include targeting selected U. S.
markets with an emphasis on second and third-tier markets, aggressively pursuing
switched services opportunities, further building out existing systems and
expanding service offerings. The Company provides these services in an expanding
number of U. S. markets. As of March 31, 1997, the Company had networks in
operation or under construction in a total of 37 U. S. cities, and the
acquisition of Metro Access Networks, Inc. on May 5, 1997 has increased the
total to 44 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. As of March 31, 1997, the Company had a total of 21 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 in all of its
operating networks by the end of the second quarter of 1997. The Company is also
expanding its capabilities to provide flexible enhanced services that compliment
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.
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, the Company and MCImetro Access Transmission Services, Inc.
(MCImetro), a wholly-owned subsidiary of MCI Communications Corporation (MCI),
have 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. Also during February 1997, the Company and
AT&T Communications, Inc. (AT&T Communications), a wholly-owned subsidiary of
AT&T Corp. (AT&T), announced the first national agreement between AT&T and a
CLEC, whereby AT&T will begin utilizing the Company's networks to originate and
terminate the calls of AT&T customers served by the Company's networks. The
agreement represents a further expansion of the Company's relationship with AT&T
and provides for origination and termination of customer calls to be completed
through the Company's networks nationwide, thus bypassing the ILEC. 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.
36
<PAGE> 38
Effective in February 1997, the Company acquired 100% of the stock of
certain companies related to Phoenix Fiberlink, Inc. (Phoenix), a provider of
competitive access and Internet services in Utah and Nevada.
Also in February 1997, the Company acquired a 60% interest in a company
formed by MaineCom, a wholly-owned subsidiary of Central Maine Power Co., 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.
As of April 1, 1997, the Company signed a definitive agreement with Century
Telephone Enterprises, Inc. for the acquisition of Metro Access Networks, Inc.
(MAN), a CLEC with networks in operation or under construction in Dallas, Fort
Worth, Houston, San Antonio, Austin, Corpus Christi and Waco, Texas. On May 5,
1997, this acquisition was completed.
The development of the Company's businesses and the construction,
acquisition and expansion of its networks require significant expenditures, a
substantial portion of which is incurred before the realization of revenues.
These expenditures, together with the associated early operating expenses,
result in negative cash flow until an adequate customer base may be established.
However, as this customer base grows, the Company expects incremental revenues
can be added within operating networks with minimal additional expense,
providing significant contributions to cash flow. The Company also incurs
ongoing capital expenditures with respect to both existing and new systems which
are directly related to the installation of new revenue-producing services. See
"Summary -- Recent Developments," "Business of the Company" and "Unaudited Pro
Forma Combined Consolidated Financial Information."
Since its inception in November 1993, the development of the Company's
business has required substantial capital investments and has resulted in
substantial net losses. The acquisition of networks, procurement of
rights-of-way and start-up costs of new networks will continue to represent a
large portion of the Company's funding requirements during the Company's
continued expansion. The costs related to the acquisition and development of new
systems, along with the varying degrees of maturity of these systems, will
materially affect the comparability of the Company's financial results from one
period to another and any assessment of the Company's operating performance.
37
<PAGE> 39
The following table provides selected statistical and financial data for
the Company as of the dates indicated:
<TABLE>
<CAPTION>
AS OF MARCH 31,
----------------------- PERCENTAGE
1997 1996 CHANGE
---- ---- ----------
<S> <C> <C> <C>
Cities in operation................................. 26 13 +100%
Cities under construction........................... 11 12 -8%
Buildings connected -- on-net....................... 1,071 495 +116%
Buildings connected -- off-net...................... 1,739 -- NM
Route miles......................................... 1,253 507 +147%
Fiber miles......................................... 97,200 26,659 +265%
Switches installed.................................. 21 3 +600%
CLEC lines in service............................... 36,075 5,944 +507%
VGE circuits........................................ 668,494 165,122 +305%
Number of employees................................. 1,054 456 +131%
Total Assets (dollars in thousands)................. $922,988 $449,135 +106%
======== ======== =====
</TABLE>
- ---------------
NM -- Not meaningful
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
REVENUE
The Company's revenues increased to $20.6 million for the three months
ended March 31, 1997 from $6.8 million for the three months ended March 31,
1996, an increase of 203%. The increase in revenues reflects the impact of the
Company's acquisition and development activities, including an increase in the
number of networks in operation to 26 from 13 in the first quarter of 1997 and
1996, respectively, 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 overall revenue growth has been the
continued growth of local switched service revenues. Annualized monthly local
switched service revenues increased to $22.2 million based on March 1997
revenues from $17.4 million based on December 1996 revenues. Local exchange
services revenues for the quarter ended March 31, 1997, totaled $5.3 million as
compared to $.7 million for the quarter ended March 31, 1996. The increase in
switched service revenue reflects continued growth in the Michigan markets,
where the Company has the most experience in providing switched service, as well
as significant growth in the Company's other markets. This is evidenced by the
fact that the Company's installed CLEC lines in markets other than Grand Rapids
have increased to 44% of the total lines as compared to 20% at December 31,
1996. Total CLEC lines in service increased 72% sequentially to 36,075 at March
31, 1997, from 21,013 at December 31, 1996, and increased 507% from 5,944 at
March 31, 1996.
COSTS AND EXPENSES
Service costs increased to $11.0 million for the three months ended March
31, 1997 from $2.9 million for the three months ended March 31, 1996. The
increase was due primarily to the impact of the Company's acquisition and
development activities, including increasing costs associated with developing
the Company's rapidly growing local exchange services and the Company's
expanding long distance resale operations. Service costs primarily represent the
portion of total operating expenses paid to third parties for unbundled loop
charges and other local and long distance service costs, including right-of-way
fees. Also included are salaries and benefits associated with the technical
operations of the networks and other network costs.
38
<PAGE> 40
The Company's selling, general and administrative expenses (SG&A) for the
three months ended March 31, 1997 were $15.9 million, as compared with SG&A
expenses of $6.6 million for the three months ended March 31, 1996. The increase
was principally due to the increasing number and continued expansion of the
Company's networks, including added personnel costs and marketing activities
related to the introduction of switched services. There is typically a period of
higher SG&A expense and a lag time in the generation of revenues following the
acquisition and development of the Company's networks. Management expects SG&A
expenses to continue to increase during the remainder of 1997 as the Company
continues to expand its networks, services and marketing activities.
Depreciation and amortization expense increased to $8.7 million for the
three months ended March 31, 1997, from $2.4 million for the three months ended
March 31, 1996, as a result of the Company's acquisitions and the continued
expansion of the Company's networks.
INTEREST INCOME (EXPENSE)
Interest expense totaling $14.7 million was recorded during the three
months ended March 31, 1997, as compared to interest expense of $3.8 million for
the three months ended March 31, 1996. 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 $13.5 million attributable
to accretion of the Company's Senior Discount Notes issued during 1996. Interest
of $987,000 was capitalized for the quarter ended March 31, 1997, related to
network construction projects. For the quarters ended March 31, 1997 and 1996,
interest income totaling $5.1 million and $1.8 million, 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 $24.7 million for the three months ended March 31, 1997,
from $7.2 million for the three months ended March 31, 1996. Minority interests
in net losses, representing minority investors' interests in certain of the
Company's subsidiaries, totaled $8,000 and $523,000 for the three months ended
March 31, 1997 and 1996, respectively. As a result, the Company's net loss for
the three months ended March 31, 1997 was $24.7 million as compared to a net
loss of $6.6 million for the three months ended March 31, 1996.
EBITDA
Earnings before interest, taxes, depreciation, amortization and minority
interest (EBITDA) decreased to ($6.3) million for the three months ended March
31, 1997, from ($2.7) million for the three months ended March 31, 1996, a
decrease of $3.6 million. The decrease reflects the increasing service 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. 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.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUE
The Company's revenues increased to $45.6 million for 1996 from $14.2
million during 1995, an increase of $31.4 million or 221%. Total annualized
monthly revenues increased to approximately $73.4 million based on December 1996
revenues from $15.5 million based on December 1995 revenues. The increase in
revenues reflects the impact of the Company's acquisition and
39
<PAGE> 41
development activities, including an increase in the number of networks in
operation to 23 from 11 in 1995, and increased utilization of the Company's
network facilities arising from the sales of additional services to current and
new customers. While access revenues were the most significant contributor to
the Company's revenue growth for 1996, the Company's entry into local switched
services, in Grand Rapids, Michigan during the first quarter of 1996 and in
additional markets during the fourth quarter of 1996, was also a factor. Current
annualized monthly local switched service revenues, based on December 1996
revenues, are $17.4 million. Local switched service revenues for the year ended
December 31, 1996, totaled $7.8 million.
Network utilization as reflected in the number of on-net buildings
connected to the Company's networks increased 309% during 1996 to 883 as
compared to 216 at December 1995. The Company's penetration of buildings to
serve additional customers is further augmented by 1,238 off-net buildings
resulting in total buildings served of 2,121 at December 31, 1996. VGEs in
service increased 321% to 516,743 VGEs as of December 31, 1996, as compared with
122,617 VGEs at the end of 1995. As reflected in CLEC lines in service, network
utilization increased to 21,013 lines in service at year-end 1996, as compared
to 3,187 lines in service on January 31, 1996 in the Company's acquired Grand
Rapids operations. Network development as measured by operational networks has
increased to 23 with these networks covering 1,059 route miles at year-end 1996,
an increase of 304% from the 262 route miles in service at December 31, 1995.
Fiber miles also increased to 71,292 from the 17,111 at December 31, 1996, an
increase of 317%. In addition, the Company's aggressive switch deployment plans
have enabled the Company to deploy switches to serve 24 of the Company's markets
by year-end 1996.
COSTS AND EXPENSES
Service costs increased to $21.5 million or 47% of telecommunications
services revenue in 1996 from $7.2 million or 51% of telecommunications services
revenue in 1995. The increase was due primarily to the impact of the Company's
acquisition and development activities, including increasing costs associated
with the Company's rapidly growing local exchange services in Grand Rapids and
the Company's expanding long distance resale operations. Total service costs
directly related to providing local exchange services increased $5.1 million in
1996. The increase in total service costs also includes an increase of $6.8
million related to the direct operating costs of the Company's long distance
resale operations. Service costs primarily represent the portion of total
operating expenses paid to third parties for unbundled loop charges and other
local and long distance service costs, including right-of-way fees. Also
included are salaries and benefits associated with the technical operations of
the networks and other network costs.
The Company's selling, general and administrative expenses (SG&A) for the
year ended December 31, 1996 were $38.6 million, as compared with SG&A expenses
of $11.4 million for the year ended December 31, 1995. The increase was
principally due to the increasing number and continued expansion of the
Company's networks, including added personnel costs and marketing activities
related to the introduction of switched services. There is typically a period of
higher SG&A expense and a lag time in the generation of revenues following the
acquisition and development of the Company's networks. Management expects SG&A
expenses to continue to increase in 1997 as the Company continues to expand its
networks, services and marketing activities.
Depreciation and amortization expense increased to $16.3 million for the
year ended December 31, 1996, from $4.1 million for the year ended December 31,
1995 as a result of the continued expansion of the Company's networks and the
Company's acquisitions.
INTEREST INCOME (EXPENSE)
Interest expense totaling $31.2 million was recorded during the year ended
December 31, 1996, as compared to interest expense of $3.7 million for the year
ended December 31, 1995. The primary contributor to the substantial increase in
interest expense as compared to the prior year is non-cash
40
<PAGE> 42
interest expense totaling $29.8 million primarily attributable to accretion of
the Company's Senior Discount Notes (see "-- Liquidity and Capital Resources")
issued during 1996. Interest of $2.0 million was capitalized for the year ended
December 31, 1996, related to network construction projects. For the years ended
December 31, 1996 and 1995, interest income totaling $16.5 million and $1.6
million, 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 $45.4 million in 1996, from $10.6 million in 1995.
Minority interests in net losses, representing minority investors' interests in
certain of the Company's subsidiaries, totaled $1.6 million and $1.1 million for
the years ended December 31, 1996 and 1995, respectively. As a result, the
Company's net loss for 1996 was $43.8 million as compared to a net loss of $9.6
million for 1995.
EBITDA
Earnings before interest, taxes, depreciation, amortization and minority
interest (EBITDA) decreased to ($14.5) million for the year ended December 31,
1996, from ($4.4) million for the year ended December 31, 1995, a decrease of
$10.1 million. The decrease reflects the increasing service 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
The Company's revenues increased to $14.2 million for the year ended
December 31, 1995 from $2.8 million for the year ended December 31, 1994, an
increase of 407%. Annualized monthly revenues increased to approximately $15.5
million based on the results for the month of December 1995 from $11.9 million
based on December 1994 results. 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. Network capacity as reflected
in VGEs in service increased to 122,617 VGEs as of December 31, 1995, as
compared to 59,208 VGEs as of December 31, 1994.
COSTS AND EXPENSES
Service costs increased to $7.2 million for the year ended December 31,
1995 from $1.6 million for the year ended December 31, 1994. Service costs as a
percentage of telecommunications services revenues declined to approximately 51%
for the year ended December 31, 1995 as compared to approximately 55% for the
year ended December 31, 1994.
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 the year ended
December 31, 1994. The increase was principally due to the increasing number and
continued expansion of the Company's competitive access networks and related
marketing activities.
Depreciation and amortization expense increased to $4.1 million for the
year ended December 31, 1995, from $663,000 for the year ended December 31, 1994
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 was recorded during the year ended
December 31, 1995, as compared to interest expense of $693,000 for the year
ended December 31, 1994, as a result of
41
<PAGE> 43
the incurrence of secured indebtedness to finance the acquisition and
development of certain of the Company's operations. For the year 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 to $10.6 million for the year ended December 31, 1995, from
$4.0 million for the year ended December 31, 1994. 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
$9.6 million as compared to a net loss of $3.9 million for 1994.
EBITDA
EBITDA decreased to ($4.4) million for the year ended December 31, 1995,
from ($2.7) million for the year ended December 31, 1994, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased from $879.6 million as of December 31,
1996 to $923.0 million at March 31, 1997. The Company's current assets of $374.3
million at March 31, 1997, including cash and cash equivalents and marketable
securities of $348.9 million, exceeded current liabilities of $45.8 million,
providing working capital of $328.5 million as compared to $435.3 million at
December 31, 1996. Network and equipment totaled $406.6 million at March 31,
1997 as compared to $306.5 million at December 31, 1996. Other assets,
principally goodwill, net of accumulated amortization, increased to $145.0
million at March 31, 1997, from $99.1 million at December 31, 1996, primarily as
a result of the Company's acquisition of the Phoenix networks.
The Company's operating activities used net cash of $17.3 million in the
year ended December 31, 1996, and $2.6 million in the year ended December 31,
1995. The increase in cash used by the operating activities was primarily due to
the increased loss from operations incurred related to the acquisition,
development and expansion of the Company's networks, which was partially offset
by increased depreciation and amortization and non-cash interest expense
associated with the Company's debt facilities. The increase in cash used was
also due to supporting increased levels of accounts receivable and other current
assets resulting from an expanding customer base and increased interest
receivable on the Company's investments. For the three months ended March 31,
1997, the Company's operating activities generated cash of $10.4 million, as
compared to the Company's use of cash of $1.9 million for the quarter ended
March 31, 1996. The cash generated during the first quarter of 1997 is due
primarily to increases in non-cash expenses including depreciation and
amortization and non-cash interest expenses and net increases in working
capital.
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; (iii) the
design, construction and development of additional networks; and (iv)
acquisitions as an alternative to constructing networks, adding customers or
introducing additional services. For the years ended December 31, 1996 and 1995,
the Company's capital expenditures, primarily for installation of digital
telephone switches, expansion of existing networks, and design, construction and
development of new networks, totaled $217.2 million and $27.6 million,
respectively. Cash used for acquisitions in 1996 and 1995 totaled $4.3
42
<PAGE> 44
million and $13.9 million, respectively. For the three months ended March 31,
1997 and 1996, the Company's capital expenditures totaled $82.5 million and
$15.6 million, respectively.
In response to the demand initially encountered for its services, the
Company will continue its aggressive capital deployment plans for the
development and expansion of its existing networks to allow for an increased
level of demand-driven capital spending to take full advantage of the
opportunities presented by offering a full array of local exchange services. The
Company's 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
significant percentage of its markets by extending its networks to serve most of
the ILEC's central offices in its markets, (ii) rapidly deploy switches with
full capabilities for local dial tone and switched access termination and
origination services and (iii) add electronics to its operating networks to
provide other enhanced services, such as high speed video conferencing, frame
relay and ATM-based packet transport services and Internet access products. In
addition, with the acquisition of MAN, the Company has an opportunity to
establish a strategic market presence in Texas, the third largest
telecommunications state in the country. The addition of these markets
represents a significant increase in the Company's addressable market potential,
to 44 markets from the existing 37 markets. The Company estimates that it will
spend $450 million during 1997 to fund these capital needs (including
expenditures on the networks acquired in the MAN acquisition), and such amounts
may be funded from the proceeds of the sale of the Private Notes together with
the Company's existing cash resources and existing and future credit facilities.
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
additional capital. The Company expects this expansion into additional cities 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 its existing markets and other strategic initiatives,
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
telecommunications equipment to meet specific customer requirements. Due to the
number and variability of the factors which could affect the amount of capital
that will be required for such purposes, the Company cannot provide a reasonable
estimate of such additional capital needs. For example, the size of a particular
network to be developed or acquired and the types of electronics installed can
impact significantly the amount of capital required. Similarly, the potential
cost of acquiring additional networks is not determinable, and it is possible
that the Company could acquire existing networks using a variety of financing
alternatives. The Company expects to meet such additional capital needs with the
proceeds from existing and future credit facilities and other borrowings and the
proceeds from sales of additional debt or equity securities and joint ventures.
However, 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.
Moreover, there can be no assurance that actual expenditures will not be
significantly higher or lower than the Company's current estimates.
The Company intends to preserve financial flexibility in order to react to
the rapidly evolving telecommunications marketplace and new opportunities. The
Company is currently considering several proposals from financial institutions
to establish a bank revolving credit facility totalling $250 million to $300
million to further expand the Company's working capital. There can be no
assurance, however, as to the Company's ability to refinance such indebtedness
pursuant to any such proposal or on any other terms that it will consider
acceptable. For a description of the Company's existing credit facilities and
other indebtedness, see "Description of Existing Debt." The Company will
continue to take advantage of favorable financing arrangements, including sales
of debt or equity securities in the public or private markets, to maintain its
financial flexibility.
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<PAGE> 45
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 establishes standards for the computation and presentation of earnings per
share for entities with publicly held common stock or potential common stock.
This Statement is effective for financial statements issued for periods ending
after December 15, 1997, and requires retroactive restatement of all prior
period earnings per share data presented. The effect of SFAS No. 128 on the
financial periods presented is not material to the Company.
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
50 cities by the end of 1998, its plans to offer switched and enhanced services
in all of its markets by the end of 1997 and its expectations for required
future capital expenditures, 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.
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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 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. Through GLA, the Company
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. Through the Company's strategic alliance with
Verio, a consolidator of ISPs, the Company plans to develop and offer a wide
range of Internet-related services to users of Verio's national ISP network,
including various dial-up and dedicated Internet access options.
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 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 most, if not all, of the ILEC's
central offices) and establishing customer relationships with IXCs,
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<PAGE> 47
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. The
Company is also pursuing opportunities in several first tier markets (those
with populations of over two million) in conjunction with operating
agreements with the Company's major IXC customers (see "Build on strategic
relationships" below).
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. At March 31, 1997, the Company had a total of 21 digital
telephone switches installed serving a total of 25 of its operating
networks, and the Company plans to leverage its networks and customer
relationships by offering local dial tone, switched access termination and
origination services, centrex and desktop products in all of its networks.
The Company has increased the number of CLEC lines in service from 5,944 at
March 31, 1996 to 36,075 at March 31, 1997, with annualized CLEC revenues
increasing from $3.0 million based on quarter ended March 1996 revenues to
$21.0 million based on quarter ended March 1997 revenues. 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
determined to more rapidly expand its existing networks and accelerate 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 add to its service offerings and establish the strong customer
relationships necessary to solidify its competitive position in its
selected markets.
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, (i) the Company and MCImetro have 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 has acquired 958,720
shares of the Company's Common Stock (see "-- Strategic Relationships"
below), (ii) the Company has concluded a national preferred vendor
agreement with AT&T Communications, pursuant to which the Company has
become AT&T Communications' preferred supplier of local access services in
most of the Company's markets, and (iii) in February 1997, the Company
concluded an agreement with AT&T pursuant to which the Company will provide
switched access origination and termination of AT&T's long distance
customer calls through the Company's local networks in most of the
Company's markets. The Company believes preferred vendor relationships with
IXCs provide opportunities to leverage its partners'
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<PAGE> 48
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" below for additional information
concerning the Company's strategic relationships with MCImetro and AT&T, as
well as information concerning its strategic relationships with Verio,
MaineCom and Century Telephone.
CONTINUE TO INCREASE THE NUMBER OF CITIES SERVED. During 1996, the
Company achieved its long-stated goal of having systems in operation or
under construction in a total of 30 cities by the end of 1996. Furthermore,
the Company, as a result of the merger with MAN, has already achieved its
goal of having systems in operation or under construction in a total of 40
cities by the end of 1997. The Company plans to have systems in operation
or under construction in 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.
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.
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<PAGE> 49
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.
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
overtime.
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.
See "The Competitive Local Telecommunications Industry," "Competition" and
"Regulatory Overview" below.
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<PAGE> 50
CURRENT PRODUCTS AND SERVICES
SPECIAL AND SWITCHED ACCESS AND PRIVATE LINE SERVICES. The Company
currently provides several types of special and switched access and private line
services to its IXC and end-user customers. Historically, CAPs such as the
Company were able to offer only non-switched special access and private line
services which involved the installation of dedicated lines to provide the
following types of communications links:
- 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. As of March 31, 1997, the Company had 21
advanced, state-of-the-art switches installed serving a total of 25 of its
networks, including one switch acquired in connection with the City Signal
Acquisition.
Most states have taken regulatory and legislative action to open local
communications markets to various degrees of local exchange competition and
co-carrier status. As of May 15, 1997, the Company had established
interconnection arrangements with ILECs for all of its operating networks. The
Company expects that continuing pro-competitive regulatory changes, including
those
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<PAGE> 51
mandated by the Telecommunications Act of 1996, together with increasing
customer demand, will create more opportunities to introduce additional services
and expand the Company's networks to address a larger customer base. See
"-- CLEC Market Potential," "-- Planned Products and Services" and "Regulatory
Overview."
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
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in all of its operating networks. These capabilities will enable the Company to
offer a variety of enhanced services where the transport function is combined
with a specific application to provide an integrated turnkey solution to its
customer's voice, data and video transmission requirements. These enhanced
services include applications such as LAN-to-LAN interconnect services, packet
transport services, high speed video conferencing, Internet access, 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 has 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. In February 1997, the Company and AT&T announced an expansion of this
relationship to include several of the new markets in which the Company is in
the process of acquiring or constructing networks. The Company is currently
providing certain services under the agreement in 20 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 1997 revenues
from this national vendor agreement will not exceed 10% of the Company's total
revenues for 1997. 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
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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."
In February 1997, the Company concluded an agreement with AT&T pursuant to
which the Company will provide switched access origination and termination of
AT&T's long distance customer calls through the Company's local networks in most
of the Company's markets.
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
Verio, a privately-held development stage company founded to form a national
Internet Service Provider network. The Company has committed a total of $24
million for a 23.7% interest in Verio, 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
Verio's national ISP network, including various dial-up and dedicated Internet
access options.
On February 25, 1997, the Company acquired a 60% interest in a company
formed by MaineCom Services, a subsidiary of Central Maine Power Co., for the
purposes of constructing, owning, operating and developing networks in Maine and
New Hampshire.
In connection with the Company's acquisition of MAN on May 5, 1997, the
Company and Century Telephone formed a 50-50 joint venture to develop
telecommunications networks in new markets in the state of Michigan. The parties
also entered into cross purchasing arrangements under which Century Telephone
will be able to purchase dedicated and switched network services from the
Company at favorable prices in certain markets in Texas and Michigan, and the
Company will be able to purchase a variety of operational and administrative
support services from Century Telephone.
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, Santa Clara, 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 Toledo, Ohio.
Also during 1996, the Company commenced the construction of networks in White
Plains, New York, Stamford, Connecticut, Kansas City, Missouri,
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Springfield, Missouri and San Mateo, California, all of which are expected to be
operational by the end of the second quarter of 1997. Since January 1, 1997, the
Company has commenced construction of networks in Long Island, New York and
Minneapolis/St. Paul, Minnesota which are expected to be operational by year end
1997.
On February 25, 1997, the Company acquired a 60% interest in a company
formed 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.
Effective in February 1997, the Company acquired 100% of the stock of
certain companies related to Phoenix FiberLink, including assets and networks in
operation and under construction in Salt Lake City, Utah and Reno, Nevada. The
Company has interconnected the Reno network with the Company's existing network
in Reno.
On May 5, 1997, the Company acquired MAN, an 89% owned subsidiary of
Century Telephone. Through its acquisition of MAN, the Company acquired networks
in operation or under development in seven Texas cities, including 326 route
miles of fiber optic cable (representing a 30% increase in the Company's route
miles nationwide) in operating networks in Austin, Dallas, Fort Worth and San
Antonio and networks under development in Corpus Christi, Houston and Waco.
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
Toledo, Ohio(1).................................... 0 1
White Plains, New York(1).......................... 1 0
Stamford, Connecticut(1)........................... 1 1
Long Island, New York(1)........................... 1 2
Portland, Maine(1)(2).............................. 0 1
Nashua, New Hampshire(1)(2)........................ 1 0
Manchester, New Hampshire(1)(2).................... 0 1
CENTRAL REGION
Oklahoma City, Oklahoma............................ 2 0
Tulsa, Oklahoma.................................... 1 1
Little Rock, Arkansas.............................. 2 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
Minneapolis, Minnesota(1).......................... 2 1
St. Paul, Minnesota(1)............................. 0 1
Austin, Texas...................................... 1 2
Dallas, Texas...................................... 3 1
Fort Worth, Texas.................................. 2 0
San Antonio, Texas................................. 1 2
Corpus Christi, Texas(1)........................... 2 1
Houston, Texas(1).................................. 3 0
Waco, Texas(1)..................................... 0 0
</TABLE>
53
<PAGE> 55
<TABLE>
<CAPTION>
OTHER CLEC
NETWORKS OF THE COMPANY NETWORKS IN CITY
- ----------------------- -----------------------
CITY SERVED CURRENT ANNOUNCED
----------- ------- ---------
<S> <C> <C>
WESTERN REGION
Sacramento, California............................. 2 0
San Jose, California............................... 2 0
Sunnyvale, California.............................. 2 0
Santa Clara, California............................ 2 0
Stockton, California............................... 0 0
Fresno, California................................. 1 0
Bakersfield, California............................ 1 0
Milpitas, California............................... 2 0
Palo Alto, California.............................. 2 0
Salt Lake City, Utah............................... 2 1
San Mateo, California(1)........................... 2 0
Reno, Nevada(1).................................... 0 0
San Francisco and Los Angeles, California(3)....... N/A N/A
</TABLE>
- ---------------
(1) Networks under construction.
(2) Majority-owned joint venture.
(3) Facilities management operations.
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.
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
54
<PAGE> 56
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 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
March 31, 1997, it has accepted delivery of 17 state-of-the-art 5ESS@-2000
switches.
CONNECTIONS TO CUSTOMER LOCATIONS
Office buildings are connected by network backbone extensions to one of a
number of physical rings of fiber optic cable, which originate and terminate at
the Company's central node. Signals are sent through a network backbone to the
central node simultaneously on both primary and alternate
55
<PAGE> 57
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, 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 March 31, 1997, approximately 21% of the
Company's consolidated revenues were attributable to access services provided to
IXCs pursuant to numerous individual
56
<PAGE> 58
service orders. Approximately 9% 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 entered into a national preferred vendor agreement with AT&T
Communications under which the Company has become AT&T Communications' preferred
supplier of certain specified services in most of the Company's markets, and has
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 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.
57
<PAGE> 59
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 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 three months ended March 31, 1997, rental expense for such locations
and offices totaled $1.3 million. At March 31, 1997, minimum future rental
payments under noncancelable leases covering the Company's locations, offices
and other equipment totaled $27.7 million. The Company owns a 23 acre parcel of
land in Town & Country, Missouri, on which it is constructing its new 150,000
square foot 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.
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<PAGE> 60
EMPLOYEES
At March 31, 1997, the Company had approximately 1,054 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 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.
59
<PAGE> 61
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]
60
<PAGE> 62
[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").
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<PAGE> 63
In the August 1993 decision, the FCC issued additional rulings concerning
expanded interconnection for competitive access services. First, the FCC
reaffirmed its Special Access Order adopted in September 1992, in which the FCC
ordered the larger 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 billion of switched access termination).
The Telecommunications Act of 1996, which contains provisions that mandate
local and long distance telecommunications services competition, was enacted
into law on February 8, 1996 (see "Regulatory Overview"). The FCC has issued and
will issue further orders under the Telecommunications Act of 1996, many of
which, if not all, will likely be appealed by one or more affected parties to
the U.S. Court of Appeals and U.S. Supreme Court. In addition, the
Telecommunications Act of 1996 may be amended in 1997 or subsequent years.
Therefore, the Company is unable to determine the final form and impact of
existing and future legislation, and the regulatory and judicial actions under
such legislation.
In addition to the federal initiatives and rulings, most states have now
taken regulatory and legislative action to open local telecommunications markets
to local exchange competition and co-carrier status. The Company is deploying
switches on its networks as rapidly as possible and plans to have switches
serving all of its operating networks by the end of the second quarter of 1997.
When the first CAP networks were built in the 1980s, they could compete
effectively only for the approximately $8.6 billion special access and private
line services portion of the local exchange market (POP to POP Special Access,
POP to End User Special Access and End User to End User Private Line). Beginning
in 1994, after the FCC's Interconnection Decisions, which allowed CAPs to
provide Collocated Special Access, Collocated Switched Access Transport and,
with the installation of a switch, Switched Access Termination services, CAPs
were allowed to compete for an additional estimated $13.8 billion portion of the
market. If regulatory and other industry trends continue, the Company believes
that ultimately the entire approximately $102 billion total U.S. market may be
open to competition as CLECs deploy switches capable of providing the full array
of local exchange services and as state public utility commissions ("PUCs")
authorize CLECs to provide full local telecommunications services.
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<PAGE> 64
The following chart illustrates the potential CLEC revenue opportunities,
based on the total 1995 local exchange revenues, both before and after a CLEC
deploys a switch in its local network.
CLEC POTENTIAL REVENUE OPPORTUNITIES*
<TABLE>
<CAPTION>
TOTAL 1995 U.S. LOCAL
EXCHANGE MARKET
($ BILLIONS)
---------------------
<S> <C>
Access/Private Line Services (Non-Switched)
1. POP to POP -- Special Access................................ $ 2.0
2. POP to End User -- Special Access........................... 2.6
3. End User to End User -- Private Line........................ 4.0
4. Collocated Special Access................................... 2.5
5. Collocated Switched Access Transport........................ 4.3
Switched Services
6. Switched Access Termination................................. 7.0
7. Switched Access Origination................................. 4.7
8. End User Common Line Access Charge
(Business).................................................. 5.9
(Residential)............................................... 5.4
9. Co-Carrier Switched Local Services (centrex)
(Business).................................................. 23.0
10. Co-Carrier Switched Local Services
(Residential)............................................... 20.8
11. Intralata Toll and Other.................................... 17.6
12. Unclassified "other"........................................ 2.0
--------
Total U.S. Market................................................ $101.8
========
</TABLE>
- ---------------
* Source: Paradigm Resources, Inc. Includes data for Tier 1, Tier 2, Tier 3 and
all other markets.
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<PAGE> 65
COMPETITION
As noted above, as a result of various legislative and regulatory
initiatives, including the Telecommunications Act of 1996 and a series of FCC
orders and rules defining and construing the terms and conditions of the various
components necessary for open competition in local exchange markets, the
barriers to competition in local exchange markets are being removed more quickly
than had earlier been anticipated. In addition, most state regulatory
authorities have taken action to require co-carrier status for CLECs and ILEC
open network scenarios. The introduction of such competition, however, has also
increased the possibility that ILECs will be authorized to provide single source
local and long distance service under the provisions of the Telecommunications
Act of 1996 more quickly than had earlier been anticipated.
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, have the potential to
subsidize competitive services from monopoly service revenues, and benefit from
favorable state and federal regulations. 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
and the Telecommunications Act of 1996. 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
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ILECs to charge CLECs substantial fees for interconnection to the ILECs'
networks or afford ILECs other 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.
If and when the RBOCs are able to convince state and federal regulators
that they have satisfied the checklist for local competition mandated by the
Telecommunications Act of 1996, they may be authorized to provide long distance
services under the provisions of the Telecommunications Act of 1996 and be in a
position to offer single source service.
Two RBOCs have filed applications with the FCC to enter the long distance
business. On January 2, 1997, Ameritech filed an application with the FCC for
authority to provide inter-LATA long distance services in Michigan which started
the 90-day time period for the FCC to render a decision on the application. On
January 17, 1997, Ameritech filed an amendment to its application, which
restarted the 90-day time period. On February 5, 1997, the Michigan Public
Service Commission filed comments with the FCC stating that it appeared that
Ameritech had met the competitive checklist under the Telecommunications Act of
1996 which is a prerequisite for entry into long distance. On February 11, 1997,
Ameritech withdrew its application. On May 21, 1997, Ameritech filed its third
application, which the FCC must approve or deny on or before August 19, 1997. On
June 10, 1997, the Michigan Public Service Commission filed comments with the
FCC stating it believed Ameritech had met 11 of the 14 checklist items and would
soon meet the remaining three checklist items.
On April 11, 1997, Southwestern Bell Telephone Company ("SWBT") filed its
application with the FCC to provide inter-LATA long distance services in
Oklahoma. On April 25, 1997, the Oklahoma Corporation Commission filed its
comments and stated that SWBT had met the competitive checklist and recommending
that SWBT's application be approved. On May 16, 1997, the U.S. Department of
Justice filed its recommendation with the FCC that SWBT's application be denied.
The FCC must render its decision on or before July 10, 1997.
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 IXCs to increasingly turn to CLECs to gain access to their
customers. However, it may also prompt IXCs to pursue combinations with ILECs.
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.
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<PAGE> 67
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 has enabled WorldCom to offer a
"one-stop shopping" combination of long distance and local exchange services.
Cable television companies are upgrading their networks with fiber optics
and installing facilities to provide fully interactive transmission of broadband
voice, video and data communications. Cable company-controlled CLECs, such as
Teleport and U.S. West/Time Warner, historically have 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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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 interconnection to Allows CLECs to service customers not
transfer calls back and forth between directly connected to their networks
ILECs and competitive networks
(including 911, 0+, directory
assistance, etc.)
</TABLE>
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<PAGE> 69
<TABLE>
<CAPTION>
CHECKLIST ITEM DEFINITION ANTICIPATED EFFECT
-------------- ---------- ------------------
<S> <C> <C>
Local Loop Unbundling........ Allows competitors to selectively Reduces the capital and service costs
gain access at cost-based rates to of CLECs to serve customers not
ILEC wires from central offices to directly connected to their networks
customers' premises
Reciprocal Compensation...... Mandates reciprocal compensation for Improves CLEC margins for local
local traffic exchange between ILECs service
and competitors
Number Portability........... Allows customers to change local Allows customers to switch to CLEC
carriers without changing numbers. provided local service without
True portability allows incoming changing phone numbers
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 telephone Allows CLECs to provide telephone
numbers to CLEC customers numbers to new customers on the same
basis as the ILEC
</TABLE>
The RBOCs' incentive to comply with the opening under the
Telecommunications Act of 1996 of the local exchange market to competition
derives from the Act's provisions allowing the removal of the current ban on
RBOC provision of interLATA toll service and equipment manufacturing. This ban
will only be removed after the RBOC demonstrates to the FCC, in consultation
with the Department of Justice and the relevant state commissions, that the RBOC
has met the requirements of the competitive checklist, which details the basic
co-carrier requirements, and the FCC concludes that RBOC entry into long
distance is in the public interest. The RBOC must also generally show that it
has entered into an approved interconnection agreement with at least one
unaffiliated, facilities-based competitor in some portion of a state before
offering long distance service in that jurisdiction. In early 1997, Ameritech
filed and withdrew two applications with the FCC for authority to provide
inter-LATA long distance service in Michigan under the Telecommunications Act of
1996. On May 21, 1997, Ameritech filed its third application, which the FCC must
approve or deny on or before August 19, 1997. SWBT has filed an application to
provide interLATA long distance service in Oklahoma, which the FCC must approve
or deny on or before July 10, 1997.
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
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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.
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 created 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. On May 7, 1997, the FCC entered its order regarding universal service,
described in more detail below. Due to the deferral of certain decisions on
universal service to future proceedings, 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 and
entered orders in 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
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<PAGE> 71
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 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 took 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 customer (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
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<PAGE> 72
recommendations. Under the Telecommunications Act of 1996, the FCC was required
to act on these recommendations by May 8, 1997 and stated that it intended to
announce new access charge rules within the same time frame.
On May 7, 1997, the FCC adopted its Report and Order on universal service.
The order left most current universal support mechanisms in place, created
mechanisms to fund needs of schools, libraries and rural health facilities
through new contributions from a broad array of telecommunications carriers,
including the Company, based upon end user revenues, and deferred several items
for future consideration. Because the FCC has not yet set the contribution
percentage and because of the deferral of certain decisions on universal service
to future proceedings, the Company is unable to predict the final formulas for
universal service contributions or its own level of contribution.
On May 7, 1997, the FCC also adopted its Report and Order on access
charges. The order contains provisions that, together with simultaneous FCC
action in the ongoing price cap proceedings, will cause some reductions in
overall access charge levels as of July 1, 1997, and in future years. In
addition, the order contains provisions that substantially alter the rate
structure under which switched access charges are collected, moving certain
amounts previously collected on a minutes of use basis to collection based upon
flat rates per subscriber line charged to the end user ("Subscriber Line Charge"
or "SLC") and charged to the interexchange carriers ("Presubscribed
Interexchange Carrier Charge" or "PICC"). In addition, a portion of the existing
"transport interconnection charge" ("TIC") will be moved to the tandem switching
function. These structural changes are phased in over a period of years. The
Company believes these structural changes will allow CLECs, such as the Company,
to more effectively compete with ILECs for certain types of business.
The Company believes that the FCC will undertake additional proceedings and
enter additional orders, as a result of the enactment of federal legislation,
defining and construing the terms and conditions of the various components
necessary for local competition, including orders deregulating and providing
pricing flexibility to the ILECs as competition develops. 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, and
may be stayed pending a decision on appeal. In addition, the Telecommunications
Act of 1996 and state telecommunications statutes 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 held arguments on the various appeals in
January 1997, and a decision is expected by mid-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
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<PAGE> 73
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 all of its operating networks. State authorizations
vary in the scope of the intrastate services permitted. The Company is in the
process of seeking to expand the scope of its intrastate certification in
various jurisdictions, a process which will depend upon regulatory action in the
individual states. State laws and regulations that prohibit or have the effect
of prohibiting, local and long distance telecommunications competition are
preempted under the Telecommunications Act of 1996.
In most states, the Company is required to file tariffs setting forth the
terms, conditions and prices for services which are classified as intrastate. In
some states, the Company's tariff can list a range of prices for particular
services, and in others, such prices can be set on an individual customer basis.
The Company is not subject to price cap or to rate of return regulation in any
state in which it currently provides services.
Under the Telecommunications Act of 1996, implementation of the Company's
plans to compete in local markets is and will continue to be, to a certain
extent, controlled by the individual states. The Company continues to support
efforts at the state government level to more quickly implement competition in
their markets under the new federal law and to permit CLECs to operate on the
same basis and with the same rights as the ILECs, sometimes referred to as
"co-carrier status." As of March 31, 1997, 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, and when state PUCs complete ILEC unbundled cost proceedings,
CLECs may realize lower costs for providing intrastate switched local exchange
services in that state.
The Company has established interconnection agreements with ILECs for all
of its operating 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, and
the Company has interconnection arrangements with ILECs in all of its operating
markets. While the Telecommunications Act of 1996 mandates the implementation of
interconnection arrangements, there can be no assurance that such negotiations
will enable the Company to secure its desired co-carrier arrangements in a
timely fashion or for appropriate rates and terms.
LOCAL GOVERNMENT AUTHORIZATIONS
In certain locations, the Company is required to obtain local franchises,
licenses or other operating rights and street opening and construction permits
to install and expand its fiber optic networks. In some of the areas where the
Company provides network services, the Company's subsidiaries pay license or
franchise fees based on a percent of gross revenues or on a per linear foot
basis. There is no assurance that certain cities that do not impose fees will
not seek to impose fees, nor is there any assurance that, following the
expiration of existing franchises, fees will remain at their current levels.
The Telecommunications Act of 1996 prohibits local governmental authorities
from discriminating among telecommunications carriers and mandates competitively
neutral treatment.
If any of the Company's existing franchise or license agreements were
terminated prior to its expiration date and the Company were forced to remove
its fiber from the streets or abandon its network in place, such termination
would have a material adverse effect on the Company's subsidiary in that
metropolitan area and could have a material adverse effect on the Company.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS
Robert A. Brooks(1)............................. 65 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............................... 48 Executive Vice President, Regulatory and
Corporate Development
David L. Solomon................................ 37 Executive Vice President & Chief Financial
Officer
Gregory J. Christoffel.......................... 48 Senior Vice President & General Counsel
Marilou Crum.................................... 49 Senior Vice President, Marketing and Carrier/
Reseller 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
W. Bruce Hanks(2,4)............................. 42 Director
Jonathan M. Nelson(1,2,4,5)..................... 41 Director
Glenn H. Post, III(1,5)......................... 44 Director
G. Jackson Tankersley, Jr.(1,2,4,5)............. 47 Director
Ronald H. Vander Pol(2,3)....................... 44 Director
Carol deB. Whitaker(2,4)........................ 43 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
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Northeastern University and currently is a member of its Corporation. Mr. Brooks
currently serves as a member of President's Council of St. Louis University and
is a Registered Professional Engineer, a Member of N.S.P.E., a Senior Member of
I.E.E.E. and an inducted member of the prestigious Cable Television Pioneers
Club.
JAMES C. ALLEN, VICE CHAIRMAN, CEO. Mr. Allen has been Vice Chairman and
CEO of the Company since its formation in November 1993. Mr. Allen previously
served as President and COO of BTC. Mr. Allen has 25 years experience as an
entrepreneur, business planner and developer, cable system operator, financier,
expert witness and advisor in cable television and broadband telecommunications.
Mr. Allen was a founder and President, CFO and COO of Cencom Cable Associates,
Vice President of Operations of Telcom Engineering, Inc., a telecommunications
engineering and consulting firm with clients in both the telephone and cable
television industries, Vice President of Operations of United Cable Television,
Divisional Manager of Continental Telephone Corporation, and Vice President for
Finance of National Communications Service Corporation. He served as Chief
Financial and Chief Operating Officer of David Lipscomb University, from which
he holds a B.S. degree.
D. CRAIG YOUNG, PRESIDENT, COO. Mr. Young has served as President and COO
of the Company since April 1995. Mr. Young has 16 years experience in the
telecommunications industry. He served as Vice President-Sales Operations,
Custom Business Services of Ameritech, Inc. from 1993 to 1995; Vice
President-Sales and Service, Business and Government Services of U.S. West
Communications, Inc. from 1992 to 1993; Vice President-Sales, Large Business
Service from 1989 to 1992; and Vice President and General Manager-U.S. West
Information Systems from 1986 to 1988. Mr. Young's responsibilities at
Ameritech, Inc. and U.S. West Communications, Inc. included the management of
all voice and data sales, engineering and pricing activities for large
commercial and government end users, and full P&L responsibility for more than
$650 million in revenue and direction of a work force of more than 400
employees. Prior to that he served as President of Executone Information
Systems, a franchise distributor of voice products. He joined the Company in
1995. He has a B.S., Business Administration/Marketing degree from California
State University and has attended the Executive Management Program at Columbia
University.
JOHN C. SHAPLEIGH, EXECUTIVE VICE PRESIDENT, REGULATORY AND CORPORATE
DEVELOPMENT. Mr. Shapleigh has been Executive Vice President in charge of the
Company's regulatory and corporate development activities since its formation in
November 1993. Mr. Shapleigh has 22 years of entrepreneurial, management,
regulatory, government policy and legal experience. He is 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
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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.
MARILOU CRUM, SENIOR VICE PRESIDENT, MARKETING AND CARRIER/RESELLER
SALES. Ms. Crum joined the Company as Senior Vice President, Marketing and
Carrier/Reseller Sales, in July 1996 and 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. Mr. Christoffel joined the Company in 1996 after
serving as the President of Brooks Telecommunications International, Inc.,
responsible for overseeing the development of a broadband integrated services
digital network in a joint venture in Guangzhou, China. Mr. Christoffel holds an
A.B. (Classical) in philosophy and languages from St. Louis University School of
Philosophy and Letters and a J.D. cum laude from St. Louis University School of
Law (Law Journal, Woolsack).
JIM A. MOFFIT, SENIOR VICE PRESIDENT, AND MANAGING DIRECTOR -- GLA
INTERNATIONAL. Mr. Moffit has 26 years experience as a financial officer,
business and financial planner, specialist in regulatory matters, accountant,
expert witness, consultant and auditor, including 24 years with a large
independent telephone company and an international accounting firm. Mr. Moffit
was President of Contel Corporation Central Region for four years until Contel
was merged into GTE in 1991. Other positions with Contel included five years as
Vice President-Financial Director, Western Region; two years as Assistant Vice
President-Revenue Requirements, Western Region; four years as Assistant Vice
President-Financial Planning, Western Region; and five years as corporate chief
accountant. Mr. Moffit also spent four years on the audit staff of Arthur
Andersen. He holds a B.S., Accounting degree, with honors, from Northeast
Missouri State University and an MBA from Washington University. Mr. Moffit also
has a CPA and is licensed to practice accounting in Missouri. He was named as
one of the telecommunications industry's "Rising Stars" by Telephony Magazine in
1989. He has served the Company in various positions since its formation in 1993
and was an executive officer of BTC from 1991 to 1993.
MARK W. SENDA, SENIOR VICE PRESIDENT, OPERATIONS. Mr. Senda joined the
Company as Senior Vice President, Operations, effective January 1, 1997, and has
more than 20 years of progressive
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experience in the areas of operations engineering, business development and
general management. During the past 15 years he has been actively engaged in the
rapidly growing competitive communications industry. More recent assignments
have included key roles as Senior Vice President Network Services for MFS
Telecom, the largest provider of North American CAP services; Vice President
North American Operations for MFS Global Network Services, the largest provider
of domestic and international CLEC, CAP and enhanced data services; Senior
Manager Strategic Accounts Implementation for MCI Communications, a worldwide
provider of competitive long distance and data services; Manager North American
Messaging Operations for MCI Digital Information Services Corporation, a leading
provider of enhanced messaging products. Mr. Senda has also honorably served as
a Non-Commissioned Officer in the United States Navy and holds a Master of Arts
degree in Telecommunications Policy from The George Washington University as
well as a Bachelor of Sciences degree in General Business from The State
University of New York.
WAYMON R. TIPTON, CFA, SENIOR VICE PRESIDENT, CORPORATE COMMUNICATIONS AND
STRATEGIC DEVELOPMENT. Mr. Tipton joined the Company as Senior Vice President,
Corporate Communications and Strategic Development, in August 1996 and has over
15 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 of ST Enterprises, Ltd., a local exchange telephone company;
Datamarine International; Golden Sky Services, Inc.; 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
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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.
W. BRUCE HANKS, DIRECTOR. Mr. Hanks is Senior Vice President -- Corporate
Development and Strategy, Chief Operating Officer and a director of Century
Telephone. He has served in various executive capacities for Century Telephone
since 1989.
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., which is the management company for PMP. He joined
that firm in 1990. Mr. Nelson is also president and chief executive officer of
Providence Equity Partners Inc., the management company of Providence Equity
Partners L.P. (together with PMP, "Providence") and 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, PCS, cable
television and broadcast businesses. Mr. Nelson is currently a director of
Wellman, Inc., Western Wireless Corporation and numerous privately-held
companies affiliated with Providence or Narragansett. 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.
GLENN H. POST, III, DIRECTOR. Mr. Post is Vice Chairman of the Board,
President and Chief Executive Officer of Century Telephone. He has served in
various executive capacities for Century Telephone since 1988.
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 20 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 video
telecommunications 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.
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Ms. Whitaker has a B.A. in Economics from Colorado College and an M.B.A. from
the University of Chicago.
Officers are elected by and serve at the discretion of the Board of
Directors. There are no 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 and a Board Governance Committee. The
Compensation Committee is comprised of Messrs. Tankersley (Chairman) and Nelson
and Ms. Whitaker.
Until April 29, 1997, Directors were not compensated for their services as
directors but were reimbursed for expenses incurred in connection with attending
Board and committee meetings. As of April 29, 1997, directors who are not
employees of the Company will be paid a $10,000 annual retainer fee in quarterly
installments plus a $1,000 per diem meeting attendance fee and will be
reimbursed for expenses incurred in connection with attending Board and
committee meetings. Outside directors will have the opportunity to elect to
receive, in lieu of the cash retainer and attendance fees, a number of common
stock options equal to the quotient of four times the cash fees divided by the
market price of the Common Stock on the first trading date following each Annual
Meeting of the Company's stockholders and with a price equal to the market price
of the Common Stock on such trading date. Effective as of April 29, 1997,
directors who are not employees of the Company will receive an initial grant of
non-qualified stock options for 10,000 shares at fair market value on date of
grant and, thereafter, annual grants of non-qualified stock options for 5,000
shares at fair market value on date of grant, which options will be one-half
vested after six months and will be fully vested upon completion of one full
year of Board service following the date of grant. The options will be granted
pursuant to the Company's 1997 Stock Incentive Plan.
The By-laws of the Company provide for a Board of Directors consisting of
12 directors. At the present time there is one vacancy. Each of the directors,
other than Messrs. Bresnan, Hanks, Post, 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, Ms. Whitaker was elected on October 15, 1996 and
Messrs. Hanks and Post have served as directors since May 5, 1997. 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 2000, are Messrs. Benbow and Vander
Pol and Ms. Whitaker; the Class II directors, whose term expires in 1998, are
Messrs. Allen, Bresnan, Hanks and Young; and the Class III directors, whose term
expires in 1999, are Messrs. Brooks, Nelson, Post and Tankersley.
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DESCRIPTION OF EXISTING DEBT
AT&T CREDIT FACILITY
The AT&T Credit Facility currently provides the Company a secured line of
credit totaling $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 interest only payments through December 1997 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 Companies and is guaranteed by intermediate
subsidiaries of the Company. The facility is further secured by the stock of
such subsidiaries and such guarantors.
The AT&T Credit Facility contains covenants substantially the same as the
covenants in the Notes and also contains covenants applicable to such
subsidiaries and such guarantors which place certain additional limitations on
the ability of such entities to incur indebtedness, create liens, engage in new
businesses, dispose of assets, issue additional capital stock, and effect
mergers and consolidations.
The Company currently intends to use proceeds of the sale of the Private
Notes to repay the AT&T Credit Facility.
BANK CREDIT FACILITY
The Bank Credit Facility provides the subsidiary operating the Company's
Tulsa, Oklahoma network the ability to borrow amounts up to $10 million from
time to time prior to June 30, 1997, with a final maturity of all loans no later
than June 30, 2002, with interest only payment through August 31, 1997 and a 4.5
year principal payout period thereafter. The Bank Credit Facility is secured by
the assets and stock of the subsidiary. The loan agreement contains certain
restrictive covenants, including limitations on the ability of the subsidiary to
declare and pay dividends to the Company, to incur additional indebtedness, to
make loans and advances and to engage in transactions with the Company (except
for reimbursement for services rendered on arms-length terms and repayment of up
to $10 million of subordinated debt prior to June 30, 1997 in the absence of a
default under the Bank Credit Facility). The Bank Credit Facility contains
financial covenants, including limitations on the ratios of the subsidiary's
annualized operating cash flow to its outstanding debt, interest expense and
debt service costs and requirements for the maintenance of a minimum amount of
annualized operating cash flow. At March 31, 1997, there was $100,000 of
outstanding indebtedness under the Bank Credit Facility.
SENIOR DISCOUNT NOTES
On May 29, 1997, the Company completed the issuance and sale of the Private
Notes for which the Company received proceeds net of underwriting discounts of
approximately $242.8 million. On November 7, 1996, the Company completed the
issuance and sale of $400.0 million aggregate principal amount of the 11 7/8%
Senior Discount Notes for which the Company received proceeds net of
underwriting discounts of approximately $217.2 million. On February 26, 1996,
the Company completed the issuance and sale of $425.0 million aggregate
principal amount of the 10 7/8% Senior Discount Notes for which the Company
received proceeds net of underwriting discounts of approximately $241.0 million.
The Senior Discount Notes rank pari passu with the Notes and contain covenants
substantially the same as the covenants in the Notes. The Senior Discount Notes
will mature in 2006 and be payable prior to the maturity of the Notes.
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DESCRIPTION OF THE NOTES
The Private Notes were, and the Exchange Notes will be, issued under an
Indenture, dated as of May 29, 1997 (the "Indenture"), between the Company and
The Bank of New York, as trustee (the "Trustee"), a copy of which has been filed
as an exhibit to the Exchange Offer Registration Statement. The statements under
this caption relating to the Notes and the Indenture are summaries and do not
purport to be complete, and are subject to, and are qualified in their entirety
by reference to, all the provisions of the Indenture, including the definitions
of certain terms therein. The Indenture is by its terms subject to and governed
by the Trust Indenture Act of 1939, as amended. Unless otherwise indicated,
references under this caption to sections, "sec." or articles are references to
the Indenture. Where reference is made to particular provisions of the Indenture
or to defined terms not otherwise defined herein, such provisions or defined
terms are incorporated herein by reference. The Private Notes and the Exchange
Notes will be considered collectively to be a single class for all purposes
under the Indenture, including, without limitation, waivers, amendments,
redemptions and Offers to Purchase, and, for purposes of this Description of the
Notes, all references herein to "Notes" shall be deemed to refer collectively to
the Private Notes and the Exchange Notes, unless the context requires otherwise.
The definitions of certain capitalized terms used in the following summary are
set forth below under "-- Certain Definitions".
GENERAL
The Notes are senior unsecured obligations of the Company limited to
$250,000,000 aggregate principal amount and will mature on June 1, 2007. The
Notes bear interest at the rate of 10% per annum from May 29, 1997 or from the
most recent Interest Payment Date to which interest has been paid or duly
provided for, payable semi-annually on June 1 and December 1 of each year,
commencing December 1, 1997 to the Person in whose name the Note (or any
predecessor Note) is registered at the close of business on the preceding May 15
and November 15, as the case may be. Interest on the Notes will be computed on
the basis of a 360-day year of twelve 30-day months. (sec.sec. 301, 307 and 310)
Principal of and premium, if any, and interest on the Notes is payable, and
the Notes may be presented for registration of transfer and exchange, at the
office or agency of the Company maintained for that purpose in the Borough of
Manhattan, The City of New York, provided that at the option of the Company,
payment of interest on the Notes may be made by check mailed to the address of
the Person entitled thereto as it appears in the Note Register. Until otherwise
designated by the Company, such office or agency will be the corporate trust
office of the Trustee, as Paying Agent and Registrar. (sec.sec. 301, 305 and
1002)
The Notes are issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiples of $1,000 in excess thereof.
(sec. 302) No service charge will be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
(sec. 305)
RANKING
The Notes are senior unsecured obligations of the Company, rank pari passu
in right of payment with all existing and future senior unsecured obligations of
the Company at the parent level and rank senior in right of payment to all
future subordinated obligations of the Company at the parent level. Holders of
secured obligations of the Company, however, will have claims that are prior to
the claims of the holders of the Notes with respect to the assets securing such
other obligations.
The Company's principal operations are conducted through its Subsidiaries
and, therefore, the Company is dependent upon the cash flow of its Subsidiaries
to meet its obligations. The Company's Subsidiaries have no obligation to
guarantee or otherwise pay amounts due under the Notes. Therefore, the Notes are
effectively subordinated to all indebtedness and other liabilities and
commitments (including trade payables) of the Company's Subsidiaries (including
obligations
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under the AT&T Credit Facility and the Bank Credit Facility). Any right of the
Company to receive assets of any of its Subsidiaries upon any liquidation or
reorganization of such Subsidiary (and the consequent right of holders of the
notes to participate in those assets) is effectively subordinated to the claims
of the Subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of the Subsidiary. Any recognized claims of the Company
as a creditor of the Subsidiary would be subordinate to any prior security
interest held by any other creditor of the Subsidiary and obligations of the
Subsidiary that are senior to those owing to the Company.
As of March 31, 1997, on a pro forma basis after giving effect to the sale
of the Private Notes, (i) the total amount of outstanding liabilities of the
Company (parent only), including trade payables, would have been approximately
$841.5 million and (ii) the total amount of outstanding liabilities of the
Company's subsidiaries, including trade payables, would have been $20.8 million.
An aggregate of $50.1 million of such outstanding liabilities is represented by
credit facilities secured by assets of the Company and certain of its
subsidiaries. The Company's outstanding Senior Discount Notes with an aggregate
principal amount at maturity of $825 million will mature in 2006 and be payable
prior to the maturity of the Notes. See "Description of Existing Debt" and "Pro
Forma Combined Consolidated Financial Information."
FORM, DENOMINATION, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES
Notes will be issued only in fully registered form, without interest
coupons, in minimum denominations of $1,000 and any integral multiples of $1,000
in excess thereof. Notes will not be issued in bearer form.
Exchange Notes issued in exchange for Private Notes currently evidenced by
one or more fully registered global notes will be evidenced by one or more Notes
in registered, global form without interest coupons (collectively, the "Global
Notes"). The Global Notes will be deposited upon issuance with the Trustee as
custodian for DTC in New York, New York, and registered in the name of DTC or
its nominee, in each case for credit to an account of a direct or indirect
participant in DTC as described below.
Except as set forth below, the Global Notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for Notes
in certificated form except in the limited circumstances described below under
"-- Exchanges of Book-Entry Notes for Certificated Notes."
EXCHANGES OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES. A beneficial
interest in a Global Note may not be exchanged for a Note in certificated form
unless (i) DTC (x) notifies the Company that it is unwilling or unable to
continue as Depositary for the Global Note or (y) has ceased to be a clearing
agency registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in either case the Company thereupon fails to appoint a
successor Depositary, (ii) the Company, at its option, notifies the Trustee in
writing that it elects to cause the issuance of the Notes in certificated form
or (iii) there shall have occurred and be continuing an Event of Default or any
event which after notice or lapse of time or both would be an Event of Default
with respect to the Notes. In all cases, certificated Notes delivered in
exchange for any Global Note or beneficial interests therein will be registered
in the names, and issued in any approved denominations, requested by or on
behalf of the Depositary (in accordance with its customary procedures). Any
certificated Note issued in exchange for an interest in a Global Note will bear
the legend restricting transfers that is borne by such Global Note. Any such
exchange will be effected through the DWAC System and an appropriate adjustment
will be made in the records of the Security Registrar to reflect a decrease in
the principal amount of the relevant Global Note.
CERTAIN BOOK-ENTRY PROCEDURES FOR GLOBAL NOTES. The descriptions of the
operations and procedures of DTC that follow are provided solely as a matter of
convenience. These operations and procedures are solely within the control of
the respective settlement systems and are subject to changes by them from time
to time. The Company takes no responsibility for these operations and
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procedures and urges investors to contact the system or their participants
directly to discuss these matters.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants ("participants") and facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical transfer and delivery of certificates.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Indirect
access to the DTC system is available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
DTC has advised the Company that its current practice, upon the issuance of
a Global Note, is to credit, on its internal system, the respective principal
amount of the individual beneficial interests represented by such Global Note to
the accounts with DTC of the participants through which such interests are to be
held. Ownership of beneficial interests in the Global Notes will be shown on,
and the transfer of that ownership will be effected only through, records
maintained by DTC or its nominees (with respect to interests of participants)
and the records of participants and indirect participants (with respect to
interests of persons other than participants).
AS LONG AS DTC, OR ITS NOMINEE, IS THE REGISTERED HOLDER OF A GLOBAL NOTE,
DTC OR SUCH NOMINEE, AS THE CASE MAY BE, WILL BE CONSIDERED THE SOLE OWNER AND
HOLDER OF THE NOTES REPRESENTED BY SUCH GLOBAL NOTE FOR ALL PURPOSES UNDER THE
INDENTURE AND THE NOTES. Except in the limited circumstances described above
under "-- Exchanges of Book-Entry Notes for Certificated Notes," owners of
beneficial interests in a Global Note will not be entitled to have any portions
of such Global Note registered in their names, will not receive or be entitled
to receive physical delivery of Notes in definitive form and will not be
considered the owners or Holders of the Global Note (or any Notes represented
thereby) under the Indenture or the Notes.
Investors may hold their interests in a Global Note directly through DTC,
if they are participants in such system, or indirectly through organizations
which are participants in such system. All interests in a Global Note will be
subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such persons may be limited to
that extent. Because DTC can act only on behalf of its participants, which in
turn act on behalf of indirect participants and certain banks, the ability of a
person having beneficial interests in a Global Note to pledge such interest to
persons or entities that do not participate in the DTC system, or otherwise take
actions in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests.
Payments of the principal of, premium, if any, and interest on Global Notes
will be made to DTC or its nominee as the registered owner thereof. Neither the
Company, the Trustee nor any of their respective agents will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note representing any Notes held by
it or its nominee, will immediately credit participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of such Global Note for such Notes as shown on the records of
DTC or its nominee. The Company also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing
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instructions and customary practices, as is the case with securities held for
the accounts of customers registered in "street name." Such payments will be the
responsibility of such participants.
Interests in the Global Notes will trade in DTC's Same-Day Funds Settlement
System and secondary market trading activity in such interests will therefore
settle in immediately available funds, subject in all cases to the rules and
procedures of DTC and its participants. Transfers between participants in DTC
will be effected in accordance with DTC's procedures, and will be settled in
same-day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account with DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of the Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default (as defined below) under the Notes, DTC reserves the
right to exchange the Global Notes for legended Notes in certificated form, and
to distribute such Notes to its participants.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of beneficial ownership interests in the Global Notes among
participants of DTC, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. None of
the Company, the Trustee nor any of their respective agents will have any
responsibility for the performance by DTC or its participants or indirect
participants of its obligations under the rules and procedures governing their
operations, including maintaining, supervising or reviewing the records relating
to, or payments made on account of, beneficial ownership interests in Global
Notes.
OPTIONAL REDEMPTION
The Notes are subject to redemption, at the option of the Company, in whole
or in part, at any time on or after June 1, 2002 and prior to maturity, upon not
less than 30 nor more than 60 days' notice mailed to each holder of Notes to be
redeemed at such holder's address appearing in the Note Register, in amounts of
$1,000 or an integral multiple of $1,000, at the following Redemption Prices
(expressed as percentages of the principal amount thereof) plus accrued interest
to but excluding the Redemption Date (subject to the right of holders of record
on the relevant Regular Record Date to receive interest due on an Interest
Payment Date that is on or prior to the Redemption Date), if redeemed during the
12-month period beginning June 1 of the years indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2002................................... 105.000%
2003................................... 103.333%
2004................................... 101.667%
2005 and thereafter.................... 100.000%
</TABLE>
(sec.sec. 203, 1101, 1105 and 1107)
The Notes are redeemable prior to June 1, 2002 only in the event that the
Company receives net proceeds from the sale of its Common Stock in a Strategic
Equity Investment on or before June 1, 2000 in which case the Company may, at
its option, use all or a portion of any such net proceeds to redeem Notes in a
principal amount of up to an aggregate amount equal to 33 1/3% of the original
principal amount of the Notes, provided, however, that Notes in an amount equal
to at least 66 2/3% of the original principal amount of the Notes remain
outstanding after such redemption. Such redemption must occur on a Redemption
Date within 75 days of such sale and upon not less than 30 nor more than 60
days' notice mailed to each holder of Notes to be redeemed at such holder's
address appearing in the Note Register, in amounts of $1,000 or an integral
multiple of $1,000 at a
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redemption price equal to 110% of the original principal amount of the Notes
plus accrued interest to but excluding the Redemption Date.
If less than all the Notes are to be redeemed, the Trustee shall select, in
such manner as it shall deem fair and appropriate, the particular Notes to be
redeemed or any portion thereof that is an integral multiple of $1,000. (sec.
1104)
The Notes do not have the benefit of any sinking fund.
COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON CONSOLIDATED DEBT
The Company may not, and may not permit any Subsidiary of the Company to,
incur any Debt unless either (a) the ratio of (i) the aggregate consolidated
principal amount of Debt of the Company outstanding as of the most recent
available quarterly or annual balance sheet, after giving pro forma effect to
the Incurrence of such Debt and any other Debt Incurred since such balance sheet
date and the receipt and application of the proceeds thereof, to (ii)
Consolidated Cash Flow Available for Fixed Charges for the four full fiscal
quarters next preceding the Incurrence of such Debt for which consolidated
financial statements are available, determined on a pro forma basis as if any
such Debt had been Incurred and the proceeds thereof had been applied at the
beginning of such four fiscal quarters, would be less than 5.5 to 1.0 for such
four-quarter periods ending on or prior to December 31, 1999 and 5.0 to 1.0 for
such periods ending thereafter, or (b) the Company's Consolidated Capital Ratio
as of the most recent available quarterly or annual balance sheet, after giving
pro forma effect to the Incurrence of such Debt and any other Debt Incurred
since such balance sheet date and the receipt and application of the proceeds
thereof, is less than 2.0 to 1.0.
Notwithstanding the foregoing limitation, the Company and any Subsidiary
may Incur the following:
(i) Debt under Secured Credit Facilities in an aggregate principal
amount at any one time not to exceed $160 million, and any renewal,
extension, refinancing or refunding thereof in an amount which, together
with any principal amount remaining outstanding or available under all
Secured Credit Facilities, does not exceed the aggregate principal amount
outstanding or available under all Secured Credit Facilities immediately
prior to such renewal, extension, refinancing or refunding;
(ii) Purchase Money Debt, which is incurred for the construction,
acquisition and improvement of Telecommunications Assets, provided that the
amount of such Purchase Money Debt does not exceed 80% of the cost of the
construction, acquisition or improvement of the applicable
Telecommunications Assets;
(iii) Debt owed by the Company to any Wholly-Owned Subsidiary of the
Company or Debt owed by a Subsidiary of the Company to the Company or a
Wholly-Owned Subsidiary of the Company; provided, however, that upon either
(x) the transfer or other disposition by such Wholly-Owned Subsidiary or
the Company of any Debt so permitted to a Person other than the Company or
another Wholly-Owned Subsidiary of the Company or (y) the issuance (other
than directors' qualifying shares), sale, lease, transfer or other
disposition of shares of Capital Stock (including by consolidation or
merger) of such Wholly-Owned Subsidiary to a Person other than the Company
or another such Wholly-Owned Subsidiary, the provisions of this clause
(iii) shall no longer be applicable to such Debt and such Debt shall be
deemed to have been Incurred at the time of such transfer or other
disposition;
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(iv) Debt Incurred to renew, extend, refinance or refund (each, a
"refinancing") Debt outstanding at the date of the Indenture or Incurred
pursuant to clause (ii) of this paragraph or the Notes in an aggregate
principal amount not to exceed the aggregate principal amount of and
accrued interest on the Debt so refinanced plus the amount of any premium
required to be paid in connection with such refinancing pursuant to the
terms of the Debt so refinanced or the amount of any premium reasonably
determined by the Company as necessary to accomplish such refinancing by
means of a tender offer or privately negotiated repurchase, plus the
expenses of the Company incurred in connection with such refinancing;
provided, however, that Debt the proceeds of which are used to refinance
the Notes or Debt which is pari passu to the Notes or Debt which is
subordinate in right of payment to the Notes shall only be permitted if (A)
in the case of any refinancing of the Notes or Debt which is pari passu to
the Notes, the refinancing Debt is made pari passu to the Notes or
constitutes Subordinated Debt, and, in the case of any refinancing of
Subordinated Debt, the refinancing Debt constitutes Subordinated Debt and
(B) in any case, the refinancing Debt by its terms, or by the terms of any
agreement or instrument pursuant to which such Debt is issued, (x) does not
provide for payments of principal of such Debt at stated maturity or by way
of a sinking fund applicable thereto or by way of any mandatory redemption,
defeasance, retirement or repurchase thereof by the Company (including any
redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of the
acceleration of any payment with respect to such Debt upon any event of
default thereunder), in each case prior to the time the same are required
by the terms of the Debt being refinanced and (y) does not permit
redemption or other retirement (including pursuant to an offer to purchase
made by the Company) of such Debt at the option of the holder thereof prior
to the time the same are required by the terms of the Debt being
refinanced, other than a redemption or other retirement at the option of
the holder of such Debt (including pursuant to an offer to purchase made by
the Company) which is conditioned upon a change of control pursuant to
provisions substantially similar to those described under "Change of
Control";
(v) Debt consisting of Permitted Interest Rate and Currency Protection
Agreements; and
(vi) Debt not otherwise permitted to be Incurred pursuant to clauses
(i) through (v) above, which, together with any other outstanding Debt
Incurred pursuant to this clause (vi), has an aggregate principal amount
not in excess of $10 million at any time outstanding. (sec. 1008)
LIMITATION ON DEBT AND PREFERRED STOCK OF SUBSIDIARIES
The Company may not permit any Subsidiary of the Company that is not a
Guarantor to Incur or suffer to exist any Debt or issue any Preferred Stock
except:
(i) Debt or Preferred Stock outstanding on the date of the Indenture
after giving effect to the application of the proceeds of the Notes;
(ii) Debt Incurred or Preferred Stock issued to and held by the
Company or a Wholly-Owned Subsidiary of the Company (provided that such
Debt or Preferred Stock is at all times held by the Company or a
Wholly-Owned Subsidiary of the Company);
(iii) Debt Incurred or Preferred Stock issued by a Person prior to the
time (A) such Person became a Subsidiary of the Company, (B) such Person
merges into or consolidates with a Subsidiary of the Company or (C) another
Subsidiary of the Company merges into or consolidates with such Person (in
a transaction in which such Person becomes a Subsidiary of the Company),
which Debt or Preferred Stock was not Incurred or issued in anticipation of
such transaction and was outstanding prior to such transaction;
(iv) Debt consisting of Permitted Interest Rate and Currency
Protection Agreements; (v) Debt or Preferred Stock of a Joint Venture;
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(vi) Debt under a Secured Credit Facility which is permitted to be
outstanding under clause (i) of the Limitation on Consolidated Debt; and
(vii) Debt or Preferred Stock which is exchanged for, or the proceeds
of which are used to refinance, refund or redeem, any Debt or Preferred
Stock permitted to be outstanding pursuant to clauses (i) and (iii) hereof
(or any extension or renewal thereof) (for purposes hereof, a
"refinancing"), in an aggregate principal amount, in the case of Debt, or
with an aggregate liquidation preference in the case of Preferred Stock,
not to exceed the aggregate principal amount of the Debt so refinanced or
the aggregate liquidation preference of the Preferred Stock so refinanced,
plus the amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Debt or Preferred Stock so
refinanced or the amount of any premium reasonably determined by the
Company as necessary to accomplish such refinancing by means of a tender
offer or privately negotiated repurchase, plus the amount of expenses of
the Company and the applicable Subsidiary Incurred in connection therewith
and provided the Debt or Preferred Stock Incurred or issued upon such
refinancing is by its terms, or by the terms of any agreement or instrument
pursuant to which such Debt or Preferred Stock is Incurred or issued, (x)
does not provide for payments of principal or liquidation value at the
stated maturity of such Debt or Preferred Stock or by way of a sinking fund
applicable to such Debt or Preferred Stock or by way of any mandatory
redemption, defeasance, retirement or repurchase of such Debt or Preferred
Stock by the Company or any Subsidiary of the Company (including any
redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon an event of default thereunder), in each
case prior to the time the same are required by the terms of the Debt or
Preferred Stock being refinanced and (y) does not permit redemption or
other retirement (including pursuant to an offer to purchase made by the
Company or a Subsidiary of the Company) of such Debt or Preferred Stock at
the option of the holder thereof prior to the stated maturity of the Debt
or Preferred Stock being refinanced, other than a redemption or other
retirement at the option of the holder of such Debt or Preferred Stock
(including pursuant to an offer to purchase made by the Company or a
Subsidiary of the Company) which is conditioned upon the change of control
of the Company pursuant to provisions substantially similar to those
contained in the Indenture described under "Change of Control" and
provided, further, that in the case of any exchange or redemption of
Preferred Stock of a Subsidiary of the Company, such Preferred Stock may
only be exchanged for or redeemed with Preferred Stock of such Subsidiary.
(sec. 1009)
LIMITATION ON RESTRICTED PAYMENTS
The Company (i) may not, directly or indirectly, declare or pay any
dividend, or make any distribution, in respect of its Capital Stock or to the
holders thereof, excluding any dividends or distributions payable solely in
shares of its Capital Stock (other than Disqualified Stock) or in options,
warrants or other rights to acquire its Capital Stock (other than Disqualified
Stock), (ii) may not, and may not permit any Subsidiary to, purchase, redeem, or
otherwise retire or acquire for value (a) any Capital Stock of the Company or
any Related Person of the Company (other than a permitted refinancing) or (b)
any options, warrants or rights to purchase or acquire shares of Capital Stock
of the Company or any Related Person of the Company or any securities
convertible or exchangeable into shares of Capital Stock of the Company or any
Related Person of the Company (other than a permitted refinancing), (iii) may
not make, or permit any Subsidiary to make, any Investment in, or payment on a
Guarantee of any obligation of, any Affiliate or any Related Person, other than
the Company or an 80% or more owned Subsidiary of the Company which is an 80% or
more owned Subsidiary prior to such Investment, and which Subsidiary (other than
a wholly-owned Subsidiary) was not established or formed in anticipation or in
furtherance thereof, except for Permitted Investments, and (iv) may not, and may
not permit any Subsidiary to, redeem, defease, repurchase, retire or otherwise
acquire or retire for value, prior to any scheduled maturity, repayment or
sinking fund payment, Debt of the Company which is subordinate in right of
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payment to the Notes (each of clauses (i) through (iv) being a "Restricted
Payment") if: (1) an Event of Default, or an event that with the passing of time
or the giving of notice, or both, would constitute an Event of Default, shall
have occurred and be continuing, or (2) upon giving effect to such Restricted
Payment, the Company could not Incur at least $1.00 of additional Debt pursuant
to the terms of the Indenture described in the first paragraph of "Limitation on
Consolidated Debt" above, or (3) upon giving effect to such Restricted Payment,
the aggregate of all Restricted Payments from February 26, 1996 exceeds the sum
of: (a) 50% of cumulative Consolidated Net Income (or, in the case Consolidated
Net Income shall be negative, less 100% of such deficit) since the end of the
last full fiscal quarter prior to February 26, 1996 through the last day of the
last full fiscal quarter ending immediately preceding the date of such
Restricted Payment; plus (b) $5.0 million; provided, however, that the Company
or a Subsidiary of the Company may make any Restricted Payment with the
aggregate net proceeds received after February 26, 1996, including the fair
value of property other than cash (determined in good faith by the Board of
Directors as evidenced by a resolution of the Board of Directors filed with the
Trustee), as capital contributions to the Company or from the issuance (other
than to a Subsidiary) of Capital Stock (other than Disqualified Stock) of the
Company and warrants, rights or options on Capital Stock (other than
Disqualified Stock) of the Company and the principal amount of Debt of the
Company that has been converted into Capital Stock (other than Disqualified
Stock and other than by a Subsidiary) of the Company after February 26, 1996.
Notwithstanding the foregoing, (i) the Company may pay any dividend on Capital
Stock of any class of the Company within 60 days after the declaration thereof
if, on the date when the dividend was declared, the Company could have paid such
dividend in accordance with the foregoing provisions, (ii) the Company may
repurchase any shares of its Common Stock or options to acquire its Common Stock
from Persons who were formerly directors, officers or employees of the Company
or any of its Subsidiaries, provided that the aggregate amount of all such
repurchases made pursuant to this clause (ii) shall not exceed $2.0 million,
plus the aggregate cash proceeds received by the Company since February 26, 1996
from issuances of its Common Stock or options to acquire its Common Stock to
directors, officers and employees of the Company or any of its Subsidiaries,
(iii) the Company and its Subsidiaries may refinance any Debt otherwise
permitted by clause (iv) of the second paragraph under "Limitation on
Consolidated Debt" above, and (iv) the Company and its Subsidiaries may retire
or repurchase any Capital Stock of the Company or of any Subsidiary of the
Company in exchange for, or out of the proceeds of the substantially concurrent
sale (other than to a Subsidiary of the Company) of, Capital Stock (other than
Disqualified Stock) of the Company. (sec. 1010)
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES
The Company may not, and may not permit any Subsidiary to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction on the ability of any Subsidiary of the
Company (i) to pay dividends (in cash or otherwise) or make any other
distributions in respect of its Capital Stock owned by the Company or any other
Subsidiary of the Company or pay any Debt or other obligation owed to the
Company or any other Subsidiary; (ii) to make loans or advances to the Company
or any other Subsidiary; or (iii) to transfer any of its property or assets to
the Company or any other Subsidiary. Notwithstanding the foregoing, the Company
may, and may permit any Subsidiary to, suffer to exist any such encumbrance or
restriction (a) pursuant to any agreement in effect on the date of the
Indenture; (b) pursuant to an agreement relating to any Acquired Debt, which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person so acquired; (c) pursuant to an
agreement effecting a renewal, refunding or extension of Debt Incurred pursuant
to an agreement referred to in clause (a) or (b) above, provided, however, that
the provisions contained in such renewal, refunding or extension agreement
relating to such encumbrance or restriction are no more restrictive in any
material respect than the provisions contained in the agreement the subject
thereof, (d) in the case of clause (iii) above, restrictions contained in any
security agreement (including a Capital Lease Obligation) securing Debt of the
Company or a Subsidiary
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otherwise permitted under the Indenture, but only to the extent such
restrictions restrict the transfer of the property subject to such security
agreement; (e) in the case of clause (iii) above, customary nonassignment
provisions entered into in the ordinary course of business in leases and other
agreements; (f) any restriction with respect to a Subsidiary of the Company
imposed pursuant to an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Subsidiary, provided that the consummation of such transaction would not result
in an Event of Default or an event that, with the passing of time or the giving
of notice or both, would constitute an Event of Default, that such restriction
terminates if such transaction is not consummated and that the consummation or
abandonment of such transaction occurs within one year of the date such
agreement was entered into; (g) pursuant to applicable law; and (h) pursuant to
the Indenture and the Notes. (sec. 1011)
LIMITATION ON LIENS
The Company may not, and may not permit any Subsidiary of the Company to,
Incur or suffer to exist any Lien on or with respect to any property or assets
now owned or hereafter acquired to secure any Debt without making, or causing
such Subsidiary to make, effective provision for securing the Notes (x) equally
and ratably with such Debt as to such property for so long as such Debt will be
so secured or (y) in the event such Debt is Debt of the Company which is
subordinate in right of payment to the Notes, prior to such Debt as to such
property for so long as such Debt will be so secured.
The foregoing restrictions shall not apply to: (i) Liens existing on the
date of the Indenture and securing Debt outstanding on the date of the Indenture
or Incurred pursuant to any Secured Credit Facility; (ii) Liens securing Debt in
an amount which, together with the aggregate amount of Debt then outstanding or
available under all Secured Credit Facilities (or under refinancings or
amendments of such Secured Credit Facilities), does not exceed 1.5 times the
Company's Consolidated Cash Flow Available for Fixed Charges for the four full
fiscal quarters preceding the Incurrence of such Lien for which consolidated
financial statements are available, determined on a pro forma basis as if such
Debt had been Incurred and the proceeds thereof had been applied at the
beginning of such four fiscal quarters; (iii) Liens in favor of the Company or
any Wholly-Owned Subsidiary of the Company; (iv) Liens on real or personal
property of the Company or a Subsidiary of the Company acquired, constructed or
constituting improvements made after the date of original issuance of the Notes
to secure Purchase Money Debt which is Incurred for the construction,
acquisition and improvement of Telecommunications Assets and is otherwise
permitted under the Indenture, provided, however, that (a) the principal amount
of any Debt secured by such a Lien does not exceed 100% of such purchase price
or cost of construction or improvement of the property subject to such Liens,
(b) such Lien attaches to such property prior to, at the time of or within 180
days after the acquisition, completion of construction or commencement of
operation of such property and (c) such Lien does not extend to or cover any
property other than the specific item of property (or portion thereof) acquired,
constructed or constituting the improvements made with the proceeds of such
Purchase Money Debt; (v) Liens to secure Acquired Debt, provided, however, that
(a) such Lien attaches to the acquired asset prior to the time of the
acquisition of such asset and (b) such Lien does not extend to or cover any
other asset; (vi) Liens to secure Debt Incurred to extend, renew, refinance or
refund (or successive extensions, renewals, refinancings or refundings), in
whole or in part, Debt secured by any Lien referred to in the foregoing clauses
(i), (ii), (iv) and (v) so long as such Lien does not extend to any other
property and the principal amount of Debt so secured is not increased except as
otherwise permitted under clause (iv) of "-- Limitation on Consolidated Debt;"
(vii) Liens not otherwise permitted by the foregoing clauses (i) through (vi) in
an amount not to exceed 5% of the Company's Consolidated Tangible Assets; and
(viii) Permitted Liens. (sec. 1015)
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LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
The Company may not, and may not permit any Subsidiary of the Company to,
enter into any Sale and Leaseback Transaction unless (i) the Company or such
Subsidiary would be entitled to Incur a Lien to secure Debt by reason of the
provisions described under "Limitation on Liens" above, equal in amount to the
Attributable Value of the Sale and Leaseback Transaction without equally and
ratably securing the Notes or (ii) the Sale and Leaseback Transaction is treated
as an Asset Disposition and all of the conditions of the Indenture described
under "Limitation on Asset Dispositions" (including the provisions concerning
the application of Net Available Proceeds) are satisfied with respect to such
Sale and Leaseback Transaction, treating all of the consideration received in
such Sale and Leaseback Transaction as Net Available Proceeds for purposes of
such covenant. (sec. 1016)
LIMITATION ON ASSET DISPOSITIONS
The Company may not, and may not permit any Subsidiary of the Company to,
make any Asset Disposition in one or more related transactions occurring within
any 12-month period unless: (i) the Company or the Subsidiary, as the case may
be, receives consideration for such disposition at least equal to the fair
market value for the assets sold or disposed of as determined by the Board of
Directors in good faith and evidenced by a resolution of the Board of Directors
filed with the Trustee; (ii) at least 75% of the consideration for such
disposition consists of (1) cash or readily marketable cash equivalents or the
assumption of Debt of the Company (other than Debt that is subordinated to the
Notes) or of the Subsidiary and release from all liability on the Debt assumed,
(2) Telecommunications Assets, or (3) shares of publicly-traded Voting Stock of
any Person engaged in the Telecommunications Business in the United States; and
(iii) all Net Available Proceeds, less any amounts invested within 360 days of
such disposition in new Telecommunications Assets, are applied within 360 days
of such disposition (1) first, to the permanent repayment or reduction of Debt
then outstanding under any Secured Credit Facility, to the extent such
agreements would require such application or prohibit payments pursuant to
clause (2) following, (2) second, to the extent of remaining Net Available
Proceeds, to make an Offer to Purchase outstanding Notes at 100% of their
principal amount plus accrued and unpaid interest thereon to the date of
purchase and, to the extent required by the terms thereof, any other Debt of the
Company that is pari passu with the Notes at a price no greater than 100% of the
principal amount thereof plus accrued interest to the date of purchase (or 100%
of the accreted value in the case of original issue discount Debt), (3) third,
to the extent of any remaining Net Available Proceeds following the completion
of the Offer to Purchase, to the repayment of other Debt of the Company or Debt
of a Subsidiary of the Company, to the extent permitted under the terms thereof
and (4) fourth, to the extent of any remaining Net Available Proceeds, to any
other use as determined by the Company which is not otherwise prohibited by the
Indenture. (sec. 1013)
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY-OWNED
SUBSIDIARIES
The Company may not, and may not permit any Subsidiary of the Company to,
issue, transfer, convey, sell or otherwise dispose of any shares of Capital
Stock of a Subsidiary of the Company or securities convertible or exchangeable
into, or options, warrants, rights or any other interest with respect to,
Capital Stock of a Subsidiary of the Company to any Person other than the
Company or a Wholly-Owned Subsidiary of the Company except (i) a sale of all of
the Capital Stock of such Subsidiary owned by the Company and any Subsidiary of
the Company that complies with the provisions described under "Limitation on
Asset Dispositions" above to the extent such provisions apply, (ii) in a
transaction that results in such Subsidiary becoming a Joint Venture, provided
such transaction complies with the provisions described under "Limitation on
Asset Dispositions" above to the extent such provisions apply (iii) if required,
the issuance, transfer, conveyance, sale or other disposition of directors'
qualifying shares, and (iv) Disqualified Stock issued in exchange for, or upon
conversion of, or the proceeds of the issuance of which are used to redeem,
refinance, replace
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or refund shares of Disqualified Stock of such Subsidiary, provided that the
amounts of the redemption obligations of such Disqualified Stock shall not
exceed the amounts of the redemption obligations of, and such Disqualified Stock
shall have redemption obligations no earlier than those required by, the
Disqualified Stock being exchanged, converted, redeemed, refinanced, replaced or
refunded. (sec. 1014)
TRANSACTIONS WITH AFFILIATES AND RELATED PERSONS
The Company may not, and may not permit any Subsidiary of the Company to,
enter into any transaction (or series of related transactions) with an Affiliate
or Related Person of the Company (other than the Company or a Wholly-Owned
Subsidiary of the Company), including any Investment, but excluding transactions
pursuant to employee compensation arrangements approved by the Board of
Directors of the Company, either directly or indirectly, unless such transaction
is on terms no less favorable to the Company or such Subsidiary than those that
could be obtained in a comparable arm's-length transaction with an entity that
is not an Affiliate or Related Person and is in the best interests of such
Company or such Subsidiary. For any transaction that involves in excess of $1.0
million but less than or equal to $5.0 million, the Chief Executive Officer of
the Company shall determine that the transaction satisfies the above criteria
and shall evidence such a determination by a certificate filed with the Trustee.
For any transaction that involves in excess of $5.0 million, a majority of the
disinterested members of the Board of Directors shall determine that the
transaction satisfies the above criteria and shall evidence such a determination
by a Board Resolution filed with the Trustee. (sec. 1012)
CHANGE OF CONTROL
Within 30 days of the occurrence of a Change of Control, the Company will
be required to make an Offer to Purchase all outstanding Notes at a purchase
price equal to 101% of their principal amount plus accrued interest to the date
of purchase. A "Change of Control" will be deemed to have occurred at such time
as either (a) any Person or any Persons acting together that would constitute a
"group" (a "Group") for purposes of Section 13(d) of the Securities Exchange Act
of 1934, or any successor provision thereto, together with any Affiliates or
Related Persons thereof, shall beneficially own (within the meaning of Rule
13d-3 under the Securities Exchange Act of 1934, or any successor provision
thereto) at least 50% of the aggregate voting power of all classes of Voting
Stock of the Company; or (b) any Person or Group, together with any Affiliates
or Related Persons thereof, shall succeed in having a sufficient number of its
nominees elected to the Board of Directors of the Company such that such
nominees, when added to any existing director or directors remaining on the
Board of Directors of the Company after such election who was a nominee of or is
an Affiliate or Related Person of such Person or Group (excluding in each case
any nominee that is a Continuing Director), will constitute a majority of the
Board of Directors of the Company. (sec. 1017)
In the event that the Company makes an Offer to Purchase the Notes, the
Company intends to comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Securities Exchange Act of 1934.
REPORTS
The Company has agreed that, for so long as any Notes remain outstanding,
it will furnish to the holders of the Notes and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act. In addition, the
Company will file with the Trustee within 15 days after it files them with the
Commission copies of the annual and quarterly reports and the information,
documents, and other reports that the Company is required to file with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC
Reports"). In the event the Company shall cease to be required to file SEC
Reports pursuant to the Exchange Act, the Company will nevertheless continue to
file such reports with the Commission (unless the Commission will not accept
such a filing) and the Trustee. The
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Company will furnish copies of the SEC Reports to the holders of Notes at the
time the Company is required to file the same with the Trustee and will make
such information available to investors who request it in writing. (sec. 1018)
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Company may not, in a single transaction or a series of related
transactions, (i) consolidate with or merge into any other Person or permit any
other Person to consolidate with or merge into the Company, or (ii) directly or
indirectly, transfer, sell, lease or otherwise dispose of all or substantially
all of its assets to any other Person, unless: (1) in a transaction in which the
Company does not survive or in which the Company sells, leases or otherwise
disposes of all or substantially all of its assets to any other Person, the
successor entity to the Company is organized under the laws of the United States
of America or any State thereof or the District of Columbia and shall expressly
assume, by a supplemental indenture executed and delivered to the Trustee in
form satisfactory to the Trustee, all of the Company's obligations under the
Indenture; (2) immediately before and after giving effect to such transaction
and treating any Debt which becomes an obligation of the Company or a Subsidiary
as a result of such transaction as having been Incurred by the Company or such
Subsidiary at the time of the transaction, no Event of Default or event that
with the passing of time or the giving of notice, or both, would constitute an
Event of Default shall have occurred and be continuing; (3) immediately after
giving effect to such transaction, the Consolidated Net Worth of the Company (or
other successor entity to the Company) is equal to or greater than that of the
Company immediately prior to the transaction; (4) immediately after giving
effect to such transaction and treating any Debt which becomes an obligation of
the Company or a Subsidiary as a result of such transaction as having been
Incurred by the Company or such Subsidiary at the time of the transaction, the
Company (including any successor entity to the Company) could Incur at least
$1.00 of additional Debt pursuant to the provisions of the Indenture described
in the first paragraph under "Limitation on Consolidated Debt" above; (5) if, as
a result of any such transaction, property or assets of the Company would become
subject to a Lien prohibited by the provisions of the Indenture described under
"Limitation on Liens" above, the Company or the successor entity to the Company
shall have secured the Notes as required by said covenant; and (6) certain other
conditions are met. (sec. 801)
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided. (sec. 101)
"Acquired Debt" means, with respect to any specified Person, (i) Debt of
any other Person existing at the time such Person merges with or into or
consolidates with or becomes a Subsidiary of such specified Person and (ii) Debt
secured by a Lien encumbering any asset acquired by such specified Person, which
Debt was not Incurred in anticipation of, and was outstanding prior to, such
merger, consolidation or acquisition.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Disposition" by any Person means any transfer, conveyance, sale,
lease or other disposition by such Person or any of its Subsidiaries (including
a consolidation or merger or other sale of any such Subsidiary with, into or to
another Person in a transaction in which such Subsidiary ceases to be a
Subsidiary of the specified Person, but excluding a disposition by a Subsidiary
of
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such Person to such Person or a Wholly-Owned Subsidiary of such Person or by
such Person to a Wholly-Owned Subsidiary of such Person) of (i) shares of
Capital Stock or other ownership interests of a Subsidiary of such Person (other
than as permitted by the provisions of the Indenture described above under the
caption "Limitation on Debt and Preferred Stock of Subsidiaries"), (ii)
substantially all of the assets of such Person or any of its Subsidiaries
representing a division or line of business (other than as part of a Permitted
Investment) or (iii) other assets or rights of such Person or any of its
Subsidiaries outside of the ordinary course of business, provided in each case
that the aggregate consideration for such transfer, conveyance, sale, lease or
other disposition is equal to $2.0 million or more in any 12-month period.
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable other than a Capital Lease Obligation, and at any
date as of which the amount thereof is to be determined, the total net amount of
rent required to be paid by such Person under such lease during the initial term
thereof as determined in accordance with generally accepted accounting
principles, discounted from the last date of such initial term to the date of
determination at a rate per annum equal to the discount rate which would be
applicable to a Capital Lease Obligation with like term in accordance with
generally accepted accounting principles. The net amount of rent required to be
paid under any such lease for any such period shall be the aggregate amount of
rent payable by the lessee with respect to such period after excluding amounts
required to be paid on account of insurance, taxes, assessments, utility,
operating and labor costs and similar charges. In the case of any lease which is
terminable by the lessee upon the payment of penalty, such net amount shall also
include the lesser of the amount of such penalty (in which case no rent shall be
considered as required to be paid under such lease subsequent to the first date
upon which it may be so terminated) or the rent which would otherwise be
required to be paid if such lease is not so terminated. "Attributable Value"
means, as to a Capital Lease Obligation, the principal amount thereof.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted accounting
principles (a "Capital Lease"). The stated maturity of such obligation shall be
the date of the last payment of rent or any other amount due under such lease
prior to the first date upon which such lease may be terminated by the lessee
without payment of a penalty. The principal amount of such obligation shall be
the capitalized amount thereof that would appear on the face of a balance sheet
of such Person in accordance with generally accepted accounting principles.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person;
provided that for purposes of a Strategic Equity Investment, Common Stock shall
include Capital Stock (other than Disqualified Stock) that is convertible into
or exchangeable for shares of the Company's Common Stock.
"Consolidated Capital Ratio" of any Person as of any date means the ratio
of (i) the aggregate consolidated principal amount of Debt of such Person then
outstanding to (ii) the aggregate consolidated paid-in capital of such Person as
of such date.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of the Company and its Subsidiaries for such period
increased by the sum of (i) Consolidated Interest Expense of the Company and its
Subsidiaries for such period, plus (ii) Consolidated Income Tax Expense of the
Company and its Subsidiaries for such period, plus
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(iii) the consolidated depreciation and amortization expense included in the
income statement of the Company and its Subsidiaries for such period, plus (iv)
any non-cash expense related to the issuance to employees of the Company or any
Subsidiary of the Company of options to purchase Capital Stock of the Company or
such Subsidiary, plus (v) any charge related to any premium or penalty paid in
connection with redeeming or retiring any Indebtedness prior to its stated
maturity; provided, however, that there shall be excluded therefrom the
Consolidated Cash Flow Available for Fixed Charges (if positive) of any
Subsidiary of the Company (calculated separately for such Subsidiary in the same
manner as provided above for the Company) that is subject to a restriction which
prevents the payment of dividends or the making of distributions to the Company
or another Subsidiary of the Company to the extent of such restriction.
"Consolidated Income Tax Expense" for any period means the aggregate
amounts of the provisions for income taxes of the Company and its Subsidiaries
for such period calculated on a consolidated basis in accordance with generally
accepted accounting principles.
"Consolidated Interest Expense" means for any period the interest expense
included in a consolidated income statement (excluding interest income) of the
Company and its Subsidiaries for such period in accordance with generally
accepted accounting principles, including without limitation or duplication (or,
to the extent not so included, with the addition of), (i) the amortization of
Debt discounts; (ii) any payments or fees with respect to letters of credit,
bankers' acceptances or similar facilities; (iii) fees with respect to interest
rate swap or similar agreements or foreign currency hedge, exchange or similar
agreements; (iv) Preferred Stock dividends of the Company and its Subsidiaries
(other than dividends paid in shares of Preferred Stock that is not Disqualified
Stock) declared and paid or payable; (v) accrued Disqualified Stock dividends of
the Company and its Subsidiaries, whether or not declared or paid; (vi) interest
on Debt guaranteed by the Company and its Subsidiaries; and (vii) the portion of
any Capital Lease Obligation paid during such period that is allocable to
interest expense.
"Consolidated Net Income" for any period means the net income (or loss) of
the Company and its Subsidiaries for such period determined on a consolidated
basis in accordance with generally accepted accounting principles; provided that
there shall be excluded therefrom (a) the net income (or loss) of any Person
acquired by the Company or a Subsidiary of the Company in a pooling-of-interests
transaction for any period prior to the date of such transaction, (b) the net
income (or loss) of any Person that is not a Subsidiary of the Company except to
the extent of the amount of dividends or other distributions actually paid to
the Company or a Subsidiary of the Company by such Person during such period,
(c) gains or losses on Asset Dispositions by the Company or its Subsidiaries,
(d) all extraordinary gains and extraordinary losses, determined in accordance
with generally accepted accounting principles, (e) the cumulative effect of
changes in accounting principles, (f) non-cash gains or losses resulting from
fluctuations in currency exchange rates and (g) the tax effect of any of the
items described in clauses (a) through (f) above; provided, further, that for
purposes of any determination pursuant to the provisions described under
"Limitation on Restricted Payments," there shall further be excluded therefrom
the net income (but not net loss) of any Subsidiary of the Company that is
subject to a restriction which prevents the payment of dividends or the making
of distributions to the Company or another Subsidiary of the Company to the
extent of such restriction.
"Consolidated Net Worth" of any Person means the stockholders' equity of
such Person, determined on a consolidated basis in accordance with generally
accepted accounting principles, less amounts attributable to Disqualified Stock
of such Person; provided that, with respect to the Company, adjustments
following the date of the Indenture to the accounting books and records of the
Company in accordance with Accounting Principles Board Opinions Nos. 16 and 17
(or successor opinions thereto) or otherwise resulting from the acquisition of
control of the Company by another Person shall not be given effect to.
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"Consolidated Tangible Assets" of any Person means the total amount of
assets (less applicable reserves and other properly deductible items) which
under generally accepted accounting principles would be included on a
consolidated balance sheet of such Person and its Subsidiaries after deducting
therefrom all goodwill, trade names, trademarks, patents, unamortized debt
discount and expense and other like intangibles, which in each case under
generally accepted accounting principles would be included on such consolidated
balance sheet.
"Continuing Director" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors of the Company on the date of the Indenture, or (ii) was nominated for
election or elected to the Board of Directors of the Company with the
affirmative vote of a majority of the Continuing Directors who were members of
the Board of Directors of the Company at the time of such nomination or
election.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations Incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(including securities repurchase agreements but excluding trade accounts payable
or accrued liabilities arising in the ordinary course of business which are not
overdue or which are being contested in good faith), (v) every Capital Lease
Obligation of such Person, (vi) all Receivables Sales of such Person, together
with any obligation of such Person to pay any discount, interest, fees,
indemnities, penalties, recourse, expenses or other amounts in connection
therewith, (vii) all obligations to redeem Disqualified Stock issued by such
Person, (viii) every obligation under Interest Rate and Currency Protection
Agreements of such Person and (ix) every obligation of the type referred to in
clauses (i) through (viii) of another Person and all dividends of another Person
the payment of which, in either case, such Person has Guaranteed. The "amount"
or "principal amount" of Debt at any time of determination as used herein
represented by (a) any Debt issued at a price that is less than the principal
amount at maturity thereof, shall be the amount of the liability in respect
thereof determined in accordance with generally accepted accounting principles,
(b) any Receivables Sale shall be the amount of the unrecovered capital or
principal investment of the purchaser (other than the Company or a Wholly-Owned
Subsidiary of the Company) thereof, excluding amounts representative of yield or
interest earned on such investment or (c) any Disqualified Stock shall be the
maximum fixed redemption or repurchase price in respect thereof.
"Disqualified Stock" of any Person means any Capital Stock of such Person
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of such Person, any
Subsidiary of such Person or the holder thereof, in whole or in part, on or
prior to the final Stated Maturity of the Notes, provided, however, that any
Preferred Stock which would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require the Company to repurchase or
redeem such Preferred Stock upon the occurrence of a Change of Control occurring
prior to the final maturity of the Notes shall not constitute Disqualified Stock
if the change of control provisions applicable to such Preferred Stock are no
more favorable to the holders of such Preferred Stock than the provisions
applicable to the Notes contained in the covenant described under "Change of
Control" and such Preferred Stock specifically provides that the Company will
not repurchase or redeem any such stock pursuant to such provisions prior to the
Company's repurchase of such Notes as are required to be repurchased pursuant to
the covenant described under "Change of Control."
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated "A"
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(or higher) according to Standard & Poor's Ratings Service or Moody's Investors
Service, Inc. at the time as of which any investment or rollover therein is
made.
"Event of Default" has the meaning set forth under "Events of Default"
below.
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or
any successor act) and the rules and regulations thereunder.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged and
which have a remaining weighted average life to maturity of not less than one
year from the date of Investment therein.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other Person (the "primary obligor") in any manner, whether directly
or indirectly, and including, without limitation, any obligation of such Person,
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Debt or to purchase (or to advance or supply funds for the purchase of)
any security for the payment of such Debt, (ii) to purchase property, securities
or services for the purpose of assuring the holder of such Debt of the payment
of such Debt, or (iii) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Debt (and "Guaranteed" and "Guaranteeing"
shall have meanings correlative to the foregoing); provided, however,that the
Guarantee by any Person shall not include endorsements by such Person for
collection or deposit, in either case, in the ordinary course of business.
"Guarantor" means a Subsidiary of the Company that has unconditionally
guaranteed, by supplemental indenture in form satisfactory to the Trustee, the
payment in full of the principal of (and premium, if any) and interest on the
Notes.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
including by acquisition of Subsidiaries or the recording, as required pursuant
to generally accepted accounting principles or otherwise, of any such Debt or
other obligation on the balance sheet of such Person (and "Incurrence",
"Incurred", "Incurrable" and "Incurring" shall have meanings correlative to the
foregoing); provided, however, that a change in generally accepted accounting
principles that results in an obligation of such Person that exists at such time
becoming Debt shall not be deemed an Incurrence of such Debt and that neither
the accrual of interest nor the accretion of original issue discount shall be
deemed an Incurrence of Debt.
"Interest Rate or Currency Protection Agreement" of any Person means any
forward contract, futures contract, swap, option or other financial agreement or
arrangement (including, without limitation, caps, floors, collars and similar
agreements) relating to, or the value of which is dependent upon, interest rates
or currency exchange rates or indices.
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other property to others or payments for property or services for the account
or use of others, or otherwise), to, or purchase or acquisition of Capital
Stock, bonds, notes, debentures or other securities or evidence of Debt issued
by, any other Person, including any payment on a Guarantee of any obligation of
such other Person, but excluding any loan, advance or extension of credit to an
employee of the Company or any of its Subsidiaries in the ordinary course of
business and commercially reasonable extensions of trade credit.
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"Joint Venture" means a corporation, partnership or other entity engaged in
one or more Telecommunications Businesses in which the Company owns, directly or
indirectly, a 45% or greater interest, with the balance of the ownership
interests being held by one or more Strategic Investors.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, Receivables Sale, deposit
arrangement, security interest, lien, charge, easement (other than any easement
not materially impairing usefulness), encumbrance, preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever
on or with respect to such property or assets (including, without limitation,
any conditional sale or other title retention agreement having substantially the
same economic effect as any of the foregoing).
"Marketable Securities" means: (i) Government Securities; (ii) any
certificate of deposit maturing not more than 270 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution; (iii)
commercial paper maturing not more than 270 days after the date of acquisition
issued by a corporation (other than an Affiliate of the Company) with a rating,
at the time as of which any investment therein is made, of "A-1" (or higher)
according to Standard & Poor's Ratings Service or "P-1" (or higher) according to
Moody's Investor Service, Inc.; (iv) any banker's acceptances or money market
deposit accounts issued or offered by an Eligible Institution; and (v) any fund
investing exclusively in investments of the types described in clauses (i)
through (iv) above.
"Net Available Proceeds" from any Asset Disposition by any Person means
cash or readily marketable cash equivalents received (including amounts received
by way of sale or discounting of any note, installment receivable or other
receivable, but excluding any other consideration received in the form of
assumption by the acquiror of Debt or other obligations relating to such
properties or assets) therefrom by such Person, net of (i) all legal, title and
recording tax expenses, commissions and other fees and expenses Incurred and all
federal, state, provincial, foreign and local taxes required to be accrued as a
liability as a consequence of such Asset Disposition, (ii) all payments made by
such Person or its Subsidiaries on any Debt which is secured by such assets in
accordance with the terms of any Lien upon or with respect to such assets or
which must by the terms of such Lien, or in order to obtain a necessary consent
to such Asset Disposition or by applicable law, be repaid out of the proceeds
from such Asset Disposition, (iii) all distributions and other payments made to
minority interest holders in Subsidiaries of such Person or Joint Ventures as a
result of such Asset Disposition and (iv) appropriate amounts to be provided by
such Person or any Subsidiary thereof, as the case may be, as a reserve in
accordance with generally accepted accounting principles against any liabilities
associated with such assets and retained by such Person or any Subsidiary
thereof, as the case may be, after such Asset Disposition, including, without
limitation, liabilities under any indemnification obligations and severance and
other employee termination costs associated with such Asset Disposition, in each
case as determined by the Board of Directors of such Person, in its reasonable
good faith judgment evidenced by a resolution of the Board of Directors filed
with the Trustee; provided, however, that any reduction in such reserve within
twelve months following the consummation of such Asset Disposition will be
treated for all purposes of the Indenture and the Notes as a new Asset
Disposition at the time of such reduction with Net Available Proceeds equal to
the amount of such reduction.
"Offer to Purchase" means a written offer (the "Offer") sent by the Company
by first class mail, postage prepaid, to each holder of Notes at his address
appearing in the Note Register on the date of the Offer offering to purchase up
to the principal amount of Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture). Unless
otherwise required by applicable law, the Offer shall specify an expiration date
(the "Expiration Date") of the Offer to Purchase which shall be, subject to any
contrary requirements of applicable law, not less than 30 days or more than 60
days after the date of such Offer and a settlement date (the "Purchase Date")
for purchase of Notes within five Business Days after the Expiration Date. The
Company shall notify the Trustee at least 15 Business Days (or such shorter
period as is
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acceptable to the Trustee) prior to the mailing of the Offer of the Company's
obligation to make an Offer to Purchase, and the Offer shall be mailed by the
Company or, at the Company's request, by the Trustee in the name and at the
expense of the Company. The Offer shall contain information concerning the
business of the Company and its Subsidiaries which the Company in good faith
believes will enable such holders to make an informed decision with respect to
the Offer to Purchase (which at a minimum will include (i) the most recent
annual and quarterly financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in the
documents required to be filed with the Trustee pursuant to the Indenture (which
requirements may be satisfied by delivery of such documents together with the
Offer), (ii) a description of material developments in the Company's business
subsequent to the date of the latest of such financial statements referred to in
clause (i) (including a description of the events requiring the Company to make
the Offer to Purchase), (iii) if applicable, appropriate pro forma financial
information concerning the Offer to Purchase and the events requiring the
Company to make the Offer to Purchase and (iv) any other information required by
applicable law to be included therein). The Offer shall contain all instructions
and materials necessary to enable such holders to tender Notes pursuant to the
Offer to Purchase. The Offer shall also state:
a. the Section of the Indenture pursuant to which the Offer to
Purchase is being made;
b. the Expiration Date and the Purchase Date;
c. the aggregate principal amount of the outstanding Notes offered to
be purchased by the Company pursuant to the Offer to Purchase (including,
if less than 100%, the manner by which such has been determined pursuant to
the Section hereof requiring the Offer to Purchase) (the "Purchase
Amount");
d. the purchase price to be paid by the Company for each $1,000
aggregate principal amount of Notes accepted for payment (as specified
pursuant to the Indenture) (the "Purchase Price");
e. that the holder may tender all or any portion of the Notes
registered in the name of such holder and that any portion of a Note
tendered must be tendered in an integral multiple of $1,000 principal
amount;
f. the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
g. that interest on any Note not tendered or tendered but not
purchased by the Company pursuant to the Offer to Purchase will continue to
accrue;
h. that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
i. that each holder electing to tender a Note pursuant to the Offer to
Purchase will be required to surrender such Note at the place or places
specified in the Offer prior to the close of business on the Expiration
Date (such Note being, if the Company or the Trustee so requires, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the holder
thereof or his attorney duly authorized in writing);
j. that holders will be entitled to withdraw all or any portion of
Notes tendered if the Company (or their Paying Agent) receives, not later
than the close of business on the Expiration Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the holder, the
principal amount of the Note the holder tendered, the certificate number of
the Note the holder tendered and a statement that such holder is
withdrawing all or a portion of his tender;
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k. that (a) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, the Company shall purchase all such Notes and (b)
if Notes in an aggregate principal amount in excess of the Purchase Amount
are tendered and not withdrawn pursuant to the Offer to Purchase, the
Company shall purchase Notes having an aggregate principal amount equal to
the Purchase Amount on a pro rata basis (with such adjustments as may be
deemed appropriate so that only Notes in denominations of $1,000 or
integral multiples thereof shall be purchased); and
l. that in the case of any holder whose Note is purchased only in
part, the Company shall execute, and the Trustee shall authenticate and
deliver to the holder of such Note without service charge, a new Note or
Notes, of any authorized denomination as requested by such holder, in an
aggregate principal amount equal to and in exchange for the unpurchased
portion of the Note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with the
Offer for such Offer to Purchase.
"Permitted Interest Rate or Currency Protection Agreement" of any Person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions in the ordinary course of business that is
designed to protect such Person against fluctuations in interest rates or
currency exchange rates with respect to Debt Incurred and which shall have a
notional amount no greater than the payments due with respect to the Debt being
hedged thereby and not for purposes of speculation.
"Permitted Investment" means (i) any Investment in a Joint Venture
(including the purchase or acquisition of any Capital Stock of a Joint Venture),
provided the aggregate amount of all Investments pursuant to this clause (i) in
Joint Ventures in which the Company owns, directly or indirectly, a less than
50% interest shall not exceed $25.0 million, (ii) any Investment in any Person
as a result of which such Person becomes an 80% or more owned Subsidiary of the
Company, and (iii) any Investment in Marketable Securities.
"Permitted Liens" means (a) Liens for taxes, assessments, governmental
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with generally accepted
accounting principles shall have been made therefor; (b) other Liens incidental
to the conduct of the Company's and its Subsidiaries' business or the ownership
of its property and assets not securing any Debt, and which do not in the
aggregate materially detract from the value of the Company's and its
Subsidiaries' property or assets when taken as a whole, or materially impair the
use thereof in the operation of its business; (c) Liens with respect to assets
of a Subsidiary granted by such Subsidiary to the Company to secure Debt owing
to the Company; (d) pledges and deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other types
of statutory obligations; (e) deposits made to secure the performance of
tenders, bids, leases, and other obligations of like nature incurred in the
ordinary course of business (exclusive of obligations for the payment of
borrowed money); (f) zoning restrictions, servitudes, easements, rights-of-way,
restrictions and other similar charges or encumbrances incurred in the ordinary
course of business which, in the aggregate, do not materially detract from the
value of the property subject thereto or interfere with the ordinary conduct of
the business of the Company or its Subsidiaries; (g) Liens arising out of
judgments or awards against the Company or any Subsidiary with respect to which
the Company or such Subsidiary is prosecuting an appeal or proceeding for review
and the Company or such Subsidiary is maintaining adequate reserves in
accordance with generally accepted accounting principles; and (h) any interest
or title of a lessor in the property subject to any lease other than a Capital
Lease.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization, government
or agency or political subdivision thereof or any other entity.
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"Preferred Dividends" for any Person means for any period the quotient
determined by dividing the amount of dividends and distributions paid or accrued
(whether or not declared) on Preferred Stock of such Person during such period
calculated in accordance with generally accepted accounting principles, by 1
minus the maximum statutory income tax rate then applicable to the Company
(expressed as a decimal).
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Purchase Money Debt" means Debt of the Company (including Acquired Debt
and Debt represented by Capital Lease Obligations, mortgage financings and
purchase money obligations) Incurred for the purpose of financing all or any
part of the cost of construction, acquisition or improvement by the Company or
any Subsidiary of the Company or any Joint Venture of any Telecommunications
Assets of the Company, any Subsidiary of the Company or any Joint Venture, and
including any related notes, Guarantees, collateral documents, instruments and
agreements executed in connection therewith, as the same may be amended,
supplemented, modified or restated from time to time.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money.
"Receivables Sale" of any Person means any sale of Receivables of such
Person (pursuant to a purchase facility or otherwise), other than in connection
with a disposition of the business operations of such Person relating thereto or
a disposition of defaulted Receivables for purpose of collection and not as a
financing arrangement.
"Related Person" of any Person means any other Person directly or
indirectly owning (a) 5% or more of the outstanding Common Stock of such Person
(or, in the case of a Person that is not a corporation, 5% or more of the
outstanding equity interest in such Person) or (b) 5% or more of the combined
outstanding voting power of the Voting Stock of such Person, except that, for
purposes of the covenant entitled "Transactions with Affiliates and Related
Persons," Related Person means any other Person directly or indirectly owning
10% or more of the combined outstanding voting power of the Voting Stock of such
Person (or, in the case of a Person that is not a corporation, 10% or more of
the outstanding equity interest in such Person).
"Sale and Leaseback Transaction" of any Person means an arrangement with
any lender or investor or to which such lender or investor is a party providing
for the leasing by such Person of any property or asset of such Person which has
been or is being sold or transferred by such Person more than 365 days after the
acquisition thereof or the completion of construction or commencement of
operation thereof to such lender or investor or to any person to whom funds have
been or are to be advanced by such lender or investor on the security of such
property or asset. The stated maturity of such arrangement shall be the date of
the last payment of rent or any other amount due under such arrangement prior to
the first date on which such arrangement may be terminated by the lessee without
payment of a penalty.
"Secured Credit Facility" means Debt outstanding at the date of the
Indenture of Subsidiaries and Joint Ventures of the Company and other Debt
Incurred from time to time pursuant to secured credit agreements or similar
facilities made available from time to time to the Company and its Subsidiaries
and Joint Ventures (including, without limitation, the secured lines of credit
with AT&T Credit Corporation and Fleet National Bank), and including any related
notes, Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
"Strategic Equity Investment" means an equity investment made by a
Strategic Investor in the Company in an aggregate amount of not less than $25.0
million.
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"Strategic Investor" means a corporation, partnership or other entity
engaged in one or more Telecommunications Businesses that has, or 80% or more of
the Voting Stock of which is owned by a Person that has, an equity market
capitalization, at the time of its initial Investment in the Company or in a
Joint Venture with the Company, in excess of $2 billion.
"Subordinated Debt" means Debt of the Company as to which the payment of
principal of (and premium, if any) and interest and other payment obligations in
respect of such Debt shall be subordinate to the prior payment in full of the
Notes to at least the following extent: (i) no payments of principal of (or
premium, if any) or interest on or otherwise due in respect of such Debt may be
permitted for so long as any default in the payment of principal (or premium, if
any) or interest on the Notes exists; (ii) in the event that any other default
that with the passing of time or the giving of notice, or both, would constitute
an event of default exists with respect to the Notes, upon notice by 25% or more
in principal amount of the Notes to the Trustee, the Trustee shall have the
right to give notice to the Company and the holders of such Debt (or trustees or
agents therefor) of a payment blockage, and thereafter no payments of principal
of (or premium, if any) or interest on or otherwise due in respect of such Debt
may be made for a period of 179 days from the date of such notice; and (iii)
such Debt may not (x) provide for payments of principal of such Debt at the
stated maturity thereof or by way of a sinking fund applicable thereto or by way
of any mandatory redemption, defeasance, retirement or repurchase thereof by the
Company (including any redemption, retirement or repurchase which is contingent
upon events or circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon an event of default thereunder), in each case
prior to the final Stated Maturity of the Notes or (y) permit redemption or
other retirement (including pursuant to an offer to purchase made by the
Company) of such other Debt at the option of the holder thereof prior to the
final Stated Maturity of the Notes, other than a redemption or other retirement
at the option of the holder of such Debt (including pursuant to an offer to
purchase made by the Company) which is conditioned upon a change of control of
the Company pursuant to provisions substantially similar to those described
under "Change of Control" (and which shall provide that such Debt will not be
repurchased pursuant to such provisions prior to the Company's repurchase of the
Notes required to be repurchased by the Company pursuant to the provisions
described under "Change of Control").
"Subsidiary" of any Person means (i) a corporation more than 50% of the
combined voting power of the outstanding Voting Stock, of which is owned,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person or by such Person and one or more Subsidiaries thereof or (ii) any
other Person (other than a corporation) in which such Person, or one or more
other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority ownership
and power to direct the policies, management and affairs thereof. An 80% or more
owned Subsidiary of the Company is (i) a corporation 80% or more of the combined
voting power of the outstanding Voting Stock, and more than 80% of the Capital
Stock or other ownership interests, of which is owned, directly or indirectly,
by the Company or by one or more other Subsidiaries of the Company or by the
Company and one or more Subsidiaries thereof or (ii) any other Person (other
than a corporation) in which the Company, or one or more other Subsidiaries of
the Company or the Company and one or more other Subsidiaries of the Company,
directly or indirectly, has at least an 80% ownership interest and power to
direct the policies, management and affairs thereof.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities, (ii) creating, developing or marketing
communications related network equipment, software and other devices for use in
a Telecommunications Business or (iii) evaluating, participating or pursuing any
other activity or opportunity that is primarily related to those identified in
(i) or (ii) above;
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provided that the determination of what constitutes a Telecommunications
Business shall be made in good faith by the Board of Directors of the Company.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly-Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Voting Stock or other ownership interests (other than
directors' qualifying shares) of which shall at the time be owned by such Person
or by one or more Wholly-Owned Subsidiaries of such Person or by such Person and
one or more Wholly-Owned Subsidiaries of such Person.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal of (or premium, if any, on) any Note when due; (b) failure to pay
any interest on any Note when due, continued for 30 days; (c) default in the
payment of principal and interest on Notes required to be purchased pursuant to
an Offer to Purchase as described under "Change of Control" when due and
payable; (d) failure to perform or comply with the provisions described under
"Merger, Consolidation and Sales of Assets" and "Limitation on Certain Asset
Dispositions"; (e) failure to perform any other covenant or agreement of the
Company under the Indenture or the Notes continued for 60 days after written
notice to the Company by the Trustee or holders of at least 25% in aggregate
principal amount of outstanding Notes; (f) default under the terms of any
instrument evidencing or securing Debt of the Company or any Subsidiary having
an outstanding principal amount of $5.0 million individually or in the aggregate
which default results in the acceleration of the payment of such indebtedness or
constitutes the failure to pay such indebtedness when due; (g) the rendering of
a final judgment or judgments (not subject to appeal) against the Company or any
Subsidiary an amount in excess of $5.0 million which remains undischarged or
unstayed for a period of 45 days after the date on which the right to appeal has
expired; and (h) certain events of bankruptcy, insolvency or reorganization
affecting the Company or any Subsidiary. (sec. 501) Subject to the provisions of
the Indenture relating to the duties of the Trustee in case an Event of Default
(as defined) shall occur and be continuing, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the holders of Notes, unless such holders shall
have offered to the Trustee reasonable indemnity. (sec. 603) Subject to such
provisions for the indemnification of the Trustee, the holders of a majority in
aggregate principal amount of the outstanding Notes will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee. (sec. 512)
If an Event of Default (other than an Event of Default described in Clause
(h) above) shall occur and be continuing, either the Trustee or the holders of
at least 25% in aggregate principal amount of the outstanding Notes may
accelerate the maturity of all Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the holders
of a majority in aggregate principal amount of outstanding Notes may, under
certain circumstances, rescind and annul such acceleration if all Events of
Default, other than the non-payment of accelerated principal, have been cured or
waived as provided in the Indenture. If an Event of Default specified in Clause
(h) above occurs, the outstanding Notes will ipso facto become immediately due
and payable without any declaration or other act on the part of the Trustee or
any holder. (sec. 502) For information as to waiver of defaults, see
"Modification and Waiver".
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default (as defined) and unless also the holders of at least 25% in aggregate
principal amount of the outstanding Notes shall have made written request,
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and offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee, and the Trustee shall not have received from the holders of a majority
in aggregate principal amount of the outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. (sec. 507) However, such limitations do not apply to a suit instituted by
a holder of a Note for enforcement of payment of the principal of and premium,
if any, or interest on such Note on or after the respective due dates expressed
in such Note. (sec. 508)
The Company will be required to furnish to the Trustee quarterly a
statement as to the performance by the Company of certain of its obligations
under the Indenture and as to any default in such performance. (sec. 1018)
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect as to all outstanding
Notes (except as to (i) rights of registration of transfer and exchange and the
Company's right of optional redemption, (ii) substitution of apparently
mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of holders of
Notes to receive payment of principal of and premium, if any, and interest on
the Notes, (iv) rights, obligations and immunities of the Trustee under the
Indenture and (v) rights of the holders of the Notes as beneficiaries of the
Indenture with respect to any property deposited with the Trustee payable to all
or any of them), if (x) the Company will have paid or caused to be paid the
principal of and premium, if any, and interest on the Notes as and when the same
will have become due and payable or (y) all outstanding Notes (except lost,
stolen or destroyed Notes which have been replaced or paid) have been delivered
to the Trustee for cancellation.
DEFEASANCE
The Indenture will provide that, at the option of the Company, (a) if
applicable, the Company will be discharged from any and all obligations in
respect of the outstanding Notes or (b) if applicable, the Company may omit to
comply with certain restrictive covenants, that such omission shall not be
deemed to be an Event of Default under the Indenture and the Notes, in either
case (A) or (B) upon irrevocable deposit with the Trustee, in trust, of money
and/or U.S. government obligations which will provide money in an amount
sufficient in the opinion of a nationally recognized firm of independent
certified public accountants to pay the principal of and premium, if any, and
each installment of interest, if any, on the outstanding Notes. With respect to
clause (B), the obligations under the Indenture other than with respect to such
covenants and the Events of Default other than the Events of Default relating to
such covenants above shall remain in full force and effect. Such trust may only
be established if, among other things (i) with respect to clause (A), the
Company has received from, or there has been published by, the Internal Revenue
Service a ruling or there has been a change in law, which in the Opinion of
Counsel provides that holders of the Notes will not recognize gain or loss for
Federal income tax purposes as a result of such deposit, defeasance and
discharge and will be subject to Federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred; or, with respect to clause (B), the
Company has delivered to the Trustee an Opinion of Counsel to the effect that
the holders of the Notes will not recognize gain or loss for Federal income tax
purposes as a result of such deposit and defeasance and will be subject to
Federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such deposit and defeasance had not occurred;
(ii) no Event of Default or event that with the passing of time or the giving of
notice, or both, shall constitute an Event of Default shall have occurred or be
continuing; (iii) the Company has delivered to the Trustee an Opinion of Counsel
to the effect that such deposit shall not cause the Trustee or the trust so
created to be subject to the Investment Company Act of 1940; and (iv) certain
other customary conditions precedent are satisfied. (sec. 1301)
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MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the holders of a majority in aggregate
principal amount of the outstanding Notes; provided, however, that no such
modification or amendment may, without the consent of the holder of each
outstanding Note affected thereby, (a) change the due date of any installment of
principal or interest on any Note, (b) reduce the principal amount of, (or the
premium) or interest on, any Note, (c) change the currency of payment of
principal of, (or premium) or interest on, any Note, (d) impair the right to
institute suit for the enforcement of any payment on or with respect to any
Note, (e) reduce the above-stated percentage of outstanding Notes necessary to
modify or amend the Indenture, (f) reduce the percentage of aggregate principal
amount of outstanding Notes necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults, (g) modify any
provisions of the Indenture relating to the modification and amendment of the
Indenture or the waiver of past defaults or covenants, except as otherwise
specified, or (h) following the mailing of any Offer to Purchase, modify any
Offer to Purchase for the Notes required under the "Limitation on Asset
Dispositions" and the "Change of Control" covenants contained in the Indenture
in a manner materially adverse to the holders thereof. (sec. 902)
The holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all holders of Notes, may waive compliance by the Company
with certain restrictive provisions of the Indenture. (sec. 1020) Subject to
certain rights of the Trustee, as provided in the Indenture, the holders of a
majority in aggregate principal amount of the outstanding Notes, on behalf of
all holders of Notes, may waive any past default under the Indenture, except a
default in the payment of principal, premium or interest or a default arising
from failure to purchase any Note tendered pursuant to an Offer to Purchase.
(sec. 513)
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture and the Notes:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to or in place of
certificated Notes;
(c) to provide for the assumption of the Company's obligations to
holders of the Notes in the case of a merger or consolidation or to secure
the Notes;
(d) to make any change that would provide any additional rights or
benefits to the holders of the Notes or that does not adversely affect the
legal rights under the Indenture of any such holder; or
(e) to comply with requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture
Act. (sec. 901)
GOVERNING LAW
The Indenture and the Notes are governed by, and construed in accordance
with, the laws of the State of New York.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise as a prudent person would exercise
under the circumstances in the conduct of such person's own affairs. (sec.sec.
601)
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The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claim as
security or otherwise. The Trustee is permitted to engage in other transactions
with the Company or any Affiliate, provided, however, that if it acquires any
conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign. (sec.sec. 608, 613)
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CERTAIN UNITED STATES TAX CONSEQUENCES TO FOREIGN HOLDERS
The following summary describes certain United States federal income and
estate tax consequences associated with the exchange of Private Notes for
Exchange Notes and with the ownership of Notes as of the date hereof. Except
where noted, this summary deals only with Notes held as capital assets by
Non-United States Holders. As used herein, the term "Non-United States Holder"
means any person that is, as to the United States, a foreign corporation, a
nonresident alien individual, a nonresident fiduciary of a foreign estate or
trust or a foreign partnership one or more of the members of which is, as to the
United States, a foreign corporation, a nonresident alien individual or a
nonresident fiduciary of a foreign estate or trust.
The discussion set forth below is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), temporary, proposed and final
regulations, rulings and judicial decisions thereunder as of the date hereof.
Such authorities may be repealed, revoked or modified so as to result in federal
income and estate tax consequences different from those discussed below. Persons
considering the purchase, ownership or disposition of Notes should consult their
own tax advisors concerning the federal income and estate tax consequences in
light of their particular situations as well as any consequences arising under
the laws of any other taxing jurisdiction.
THE EXCHANGE
The exchange of Private Notes for Exchange Notes should not be treated as a
taxable transaction for federal income tax purposes because the Exchange Notes
will not be considered to differ materially in kind or extent from the Private
Notes. Rather, the Exchange Notes received by a holder of Private Notes should
be treated as a continuation of the Private Notes in the hands of such holder.
As a result, there should be no material federal income tax consequences to
holders exchanging Private Notes for Exchange Notes.
PERSONS CONSIDERING THE EXCHANGE OF THE PRIVATE NOTES FOR EXCHANGE NOTES
SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE FEDERAL INCOME TAX
CONSEQUENCES AND THE TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION OF SUCH AN EXCHANGE.
EXEMPTIONS FROM WITHHOLDING FOR NON-UNITED STATES HOLDERS
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) generally no withholding of United States federal income tax will
be required with respect to the payment by the Company or any paying agent
of principal or interest on a Note owned by a Non-United States Holder,
provided (i) that the beneficial owner does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock
of the Company entitled to vote within the meaning of section 871(h)(3) of
the Code and the regulations thereunder, (ii) the beneficial owner is not a
"controlled foreign corporation" (as defined in Section 957 of the Code)
that is related directly, indirectly or constructively to the Company
through stock ownership and (iii) the beneficial owner satisfies the
statement requirement (described generally below) set forth in section
871(h) and section 881(c) of the Code and the regulations thereunder;
(b) generally no withholding of United States federal income tax will
be required with respect to any gain or income realized by a Non-United
States Holder upon the sale, exchange or retirement of a Note; and
(c) a Note beneficially owned by an individual who at the time of
death is a Non-United States Holder generally will not be includible in the
individual's gross estate for the purposes of the United States federal
estate tax as a result of such individual's death, provided that such
individual does not at the time of death actually or constructively own 10%
or more of the total combined voting power of all classes of stock of the
Company entitled to vote within the
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meaning of section 871(h)(3) of the Code and provided that the interest
payments with respect to such Note will not have been, if received at the
time of such individual's death, effectively connected with the conduct of
a United States trade or business by such individual.
To satisfy the requirement referred to in (a)(iii) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, a paying
agent of the Company with a statement to the effect that the beneficial owner is
not a U.S. person. Pursuant to current temporary Treasury regulations, these
requirements will be met if (1) the beneficial owner provides the payor his name
and address, and certifies, under penalties of perjury, that he is not a U.S.
person (which certification may be made on an Internal Revenue Service Form W-8
(or successor or substitute form)) or (2) a financial institution that holds
customers' securities in the ordinary course of its trade or business and holds
the Note on behalf of the beneficial owner certifies, under penalties of
perjury, that such statement has been received by it (or by another financial
institution acting on behalf of the Non-United States Holder), and furnishes a
paying agent with a copy thereof.
Recently proposed Internal Revenue Service Treasury regulations (the
"Proposed Regulations") would provide alternative methods for satisfying the
certification requirement described in clause (a)(iii) above. The Proposed
Regulations also would require, in the case of Notes held by a foreign
partnership, that (x) the certification described in clause (a)(iii) above be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide certain information, including a United States taxpayer
identification number. A look-through rule would apply in the case of tiered
partnerships. The Proposed Regulations are proposed to be effective for payments
made after December 31, 1997. There can be no assurance that the Proposed
Regulations will be adopted or as to the provisions that they will include if
and when adopted in temporary or final form.
If a Non-United States Holder cannot satisfy the requirements of the
"portfolio interest" exception described in (a) above, payments of premium, if
any, and interest made to Non-United States Holders will generally be subject to
a 30% withholding tax, or such lower rate as may be specified by an applicable
income tax treaty, unless the beneficial owner of the Note provides the Company
or its paying agent, as the case may be, with a properly executed (1) Internal
Revenue Service Form 1001 (or successor form) claiming an exemption from
withholding under the benefit of a tax treaty or (2) Internal Revenue Service
Form 4224 (or successor form) stating that interest paid on the Note is not
subject to withholding tax because it is effectively connected with the
beneficial owner's conduct of a trade or business in the United States.
If a Non-United States Holder is engaged in a trade or business in the
United States and premium, if any, or interest on the Note is effectively
connected with the conduct of such trade or business, the Non-United States
Holder, although exempt from the withholding tax discussed above, will generally
be subject to United States federal income tax on such interest on a net income
basis in the same manner as if it were a United States person. In addition, if
such holder is a foreign corporation, it may be subject to a branch profits tax
equal to 30% of its effectively connected earnings and profits for the taxable
year, or such lower rate as may be specified by an applicable income tax treaty,
subject to adjustments. For this purpose, such premium, if any, and interest on
a Note will be included in such foreign corporation's earnings and profits.
Any gain or income realized upon the sale, exchange or retirement of a Note
generally will not be subject to United States federal income tax unless (i)
such gain or income is effectively connected with a trade or business in the
United States of the Non-United States Holder, or (ii) in the case of a
Non-United States Holder who is a nonresident alien individual, such Holder is
present in the United States for 183 days or more in the taxable year of such
sale, exchange or retirement, and certain other conditions are met.
106
<PAGE> 108
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, a 31% backup withholding tax and information reporting
requirements apply to certain payments of principal and interest paid on Notes
and to the proceeds from the sale of a Note.
Generally, no information reporting or backup withholding will be required
with respect to payments made by the Company or any paying agent to Non-United
States Holder if a statement described in (a)(iii) above has been received and
the payor does not have actual knowledge that the beneficial owner is a United
States person. The Company or a paying agent, however, may report (on Internal
Revenue Service Form 1042S) payments of interest on Notes. See the discussion
above with respect to the Proposed Regulations.
In addition, backup withholding and information reporting generally will
not apply if payments of principal and interest on a Note are paid or collected
by a foreign office of a custodian, nominee or other foreign agent on behalf of
the beneficial owner of such Note, or if a foreign office of a broker (as
defined in applicable Treasury regulations) pays the proceeds of the sale of a
Note to the owner thereof. If, however, such nominee, custodian, agent or broker
is, for United States federal income tax purposes, a U.S. person, a controlled
foreign corporation or a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States, such payments will not be subject to backup withholding but will be
subject to information reporting, unless (1) such custodian, nominee, agent or
broker has documentary evidence in its records that the beneficial owner is not
a U.S. person and certain other conditions are met or (2) the beneficial owner
otherwise establishes an exemption. Temporary Treasury regulations provide that
the Treasury is considering whether backup withholding will apply with respect
to such payments of principal, interest or the proceeds of a sale that are not
subject to backup withholding under the current regulations.
Payments of principal and interest on a Note paid to the beneficial owner
of a Note by a United States office of a custodian, nominee or agent, or the
payment by the United States office of a broker of the proceeds of sale of a
Note, generally will be subject to both backup withholding and information
reporting unless the beneficial owner provides the statement referred to in
(a)(iii) above and the payor does not have actual knowledge that the beneficial
owner is a United States person or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the Service.
107
<PAGE> 109
PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of any Exchange Notes
received in exchange for Private Notes acquired by such broker-dealer as a
result of market-making or other trading activities. Each such broker-dealer
that receives Exchange Notes for its own account in exchange for such Private
Notes pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Company has
agreed that for a period of up to 90 days after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any such
broker-dealer that requests copies of this Prospectus in the Letter of
Transmittal for use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers or any other persons. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions or through the writing of options on the Exchange Notes,
or a combination of such methods of resale, at market prices prevailing at the
time of resale or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange
Notes that were received by it for its own account pursuant to the Exchange
Offer in exchange for Private Notes acquired by such broker-dealer as a result
of market-making or other trading activities and any broker-dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Private Notes (including any broker-dealers), and
certain parties related to such holders, against certain liabilities, including
liabilities under the Securities Act.
VALIDITY OF THE EXCHANGE NOTES
The validity of the Exchange Notes will be passed upon for the Company by
Bryan Cave LLP, St. Louis, Missouri. John P. Denneen, Esq., a member of Bryan
Cave LLP, is Secretary of the Company and its subsidiaries. Mr. Denneen and two
other members of Bryan Cave LLP own an aggregate of 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,
1996 and 1995 and for each of the years in the three-year period ended December
31, 1996 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 Metro Access Networks, Inc. as of
December 31, 1996 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.
108
<PAGE> 110
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 three months ended March 31, 1997....................... F-3
(b) Pro Forma Combined Consolidated Statement of Operations for
the year ended December 31, 1996............................ F-4
(c) Pro Forma Combined Consolidated Balance Sheet at March 31,
1997........................................................ F-5
(d) Notes to Pro Forma Combined Consolidated Financial
Statements.................................................. F-6
CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS OF BROOKS FIBER PROPERTIES,
INC.
(a) Consolidated Balance Sheets at March 31, 1997 and December
31, 1996.................................................... F-7
(b) Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996............................... F-8
(c) Consolidated Statement of Changes in Shareholders' Equity
for the three months ended March 31, 1997................... F-9
(d) Consolidated Statement of Cash Flows for the three months
ended March 31, 1997 and 1996............................... F-10
(e) Notes to 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, 1996 and 1995... F-16
(c) Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994............................ F-17
(d) Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994........ F-18
(e) Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994............................ F-19
(f) Notes to Consolidated Financial Statements.................. F-20
FINANCIAL STATEMENTS OF METRO ACCESS NETWORKS, INC.
(a) Independent Auditors' Report................................ F-34
(b) Balance Sheets at December 31, 1996 and 1995................ F-35
(c) Statements of Operations for the years ended December 31,
1996, 1995 and 1994......................................... F-36
(d) Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994............................ F-37
(e) Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994......................................... F-38
(f) Notes to Financial Statements............................... F-39
</TABLE>
F-1
<PAGE> 111
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 of the Company with Metro Access
Networks, Inc. (MAN) (which occurred on May 5, 1997) using the purchase method
of accounting and assumes (i) for purposes of the pro forma statement of
operations data for the three months ended March 31, 1997, that the merger was
consummated on January 1, 1997, (ii) for purposes of the pro forma statement of
operations data for the year ended December 31, 1996, that the merger was
consummated on January 1, 1996, and (iii) for purposes of the pro forma balance
sheet that the merger was consummated on March 31, 1997.
The unaudited pro forma combined consolidated financial information and
accompanying notes reflect the historical operations and balances of the Company
and MAN 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
companies after the merger with MAN or of the financial position or the results
of operations of the combined company that would have actually occurred had the
merger with MAN been in effect as of the date or for the period 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 and MAN, which are included herein, as of December 31,
1996 and 1995 and for the years ended December 31, 1996, 1995, and 1994.
F-2
<PAGE> 112
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
BFP
METRO ACCESS PRO FORMA
NETWORKS, INC. PRO FORMA COMBINED
BFP (MAN) ADJUSTMENTS CONSOLIDATED
--- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues.............................. $ 20,550,000 $ 1,230,000 $ 21,780,000
Expenses:
Service Costs....................... 11,003,000 1,732,000 12,735,000
Selling, general and administrative
expenses.......................... 15,852,000 3,644,000 $ (80,000)(1) 19,416,000
Depreciation and amortization....... 8,736,000 337,000 515,000 (2) 9,588,000
------------ ----------- ----------- ------------
35,591,000 5,713,000 435,000 41,739,000
------------ ----------- ----------- ------------
Loss from operations................ (15,041,000) (4,483,000) (435,000) (19,959,000)
Other income (expense):
Interest income..................... 5,072,000 -- -- 5,072,000
Interest expense.................... (14,705,000) (790,000) 790,000 (3) (14,705,000)
------------ ----------- ----------- ------------
Loss before income taxes and
minority interests................ (24,674,000) (5,273,000) 355,000 (29,592,000)
Income tax benefit.................... -- (1,842,000) 1,842,000 (4) --
------------ ----------- ----------- ------------
Loss before minority interests...... (24,674,000) (3,431,000) (1,487,000) (29,592,000)
Minority interests in share of loss... 8,000 -- -- 8,000
------------ ----------- ----------- ------------
Net loss............................ $(24,666,000) $(3,431,000) $(1,487,000) $(29,584,000)
============ =========== =========== ============
Pro forma loss per common equivalent
share............................... $ (0.80)(5)
============
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-3
<PAGE> 113
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
METRO
ACCESS BFP
NETWORKS, PRO FORMA
INC. PRO FORMA COMBINED
BFP (MAN) ADJUSTMENTS CONSOLIDATED
--- --------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues.......................... $ 45,574,000 3,999,000 $ 49,573,000
Expenses:
Service Costs................... 21,468,000 4,082,000 25,550,000
Selling, general and
administrative expenses...... 38,596,000 5,183,000 (320,000)(1) 43,459,000
Depreciation and amortization... 16,296,000 1,259,000 2,061,000 (2) 19,616,000
------------ ---------- ---------- ------------
76,360,000 10,524,000 1,741,000 88,625,000
------------ ---------- ---------- ------------
Loss from operations............ (30,786,000) (6,525,000) (1,741,000) (39,052,000)
Other income (expense):
Interest income................. 16,539,000 8,000 (8,000)(3) 16,539,000
Interest expense................ (31,186,000) (1,866,000) 1,866,000 (3) (31,186,000)
------------ ---------- ---------- ------------
Loss before income taxes and
minority interests........... (45,433,000) (8,383,000) 117,000 (53,699,000)
Income tax benefit................ -- (2,930,000) 2,930,000 (4) --
------------ ---------- ---------- ------------
Loss before minority
interests.................... (45,433,000) (5,453,000) (2,813,000) (53,699,000)
Minority interest in share of
loss............................ 1,590,000 -- 1,590,000
------------ ---------- ---------- ------------
Net Loss........................ $(43,843,000) (5,453,000) (2,813,000) $(52,109,000)
============ ========== ========== ============
Pro forma loss per common
equivalent share................ $ (1.72)(5)
============
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-4
<PAGE> 114
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
BFP
METRO ACCESS PRO FORMA
NETWORKS, PRO FORMA COMBINED
BFP INC.(MAN) ADJUSTMENTS CONSOLIDATED
--- ------------ ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $192,169,000 5,000 (6,497,000)(1) $ 185,677,000
Marketable securities, at
cost.......................... 156,705,000 -- 156,705,000
------------ ----------- ----------- --------------
348,874,000 5,000 (6,497,000) 342,382,000
Accounts receivable, net........ 18,420,000 1,140,000 19,560,000
Other current assets............ 6,977,000 142,000 7,119,000
------------ ----------- ----------- --------------
Total current assets.......... 374,271,000 1,287,000 (6,497,000) 369,061,000
Networks and equipment, at cost... 406,569,000 41,404,000 447,973,000
Less accumulated depreciation
and amortization.............. 22,875,000 2,654,000 25,529,000
------------ ----------- ----------- --------------
Networks and equipment, net..... 383,694,000 38,750,000 422,444,000
Investment in minority owned
venture......................... 20,000,000 -- 20,000,000
Other assets, net................. 145,023,000 1,231,000 51,517,000 (3) 197,771,000
------------ ----------- ----------- --------------
Total assets.................. $922,988,000 41,268,000 45,020,000 $1,009,276,000
============ =========== =========== ==============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable................ $ 31,473,000 47,093,000 (45,000,000)(2) $ 33,566,000
Accrued liabilities............. 13,282,000 1,600,000 14,882,000
Other current liabilities....... 1,032,000 616,000 1,648,000
------------ ----------- ----------- --------------
Total current liabilities..... 45,787,000 49,309,000 (45,000,000) 50,096,000
Long-term debt, net of current
portion......................... 566,510,000 -- 566,510,000
Minority interests................ 3,452,000 -- 3,452,000
Common stock, subject to
redemption...................... 25,200,000 -- 25,200,000
Shareholders' equity:
Common stock.................... 313,000 -- 46,000 (1) 359,000
Additional paid-in capital...... 363,899,000 4,264,000 (4,264,000)(3) 445,832,000
81,933,000 (1)
Accumulated deficit............. (82,173,000) (12,305,000) 12,305,000 (3) (82,173,000)
------------ ----------- ----------- --------------
Total shareholders' equity.... 282,039,000 (8,041,000) 90,020,000 364,018,000
------------ ----------- ----------- --------------
Total liabilities and
shareholders' equity........ $922,988,000 41,268,000 45,020,000 $1,009,276,000
============ =========== =========== ==============
</TABLE>
See accompanying notes to pro forma combined consolidated financial statements.
F-5
<PAGE> 115
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 explanations related to the pro forma adjustments to the
historical statements of operations of the Company and MAN for the three months
ended March 31, 1997 and the year ending December 31, 1996.
1. Adjustment represents the elimination of corporate allocation expenses
charged to MAN by Century Telephone Enterprises, Inc. (Century) which
would be non-recurring in nature.
2. Amount represents the amortization, over a period of 25 years, of the
pro forma goodwill related to the merger with MAN of approximately
$51,517,000.
3. Represents the elimination of interest expense on outstanding debt
payable to Century, as well as interest income earned from Century on
the related cash balances during the year ended December 31, 1996. The
debt payable to Century was exchanged for shares of common stock of MAN
at the time of the merger for purposes of determining the merger
consideration to be paid to Century.
4. Adjustments represent the elimination of an income tax benefit allocated
to MAN resulting from Century utilizing a net tax loss generated by MAN
on its consolidated federal income tax return. No provision for income
taxes would be recorded on the pro forma consolidated statements of
operations.
5. Pro forma loss per share has been computed using the weighted average
number of shares of common stock outstanding after giving effect to the
shares issued in connection with the MAN merger. The number of shares
used in computing pro forma loss per share was 36,775,245 for the three
months ended March 31, 1997 and 30,213,554 for the year ended December
31, 1996.
BALANCE SHEET
The following notes to the pro forma combined consolidated financial
statements represent the explanations related to the pro forma adjustments to
the balance sheets of the Company and MAN.
1. Reflects the issuance of 4,586,226 shares of common stock by the Company
and additional cash paid in connection with the merger with MAN.
2. The adjustment represents the elimination of outstanding debt to
Century. The debt payable to Century was exchanged for shares of common
stock of MAN at the time of the merger for purposes of determining the
merger consideration to be paid to Century.
3. Represents the pro forma goodwill related to the MAN merger of
approximately $51,517,000 based on the issuance of shares and cash paid,
as well as assumption of certain specified liabilities. The purchase
price of $88,476,000 was allocated based on the fair value of tangible
assets acquired of $41,268,000 and the fair value of liabilities assumed
of $4,309,000.
F-6
<PAGE> 116
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $192,169,000 $261,880,000
Marketable securities, at cost............................ 156,705,000 182,304,000
------------ ------------
348,874,000 444,184,000
Accounts receivable, net.................................. 18,420,000 13,989,000
Other current assets...................................... 6,977,000 11,989,000
------------ ------------
Total current assets................................... 374,271,000 470,162,000
Networks and Equipment, at cost............................. 406,569,000 306,455,000
Less accumulated depreciation and amortization............ 22,875,000 16,114,000
------------ ------------
Networks and Equipment, net................................. 383,694,000 290,341,000
Investment in Minority-Owned Venture........................ 20,000,000 20,000,000
Other Assets, net........................................... 145,023,000 99,078,000
------------ ------------
$922,988,000 $879,581,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 31,473,000 $ 6,511,000
Accrued liabilities....................................... 13,282,000 17,915,000
Other current liabilities................................. 1,032,000 10,511,000
------------ ------------
Total current liabilities.............................. 45,787,000 34,937,000
Long-Term Debt, net of current portion...................... 566,510,000 552,810,000
Minority Interests.......................................... 3,452,000 --
Common Stock, subject to redemption, $.01 par value,
2,016,000 shares issued and outstanding................... 25,200,000 25,200,000
Shareholders' Equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 31,316,179 and 29,066,139 shares issued and
outstanding............................................ 313,000 291,000
Additional paid-in capital................................ 363,899,000 323,850,000
Accumulated deficit....................................... (82,173,000) (57,507,000)
------------ ------------
Total shareholders' equity............................. 282,039,000 266,634,000
------------ ------------
$922,988,000 $879,581,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 117
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------------
1997 1996
---- ----
<S> <C> <C>
Revenues.................................................... $ 20,550,000 $ 6,795,000
Expenses:
Service costs............................................. 11,003,000 2,868,000
Selling, general & administrative expenses................ 15,852,000 6,621,000
Depreciation and amortization............................. 8,736,000 2,427,000
------------ -----------
35,591,000 11,916,000
------------ -----------
Loss from operations................................... (15,041,000) (5,121,000)
Other income (expense):
Interest income........................................... 5,072,000 1,793,000
Interest expense.......................................... (14,705,000) (3,835,000)
------------ -----------
Loss before minority interest.......................... (24,674,000) (7,163,000)
Minority interest in share of loss.......................... 8,000 523,000
------------ -----------
Net loss.................................................. $(24,666,000) $(6,640,000)
============ ===========
Pro forma loss per common and common equivalent share....... $ (0.77) $ (0.34)
============ ===========
Pro forma weighted average number of shares outstanding..... 32,171,019 19,523,584
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 118
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1996..................... 29,066,139 $291,000 $323,850,000 $(57,507,000) $266,634,000
Issuance of common stock in
connection with secondary
offering, net............ 1,008,514 10,000 23,211,000 -- 23,221,000
Issuance of common stock in
connection with
acquisitions............. 600,000 6,000 15,722,000 -- 15,728,000
Options exercised.......... 641,526 6,000 1,116,000 -- 1,122,000
Net loss................... -- -- -- (24,666,000) (24,666,000)
---------- -------- ------------ ------------ ------------
Balance, March 31, 1997.... 31,316,179 $313,000 $363,899,000 $(82,173,000) $282,039,000
========== ======== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 119
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-----------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (24,666,000) $ (6,640,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 8,736,000 2,428,000
Non-cash interest expense.............................. 13,480,000 3,754,000
Minority interests..................................... (8,000) (523,000)
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable.................................. (4,420,000) (382,000)
Accounts payable and accrued expenses................ 6,529,000 (1,830,000)
Other, net........................................... 10,781,000 1,253,000
------------- ------------
Net cash provided by (used in) operating
activities................................... 10,432,000 (1,940,000)
------------- ------------
Cash flows from investing activities:
Purchase of networks and equipment........................ (82,505,000) (15,577,000)
Purchase of marketable securities......................... (53,902,000) (25,154,000)
Maturity of marketable securities......................... 79,500,000 --
Increase in other assets.................................. (4,497,000) (2,159,000)
Payment for acquisitions, net of cash acquired............ (46,273,000) 1,285,000
------------- ------------
Net cash used in investing activities........... (107,677,000) (41,605,000)
------------- ------------
Cash flows from financing activities:
Issuance of common stock, net............................. 24,343,000
Issuance of preferred stock and subscriptions receivable
payments, net.......................................... 997,000
Minority investment in subsidiary......................... 3,460,000 --
Proceeds from long-term debt, net......................... -- 249,917,000
Repayment of long-term debt and capital leases, net....... (95,000) (3,233,000)
Other financing activities................................ (174,000) (10,253,000)
------------- ------------
Net cash provided by financing activities....... 27,534,000 237,428,000
------------- ------------
Net increase (decrease) in cash................. (69,711,000) 193,883,000
Cash, beginning of period................................... 261,880,000 59,913,000
------------- ------------
Cash, end of period......................................... $ 192,169,000 $253,796,000
============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 1,225,000 $ 58,000
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE> 120
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, 1996 was obtained from the Company's audited
balance sheet as of that date. All other financial statements contained herein
are unaudited and, in the opinion of management, contain all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation. Operating results for the three months ended March 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. 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, 1996.
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 and notes, commercial
paper, and repurchase agreements with 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
Effective February 1, 1997, the Company acquired 100% of the stock of
certain companies related to Phoenix Fiberlink, Inc. (Phoenix), a provider of
competitive access and internet services in Utah and Nevada. The purchase price
was paid through the issuance by the Company of an aggregate of 600,000 shares
of common stock valued at current market value and cash.
The above acquisition was 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 date of acquisition. Intangible assets of $42.4 million were recorded
as a result of this acquisition.
On February 25, 1997, the Company acquired a 60% interest in a company
formed by MaineCom Services (MaineCom), a subsidiary of Central Maine Power Co.,
for the purposes of constructing, owning, operating and developing networks
initially in Portland, Maine and Nashua and Manchester, New Hampshire, and other
markets in Maine and New Hampshire as may be agreed upon by the Company and
MaineCom in the future. The Company has contributed approximately $5.2 million
for its 60% interest; MaineCom's investment of approximately $3.5 million is
reflected as a minority interest investment.
F-11
<PAGE> 121
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NETWORKS AND EQUIPMENT
Networks and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Telecommunications networks.................... $223,663,000 $170,687,000
Electronic and related equipment............... 123,973,000 85,050,000
Office equipment and furniture................. 26,652,000 22,625,000
Leasehold improvements and other equipment..... 15,652,000 14,456,000
Land and buildings............................. 16,629,000 13,637,000
------------ ------------
406,569,000 306,455,000
Less accumulated depreciation.................. 22,875,000 16,114,000
------------ ------------
$383,694,000 $290,341,000
============ ============
</TABLE>
As of March 31, 1997 and December 31, 1996, networks and equipment include
$32,747,000 and $21,875,000, respectively, of networks in progress that are not
in service and, accordingly, have not been depreciated. In addition, for the
three months ended March 31, 1997, interest totaling $987,000 has been
capitalized in connection with the Company's network construction projects.
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Goodwill....................................... $109,151,000 $ 65,648,000
Debt issuance costs............................ 20,588,000 20,437,000
Organization, development, and
pre-operating costs.......................... 17,272,000 13,756,000
Interest rate cap arrangements................. 1,511,000 1,511,000
Rights-of-way and other........................ 4,376,000 3,604,000
------------ ------------
152,898,000 104,956,000
Less accumulated amortization.................. 7,875,000 5,878,000
------------ ------------
$145,023,000 $ 99,078,000
============ ============
</TABLE>
7. SHAREHOLDERS' EQUITY
On February 4, 1997, the Company completed a secondary offering of
6,723,429 shares of common stock at a price of $25.00 per share. All of the
6,723,429 shares offered were sold by existing shareholders of the Company, and
the Company did not receive any proceeds from the sale of these shares. In
conjunction with the offering, the underwriters were granted an over-allotment
option by the Company to purchase additional shares at $25.00 per share. This
option was fully exercised by the underwriters, and an additional 1,008,514
shares were issued by the Company. Gross proceeds to the Company from this
offering totaled approximately $25.2 million, and proceeds net of underwriting
discounts and expenses totaled approximately $23.2 million.
F-12
<PAGE> 122
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS AND WARRANTS
The Company's 1993 Stock Option Plan (the "1993 Plan") authorizes the
granting of options and stock appreciation rights covering up to 3,400,000
shares of common stock. On February 18, 1997, the Compensation Committee of the
Board of Directors adopted and approved, subject to stockholder approval, the
Company's 1997 Stock Incentive Plan which authorizes the issuance of an
additional 3,000,000 shares of common stock, stockholder approval was
subsequently obtained at the 1997 Annual Meeting of Stockholders on April 29,
1997. Stock options are granted with an exercise price equal to the stock's fair
market value at the date of grant and generally vest over a period of three
years from the date of grant.
Stock option activity for the 1993 Plan for the three months ended March
31, 1997 is as follows:
<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
------ ---------------
<S> <C> <C>
Balance, December 31, 1996..................... 2,750,186 $4.00- $33.75
Granted...................................... 509,808 $25.50- $25.625
Exercised.................................... (641,526) $4.00- $12.50
Canceled..................................... (163,427) $4.00- $11.35
---------
Balance, March 31, 1997........................ 2,455,041 $4.00- $33.75
=========
</TABLE>
There was no stock warrant activity during the three months ended March 31,
1997. At March 31, 1997, outstanding warrants totaled 409,860 at prices per
share ranging from $11.35 to $31.04. On March 11, 1997, the Board of Directors
of the Company approved a one-year extension of the expiration dates of stock
warrants covering an aggregate of 345,600 shares of common stock which otherwise
were scheduled to expire on various dates from March 31, 1997, through May 31,
1997.
9. PRO FORMA LOSS PER SHARE
Pro forma loss per share has been computed using the number of shares of
common stock and common stock equivalents outstanding. The weighted average
number of shares used in computing pro forma loss per share was 32,171,019 for
the three-month period ended March 31, 1997, and 19,523,584 for the three-month
period ended March 31, 1996. 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
(May 2, 1996) have been included in the calculation of common stock equivalent
shares for the three months ended March 31, 1996, using the treasury stock
method, as if they were outstanding for the entire three-month period. For the
three months ended March 31, 1997, 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.
10. COMMITMENTS AND CONTINGENCIES
During September 1995, GST Tucson Lightwave, Inc. ("Lightwave") was
permitted to intervene in litigation originally filed by Brooks Fiber
Communications of Tucson, Inc. a wholly-owned subsidiary of BFP ("BFC Tucson").
Lightwave filed a counterclaim against BFC Tucson, BFP, and Tucson Electric
Power Company ("TEP") charging BFC Tucson, BFP, and TEP with violations of
antitrust laws, all of which stem from an agreement between BFC Tucson and TEP
that allowed BFC Tucson exclusive rights, for one year, to utilize certain of
TEP's rights-of-way. The original causes of the action have been settled,
however, the counterclaim by Lightwave is currently still pending. The
F-13
<PAGE> 123
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company believes the claim to be without merit and intends to vigorously defend
against this action. The Company believes that resolution of the matter will not
have a material adverse effect on the financial condition or results of
operations of the Company.
11. SUBSEQUENT EVENTS
Pursuant to definitive agreements dated as of April 1, 1997, with Century
Telephone Enterprises, Inc. for the acquisition of 100% of the stock of Metro
Access Networks, Inc. (MAN), a competitive local exchange carrier with networks
in operation or under construction in Dallas, Fort Worth, Houston, San Antonio,
Austin, Corpus Christi, and Waco, Texas, the Company completed the acquisition
of MAN on May 5, 1997. The purchase price was paid by the issuance of
approximately 4.6 million shares of common stock and by payments of
approximately $6.5 million in cash. The following unaudited condensed pro forma
information presents the results of operations of the Company for the three
months ended March 31, 1997, as if the above transaction had occurred on January
1, 1997:
<TABLE>
<S> <C>
Revenue..................................................... $ 21,780,000
Loss before minority interest............................... $(29,592,000)
</TABLE>
On April 29, 1997, the Company's Restated Certificate of Incorporation was
amended to, among other things, increase the authorized number of shares of
common stock from 50 million shares to 150 million shares.
F-14
<PAGE> 124
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Brooks Fiber Properties, Inc.:
We have audited the accompanying consolidated balance sheets of Brooks
Fiber Properties, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
St. Louis, Missouri
February 12, 1997, except
for Note 14, which is as
of February 25, 1997
F-15
<PAGE> 125
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $261,880,000 $ 59,913,000
Marketable securities, at cost, market value of
$182,190,000........................................... 182,304,000 --
------------ ------------
444,184,000 59,913,000
Accounts receivable, net.................................. 13,989,000 2,003,000
Other current assets...................................... 11,989,000 1,183,000
------------ ------------
Total current assets................................... 470,162,000 63,099,000
Networks and equipment, at cost............................. 306,455,000 53,172,000
Less accumulated depreciation and amortization............ 16,114,000 3,130,000
------------ ------------
Networks and equipment, net............................... 290,341,000 50,042,000
Investment in minority-owned venture........................ 20,000,000 --
Other assets, net........................................... 99,078,000 33,469,000
------------ ------------
$879,581,000 $146,610,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,511,000 $ 4,397,000
Accrued liabilities....................................... 17,915,000 789,000
Other current liabilities................................. 10,511,000 --
------------ ------------
Total current liabilities.............................. 34,937,000 5,186,000
Long-term debt, net of current portion...................... 552,810,000 43,977,000
Minority Interests.......................................... -- 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;
0 and 4,545 shares issued and outstanding............ -- 711,000
Common stock, $.01 par value, 50,000,000 shares
authorized, 29,066,139 and 1,162,800 shares issued and
outstanding............................................ 291,000 12,000
Additional paid-in capital................................ 323,850,000 --
Accumulated deficit....................................... (57,507,000) (13,664,000)
------------ ------------
Total shareholders' equity............................. 266,634,000 93,455,000
------------ ------------
$879,581,000 $146,610,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 126
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues........................................ $ 45,574,000 $ 14,160,000 $ 2,809,000
Expenses:
Service costs................................. 21,468,000 7,177,000 1,557,000
Selling, general and administrative
expenses................................... 38,596,000 11,405,000 3,966,000
Depreciation and amortization................. 16,296,000 4,118,000 663,000
------------ ------------ -----------
76,360,000 22,700,000 6,186,000
------------ ------------ -----------
Loss from operations.......................... (30,786,000) (8,540,000) (3,377,000)
Other income (expense):
Interest income............................... 16,539,000 1,608,000 95,000
Interest expense.............................. (31,186,000) (3,704,000) (693,000)
------------ ------------ -----------
Loss before minority interest................. (45,433,000) (10,636,000) (3,975,000)
Minority interests in share of loss............. 1,590,000 1,085,000 78,000
------------ ------------ -----------
Net loss...................................... $(43,843,000) $ (9,551,000) $(3,897,000)
============ ============ ===========
Net loss per share............................ $ (1.71) $ (0.49)
============ ============
Weighted average number of shares
outstanding................................ 25,627,328 19,523,584
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE> 127
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<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, 1994........... 396,000 $ 39,600,000 -- -- 12,000 $ 1,200,000 -- --
Subscriptions receivable, payments
and reclassifications............. -- -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- -- --
-------- ------------ -------- ------------ ------- ----------- ------ ---------
Balance, December 31, 1994......... 396,000 39,600,000 -- -- 12,000 1,200,000 -- --
Issuance of Series A-2 preferred
stock............................. -- -- 419,705 $ 65,596,000 -- -- -- --
Issuance of Series B-2 preferred
stock............................. -- -- -- -- -- -- 4,545 $ 711,000
Net loss........................... -- -- -- -- -- -- -- --
-------- ------------ -------- ------------ ------- ----------- ------ ---------
Balance, December 31, 1995......... 396,000 39,600,000 419,705 65,596,000 12,000 1,200,000 4,545 711,000
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 -- -- -- --
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)
Options exercised.................. -- -- -- -- -- -- -- --
Warrants exercised................. -- -- -- -- -- -- -- --
Conversion of minority interest in
Subsidiaries to common stock...... -- -- -- -- -- -- -- --
Net loss........................... -- -- -- -- -- -- -- --
-------- ------------ -------- ------------ ------- ----------- ------ ---------
Balance, December 31, 1996......... -- $ -- -- $ -- -- $ -- -- $ --
======== ============ ======== ============ ======= =========== ====== =========
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN SUBSCRIPTIONS ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY
------ ------ ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994........... 1,162,800 $ 12,000 $ -- $(35,750,000) $ (216,000) $ 4,846,000
Subscriptions receivable, payments
and reclassifications............. -- -- -- 35,750,000 -- 35,750,000
Net loss........................... -- -- -- -- (3,897,000) (3,897,000)
---------- -------- ------------ ------------- ------------ ------------
Balance, December 31, 1994......... 1,162,800 12,000 -- -- (4,113,000) 36,699,000
Issuance of Series A-2 preferred
stock............................. -- -- -- -- -- 65,596,000
Issuance of Series B-2 preferred
stock............................. -- -- -- -- -- 711,000
Net loss........................... -- -- -- -- (9,551,000) (9,551,000)
---------- -------- ------------ ------------- ------------ ------------
Balance, December 31, 1995......... 1,162,800 12,000 -- -- (13,664,000) 93,455,000
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
Warrants exercised................. -- -- -- -- -- 109,000
Initial public offering:
-- issuance of common stock....... 7,385,331 74,000 185,149,000 -- -- 185,223,000
-- 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 -- -- --
Options exercised.................. 70,474 1,000 356,000 -- -- 357,000
Warrants exercised................. 1,489,185 15,000 7,681,000 -- -- 7,696,000
Conversion of minority interest in
Subsidiaries to common stock...... 1,201,869 12,000 10,373,000 -- -- 10,385,000
Net loss........................... -- -- -- -- (43,843,000) (43,843,000)
---------- -------- ------------ ------------- ------------ ------------
Balance, December 31, 1996......... 29,066,139 $291,000 $323,850,000 $ -- $(57,507,000) $266,634,000
========== ======== ============ ============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE> 128
BROOKS FIBER PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $ (43,843,000) $ (9,551,000) $ (3,897,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ 16,296,000 4,118,000 663,000
Non-cash interest expense................ 29,787,000 3,814,000 135,000
Minority interests....................... (1,590,000) (1,085,000) (78,000)
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable.................... (7,931,000) (593,000) (576,000)
Accounts payable and accrued
expenses............................ (384,000) 623,000 3,955,000
Other, net............................. (9,587,000) 114,000 (133,000)
------------- ------------ ------------
Net cash provided by (used in)
operating activities........... (17,252,000) (2,560,000) 69,000
------------- ------------ ------------
Cash flows from investing activities:
Purchase of networks and equipment.......... (217,230,000) (27,577,000) (6,693,000)
Purchase of marketable securities........... (358,598,000) -- --
Maturity of marketable securities........... 176,294,000 -- --
Increase in other assets.................... (11,831,000) (2,026,000) (769,000)
Payment for acquisitions, net of cash
acquired................................. (4,290,000) (13,941,000) (35,669,000)
Investment in minority-owned venture........ (20,000,000) -- --
------------- ------------ ------------
Net cash used in investing
activities..................... (435,655,000) (43,544,000) (43,131,000)
------------- ------------ ------------
Cash flows from financing activities:
Issuances of common stock................... 193,260,000 -- --
Issuance of preferred stock and
subscriptions receivable payments, net... 1,106,000 84,107,000 21,781,000
Proceeds from minority investments.......... 7,991,000 4,088,000 1,067,000
Proceeds from long-term debt................ 477,772,000 10,760,000 29,268,000
Long-term debt issuance cost................ (19,197,000) -- --
Repayment of long-term debt and capital
leases................................... (5,797,000) -- --
Other financing activities.................. (261,000) (1,733,000) (1,337,000)
------------- ------------ ------------
Net cash provided by financing
activities..................... 654,874,000 97,222,000 50,779,000
------------- ------------ ------------
Net increase in cash.......................... 201,967,000 51,118,000 7,717,000
Cash, beginning of period..................... 59,913,000 8,795,000 1,078,000
------------- ------------ ------------
Cash, end of period........................... $ 261,880,000 $ 59,913,000 $ 8,795,000
============= ============ ============
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest...... $ 1,399,000 $ 132,000 $ 408,000
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE> 129
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The consolidated financial statements include the accounts of Brooks Fiber
Properties, Inc. (BFP) and its wholly-owned subsidiaries (the Company). The
Company, through its subsidiaries, is a leading provider of competitive local
telecommunications services in selected cities within the United States. The
Company competes with local exchange carriers by providing high quality,
integrated local telecommunications services over fiber optic digital networks
to meet the voice, data and video transmission needs of its customers. The
Company's customers are principally inter-exchange carriers (IXCs), internet
service providers (ISPs), wireless carriers, telecommunications-intensive
business, government and institutional end users, and residential customers. The
Company offers these customers technologically advanced local telecommunications
services as well as superior customer service, flexible pricing and route
diversity.
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).
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 canceled. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of all
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS:
The Company considers cash equivalents as all highly liquid securities
purchased with a maturity of three months or less.
MARKETABLE SECURITIES:
Marketable securities consist of treasury bills and notes, commercial
paper, and repurchase agreements with maturities beyond three months but less
than twelve months.
FINANCIAL INSTRUMENTS:
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of marketable securities and
accounts receivable. Concentrations of credit risk of marketable securities are
limited as the Company invests in short-term, investment grade securities.
CONCENTRATION OF CREDIT RISK:
For purposes of segment reporting, management believes the Company operates
in the telecommunications industry. Concentrations of credit risk with respect
to accounts receivable are
F-20
<PAGE> 130
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
limited due to the dispersion of the Company's customer base among different
industries and geographic areas and remedies provided by terms of contracts and
statutes. One long distance carrier customer accounted for 13% and 24% of total
revenues for the years ended December 31, 1996 and 1995, respectively.
NETWORKS AND EQUIPMENT:
Networks and equipment are stated at cost. Costs of construction are
capitalized, including interest costs related to the installation and expansion
of the Company's networks. Leasehold improvements are amortized using the
straight-line method over their useful life or lease term, whichever is shorter.
Generally, provisions for depreciation are provided using the straight-line
method over the estimated useful lives beginning in the year an asset is put
into service as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Telecommunications networks................................. 8-25
Electronics and related equipment........................... 8
Office equipment and furniture.............................. 5-7
Leasehold improvements and other equipment.................. 5-10
Buildings................................................... 40
</TABLE>
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. The Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, on January 1,
1996. This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of SFAS No. 121 did not have a material impact on the Company's
financial position, results of operations or liquidity.
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. Pre-operating costs representing
substantially all direct incremental non-development costs incurred during the
pre-operating phase of a newly constructed network 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-21
<PAGE> 131
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION:
The Company recognizes revenue on local telecommunications services in the
month such services are provided. Revenues and associated costs of facilities
management services are recognized as services are provided.
INCOME TAXES:
The Company accounts for income taxes in accordance with the
asset/liability method. 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.
STOCK OPTION PLAN:
On January 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
later years as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
LOSS PER SHARE:
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 loss per share was 25,627,328 and 19,523,584 for the years
ended December 31, 1996 and 1995, respectively. 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 the Company's common stock on May 2, 1996, of $27.00 per share during the
twelve-month period preceding the date of the Company's initial filing of the
Registration Statement for such offering have been included in the calculation
of common stock equivalent shares using the treasury stock method as if they
were outstanding for all of 1995 and for the entire six-month period ended June
30, 1996. Subsequent to this period, 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.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-22
<PAGE> 132
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of cash on hand and all highly liquid
securities with insignificant interest rate risk and original maturities of
three months or less at the date of acquisition. Accordingly, the carrying value
is a reasonable estimate of fair value.
MARKETABLE SECURITIES:
Marketable securities, as defined in Note 2, 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. The carrying value and fair value
of marketable securities at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE
-------------- ----------
<S> <C> <C>
U. S. Treasury securities..................... $ 56,737,000 $ 56,703,000
Corporate debt securities..................... 125,567,000 125,487,000
------------ ------------
Total marketable securities................... $182,304,000 $182,190,000
============ ============
</TABLE>
The Company had unrealized gains of $4,000 and unrealized losses of
$118,000 related to the above marketable securities held at December 31, 1996.
ACCOUNTS RECEIVABLE:
Accounts receivable are reflected net of an allowance for doubtful accounts
of $740,000 and $76,000 at December 31, 1996 and 1995, respectively. The net
carrying value of accounts receivable approximates fair value due to the terms
of the underlying receivables.
INVESTMENT IN MINORITY-OWNED VENTURE:
The investment in minority-owned venture represents an investment in
convertible preferred stock of Verio, Inc., formerly known as World-Net Access,
Inc. (Verio). Verio is a development stage company, and the underlying
securities are not readily marketable. The investment is carried at cost, and
management believes there is no impairment of the underlying value of the
securities.
LONG-TERM DEBT:
As of December 31, 1996, the fair value of long-term debt approximated
carrying value.
In conjunction with certain of the long-term debt agreements, the Company
purchased 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. As of December 31, 1996, the Company
had notional amounts of interest rate caps totaling $4,752,000 and $30,551,000
related to contract periods from October 1996 through October 2001, and January
1997 through January 2002, respectively. Notional amounts decrease during the
contract period. As of December 31, 1996, the carrying value, net of
amortization, and fair value of the interest rate cap arrangements approximated
$1,498,000 and $469,000, respectively.
F-23
<PAGE> 133
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NETWORKS AND EQUIPMENT
Networks and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Telecommunications networks...................... $170,687,000 $30,158,000
Electronics and related equipment................ 85,050,000 20,174,000
Office equipment and furniture................... 22,625,000 2,435,000
Leasehold improvements and other equipment....... 14,456,000 405,000
Land and buildings............................... 13,637,000 --
------------ -----------
306,455,000 53,172,000
Less accumulated depreciation.................... 16,114,000 3,130,000
------------ -----------
$290,341,000 $50,042,000
============ ===========
</TABLE>
As of December 31, 1996 and 1995, networks and equipment include
$21,875,000 and $4,469,000, respectively, of networks in progress that were not
in service and, accordingly, have not been depreciated.
5. OTHER ASSETS, NET
Other assets consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Goodwill......................................... $ 65,648,000 $29,129,000
Debt issuance costs.............................. 20,437,000 1,559,000
Organization, development and pre-operating
costs.......................................... 13,756,000 2,341,000
Interest rate cap arrangements................... 1,511,000 1,511,000
Rights-of-way and other.......................... 3,604,000 581,000
------------ -----------
104,956,000 35,121,000
Less accumulated amortization.................... 5,878,000 1,652,000
------------ -----------
$ 99,078,000 $33,469,000
============ ===========
</TABLE>
Amortization charged to expense for the years ended December 31, 1996 and
1995 was $4,226,000 and $1,356,000, respectively.
F-24
<PAGE> 134
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
10 7/8% Senior discount notes, due March 1,
2006........................................... $273,379,000 $ --
11 7/8% Senior discount notes, due November 1,
2006........................................... 229,109,000 --
Credit Facility at a variable rate (approximately
9.46% at December 31, 1996).................... 50,000,000 43,877,000
Other long-term debt............................. 756,000 100,000
------------ -----------
553,244,000 43,977,000
Less: Current portion............................ 434,000 --
------------ -----------
$552,810,000 $43,977,000
============ ===========
</TABLE>
THE SENIOR DISCOUNT NOTES:
On February 26, 1996, the Company issued $425 million aggregate principal
amount of 10 7/8% Senior Discount Notes due March 1, 2006 (the 10 7/8% Senior
Discount Notes), and on November 7, 1996, issued $400 million aggregate
principal amount of 11 7/8% Senior Discount Notes due November 1, 2006 (the
11 7/8% Senior Discount Notes), from which the Company received gross proceeds
of $250 million and $225 million, respectively. The 10 7/8% Senior Discount
Notes and 11 7/8% Senior Discount Notes (the Senior Discount Notes) will not
require the payment of interest until March 1, 2001, and November 1, 2001,
respectively; however, the Company may elect to commence the payment of interest
at any time prior to that date. Thereafter, interest will be payable
semi-annually until maturity.
On or after March 1, 2001, and November 1, 2001, the Senior Discount Notes
will be redeemable at the option of the Company, in whole or in part from time
to time, at the following prices (expressed in percentages of the principal
amount at the stated maturity), if redeemed during the 12 months beginning March
1 and November 1, respectively, of the years indicated below, in each case
together with interest accrued to the redemption date.
<TABLE>
<CAPTION>
10 7/8% SENIOR 11 7/8% SENIOR
DISCOUNT NOTES DISCOUNT NOTES
-------------- --------------
<S> <C> <C>
2001....................................... 104.50% 105.94%
2002....................................... 103.00% 103.96%
2003....................................... 101.50% 101.98%
2004 and thereafter........................ 100.00% 100.00%
</TABLE>
In addition, under certain conditions related to a change in control of the
Company, the Company may be required to repurchase all or any part of the Senior
Discount Notes as stipulated in the note agreements. The Senior Discount Notes
are senior unsecured obligations of the Company and are subordinated to all
current and future indebtedness of the Company's subsidiaries, including trade
accounts payable.
F-25
<PAGE> 135
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CREDIT FACILITY:
The Company's Amended and Restated Loan and Security Agreement dated as of
October 1, 1996 (Credit Facility) with AT&T Credit Corporation (AT&T Credit)
provides 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, 1996, outstanding
indebtedness under the Credit Facility is $50.0 million. Amounts borrowed bear
interest at the 90-day commercial paper rate plus 4.0% per annum, payable
quarterly. Terms of the Credit Facility further provide for interest-only
payments through December 31, 1997, and a six-year principal and interest payout
period thereafter. Borrowings are secured by the assets and stock of certain of
the Company's subsidiaries.
OTHER:
Other long-term debt includes $100,000 related to a $10 million credit
facility with a commercial bank (Bank Credit Facility) and $656,000 related to
certain capitalized leases. Terms of the Bank Credit Facility provide for a
wholly-owned subsidiary of the Company to borrow amounts up to $10 million from
time to time prior to June 30, 1997. Terms of the Bank Credit Facility further
provide for interest-only payments through August 31, 1997, a 4.5 year principal
and interest payout and final maturity of all loans no later than June 30, 2002.
The aforementioned credit agreements contain certain restrictive and
financial covenants, including limitations on the ability of the Company and its
subsidiaries to declare and pay dividends, incur additional indebtedness,
dispose of assets, issue additional capital stock, make loans and advances, and
the maintenance of certain financial ratios and minimum annualized operating
cash flow. At December 31, 1996, the Company was in compliance with the terms of
these covenants.
Maturities of long-term debt at December 31, 1996, are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 2,680,000
1999........................................................ 5,072,000
2000........................................................ 7,528,000
2001........................................................ 10,028,000
Thereafter.................................................. 527,502,000
------------
$552,810,000
============
</TABLE>
7. ACQUISITIONS AND JOINT VENTURES
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 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 the Company 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. Intangible assets of approximately
$6.4 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
related assets. 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
F-26
<PAGE> 136
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
result of this acquisition. In addition, the Company granted the seller the
option to require the Company to repurchase any or all of such shares at a price
of $12.50 per share on or before February 1, 1998. In conjunction with the
Company's initial public offering, the holder of such shares sold 10% of such
shares. Accordingly, approximately 2.0 million shares remain subject to
redemption.
On March 15, 1995, the Company acquired 100% of the assets of PSC of
Oklahoma (PSO), a 105-mile competitive access network in Tulsa, Oklahoma.
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. Also, effective September 1, 1996, the Company acquired 100% of
the stock of Bittel Telecommunications Corporation (Bittel), a switch-based
reseller of long distance services primarily to customers in the San Francisco
and Los Angeles, California areas. In connection with the aforementioned
acquisitions, the Company has an obligation totaling $10 million due during
January, 1997, which is included in other current liabilities at December 31,
1996.
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 following unaudited condensed pro forma
information presents the results of operations of the Company for the years
ended December 31, 1996 and 1995 as if the above transactions had occurred on
January 1, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenue......................................... $ 54,515,000 $ 34,844,000
Loss before minority interest................... $(46,410,000) $(20,125,000)
</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.
In June 1996, the Company formed a strategic alliance with Verio, Inc.,
formerly known as World-Net Access, Inc. (Verio), and to date has made a $20
million convertible preferred stock investment for a 25.5% fully-diluted
interest in Verio. The investment in Verio is classified as Investment in
Minority-Owned Venture on the Company's consolidated balance sheet. Verio is a
privately-held consolidator of ISPs.
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.
F-27
<PAGE> 137
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY
COMMON STOCK:
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. Gross proceeds
from this offering totaled approximately $199.4 million, and proceeds net of
underwriting discounts, advisory fees and expenses totaled approximately $185.2
million.
The Company's authorized common stock consists of 50,000,000 shares, of
which 49,669,100 shares are designated as voting common stock and 330,900 shares
are designated as non-voting stock. No shares of non-voting common stock are
outstanding. A total of 14,358,155 authorized shares of common stock, which have
not been reserved for issuance upon exercise of warrants and options and under
employee stock plans are available for issuance from time to time and under such
circumstances as may be determined by the Board of Directors.
In connection with the Agreement and Plan of Merger between the Company and
BTC on January 2, 1996, 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.
In June 1996, the Company and MCImetro Access Transmission Services, Inc.
(MCImetro) entered into an agreement pursuant to which MCImetro acquired a 15%
interest in the Company's Sacramento, California network for $4.5 million, and
invested an additional $3.5 million in the Company's majority-owned San Jose,
California joint venture company, formed in September 1995 between the Company
and MCImetro to operate and expand the Company's existing networks in San Jose
and its environs. 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 and its September 1995 investment in the San Jose
joint venture company for 958,720 shares of the Company's common stock.
On November 12, 1996, AT&T Credit exchanged the agreed value of its
minority investments in certain subsidiaries of the Company made in connection
with borrowings under the Credit Facility for an aggregate of 234,260 shares of
the Company's common stock.
Stock warrant activity for the years ended December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
NUMBER PRICE PER SHARE
------ ---------------
<S> <C> <C>
Balance, January 1, 1995........................ 1,632,000 $11.00
Granted....................................... 192,340 $8.25
----------
Balance, December 31, 1995...................... 1,824,340 $8.25-$11.00
Issued........................................ 814,520 $11.35-$31.04
Exercised..................................... (2,228,940) $8.25-$22.17
Canceled...................................... (60) $8.25
----------
Balance, December 31, 1996...................... 409,860 $11.35-$31.04
========== =============
</TABLE>
F-28
<PAGE> 138
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PREFERRED STOCK:
The Company's authorized preferred stock consists of 1,040,012 shares, of
which 50,000 shares are designated Series C Junior Participating Preferred Stock
and reserved for issuance in connection with the Rights described below. 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 a new series
of preferred stock created by resolution of the Board of Directors. At December
31, 1996, there was no preferred stock outstanding.
STOCKHOLDER RIGHTS PLAN:
In February 1996, the Company adopted a Shareholders Protection Rights Plan
(Rights Plan) and distributed a dividend of one Preferred Stock Purchase Right
(Right) (collectively the Rights). The Rights expire on February 28, 2006. The
Rights generally will be exercisable and transferable apart from the common
stock only after the tenth day following public disclosure that a person or
group has acquired beneficial ownership of 20% or more of the voting power of
the Company's stock or the tenth business day after the date on which a person
commences a tender or exchange offer upon consummation of which such person or
group would beneficially own 20% or more of the voting power of the Company's
stock of the Company. Thereafter, each holder of a Right will be entitled to
purchase shares of common stock of the Company having a value equal to twice the
Right's exercise price.
In addition, if, after any person or group has become a 20%-or-more
stockholder, the Company is involved in a merger or other business combination
transaction with another person or group in which its common stock is changed or
converted, or sells 50% or more of its assets or earning power to another person
or group, each Right will entitle its holder to purchase shares of common stock
of such other person or group having a value of twice the Right's exercise
price.
At any time prior to the time the Rights become exercisable, the Company is
generally entitled to redeem the Rights at $.001 per Right.
9. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN:
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. Stock options are granted with an exercise price equal to the stock's
fair market value at the date of grant and generally vest over a period of three
years from the date of grant.
F-29
<PAGE> 139
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock option activity for the Plan for the years ended December 31, 1996,
and 1995 is as follows:
<TABLE>
<CAPTION>
PRICE PER
NUMBER SHARE
------ ---------
<S> <C> <C>
Balance, January 1, 1994.......................... 580,000 $ 4.00
Granted......................................... 460,000 $ 4.00
Canceled........................................ (120,000) $ 4.00
---------
Balance, January 1, 1995.......................... 920,000 $ 4.00
Granted......................................... 875,000 $ 4.00-$ 6.60
Canceled........................................ (143,340) $ 4.00-$ 6.60
---------
Balance, December 31, 1995........................ 1,651,660 $ 4.00-$ 6.60
Granted......................................... 1,313,000 $12.50-$33.75
Exercised....................................... (70,474) $ 4.00-$ 6.60
Canceled........................................ (144,000) $ 6.00-$12.50
---------
Balance, December 31, 1996........................ 2,750,186 $ 4.00-$33.75
=========
</TABLE>
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the grant
date for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123,
the Company's net loss and net loss per share would have been the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net loss -- as reported.......................... $(43,843,000) $(9,551,000)
Net loss -- pro forma............................ (46,825,000) (9,847,000)
Net loss per share -- as reported................ (1.71) (0.49)
Net loss per share -- pro forma.................. (1.83) (0.50)
</TABLE>
Pro forma net loss reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of three years and compensation cost for options granted prior to January
1, 1995 is not considered.
The fair value of each options grant for both 1996 and 1995 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants: expected volatility of
37.2%, risk-free interest rate of 6.1%, expected life of 5 years; and an
expected dividend yield of 0.0%.
The pro forma information is provided for informational purposes only and
is not necessarily indicative of the results of operations that would have
occurred or of the future anticipated results of operations of the Company.
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
F-30
<PAGE> 140
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
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.
401(K) PLAN:
The Company has a 401(k) Plan which covers substantially all employees of
the Company. 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, at which time they may voluntarily contribute a percentage of
compensation. Participants are 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. The Company's
matching contributions for 1996 and 1995 were $181,000 and $69,000,
respectively.
10. 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 provided for payment by the Company to BTC of a
fee equal to $250,000 per year adjusted annually beginning in 1996 and
subsequent years for inflation, plus the Company's proportionate share of rent
and support services. Furthermore, BTC charged BFP for consulting services and
certain expenses incurred, plus the Company's proportionate share of rent and
support services. Aggregate expenses related to services provided by BTC during
1995 totaled $1,478,000. Concurrent with the Agreement and Plan of Merger
between BTC and the Company on January 2, 1996, the management agreement was
canceled.
11. INCOME TAXES
The Company files its income tax return on a consolidated basis. No
provision for income taxes was recorded for 1996, 1995, or for any prior
periods. 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 $20.6 million and $4.4
million for 1996 and 1995, respectively.
The actual income tax expense for the years ended December 31, 1996, 1995
and 1994 differs from the "expected" income tax expense, computed by applying
the U. S. Federal corporate tax rate of 35% to income before income taxes as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax
expense.......................... $(15,345,000) $(3,343,000) $(1,364,000)
Non-utilization of net operating
loss............................. 14,150,000 2,691,000 1,272,000
Amortization of goodwill........... 579,000 258,000 60,000
Minority interest.................. 557,000 380,000 27,000
Other, net......................... 59,000 14,000 5,000
------------ ----------- -----------
$ -- $ -- $ --
============ =========== ===========
</TABLE>
F-31
<PAGE> 141
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1996 and 1995, temporary differences and carryforwards
that give rise to deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred income tax assets:
Tax loss carryforwards......................... $ 35,040,000 $ 6,358,000
Other.......................................... 611,000 52,000
------------ -----------
Gross deferred income tax assets............... 35,651,000 6,410,000
Less valuation allowance....................... (26,573,000) (6,011,000)
------------ -----------
Net deferred income tax asset.................. 9,078,000 399,000
Deferred income tax liabilities:
Tangible and intangible assets................. (9,078,000) (399,000)
Net deferred income tax liabilities............ (9,078,000) (399,000)
------------ -----------
Net deferred income taxes...................... $ -- $ --
</TABLE>
As of December 31, 1996, net operating loss carryforwards totaling $87.6
million expire in years 2008-2012 if not utilized in future income tax returns.
12. COMMITMENTS AND CONTINGENCIES
The Company leases office space and other equipment at various locations
under operating leases. Rent expense totaled $3,150,000 and $688,000 for 1996
and 1995, respectively. Future minimum rental payments under non-cancelable
operating leases at December 31, 1996, were as follows:
<TABLE>
<S> <C>
1997........................................................ $ 4,328,000
1998........................................................ 3,602,000
1999........................................................ 3,252,000
2000........................................................ 2,637,000
2001........................................................ 2,343,000
Thereafter.................................................. 9,508,000
-----------
Total minimum lease payments................................ $25,670,000
</TABLE>
On September 22, 1995, GST Tucson Lightwave, Inc. (Lightwave) was permitted
to intervene in litigation originally filed by Brooks Fiber Communications of
Tucson, Inc., a wholly-owned subsidiary of the Company (BFC Tucson). On October
2, 1995, Lightwave filed a counterclaim against BFC Tucson, the Company and
Tucson Electric Power Company (TEP) charging BFC Tucson, the Company and TEP
with violations of antitrust laws, all of which alleged violations stem from an
agreement between BFC Tucson and TEP that allowed BFC Tucson exclusive rights,
for one year, to utilize certain of TEP's rights of way. The original causes of
action have been settled; however, the counterclaim by Lightwave is currently
still pending. The counterclaim seeks treble damages, attorneys' fees, costs
(all in an unspecified amount) and such other relief as the court deems proper.
The Company believes the claims are without merit and intends to defend
vigorously against this action. The Company believes that resolution of the
matter will not have a material adverse effect on the consolidated financial
condition or results of operations of the Company.
13. QUARTERLY SUMMARY OF OPERATIONS (UNAUDITED)
The following table presents unaudited quarterly operating results for 1995
and 1996. The Company believes that all necessary adjustments have been included
in the amounts stated below
F-32
<PAGE> 142
BROOKS FIBER PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to present fairly the quarterly results when read in conjunction with the
Consolidated Financial Statements and notes thereto. Results of operations for
any particular quarter are not necessarily indicative of results of operations
for a full year or predictive of future periods.
<TABLE>
<CAPTION>
1995 1996
--------------------------------- ------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
--- --- --- --- --- --- --- ---
($ IN 000S)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue.............. 3,023 3,489 3,797 3,851 6,795 8,409 12,943 17,427
Loss from
operations......... (1,644) (1,805) (2,181) (2,910) (5,121) (7,074) (7,605) (10,986)
Other expense, net... (712) (825) (396) (163) (2,043) (3,296) (2,837) (6,471)
------ ------ ------ ------ ------ ------- ------- -------
Loss before minority
interest........... (2,356) (2,630) (2,577) (3,073) (7,164) (10,370) (10,442) (17,457)
Minority interest.... 142 176 271 496 523 615 451 --
------ ------ ------ ------ ------ ------- ------- -------
Net loss............. (2,214) (2,454) (2,306) (2,577) (6,641) (9,755) (9,991) (17,457)
====== ====== ====== ====== ====== ======= ======= =======
Loss per share
applicable to
common
shareholders....... (.11) (.13) (.12) (.13) (.35) (.40) (.35) (.58)
====== ====== ====== ====== ====== ======= ======= =======
EBITDA(1)............ (899) (797) (1,061) (1,665) (2,693) (3,908) (3,340) (4,549)
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
- ---------------
(1) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization and minority interests. EBITDA is commonly used
in the communications industry to analyze companies on the basis of
operating performance, leverage and liquidity. EBITDA is not intended to
represent cash flows for the periods. See Consolidated Statement of Cash
Flows.
14. SUBSEQUENT EVENTS
On February 4, 1997, the Company completed a secondary offering of
6,723,429 shares of common stock at a price of $25.00 per share. All of the
6,723,429 shares offered were sold by existing shareholders of the Company, and
the Company did not receive any proceeds from the sale of these shares. In
conjunction with the offering, the underwriters were granted an over-allotment
option by the Company to purchase additional shares at $25.00 per share. This
option was fully exercised by the underwriters, and an additional 1,008,514
shares were issued by the Company. Gross proceeds to the Company from this
offering totaled approximately $25.2 million, and proceeds net of underwriting
discounts totaled approximately $24.0 million.
On February 7, 1997, the Company signed definitive agreements to acquire
100% of the stock of certain companies related to Phoenix Fiberlink, Inc.
(Phoenix), a provider of competitive access and internet services in Utah and
Nevada. The definitive agreements provide for the purchase price to be paid
through the issuance by the Company of an aggregate of 600,000 shares of common
stock valued at current market value and cash. The transaction is subject to
regulatory approvals.
On February 25, 1997, the Company and MaineCom Services, Inc. (MaineCom), a
subsidiary of Central Maine Power Company, formed a joint venture company, 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.
F-33
<PAGE> 143
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Metro Access Networks, Inc.:
We have audited the accompanying balance sheet of Metro Access Networks,
Inc. (the Company) as of December 31, 1996, and the related statements of
operations, changes in stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Metro Access Networks, Inc.
as of December 31, 1996, and the results of its operations and its cash flows
for the period then ended, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
St. Louis, Missouri
April 7, 1997
F-34
<PAGE> 144
METRO ACCESS NETWORKS, INC.
(A SUBSIDIARY OF CENTURY TELEPHONE ENTERPRISES, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,000 $ --
Accounts receivable
Customers, less allowance for doubtful accounts of
$32,000 in 1996...................................... 498,000 268,000
Other.................................................. 1,272,000 6,000
Note receivable........................................... -- 325,000
Prepayments............................................... 106,000 8,000
----------- -----------
1,881,000 607,000
----------- -----------
Property, plant and equipment:
Property, plant and equipment............................. 35,017,000 13,611,000
Accumulated depreciation.................................. (1,960,000) (813,000)
----------- -----------
33,057,000 12,798,000
----------- -----------
Deferred income taxes....................................... 107,000 457,000
----------- -----------
Other assets................................................ 1,078,000 421,000
----------- -----------
$36,123,000 $14,283,000
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Century Telephone Enterprises, Inc..................... $37,959,000 $16,014,000
Construction........................................... 3,216,000 --
Trade.................................................. 684,000 1,000
Accrued expenses
Taxes.................................................. 173,000 8,000
Other.................................................. 1,090,000 32,000
----------- -----------
43,122,000 16,055,000
----------- -----------
Stockholders' equity:
Common stock, $.10 par value, 10,000 shares authorized,
1,000 issued and outstanding........................... -- --
Paid-in capital........................................... 2,476,000 2,250,000
Accumulated deficit....................................... (9,475,000) (4,022,000)
----------- -----------
(6,999,000) (1,772,000)
----------- -----------
$36,123,000 $14,283,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE> 145
METRO ACCESS NETWORKS, INC.
(A SUBSIDIARY OF CENTURY TELEPHONE ENTERPRISES, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Operating revenues................................. $ 3,999,000 $ 634,000 $ --
----------- ----------- -----------
Operating expenses
Cost of services................................. 4,082,000 1,267,000 19,000
Selling, general and administrative expenses..... 5,183,000 2,138,000 1,720,000
Depreciation and amortization.................... 1,259,000 819,000 4,000
----------- ----------- -----------
Total operating expenses.................... 10,524,000 4,224,000 1,743,000
----------- ----------- -----------
Operating loss..................................... (6,525,000) (3,590,000) (1,743,000)
----------- ----------- -----------
Other income (expense)
Interest expense................................. (1,866,000) (739,000) (5,000)
Interest income.................................. 8,000 31,000 57,000
----------- ----------- -----------
Total other income (expense)................ (1,858,000) (708,000) 52,000
----------- ----------- -----------
Loss before income tax benefit..................... (8,383,000) (4,298,000) (1,691,000)
Income tax benefit................................. (2,930,000) (1,502,000) (590,000)
----------- ----------- -----------
Net loss........................................... $(5,453,000) $(2,796,000) $(1,101,000)
=========== =========== ===========
Primary loss per share............................. $ (2,908) $ (1,524) $ (615)
=========== =========== ===========
Fully diluted loss per share....................... $ (2,908) $ (1,524) $ (615)
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE> 146
METRO ACCESS NETWORKS, INC.
(A SUBSIDIARY OF CENTURY TELEPHONE ENTERPRISES, INC.)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Common stock
Balance at beginning and end of year........... $ -- $ -- $ --
----------- ----------- -----------
Paid in capital
Balance at beginning of year................... 2,250,000 2,250,000 2,250,000
Amortization of compensation under stock option
agreements.................................. 226,000 -- --
----------- ----------- -----------
Balance at end of year......................... 2,476,000 2,250,000 2,250,000
----------- ----------- -----------
Accumulated deficit
Balance at beginning of year................... (4,022,000) (1,226,000) (125,000)
Net loss....................................... (5,453,000) (2,796,000) (1,101,000)
----------- ----------- -----------
Balance at end of year......................... (9,475,000) (4,022,000) (1,226,000)
----------- ----------- -----------
Total stockholders' equity....................... $(6,999,000) $(1,772,000) $ 1,024,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE> 147
METRO ACCESS NETWORKS, INC.
(A SUBSIDIARY OF CENTURY TELEPHONE ENTERPRISES, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................ $ (5,453,000) $ (2,796,000) $(1,101,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 1,259,000 819,000 4,000
Deferred income taxes........................ 350,000 (459,000) 3,000
Changes in current assets and current
liabilities:
Increase in accounts receivable............ (1,496,000) (249,000) (25,000)
Increase in accounts payable -- trade...... 683,000 1,000 --
Changes in other current assets and other
current liabilities, net................ 1,125,000 31,000 1,000
Other, net................................. (56,000) (296,000) (172,000)
------------ ------------ -----------
NET CASH USED IN OPERATING ACTIVITIES... (3,588,000) (2,949,000) (1,290,000)
------------ ------------ -----------
INVESTING ACTIVITIES
Payments for property, plant and equipment...... (18,734,000) (12,284,000) (1,326,000)
Note receivable................................. 325,000 -- --
Other, net...................................... 57,000 35,000 --
------------ ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES... (18,352,000) (12,249,000) (1,326,000)
------------ ------------ -----------
FINANCING ACTIVITIES
Advances from Century Telephone Enterprises,
Inc.......................................... 21,945,000 15,198,000 726,000
------------ ------------ -----------
Increase (decrease) in cash and
cash equivalents............................. 5,000 -- (1,890,000)
Cash and cash equivalents at beginning of
year......................................... -- -- 1,890,000
------------ ------------ -----------
Cash and cash equivalents at end of year........ $ 5,000 $ -- $ --
============ ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-38
<PAGE> 148
METRO ACCESS NETWORKS, INC.
(A SUBSIDIARY OF CENTURY TELEPHONE
ENTERPRISES, INC.)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION RELATED TO 1995 AND 1994 IS UNAUDITED)
DECEMBER 31, 1996
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Metro Access Networks, Inc. (the "Company") is a subsidiary of Century
Telephone Enterprises, Inc. ("Century"). Century owns an 80% interest in the
Company; the remaining 20% is owned by Richard Kolsby ("Kolsby"). The Company
was formed in late 1993 and its primary business is to provide enhanced data
transmission services, transport to local area network users and central office
interconnection primarily for large business customers in certain metropolitan
areas of Texas. The Company is dependent upon Century and certain Century
subsidiaries to fund construction and maintenance services, to fund the
operational requirements of the Company and to provide managerial, technical and
accounting services.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Carrier and end user revenues are recognized when the services are
rendered. Installation revenue is recognized upon installation or delivery of
the related equipment.
In 1996 the Company entered into agreements with unrelated third parties
whereby the Company will provide indefeasible rights of use ("IRUs") in
installed fiber and conduits. The Company receives (i) compensation for the
installation of the fiber and (ii) a monthly amount over the term of the
agreement applicable to the maintenance of the fiber and conduit. The Company
records the amount received for installation as revenue and charges cost of
services for (i) the costs of installation and (ii) the pro rata cost of the
assets subject to the IRUs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation of property
is provided on the straight line method over estimated service lives ranging
from three to twenty years. When property is sold or retired, a gain or loss is
recognized.
In 1996 the Company adopted Statement of Financial Accounting Standards No.
121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS 121 established accounting standards
for the impairment of long-lived assets, certain identifiable intangibles and
for long-lived assets and certain identifiable intangibles to be disposed of.
The carrying value of long-lived assets is reviewed for impairment at least
annually, or whenever events or changes in circumstances indicate that such
carrying value may not be recoverable, by assessing the recoverability of such
carrying value through estimated undiscounted future net cash flows expected to
be generated by the assets. The adoption of SFAS 121 did not affect the
Company's financial position or results of operations.
F-39
<PAGE> 149
METRO ACCESS NETWORKS, INC.
(A SUBSIDIARY OF CENTURY TELEPHONE
ENTERPRISES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The Company is included in the consolidated federal income tax return of
Century. For financial accounting purposes, federal income taxes are computed
and recorded as if the Company filed a separate federal income tax return,
except that (i) in the event the Company generates a net tax loss which is
utilized in Century's consolidated return, the Company will be given the benefit
of such loss, and (ii) income taxes are calculated based upon the statutory tax
rate in effect for Century and its subsidiaries on a consolidated basis. The
Company periodically settles amounts for federal income taxes with Century.
The Company uses the asset and liability method of accounting for income
taxes under which deferred tax assets and liabilities are established for the
future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases.
LOSS PER SHARE
Loss per share amounts are determined on the basis of the weighted average
number of common shares and common stock equivalents outstanding during the
year. Common stock equivalents consist of shares issuable under employee stock
option agreements. Century has an arrangement whereby if common shares are
issued to parties other than Century, Century will be issued a sufficient number
of common shares (at $.10 per share) in order to maintain its 80% ownership
interest in the Company. Such shares are also considered common stock
equivalents as they relate to shares issuable under stock option agreements. The
weighted average number of shares used in computing primary and fully diluted
loss per share for 1996, 1995 and 1994 was 1,875, 1,835 and 1,790, respectively.
STOCK COMPENSATION
During 1996 the Company adopted Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." As allowed by
SFAS 123, the Company accounts for employee stock compensation plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees."
CASH EQUIVALENTS
The Company considers short-term investments with a maturity at date of
purchase of three months or less to be cash equivalents.
F-40
<PAGE> 150
METRO ACCESS NETWORKS, INC.
(A SUBSIDIARY OF CENTURY TELEPHONE
ENTERPRISES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(2) PROPERTY, PLANT AND EQUIPMENT
The following table summarizes the major classes of property, plant and
equipment.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
Telecommunications equipment...................... $20,086,000 $ 7,969,000
Electronics equipment............................. 12,833,000 5,212,000
Buildings, office equipment and vehicles.......... 1,096,000 278,000
Leasehold improvements............................ 1,002,000 152,000
----------- -----------
$35,017,000 $13,611,000
=========== ===========
</TABLE>
As of December 31, 1996 and 1995, property, plant and equipment included
$13,872,000 and $3,485,000 of construction in progress that was not in service
and, accordingly, has not been depreciated. Depreciation expense was $1,090,000,
$809,000 and $4,000 during 1996, 1995 and 1994, respectively.
(3) OTHER ASSETS
Other assets primarily represent collocation costs that have been
capitalized and are being amortized over five years. Amortization of other
assets was $169,000 during 1996 and $10,000 during 1995 and is included in
depreciation and amortization.
(4) INCOME TAXES
Income tax benefit consists of the following components.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Federal
Current............................. $(3,280,000) $(1,043,000) $(593,000)
Deferred............................ 350,000 (459,000) 3,000
----------- ----------- ---------
$(2,930,000) $(1,502,000) $(590,000)
=========== =========== =========
</TABLE>
The following is a reconciliation from the statutory federal income tax
rate to the Company's effective income tax rate:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Statutory federal income tax rate... (35.0)% (35.0)% (35.0)%
Other, net.......................... -- .1 .1
----- ----- -----
Effective income tax rate........... (35.0)% (34.9)% (34.9)%
===== ===== =====
</TABLE>
F-41
<PAGE> 151
METRO ACCESS NETWORKS, INC.
(A SUBSIDIARY OF CENTURY TELEPHONE
ENTERPRISES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---- ----
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Start-up costs capitalized for tax/expensed for
book............................................ $ 441,000 $ 599,000
Employee stock compensation........................ 116,000 --
Other.............................................. 20,000 3,000
--------- ---------
Total gross deferred tax assets................. 577,000 602,000
Less valuation allowance........................ -- --
--------- ---------
Net deferred tax assets......................... 577,000 602,000
--------- ---------
Deferred tax liability:
Property, plant and equipment, primarily due to
depreciation differences........................ (470,000) (145,000)
--------- ---------
Net deferred tax asset.......................... $ 107,000 $ 457,000
========= =========
</TABLE>
The Company is included in the consolidated tax return of Century and it is
anticipated that the Company's deferred tax assets will be realized based upon
expected future taxable income in Century's consolidated tax return.
(5) EMPLOYEE BENEFIT PLANS
Certain of the employees of the Company began participating in Century's
Employee Stock Ownership Plan and Employee Stock Bonus Plan in 1995. The Company
contributes a proportionate amount, based on participating employee salaries, of
the total contributions made by Century and subsidiaries to these plans as
determined annually by the Board of Directors of Century. The Company recorded
contributions, costs and administrative expenses related to these plans in the
amount of $46,000 and $39,000 during 1996 and 1995, respectively.
Century and the Company sponsor a defined benefit health care plan that
provides postretirement medical, life and dental benefits to substantially all
retired full-time employees.
Net periodic postretirement benefit cost, which was based on actuarial
studies performed for Century and allocated to its subsidiaries, totaled
$39,000, $22,000 and $10,000 for 1996, 1995 and 1994, respectively.
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents, Accounts Receivable, Note Receivable, Accounts
Payable and Accrued Expenses -- The carrying amount approximates the fair value
due to the short maturity of these instruments.
(7) STOCK OPTION PROGRAM
Under the Company's stock option program, options have been granted to
employees at a price equal to the then-current estimated market price. All of
the options expire ten years after the date of
F-42
<PAGE> 152
METRO ACCESS NETWORKS, INC.
(A SUBSIDIARY OF CENTURY TELEPHONE
ENTERPRISES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
grant. In a supplemental agreement with stock option recipients, the Company
agreed to provide for bonuses equivalent to the aggregate exercise price at the
time of exercise. Such bonuses are being amortized to operations over the
vesting period of the option agreements.
During 1996 the Company granted 36 options. The weighted-average fair value
of each of the options was estimated as of the date of grant to be $795 using an
option pricing model with the following assumptions: dividend yield -- 0%;
expected volatility -- 35%, risk-free interest rate -- 6.5%; and expected life
- -- six years.
Stock option transactions during 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
NUMBER OF AVERAGE
OPTIONS PRICE
--------- -------
<S> <C> <C>
Outstanding December 31, 1993.......................... 149 $1,410
Granted................................................ 18 1,410
---
Outstanding December 31, 1994 and 1995................. 167 1,410
Granted................................................ 36 1,937
Forfeited.............................................. (23) 1,410
---
Outstanding December 31, 1996.......................... 180 1,515
===
</TABLE>
The following summarizes certain information about the Company's stock
options at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
--------------------------------------------
WEIGHTED
NUMBER OF NUMBER OF AVERAGE
EXERCISE OPTIONS OPTIONS REMAINING
PRICES OUTSTANDING EXERCISABLE CONTRACTUAL LIFE
-------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
$1,410 148 113 7.6 years
2,003 32 12 9.1
--- ---
180 125 7.9
=== ===
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for its program. Pro forma net
loss for 1996 as computed under the provisions of SFAS 123 was not materially
different than the reported net loss of $5,453,000.
(8) STOCK APPRECIATION RIGHTS
At December 31, 1996, the Company had outstanding 26.125 stock appreciation
rights ("SARs") granted in 1996 to certain employees at prices that ranged from
$1,410 to $2,003. The SARs were granted for a ten-year period; twenty-five
percent of the SARs vest at each anniversary date over the first four years.
Compensation expense recorded during 1996 related to the SARs totaled $331,000
based upon the estimated fair market value of the SARs.
F-43
<PAGE> 153
METRO ACCESS NETWORKS, INC.
(A SUBSIDIARY OF CENTURY TELEPHONE
ENTERPRISES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(9) CERTAIN TRANSACTIONS
Since inception of the Company, Century has funded substantially all of the
capital expenditure requirements and operational requirements of the Company and
it is anticipated that Century will continue to fund such requirements for the
next several years. The Company is assessed interest on its payable to Century
each month based upon the weighted-average interest rate of Century's long-term
debt. Such interest rate was 7.4% and 7.7% at December 31, 1996 and 1995,
respectively. Related interest expense amounted to $1,866,000 in 1996, $739,000
in 1995 and $5,000 in 1994.
The Company purchases certain services (primarily managerial, accounting
and human resources) from Century and other affiliated companies. Services
purchased by the Company from Century and its subsidiaries totaled approximately
$477,000, $385,000 and $414,000 during 1996, 1995 and 1994, respectively. The
Company believes such amounts are representative of arms-length transactions for
the underlying services.
In 1993 the Company loaned Kolsby $325,000. Interest was assessed on a
monthly basis at the then-current prime rate. Related interest income was $8,000
in 1996, $31,000 in 1995 and $25,000 in 1994. During 1996 Kolsby repaid the
note, including accrued interest.
In addition to leasing its main office, the Company leases space in
buildings which house certain of the Company's telecommunications equipment.
Rental expense for 1996, 1995 and 1994 was $483,000, $184,000 and $31,000,
respectively. Future minimum rental payments under operating leases that have
initial or remaining noncancelable lease terms in excess of one year at December
31, 1996 are as follows: 1997 -- $905,000; 1998 -- $990,000, 1999 -- $942,000;
2000 -- $843,000; 2001 -- $789,000; and thereafter $4,233,000.
(10) LEASE AGREEMENTS
The Company has entered into several agreements whereby the Company leases
fiber to its customers for periods that range from three to ten years. The
amounts received from such lease agreements through December 31, 1996, have not
been material to the Company's results of operations.
(11) COMMITMENTS
Expenditures for property, plant and equipment are anticipated to be
approximately $30,000,000 during 1997. It is anticipated that such expenditures
will be financed through advances from Century.
(12) SUBSEQUENT EVENT (UNAUDITED)
On March 31, 1997, Century signed a definitive agreement with Brooks Fiber
Properties, Inc. ("Brooks") under which Brooks will acquire 100% of the common
stock of the Company. Century will receive common stock of Brooks as
consideration in the transaction and the remaining shareholders will receive
cash and/or Brooks common stock. This transaction is expected to be finalized in
the second quarter of 1997.
Pursuant to a Settlement Agreement dated as of May 1, 1997 by and among the
Company, Century, Kolsby and each of the holders of options to acquire shares of
the Company's common stock (the "Option Holders"), Century exchanged all of its
rights to be repaid the entire indebtedness owed to it by the Company, totaling
$44,999,688, for 1,543 shares of the Company's common
F-44
<PAGE> 154
METRO ACCESS NETWORKS, INC.
(A SUBSIDIARY OF CENTURY TELEPHONE
ENTERPRISES, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
stock, and Century received an additional 720 shares of the Company's common
stock in connection with the Option Holders' agreement to exercise their options
immediately prior to the closing of the merger with Brooks. Pursuant to an
Agreement Among SAR Holders dated as of May 1, 1997 by and among the Company and
each of the holders of the Company's SARs, the Company paid such holders an
aggregate of $487,917 in full settlement of their rights under the Company's
SARs.
F-45
<PAGE> 155
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.
ADSL -- Asynchronous digital subscriber line, a service for speeding up the
transmission of data on the Internet which is an alternative to ISDN (Integrated
Services Digital Network) Service.
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
used by the network to route calls is 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 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
A-1
<PAGE> 156
terms, even though the CLEC's network connection equipment is not physically
located inside the central offices.
DEDICATED LINES -- Telecommunications lines dedicated or reserved for use
exclusively by particular customers along predetermined routes (in contrast to
telecommunications lines within the 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.
A-2
<PAGE> 157
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.
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, Internet access, 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 -- Intra-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
A-3
<PAGE> 158
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.
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. Interim number portability is currently available
and permanent number portability is expected to be available within the next few
years.
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.
A-4
<PAGE> 159
ON-NET -- a customer that is physically connected to one of the Company's
networks.
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
A-5
<PAGE> 160
line or equipment failure can be overcome by rerouting calls within the network.
If the line is cut, the traffic is simply reversed and sent to its destination
around the other side of the ring.
SWITCH -- A sophisticated computer that accepts instructions from a caller
in the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow local telecommunications service providers to
connect calls directly to their destination, while providing advanced features
and recording connection information for future billing.
SWITCHED ACCESS SERVICES -- Switched Access Services are the services
provided by 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> 161
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS 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. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES, OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. 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 ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Notice to Investors........................ 3
Available Information...................... 4
Incorporation of Certain Documents By
Reference................................ 4
Prospectus Summary......................... 5
Risk Factors............................... 19
No Cash Proceeds to the Company............ 25
Price Range of the Private Notes........... 25
Capitalization............................. 26
The Exchange Offer......................... 27
Summary Historical and Pro Forma Financial
and Other Operating Data................. 34
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 36
Business of the Company.................... 45
The Competitive Local Telecommunications
Industry................................. 60
Competition................................ 64
Regulatory Overview........................ 67
Management................................. 73
Description of Existing Debt............... 79
Description of the Notes................... 80
Certain United States Tax Consequences to
Foreign Holders.......................... 105
Plan of Distribution....................... 108
Validity of the Exchange Notes............. 108
Independent Auditors....................... 108
Index to Financial Statements.............. F-1
Glossary................................... A-1
</TABLE>
======================================================
======================================================
BROOKS FIBER
PROPERTIES, INC.
OFFER TO EXCHANGE
10% SENIOR NOTES DUE
JUNE 1, 2007
FOR ALL OUTSTANDING
10% SENIOR NOTES DUE
JUNE 1, 2007
----------------------
[BROOKS FIBER PROPERTIES LOGO]
----------------------
======================================================
<PAGE> 162
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The following is a summary of Section 145 of the General Corporation Law of
the State of Delaware (the "DGCL").
Subject to restrictions contained in the statute, a corporation may
indemnify any person, who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding by reason of
the fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection therewith if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, in connection with any criminal action or
proceeding, had no reasonable cause to believe that such person's conduct was
unlawful. A person who is successful on the merits or otherwise in any suit or
matter covered by the indemnification statute, shall be indemnified and
indemnification is otherwise authorized upon a determination that the person to
be indemnified has met the applicable standard of conduct required. Such
determination shall be made by a majority vote of the board of directors who
were not parties to such action, suit or proceeding, even though less than a
quorum, or if there are no such directors, or if such directors so direct, by
special independent counsel in a written opinion, or by the shareholders.
Expenses incurred in defense may be paid in advance upon receipt by the
corporation of written undertaking by or on behalf of the recipient to repay
such amount if it is ultimately determined that the recipient is not entitled to
indemnification under the statute. The indemnification provided by statute is
not exclusive of any other rights of which those seeking indemnification may be
entitled under any by-law, agreement, vote of shareholders or disinterested
directors or otherwise, and shall inure to the benefit of the heirs, executors
and administrators of such person. Insurance may be purchased on behalf of any
person entitled to indemnification by the corporation against any liability
asserted against him or her and incurred in an official capacity regardless of
whether the person could be indemnified under the statute. References to the
corporation include all constituent corporations absorbed in a consolidation or
merger as well as the resulting corporation and anyone seeking indemnification
by virtue of acting in some capacity with a constituent corporation would stand
in the same position as if such person had served the resulting or surviving
corporation in the same capacity.
The Second Restated Certificate of Incorporation and By-laws of the Company
provide for indemnification of directors and officers of the Company to the
maximum extent permitted by the DGCL.
The directors and officers of the Company are insured under a policy of
directors' and officers' liability insurance.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
See Index to Exhibits.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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<PAGE> 163
(b) The undersigned Registrant hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim of indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
II-2
<PAGE> 164
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to this registration statement to be signed on
its behalf by the undersigned thereunto duly authorized, in the City of Town &
Country, State of Missouri, on June 17, 1997.
BROOKS FIBER PROPERTIES, INC.
By: DAVID L. SOLOMON
--------------------------------------
David L. Solomon
Executive Vice President and
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James C. Allen and David L. Solomon, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this registration statement and any other documents and
instruments incidental thereto, and any registration statement filed pursuant to
Rule 462 under the Securities Act of 1933, as amended, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite or necessary to be done in and about the premises,
as full to all intents and purposes as he might or could do in person, hereby
ratifying and confirming that each of said attorneys-in-fact and agents and/or
either of them, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated on June 17, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
ROBERT A. BROOKS Director (Chairman of the Board)
- -----------------------------------------------------
Robert A. Brooks
JAMES C. ALLEN Vice Chairman and Director
- ----------------------------------------------------- (Chief Executive Officer)
James C. Allen
President and Director
- ----------------------------------------------------- (Chief Operating Officer)
D. Craig Young
DAVID L. SOLOMON Executive Vice President and
- ----------------------------------------------------- Chief Financial Officer
David L. Solomon (Principal Financial and Accounting
Officer)
Director
- -----------------------------------------------------
William J. Bresnan
ROBERT F. BENBOW Director
- -----------------------------------------------------
Robert F. Benbow
</TABLE>
II-3
<PAGE> 165
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
W. BRUCE HANKS Director
- -----------------------------------------------------
W. Bruce Hanks
JONATHAN M. NELSON Director
- -----------------------------------------------------
Jonathan M. Nelson
GLEN F. POST, III Director
- -----------------------------------------------------
Glen F. Post, III
G. JACKSON TANKERSLEY, JR. Director
- -----------------------------------------------------
G. Jackson Tankersley, Jr.
Director
- -----------------------------------------------------
Ronald H. Vander Pol
CAROL DEB. WHITAKER Director
- -----------------------------------------------------
Carol deB. Whitaker
</TABLE>
II-4
<PAGE> 166
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ----------
<C> <S> <C>
2.1 Agreement and Plan of Merger dated December 19, 1995 between
the Company and Brooks Telecommunications Corporation
(incorporated by reference to Exhibit 2.1 to the Company's
Registration Statement on Form S-1 (File No. 333-1924) filed
with the Commission on March 4, 1996 (the "IPO Form S-1"))
2.2 Agreement and Plan of Merger dated January 17, 1996 between
the Company, Brooks Fiber Communications of Michigan, Inc.,
City Signal, Inc. and Ronald H. Vander Pol (incorporated by
reference to Exhibit 2.2 to the IPO Form S-1)
2.3 Agreement and Plan of Merger dated as of April 1, 1997
between the Company, Brooks Fiber Communications of Texas,
Inc., Century Telephone Enterprise, Inc. and Metro Access
Networks, Inc., (incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K dated May 5, 1997)
3.1 Second Restated Certificate of Incorporation of the Company
3.2 By-laws of the Company as amended April 29, 1997
4.1 Rights Agreement dated February 29, 1996 between the Company
and The Boatmen's Trust Company, as Rights Agent
(incorporated by reference to Exhibit 4.2 to the IPO Form
S-1)
4.2 Amended and Restated Stockholders Agreement dated as of June
15, 1995 (incorporated by reference to Exhibit 4.3 to the
IPO Form S-1)
4.3 Amended and Restated Registration Rights Agreement dated as
of June 15, 1995 (incorporated by reference to Exhibit 4.4
to the IPO Form S-1)
4.4 Indenture dated as of February 26, 1996 between the Company
and The Bank of New York, as Trustee (incorporated by
reference to Exhibit 4.6 to the IPO Form S-1)
4.5 Indenture dated as of November 7, 1996 between the Company
and The Bank of New York, as Trustee (incorporated by
reference to Exhibit 4.6 to the Company's Registration
Statement on Form S-1 (File No. 333-16495) filed with the
Commission on November 20, 1996
4.6 Amended and Restated Loan and Security Agreement dated as of
October 1, 1996 among AT&T Credit Corporation, the Company
and certain subsidiaries of the Company (incorporated by
reference to Exhibit 4.8 to the Company's Registration
Statement on Form S-4 (File No. 333-18503) filed with
Commission on December 20, 1996)
4.7 Form of Exchange Note (included in Exhibit 4.10)
4.8 Purchase Agreement dated May 23, 1997 between the Company
and the Initial Purchasers named therein
4.9 Exchange and Registration Rights Agreement dated as of May
29, 1997 between the Company and the Initial Purchasers
named therein (incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated May 29, 1997)
4.10 Indenture dated as of May 29, 1997 between the Company and
The Bank of New York, as Trustee (incorporated by reference
to Exhibit 4.2 to the Company's Current Report on Form 8-K
dated May 29, 1997)
4.11 The Company has not filed certain instruments with respect
to long-term debt since the total amount of securities
authorized thereunder does not exceed 10% of the total
assets of the Company and its subsidiaries on a consolidated
basis. The Company agrees to furnish a copy of any such
agreement to the Commission upon request.
5.1 Opinion of Bryan Cave LLP regarding the validity of the
Exchange Notes
8.1 Tax Opinion of Bryan Cave LLP (included in Exhibit 5.1)
12.1 Statement Re Computation of Ratio of Deficiency of Earnings
to Fixed Charges
</TABLE>
II-5
<PAGE> 167
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ----------
<C> <S> <C>
23.1 Consent of Bryan Cave LLP (included in Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP
24.1 Power of Attorney (included on signature page)
25.1 Statement of Eligibility of The Bank of New York, as Trustee
99.1 Form of Letter of Transmittal
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and other Nominees
99.4 Form of Letter to Clients of Brokers, Dealers, Commercial
Banks, Trust Companies and other Nominees
99.5 Form of Exchange Agent Agreement
</TABLE>
II-6
<PAGE> 1
EXHIBIT 3.1
SECOND RESTATED CERTIFICATE OF INCORPORATION
OF
BROOKS FIBER PROPERTIES, INC.
**************
FIRST. The name of the Corporation is
BROOKS FIBER PROPERTIES, INC.
SECOND. The address of its registered office in the State of Delaware is
located at 1013 Centre Road, in the City of Wilmington, County of New Castle,
Delaware 19805. The name of its registered agent at such address is
Corporation Service Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware ("GCL").
FOURTH:
A. CLASSES AND NUMBER OF SHARES.
The aggregate number of shares of capital stock which the
Corporation is authorized to issue is 151,040,012 shares, consisting of:
(i) 150,000,000 shares of Common Stock, par value $.01 per share
("Common Stock"); and
(ii) 1,040,012 shares of Preferred Stock, par value $.01 per share
("Preferred Stock"), of which 50,000 shares are designated as Series A Junior
Participating Preferred Stock ("Series A Preferred Stock").
B. PREEMPTIVE RIGHTS.
No stockholder of any class of stock of the Corporation shall have
any preemptive right to acquire any additional shares of stock of the
Corporation of any class or series or any security convertible into, or
exercisable or exchangeable for, such stock.
C. TERMS OF PREFERRED STOCK.
1. SERIES A PREFERRED STOCK. The preferences and relative, participating,
optional and other special rights of the Series A Preferred Stock, and the
qualifications, limitations and restrictions thereof, are as follows:
<PAGE> 2
(I) DIVIDENDS AND DISTRIBUTIONS.
(a) Subject to the rights of the holders of any shares of any series
of Preferred Stock of the Corporation ranking prior and superior to the Series A
Preferred Stock with respect to dividends, the holders of shares of Series A
Preferred Stock, in preference to the holders of shares of Common Stock and of
any other junior stock, shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for the purpose,
quarterly dividends payable in cash on any regular quarterly dividend payment
date as shall be established by the Board of Directors (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Preferred Stock, in an amount per share
(rounded to the nearest cent) equal to the greater of (a) $10.00 or (b) subject
to the provision for adjustment hereinafter set forth, 1000 times the aggregate
per share amount of all cash dividends, and 1000 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions,
other than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock since the immediately preceding Quarterly Dividend Payment
Date or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series A Preferred Stock.
In the event the Corporation shall at any time after February 29, 1996 (the
"Rights Declaration Date") declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under clause (b) of the preceding sentence
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in subparagraph (a) of this paragraph (i)
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); provided that, in
the event no dividend or distribution shall have been declared on the Common
Stock during the period between any Quarterly Dividend Payment Date and the
next subsequent Quarterly Dividend Payment Date, a dividend of $10.00 per share
on the Series A Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date
next preceding the date of issue of such shares, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall begin to accrue from
the date of issue of such shares, or unless the date of issue is a Quarterly
Dividend Payment Date or is a date after the record date for the determination
of holders of shares of
2
<PAGE> 3
Series A Preferred Stock entitled to receive a quarterly dividend and before
such Quarterly Dividend Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on
the shares of Series A Preferred Stock in an amount less than the total amount
of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may, in accordance with applicable law,
fix a record date for the determination of holders of shares of Series A
Preferred Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be not more than such number of days
prior to the date fixed for the payment thereof as may be allowed by applicable
law.
(II) VOTING RIGHTS. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(a) Each share of Series A Preferred Stock shall entitle the holder
thereof to 1000 votes on all matters submitted to a vote of the stockholders of
the Corporation. In the event the Corporation shall at any time after the
Rights Declaration Date declare or pay any dividend on the Common Stock payable
in shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
number of votes to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event under the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) Except as otherwise provided herein or by law, the holders of
shares of Series A Preferred Stock, the holders of shares of Common Stock and
the holders of shares of any other capital stock of the Corporation having
general voting rights shall vote together as one class on all matters submitted
to a vote of stockholders of the Corporation.
(c) Except as otherwise set forth herein and except as otherwise
provided by law, holders of Series A Preferred Stock shall have no special
voting rights and their consent shall not be required (except to the extent
they are entitled to vote with holders of Common Stock as set forth herein) for
taking any corporate action.
(III) CERTAIN RESTRICTIONS.
(a) Whenever dividends or distributions payable on the Series A
Preferred Stock as provided in paragraph (i) above are in arrears, thereafter
and until all accrued and unpaid dividends and distributions, whether or not
declared, on shares of Series A Preferred Stock outstanding shall have been
paid in full, the Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or
3
<PAGE> 4
redeem or purchase or otherwise acquire for consideration any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then
entitled;
(iii) except as permitted in subparagraph (a)(iv) of this
paragraph (iii) below, redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series
A Preferred Stock, provided that the Corporation may at any time redeem,
purchase or otherwise acquire shares of any such parity stock in exchange
for shares of any stock of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the Series A
Preferred Stock; and
(iv) purchase or otherwise acquire for consideration any shares
of Series A Preferred Stock, or any shares of stock ranking on a parity
with the Series A Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board of
Directors) to all holders of such shares upon such terms as the Board of
Directors, after consideration of the respective annual dividend rates and
other relative rights and preferences of the respective series and
classes, shall determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under subparagraph (a)
of this paragraph (iii), purchase or otherwise acquire such shares at such time
and in such manner.
(IV) REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. The Corporation
shall cause all such shares upon their cancellation to be authorized but
unissued shares of Preferred Stock which may be reissued as part of a new
series of Preferred Stock, subject to the conditions and restrictions on
issuance set forth herein.
(V) LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) Subject to the rights of the holders of any shares of any
series of Preferred Stock of the Corporation ranking prior and superior to the
Series A Preferred Stock with respect to liquidation, upon any liquidation
(voluntary or otherwise), dissolution or winding up of the
4
<PAGE> 5
Corporation, no distribution shall be made to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless, prior thereto, the holders
of shares of Series A Preferred Stock shall have received $1000.00 per share,
plus an amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment (the "Series A Liquidation
Preference"). Following the payment of the full amount of the Series A
Liquidation Preference, no additional distributions shall be made to the
holders of shares of Series A Preferred Stock, unless, prior thereto, the
holders of shares of Common Stock shall have received an amount per share (the
"Common Adjustment") equal to the quotient obtained by dividing (i) the Series
A Liquidation Preference by (ii) 1000 (as appropriately adjusted as set forth
in subparagraph (b) below to reflect such events as stock dividends, and
subdivisions, combinations and consolidations with respect to the Common Stock)
(such number in clause (ii) being referred to as the "Adjustment Number").
Following the payment of the full amount of the Series A Liquidation Preference
and the Common Adjustment in respect of all outstanding shares of Series A
Preferred Stock and Common Stock, respectively, holders of Series A Preferred
Stock and holders of shares of Common Stock shall receive their ratable and
proportionate share of the remaining assets to be distributed in the ratio of
the Adjustment Number to 1 with respect to such Series A Preferred Stock and
Common Stock, on a per share basis, respectively.
(b) In the event there are not sufficient assets available to permit
payment in full of the Series A Liquidation Preference and the liquidation
preferences of all other series of Preferred Stock, if any, which rank on a
parity with the Series A Preferred Stock, then such remaining assets shall be
distributed ratably to the holders of such parity shares in proportion to their
respective liquidation preferences. In the event there are not sufficient
assets available to permit payment in full of the Common Adjustment, then such
remaining assets shall be distributed ratably to the holders of Common Stock.
(c) In the event the Corporation shall at any time after the Rights
Declaration Date declare or pay any dividend on Common Stock payable in shares
of Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the Adjustment Number
in effect immediately prior to such event shall be adjusted by multiplying such
Adjustment Number by a fraction the numerator of which is the number of shares
of Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(VI) CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into
any consolidation, merger, combination or other transaction in which the shares
of Common Stock are exchanged for or changed into other stock or securities,
cash and/or any other property, then in any such case the shares of Series A
Preferred Stock shall at the same time be similarly exchanged or changed in an
amount per share (subject to the provision for adjustment hereinafter set
forth) equal to 1000 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time after the Rights
5
<PAGE> 6
Declaration Date declare or pay any dividend on Common Stock payable in shares
of Common Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser
number of shares of Common Stock, then in each such case the amount set forth
in the preceding sentence with respect to the exchange or change of shares of
Series A Preferred Stock shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that are outstanding immediately prior to such
event.
(VII) REDEMPTION. The shares of Series A Preferred Stock shall not be
redeemable.
(VIII) RANKING. The Series A Preferred Stock shall rank junior to all
other series of the Corporation's Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of any such series
shall provide otherwise.
(IX) FRACTIONAL SHARES. Series A Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Preferred Stock.
2. OTHER SERIES OF PREFERRED STOCK. The terms of the shares of each
other series of Preferred Stock shall be as stated and expressed in this
Certificate of Incorporation or any amendment hereto, or in the resolution or
resolutions providing for the issuance of such series of Preferred Stock
adopted by the Board of Directors. Subject to the requirements of the GCL and
the provisions of this Certificate of Incorporation, the Board of Directors is
expressly authorized to cause any number of the authorized and undesignated
shares of Preferred Stock to be issued from time to time in one or more series
of Preferred Stock with such voting powers, full or limited, or no voting
powers, and such designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, if any, as the Board of Directors may fix by resolution
or resolutions, prior to the issuance of any shares of such series of Preferred
Stock, each of which series may differ from any and all other series,
including, without limiting the generality of the foregoing, the following:
(i) The number of shares constituting such series of Preferred
Stock and the designation thereof;
(ii) The dividend rate, if any, on the shares of such series of
Preferred Stock, whether and the extent to which any such dividends shall be
cumulative or non-cumulative, the relative rights of priority, if any, of
payments of any dividends, and the times at which, and the terms and conditions
on which, any dividends shall be paid;
(iii) The right, if any, of the holders of shares of such series of
Preferred Stock to vote and the manner of voting, except as may otherwise be
provided by the GCL;
6
<PAGE> 7
(iv) The right, if any, of the holders of shares of such series of
Preferred Stock to convert the same into, or the right, if any, of the
Corporation to exchange the same for, another class or series of stock of the
Corporation and the terms and conditions, including any provision for future
adjustment in the conversion or exchange rate, under which said shares may be
converted or exchanged;
(v) The redemption or purchase price or prices of the shares of
such series of Preferred Stock, if any, and the times at which, and the terms
and conditions on which, the shares of such series of Preferred Stock may be
redeemed or purchased;
(vi) The terms of the sinking fund, if any, to be provided for such
series of Preferred Stock, and the terms and amount of such sinking fund;
(vii) The rights of the holders of shares of such series of Preferred
Stock in the event of a voluntary or involuntary liquidation, dissolution or
winding up of the Corporation and the relative rights of priority, if any, of
such holders with respect thereto; and
(viii) Any other relative powers, preferences and rights, and any
qualifications, limitations or restrictions, of such series of Preferred Stock.
D. TERMS OF COMMON STOCK.
The voting powers and relative, participating, optional and other
special rights of the Common Stock, and the qualifications, limitations and
restrictions thereof, are as follows:
(i) VOTING RIGHTS AND POWERS. Except as provided in the GCL, the holders
of shares of the Common Stock shall vote together as a single class (with the
holders of all series of Preferred Stock entitled to vote together with the
holders of the shares of Common Stock) on all matters as to which such holders
are entitled to vote.
(ii) DIVIDEND RIGHTS. Cash dividends may be declared and paid upon the
Common Stock in such amounts and at such times as the Board of Directors may
determine, provided that such dividends are paid on the outstanding Common
Stock in equal amounts per share. Each share of the Common Stock shall be
equal in respect of rights to dividends and distributions when and as declared
in the form of stock or other property of the Corporation. Funds otherwise
legally available for the payment of dividends on the Common Stock shall not be
restricted or reduced by reason of there being any excess of the aggregate
preferential amount of any series of Preferred Stock outstanding over the
aggregate par value thereof.
(iii) LIQUIDATION RIGHTS. Upon the dissolution, liquidation or winding up
of the Corporation, after there shall have been paid or set apart for payment
to the holders of any outstanding shares of Preferred Stock the full
preferential amounts to which they are entitled, the holders of the outstanding
shares of the Common Stock shall be entitled, on a share for share basis, to
receive the funds of the Corporation remaining for distribution to its
stockholders. Neither the sale of all or substantially all the property or
business of the Corporation nor the merger or
7
<PAGE> 8
consolidation of the Corporation into or with any other Corporation or the
merger or consolidation of any other Corporation into or with the Corporation
shall be deemed to be a dissolution, liquidation or winding up, voluntary or
involuntary, of the Corporation within the meaning of this paragraph (iii).
(iv) OTHER POWERS AND RIGHTS. Except as otherwise required by the GCL or
as otherwise provided in this Certificate of Incorporation, each share of
Common Stock shall have identical powers and rights.
FIFTH. All corporate powers of the Corporation shall be exercised by or
under the direction of the Board of Directors except as otherwise provided
herein or by applicable law. In furtherance and not in limitation of the
powers conferred by law, the Board of Directors is expressly authorized:
(i) to adopt, amend or repeal By-laws of the Corporation, subject to
the right of the stockholders of the Corporation entitled to vote with
respect thereto to adopt By-laws and to amend or repeal By-laws made by
the Board of Directors; and
(ii) from time to time to determine whether and to what extent, at
what time and place, and under what conditions and regulations the
accounts and books of the Corporation, or any of them, shall be open to
the inspection of any stockholder; and no stockholder shall have any right
to inspect any account or book or document of the Corporation except as
provided by applicable law or the By-laws of the Corporation or as
authorized by resolution of the stockholders or Board of Directors of the
Corporation.
SIXTH. No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for any breach of
fiduciary duty by such director as a director; provided, however, that the
foregoing shall not be deemed to eliminate or limit the liability of a director
to the extent provided by applicable law (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the GCL, or (iv) for any
transaction from which the director derived an improper personal benefit. This
provision is not intended to eliminate or narrow any defenses to or protection
against liability otherwise available to directors of the Corporation. No
amendment to or repeal of this Article Seventh shall apply to or have any
effect on the liability or alleged liability of any director of the Corporation
for or with respect to any acts or omissions of such director occurring prior
to such amendment.
SEVENTH.
A. Every person who was or is a party or is threatened to be made a
party to or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person or a person of whom such person is a legal
representative is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation or for its benefit as a director,
officer, employee or agent
8
<PAGE> 9
of any other corporation, or as the representative of the Corporation in a
partnership, joint venture, trust or other entity, shall be indemnified and
held harmless by the Corporation to the fullest extent legally permissible
under the GCL, as amended from time to time, against all expenses, liabilities
and losses (including attorneys' fees, judgments, fines and amounts paid or to
be paid in settlement) reasonably paid or incurred by such person in connection
therewith. Such right of indemnification shall be a contract right that may be
enforced in any manner desired by such person. Such right of indemnification
shall include the right to be paid by the Corporation the expenses incurred in
defending any such action, suit or proceeding in advance of its final
disposition upon receipt of an undertaking by or on behalf of such person to
repay such amount if ultimately it should be determined that such person is not
entitled to be indemnified by the Corporation under the GCL. Such right of
indemnification shall not be exclusive of any other right which such directors,
officers or representatives may have or hereafter acquire and, without limiting
the generality of such statement, they shall be entitled to their respective
rights of indemnification under any By-law, agreement, vote of stockholders,
provision of law or otherwise, as well as their rights under this Article
Seventh.
B. The Board of Directors may adopt By-laws from time to time with
respect to indemnification to provide at all times the fullest indemnification
permitted by the GCL, as amended from time to time, and may cause the
Corporation to purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation or for its benefit as a director,
officer, employee or agent of any other corporation, or as the representative
of the Corporation in a partnership, joint venture, trust or other entity,
against any expense, liability or loss asserted against or incurred by any such
person in any such capacity or arising out of any such status, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss.
EIGHTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders, directors and officers herein are granted subject to this
reservation; provided that (in addition to any required class or other vote)
the affirmative vote of the holders of record of outstanding shares
representing at least 66 2/3% of all the outstanding Common Stock and Preferred
Stock entitled to vote generally in the election of directors, voting together
as a single class, shall be required to amend, alter, change or repeal, or
adopt any provision or provisions inconsistent with, Article Fourth of this
Certificate of Incorporation.
NINTH.
A. The Board of Directors shall be divided into three (3) classes,
designated Class I, Class II and Class III. Each class shall consist, as
nearly as may be possible, of one-third of the total number of directors
constituting the entire Board of Directors. At the annual meeting of
stockholders to be held in 1996, the directors of Class I shall be elected for
a term of one year, the directors of Class II shall be elected for a term of
two years, and the directors of Class III shall be elected for a term of three
years, and in each case, until their respective successors shall have been
elected and qualified in the class to which such director is assigned or until
their
9
<PAGE> 10
earlier death, resignation and removal. At each annual meeting of stockholders
thereafter, the successors of the directors of the class whose term expires in
that year shall be elected to hold office for a term of three years (and until
their respective successors shall have been elected and qualified in such class
or until their earlier death, resignation or removal), so that the term of one
class of directors shall expire in each year. If the number of directors is
changed, any increase or decrease in directorships shall be apportioned among
the classes so as to maintain the number of directors in each class as nearly
equal as possible, and any additional directors of any class elected to fill a
vacancy resulting from an increase in such class shall hold office only until
the next election of directors by the stockholders, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
Any vacancy on the Board of Directors, whether arising through death,
resignation or removal, or through an increase in the number of directors, may
be filled by the affirmative vote of a majority of the remaining directors then
in office, even if less than a quorum. Any director elected to fill a vacancy
shall hold office only until the next election of directors by the
stockholders.
B. Notwithstanding anything in this Certificate of Incorporation or
By-Laws of the Corporation to the contrary, whenever the holders of any one or
more classes or series of shares of capital stock of the Corporation other than
shares of Common Stock shall have the right, voting separately by class or
series, to elect directors, the election, term of office, filling of vacancies
and other features of such directorship shall be governed by the terms of the
Certificate of Incorporation of the Corporation or any Certificate of
Designation thereunder applicable thereto; and such directors so elected shall
not be divided into classes pursuant to this Article Ninth unless expressly
provided by such terms.
10
<PAGE> 1
EXHIBIT 3.2
BY-LAWS
OF
BROOKS FIBER PROPERTIES, INC.
AS OF APRIL 29, 1997
<PAGE> 2
BY-LAWS
OF
BROOKS FIBER PROPERTIES, INC.
TABLE OF CONTENTS
PAGE
----
ARTICLE I Offices 1
Section 1.1 Registered Office 1
Section 1.2 Other Offices 1
ARTICLE II Meetings of Stockholders 1
Section 2.1 Place 1
Section 2.2 Annual Meetings 1
Section 2.3 Special Meetings 1
Section 2.4 Notice of Meetings 1
Section 2.5 Adjournments 2
Section 2.6 List of Stockholders 2
Section 2.7 Quorum 2
Section 2.8 Organization 3
Section 2.9 Proxies; Voting 3
ARTICLE III Board of Directors 4
Section 3.1 General Powers 4
Section 3.2 Number and Term of Office 4
Section 3.3 Resignation, Removal and Vacancies 4
Section 3.4 Meetings 4
Section 3.5 Compensation 6
Section 3.6 Nominations 6
ARTICLE IV Committees 7
Section 4.1 Committees 7
Section 4.2 Meetings and Quorum 7
ARTICLE V Officers 7
Section 5.1 Election and Appointment; Term of Office 7
Section 5.2 Resignation; Removal; Vacancies 8
i
<PAGE> 3
PAGE
----
Section 5.3 Duties and Functions 8
ARTICLE VI Books and Records 10
ARTICLE VII Shares and Their Transfer; Fixing Record Dates 10
Section 7.1 Certificates for Stock 10
Section 7.2 Transfer Agents and Registrars;
Facsimile Signatures 10
Section 7.3 Stock Record 10
Section 7.4 Transfer of Stock 11
Section 7.5 Lost, Stolen, Destroyed, or
Mutilated Certificates 11
Section 7.6 Record Dates 11
ARTICLE VIII Corporate Seal 12
ARTICLE IX Fiscal Year 12
ARTICLE X Indemnification 12
ARTICLE XI Amendments 13
ii
<PAGE> 4
BY-LAWS
OF
BROOKS FIBER PROPERTIES, INC.
ARTICLE I
OFFICES
SECTION 1.1. REGISTERED OFFICE. The registered office of the Corporation
in the State of Delaware shall be located at 1013 Centre Road, City of
Wilmington, County of New Castle, Delaware, 19805. The name of the registered
agent in charge thereof is Corporation Service Company.
SECTION 1.2 OTHER OFFICES. The Corporation may also have offices at such
other places within or without the State of Delaware as the Board of Directors
may from time to time determine or as the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.1 PLACE. Meetings of stockholders shall be held at such place,
within or without the State of Delaware, as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting.
SECTION 2.2 ANNUAL MEETINGS. The annual meeting of stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held on the second Tuesday of April
if not a legal holiday, and if a legal holiday then on the next day following
which is not a legal holiday, at 10:00 A.M., or at such other date and time as
shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting.
SECTION 2.3 SPECIAL MEETINGS. Special meetings of the stockholders for
any purpose or purposes may be called by any two (2) members of the Board of
Directors or by the Chairman of the Board of the Corporation, to be held at
such place, either within or without the State of Delaware, and at such date
and time as shall be designated in the notice of the meeting.
SECTION 2.4 NOTICE OF MEETINGS. Except as otherwise expressly required by
law, written notice of each meeting of the stockholders shall be given not less
than
<PAGE> 5
ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed given when deposited in the United States mail, postage
prepaid, directed to the stockholder at the stockholder's address as it appears
on the records of the Corporation. Every such notice shall state the place,
date and hour of the meeting and, in the case of a special meeting, the purpose
or purposes for which the meeting is called. A written waiver of notice,
signed by the person entitled thereto, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a person at a
meeting in person or by proxy shall constitute a waiver of notice of such
meeting, except when the person attends the meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened.
SECTION 2.5. ADJOURNMENTS. Any meeting of the stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting, the Corporation may transact any business
which might have been transacted at the original meeting. If the adjournment
is for more than thirty (30) days, or if after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting
shall be given to each stockholder of record entitled to vote at the meeting.
SECTION 2.6 LIST OF STOCKHOLDERS. At least ten (10) days before every
meeting of the stockholders, the Secretary or other officer of the Corporation
who shall have charge of the stock ledger of the Corporation shall prepare and
make, or cause the preparation and making of, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at
the place where the meeting is to be held. Such list shall also be produced
and kept at the time and place of the meeting during the whole time thereof,
and may be inspected by any stockholder who is present.
SECTION 2.7 QUORUM. At each meeting of the stockholders, except as
otherwise expressly required by law or by the Certificate of Incorporation of
the Corporation, the holders of a majority of the voting power of the issued
and outstanding shares of each class of stock of the Corporation entitled to
vote at the meeting, present in person or represented by proxy, shall
constitute a quorum for the transaction of business. For purposes of the
foregoing, two or more classes or series of stock shall be considered a single
class if the holders thereof are entitled to vote together as a single class at
the meeting. In the absence of a quorum at any such meeting or any adjournment
thereof, any officer entitled to preside at, or to act as secretary of, such
meeting may adjourn the meeting from time to time in the manner provided in
Section 2.5 of these By-laws, until stockholders holding the amount of stock
requisite for a quorum shall be present in person or by proxy.
2
As amended 4/29/97
<PAGE> 6
SECTION 2.8 ORGANIZATION. At each meeting of the stockholders, one of the
following shall act as chairman of the meeting and preside thereat, in the
following order of precedence:
(a) the Chairman of the Board;
(b) the Vice Chairman of the Board;
(c) the President;
(d) any other officer of the Corporation designated by the Board of
Directors to act as chairman of such meeting and to preside thereat
if both of the above-named officers shall be absent from such
meeting; or
(e) in the absence of any of the foregoing, a stockholder of record of
the Corporation who shall be chosen chairman of such meeting by a
majority in voting power of the stockholders present in person or by
proxy at the meeting and entitled to vote thereat.
The Secretary, or, if the Secretary shall be presiding over the meeting in
accordance with the provisions of this Section or if the Secretary shall be
absent from such meeting, the person (who shall be an Assistant Secretary, if
an Assistant Secretary, shall be present thereat) whom the chairman of such
meeting shall appoint, shall act as secretary of such meeting and keep the
minutes thereof.
SECTION 2.9. PROXIES; VOTING. Each stockholder entitled to vote at a
meeting of stockholders or to express consent or dissent to corporate action in
writing without a meeting may authorize another person or persons to act for
such stockholder by proxy, but no such proxy shall be voted or acted upon after
three (3) years from its date, unless the proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is irrevocable
and if, and only as long as, it is coupled with an interest sufficient in law
to support an irrevocable power. A stockholder may revoke any proxy which is
not irrevocable by attending the meeting and voting in person or by filing an
instrument in writing revoking the proxy or another duly executed proxy bearing
a later date with the Secretary of the Corporation. Voting at meetings of the
stockholders need not be by written ballot and need not be conducted by
inspectors unless otherwise provided in these By-laws or unless so directed by
the chairman of the meeting or unless the holders of a majority of the voting
power of the outstanding shares of all classes of stock entitled to vote
thereon present in person or by proxy at such meeting shall so determine. At
all meetings of the stockholders for the election of directors, a plurality of
the votes of the shares present in person or represented by proxy at the
meeting and entitled to vote on the election of directors shall be sufficient
to elect. All other elections and questions shall, unless otherwise provided
by law or by the Certificate of Incorporation of the Corporation or a
Certificate of Designation thereunder, or these By-laws, be decided by the vote
of the holders of a majority of the voting power of the outstanding shares of
the Corporation's stock entitled to
3
As amended 4/29/97
<PAGE> 7
vote thereon present in person or by proxy at the meeting, voting as a single
class, provided that (except as otherwise required by law or by the Certificate
of Incorporation of the Corporation) the Board of Directors may require a
larger vote upon any election or question.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors.
SECTION 3.2. NUMBER AND TERM OF OFFICE. The number of directors which
shall constitute the whole Board of Directors shall be twelve (12). The Board
of Directors shall be divided into three classes, each class having such number
of directors and serving such term as is provided in Article Tenth of the
Restated Certificate of Incorporation of the Corporation and by law. At each
annual meeting of the stockholders of the Corporation, the directors of one
class shall be elected by a plurality of the votes of the shares present in
person or represented by proxy at the meeting and entitled to vote on the
election of directors.
SECTION 3.3. RESIGNATION, REMOVAL AND VACANCIES. Any director may resign
at any time by giving written notice of his resignation to the Board of
Directors or to the Chairman of the Board or the Secretary of the Corporation.
Any such resignation shall take effect upon receipt unless specified to be
effective at some other time and, unless otherwise specified therein, no
acceptance of such resignation shall be necessary to make it effective. A
director may be removed with or without cause by the holders of a majority of
the shares of stock entitled to vote for the election of directors, provided,
that, if the director to be removed has been designated to serve by a
stockholder or group of stockholders pursuant to the terms of a stockholders
agreement between the Corporation and the holders of at least a majority of the
stock entitled to vote for the election of directors, such stockholder or group
of stockholders has voted in favor of the removal of such director. Any
vacancy by reason of death, resignation, removal or otherwise may be filled by
the holders of a majority of the stock entitled to vote for the election of
directors to fill such vacancy or by a majority of the directors then in
office, though less than a quorum, or by a sole remaining director so elected,
each to hold office until the next annual meeting of stockholders and until his
or her successor shall have been elected and qualified or until his or her
earlier death, resignation or removal; provided, that, if a director whose
vacancy is to be filled has been designated to serve by a stockholder or group
of stockholders pursuant to the terms of a stockholders agreement between the
Corporation and the holders of at least a majority of the stock entitled to
vote for the election of directors, the candidate chosen to fill such vacancy
shall be a candidate designated by such stockholder or group of stockholders.
4
As amended 4/29/97
<PAGE> 8
SECTION 3.4. MEETINGS.
(A) ANNUAL MEETINGS. As promptly as practicable after each annual
election of directors, the Board of Directors shall meet for the purpose of
organization, the election of officers and the transaction of other business.
(B) REGULAR MEETINGS. Regular meetings of the Board of Directors shall be
held at such times and places as the Board of Directors shall from time to time
determine.
(C) SPECIAL MEETINGS. Special meetings of the Board of Directors shall be
held whenever called by the Chairman of the Board or by any two (2) members of
the Board of Directors. Any and all business may be transacted at a special
meeting which may be transacted at a regular meeting of the Board of Directors.
(D) PLACE OF MEETING. The Board of Directors may hold its meetings at
such place or places within or without the State of Delaware as the Board of
Directors may from time to time by resolution determine or as shall be
designated in the notice of meeting.
(E) NOTICE OF MEETINGS. Notice of the annual and other regular meetings
of the Board of Directors or of any adjourned meeting need not be given.
Notice of special meetings of the Board of Directors, or of any meeting of any
committee of the Board of Directors, shall be given to each director, or member
of such committee, at least five (5) business days before the day on which such
meeting is to be held, if by mail, and at least two (2) business days before
the time of the meeting, if by telegraph, cable, telex, telecopy or telephone,
or if delivered personally. Such notice shall include the time and place of
such meeting. A written waiver of notice, signed by the director, whether
before or after such meeting shall be deemed equivalent to notice. Attendance
of a director at a meeting shall constitute a waiver of notice of such meeting,
except when the director attends the meeting for the express purposes of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened.
(F) QUORUM AND MANNER OF ACTING. A majority of the directors then in
office shall be present in person at any meeting of the Board of Directors in
order to constitute a quorum for the transaction of business at such meeting.
In the absence of a quorum for any such meeting, a majority of the directors
present thereat may adjourn such meeting from time to time until a quorum shall
be present. The vote of a majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors unless the
vote of a greater number of directors or any specified number of such
Institutional Directors shall be required by the Certificate of Incorporation
of the Corporation, these By-laws or any Stockholders Agreement between the
Corporation and the holders of at least a majority of the stock entitled to
vote for the election of directors.
(G) ACTION BY COMMUNICATIONS EQUIPMENT. The directors, or the members of
any committee of the Board of Directors, may participate in a meeting of the
Board of
5
As amended 4/29/97
<PAGE> 9
Directors, or of such committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation shall constitute presence
in person at such meeting.
(H) ACTION BY CONSENT. Any action required or permitted to be taken at
any meeting of the Board of Directors, or of any committee thereof, may be
taken without a meeting if all members of the Board of Directors or such
committee, as the case may be, consent thereto in writing, and such writing is
filed with the minutes of the proceedings of the Board of Directors or such
committee.
(I) ORGANIZATION. At each meeting of the Board of Directors, the Chairman
of the Board, or, if the Chairman of the Board shall be absent from a meeting,
any director chosen by a majority of the directors present thereat, shall act
as chairman of the meeting and preside thereat. The Secretary or, in the
absence of the Secretary, any person (who shall be an Assistant Secretary, if
an Assistant Secretary shall be present thereat) whom the chairman shall
appoint shall act as secretary of such meeting and keep the minutes thereof.
SECTION 3.5. COMPENSATION. The Board of Directors may provide that the
Corporation shall reimburse directors for any expenses incurred on account of
attendance at any meeting of the Board of Directors or any committee thereof,
and may otherwise fix the compensation of directors. Nothing herein shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor or limit the authority of the Board of
Directors to fix such compensation.
SECTION 3.6. NOMINATIONS. Only persons who are nominated in accordance
with the following procedures shall be eligible for election by the
stockholders as Directors. Nominations of persons for election as Directors of
the Corporation may be made at a meeting of stockholders at which Directors are
being elected (i) by or at the direction of the Board of Directors and/or by or
at the direction of any committee or person authorized or appointed by the
Board of Directors or (ii) by any stockholder of the Corporation entitled to
vote for the election of directors at the meeting who complies with the notice
procedures set forth in this Section 3.6. Any nomination other than those
governed by clause (i) of the preceding sentence shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 50 days prior to
the meeting; provided, however, that in the event that less than 60 days'
notice or prior public disclosure of the date of the meeting is given or made
to stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. Such stockholder's notice to the Secretary shall set forth (i) the name,
age, business address and residence of any such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of any
shares of the Corporation or any subsidiary of the Corporation which are
beneficially owned by such person, and (iv) any other information relating to
such person that is required to be disclosed in solicitations for proxies for
election of Directors pursuant to any then existing rule or regulation
promulgated under the Securities Exchange Act of 1934, as
6
As amended 4/29/97
<PAGE> 10
amended; and (b) as to the stockholder giving the notice (i) the name
and record address of such stockholder and (ii) the class and number of shares
of the Corporation which are beneficially owned by such stockholder. The
Corporation may require any proposed nominee to furnish such other information
as may reasonably be required by the Corporation to determine the eligibility
of such proposed nominee as a Director. No person shall be eligible for
election as a Director unless nominated as set forth herein.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if the chairman should so determine, the chairman
shall so declare to the meeting and the defective nomination shall be
disregarded.
ARTICLE IV
COMMITTEES*
SECTION 4.1. COMMITTEES. The Board of Directors may designate one or more
committees, each committee to consist of three (3) or more directors and to
have such duties and functions permitted by law as shall be provided in such
resolution.
SECTION 4.2. MEETINGS AND QUORUM. Each Committee shall meet as often as
may be deemed necessary and expedient at such times and places as shall be
determined by such Committee. At all meetings of any Committee, a majority of
the members thereof shall constitute a quorum and the vote of a majority of all
of the members thereof at a meeting at which a quorum is present shall be the
act of such Committee. The Chairman of the Board or, in his absence, any other
member of any Committee selected by a majority of the members present shall
preside at the meetings of any Committee.
ARTICLE V
OFFICERS
SECTION 5.1. ELECTION AND APPOINTMENT; TERM OF OFFICE. The officers of
the Corporation shall be a Chairman of the Board, one or more Vice Chairmen of
the Board (the number thereof to be determined from time to time by the Board
of Directors), * Effective April 29, 1997, the Board of Directors has elected
to be governed by the provisions of subsection (2) of Section 141(C) of the
General Corporation Law of the State of Delaware.
a President, one or more Vice Presidents (the number thereof to be determined
from time to time by the Board of Directors), a Treasurer and a Secretary.
Each such officer shall be elected by the Board of Directors at its annual
meeting and shall hold office until the next annual meeting of the Board of
Directors and until his or her successor is elected or until his or her earlier
death, resignation or removal in the manner hereinafter provided. The Board of
Directors may elect or appoint such other officers (including one or more
Assistant Treasurers
- -------------------
* Effective April 29, 1997, the Board of Directors has elected to be governed
by the provisions of subsection (2) of Section 141(C) of the General
Corporation Law of the State of Delaware.
7
As amended 4/29/97
<PAGE> 11
and one or more Assistant Secretaries) as it deems necessary who shall have
such authority and shall perform such duties as the Board of Directors may
prescribe. If additional officers are elected or appointed during the year,
each of them shall hold office until the next annual meeting of the Board of
Directors at which officers are regularly elected or appointed and until his or
her successor is elected or appointed or until his or her earlier death,
resignation or removal in the manner hereinafter provided.
SECTION 5.2. RESIGNATION; REMOVAL; VACANCIES.
(A) RESIGNATION. Any officer may resign at any time by giving written
notice to the Chairman of the Board or the Secretary of the Corporation, and
such resignation shall take effect upon receipt unless specified therein to be
effective at some other time (subject always to the provisions of Section
5.2B). No acceptance of any such resignation shall be necessary to make it
effective.
(B) REMOVAL. All officers and agents elected or appointed by the Board of
Directors shall be subject to removal at any time by the Board of Directors
with or without cause.
(C) VACANCIES. A vacancy in any office may be filled for the unexpired
portion of the term in the same manner as provided for election or appointment
to such office.
SECTION 5.3. DUTIES AND FUNCTIONS.
(A) CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all
meetings of stockholders and directors and shall perform such other duties as
the Board of Directors may prescribe.
(B) CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the
Corporation shall see that orders and resolutions of the stockholders and Board
of Directors are carried into effect. Subject to the direction and control of
the Board of Directors, the Chief Executive Officer shall have responsibility
for the management and control of the affairs and business of the Corporation
and shall perform all duties and have all powers which are commonly incident to
the office of the Chief Executive Officer, including the power to enter into
commitments, execute and deliver contracts and do and perform all such other
acts and things as are necessary and appropriate in the ordinary course of
business to accomplish the Corporation's business and operations and to manage
the day to day business and affairs of the Corporation. In the absence or
incapacity of the Chairman of the Board or the President, the
powers and duties of the Chairman of the Board or the President, as the case
may be, shall be vested in the Vice Chairmen of the Board in the order of their
seniority or as otherwise established by the Board of Directors from time to
time, or by such other officer as the Board of Directors or the Chairman of the
Board shall have most recently designated for that purpose in a writing filed
with the Secretary. The Chief Executive Officer may assign such duties to
other officers of the Corporation as he or she deems appropriate.
8
As amended 4/29/97
<PAGE> 12
(C) PRESIDENT. The President shall act under the direction of the Chief
Executive Officer of the Corporation. The President shall be the Chief
Operating Officer of the Corporation and shall have such powers and perform
such duties as the Board of Directors or the Chief Executive Officer of the
Corporation may prescribe.
(D) VICE PRESIDENTS. The Vice Presidents shall have such powers and
perform such duties as the Board of Directors or the Vice Chairman of the Board
or the President may prescribe. One or more Vice Presidents may be given and
shall use as part of his or her title such other designations, including,
without limitation, the designations "Executive Vice President" and "Senior
Vice President", as the Board of Directors may designate from time to time. In
the absence or incapacity of the Vice Chairman of the Board and the President,
the powers and duties of the President shall be vested in and performed by such
Vice Presidents as have the designation "Executive Vice President", in the
order of their seniority or as otherwise established by action of the Board of
Directors from time to time, or by such other officer as the Board of Directors
or the Vice Chairman of the Board shall have most recently designated for that
purpose in a writing filed with the Secretary.
(E) TREASURER. The Treasurer shall act under the direction of the Vice
Chairman of the Board. Subject to the direction of the Vice Chairman of the
Board, the Treasurer shall have charge and custody of and be responsible for
all funds and securities of the Corporation and the deposit thereof in the name
and to the credit of the Corporation in such depositories as may be designated
by the Board of Directors or by the Treasurer pursuant hereto. The Treasurer
shall be authorized at any time, and from time to time, by a writing
countersigned by the Vice Chairman of the Board, to open bank accounts in the
name of the Corporation in any bank or trust company for the deposit therein of
any funds, drafts, checks or other orders for the payment of money to the
Corporation; and the Treasurer shall be authorized at any time, and from time
to time, by a writing countersigned by the Vice Chairman of the Board, to
authorize and empower any representative or agent of the Corporation to draw
upon or sign for the Corporation either manually or by the use of facsimile
signature, any and all checks, drafts or other orders for the payment of money
against such bank accounts which any such bank or trust company may pay without
further inquiry. Subject to the direction of the Vice Chairman of the Board,
the Treasurer shall also have charge of the accounting records of the
Corporation, shall keep full and accurate accounts of all receipts and
disbursements in books belonging to the Corporation, shall maintain adequate
internal control of the Corporation's accounts, and may perform such other
duties as may be prescribed by the Vice Chairman of the Board, and by the Board
of Directors.
(F) SECRETARY. The Secretary shall act under the direction of the Vice
Chairman of the Board. Subject to the direction of the Vice Chairman of the
Board, the Secretary shall attend all meetings of the Board of Directors and
the stockholders and record the proceedings in a book to be kept for that
purpose and shall perform like duties for committees designated by the Board of
Directors when required. The Secretary shall give or cause to be given notice
of all meetings of the stockholders and special meetings of the Board of
Directors. The Secretary shall affix the seal of the Corporation to all deeds,
contracts, bonds or other instruments requiring the corporate seal when the
same shall have been signed on behalf of the
9
As amended 4/29/97
<PAGE> 13
Corporation by a duly authorized officer. The Secretary shall be the custodian
of all contracts, deeds, documents and all other indicia of title to properties
owned by the Corporation and of its other corporate records (except accounting
records).
G. EXECUTION OF DOCUMENTS. The Board of Directors or the Vice Chairman of
the Board shall designate the officers, employees and agents of the Corporation
who shall have power to execute and deliver deeds, contracts, mortgages, bonds,
debentures, checks, notes, drafts and other orders for the payment of money and
other documents in the ordinary course of business of the Corporation for and
in the name of the Corporation, except when the execution and delivery thereof
shall be expressly delegated by the Board of Directors or these By-laws to some
other officer or agent of the Corporation.
ARTICLE VI
BOOKS AND RECORDS
The books and records of the Corporation may be kept at such places within
or without the State of Delaware as the Board of Directors may from time to
time determine.
ARTICLE VII
SHARES AND THEIR TRANSFER; FIXING RECORD DATES
SECTION 7.1. CERTIFICATES FOR STOCK. Every owner of stock of the
Corporation shall be entitled to have a certificate certifying the number of
shares owned and designating the class of stock to which such shares belong,
which shall otherwise be in such form as the Board of Directors shall
prescribe. Each such certificate shall be signed by, or in the name of the
Corporation by, the Vice Chairman of the Board or the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary of the Corporation. In the event the Corporation is
advised in writing of any agreement or agreements among stockholders of the
Corporation relating to restrictions on the transferability or voting rights of
the Corporation's stock, no certificate for such restricted stock will be
issued by the Corporation unless first imprinted with a legend referring to
such agreement or agreements.
SECTION 7.2 TRANSFER AGENTS AND REGISTRARS; FACSIMILE SIGNATURES. The
Board of Directors shall have the power to appoint one or more transfer agents
and/or registrars for the transfer and/or registration of certificates of stock
of any class, and may require that stock certificates shall be countersigned
and/or registered by one or more of such transfer agents and/or registrars. In
the case of certificates for stock of the Corporation countersigned by a
transfer agent of the Corporation and/or registered by a registrar of the
Corporation, the signatures of the officers of the Corporation thereon may be
facsimiles of their respective autograph signatures, and all such stock
certificates so countersigned and/or registered and signed in facsimile as
aforesaid shall be as valid and effective for all purposes as if the facsimile
10
As amended 4/29/97
<PAGE> 14
signatures thereon of such officers were their respective autograph signatures,
and notwithstanding the fact that any such officer whose facsimile signature
appears thereon may have ceased to be such officer at the time when any such
stock certificate shall be actually issued or delivered.
SECTION 7.3. STOCK RECORD. A record shall be kept of the name of the
person owning the stock represented by each certificate for stock of the
Corporation issued, the number of shares represented by each such certificate,
and the date thereof, and, in the case of cancellation, the date of
cancellation. The person in whose name shares of stock stand on the books of
the Corporation shall be deemed the owner thereof for all purposes.
SECTION 7.4. TRANSFER OF STOCK. Transfers of shares of the stock of the
Corporation shall be made only on the books of the Corporation by the
registered holder thereof, or by the attorney of such registered holder
thereunto authorized by power of attorney duly executed and filed with the
Secretary of the Corporation, and upon the surrender to the Corporation or a
transfer agent of the Corporation of the certificate or certificates for such
shares properly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer.
SECTION 7.5. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. The
holder of any stock of the Corporation shall promptly notify the Corporation of
any loss, theft, destruction or mutilation of the certificate therefor. The
Corporation may issue a new certificate for stock in the place of any
certificate theretofore issued by it and alleged to have been lost, stolen,
destroyed or mutilated, and the Board of Directors may, in its discretion,
require the owner of the lost, stolen, destroyed or mutilated certificate or
the legal representative of such owner to give the Corporation a bond in such
sum, limited or unlimited, in such form and with such surety or sureties as the
Board of Directors shall in its discretion determine, to indemnify the
Corporation against any claim that may be made against it on account of the
alleged loss, theft, destruction or mutilation of any such certificate or the
issuance of any such new certificate.
SECTION 7.6. RECORD DATES. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of the
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock
or for the purpose of any other lawful action, the Board of Directors may fix,
in advance, a record date, which shall not be more than sixty (60) nor less
than ten (10) days before the date of such meeting, nor more than sixty (60)
days prior to any such other action. If no record date is fixed: (1) the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; (2) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors is necessary, shall be the day on which the first
written consent is expressed; and (3) the record date for determining
stockholders for any other purpose shall be at the close of
11
As amended 4/29/97
<PAGE> 15
business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of
the meeting; provided, however, that the Board of Directors may fix a new
record date for the adjourned meeting.
ARTICLE VIII
CORPORATE SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization, and the words "Corporate Seal
Delaware". The seal may be used by causing it or a facsimile to be impressed
or affixed or in any other manner reproduced.
ARTICLE IX
FISCAL YEAR
The fiscal year of the Corporation shall end on the 31st day of December
of each year, or as otherwise fixed by resolution of the Board of Directors.
ARTICLE X
INDEMNIFICATION
A. Every person who was or is a party or is threatened to be made a party
to or is involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person or a person of whom such person is a legal
representative is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation or for its benefit as a director,
officer, employee or agent of any other corporation, or as the representative
of the Corporation in a partnership, joint venture, trust or other entity,
shall be indemnified and held harmless by the Corporation to the fullest extent
legally permissible under the General Corporation Law of the State of
Delaware, as amended from time to time, against all expenses, liabilities and
losses (including attorneys' fees, judgments, fines and amounts paid or to be
paid in settlement) reasonably paid or incurred by such person in connection
therewith. Such right of indemnification shall be a contract right that may be
enforced in any manner desired by such person. Such right of indemnification
shall include the right to be paid by the Corporation the expenses incurred in
defending any such action, suit or proceeding in advance of its final
disposition upon receipt of an undertaking by or on behalf of such person to
repay such amount if ultimately it should be determined that such person is not
entitled to be indemnified by the Corporation under the General Corporation Law
of the State of Delaware. Such right of indemnification shall not be exclusive
of any other right which such directors, officers or representatives may have
or hereafter acquire and, without limiting the generality of such statement,
they shall be entitled to
12
As amended 4/29/97
<PAGE> 16
their respective rights of indemnification under the Certificate of
Incorporation of the Corporation or any agreement, vote of stockholders,
provision of law or otherwise, as well as their rights under this Article X.
B. Notwithstanding anything in this Article X to the contrary, no person
shall be indemnified in respect of any claim, action, suit or proceeding
initiated by any such person or in which any such person has voluntarily
intervened, other than an action initiated by such person to enforce
indemnification rights hereunder or an action initiated with the approval of a
majority of the Board of Directors.
C. The Board of Directors may cause the Corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of
the Corporation or for its benefit as a director, officer, employee or agent of
any other corporation, or as the representative of the Corporation in a
partnership, joint venture, trust or other entity, against any expense,
liability or loss asserted against or incurred by any such person in any such
capacity or arising out of such status, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or
loss.
D. The Board of Directors may adopt further By-laws from time to time with
respect to indemnification and may amend these and such further By-laws to
provide at all times the fullest indemnification permitted by the General
Corporation Law of the State of Delaware, as amended from time to time.
ARTICLE XI
AMENDMENTS
These By-laws 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 the Corporation's stock entitled to vote
generally at a meeting of stockholders, voting as a single class.
13
As amended 4/29/97
<PAGE> 1
EXHIBIT 4.8
BROOKS FIBER PROPERTIES, INC.
10% SENIOR NOTES DUE JUNE 1, 2007
---------------------------------
PURCHASE AGREEMENT
May 23, 1997
Goldman, Sachs & Co.
Salomon Brothers Inc
Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
Brooks Fiber Properties, Inc., a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Purchasers named in Schedule I hereto (the "Purchasers") an aggregate of
$250,000,000 principal amount of the Notes specified above (the "Securities").
1. The Company represents and warrants to, and agrees with, each of the
Purchasers that:
(a) A preliminary offering circular, dated May 21, 1997 (the
"Preliminary Offering Circular") has been prepared and an offering
circular in final form, dated May 23, 1997 (the "Offering Circular", in
each case including the international supplement thereto), will be
prepared promptly after the execution of this Agreement in connection with
the offering of the Securities. Any reference to the Preliminary Offering
Circular or the Offering Circular shall be deemed to refer to and include
any Additional Issuer Information (as defined in Section 5(f)) furnished
by the Company prior to the completion (as notified to the Company by
Goldman, Sachs & Co.) of the distribution of the Securities. The
Preliminary Offering Circular or the Offering Circular and any amendments
or supplements thereto did not and will not, as of their respective dates,
<PAGE> 2
contain an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by a Purchaser through
Goldman, Sachs & Co. expressly for use therein;
(b) Neither the Company nor any of its subsidiaries (which term is
used herein as defined in the Indenture referred to in Section 1(f) below)
has sustained since the date of the latest audited financial statements
included in the Offering Circular any material loss or interference with
its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in
the Offering Circular; and, since the respective dates as of which
information is given in the Offering Circular, there has not been any
decrease or material increase in the capital stock of the Company or its
subsidiaries or any change in total consolidated debt (in excess of
$2,000,000) or decrease in total consolidated assets (in excess of
$5,000,000) or working capital (in excess of $25,000,000) of the Company
and its subsidiaries or any material adverse change, or any development
that may reasonably be expected to result in a material adverse change, in
or affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries on a consolidated basis, other than as set forth or
contemplated in the Offering Circular (including the pro forma
financial information contained therein);
(c) The Company and its subsidiaries own no real property other than
a 23 acre parcel of land in Town & Country, Missouri, on which it is
constructing its new corporate headquarters and a 42,000 square foot
office building in Grand Rapids, Michigan, and, to the best of the
Company's knowledge, have good and marketable title in fee simple to such
property; the Company and its subsidiaries have good and marketable title
to all material items of personal property owned by them, in each case
free and clear of all liens, encumbrances and defects except such as are
described in the Offering Circular or such as do not materially affect the
value of such property and do not materially interfere with the use made
and proposed to be made of such property by the Company and its
subsidiaries; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid and subsisting
leases enforceable by the Company and its subsidiaries with such
exceptions as are not material and do not materially interfere with the
use made and proposed to be made of such property and buildings by the
Company and its subsidiaries;
(d) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Offering Circular, and has been
duly qualified as a foreign corporation for the transaction of business
and is in good standing under the laws of the States of
2
<PAGE> 3
Missouri and California, the only jurisdictions in which its ownership or
leasing of properties or its conduct of any business requires such
qualification; and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation;
(e) The Company has an authorized capitalization as set forth in the
Offering Circular, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued and are fully
paid and non-assessable; and all of the issued shares of capital stock of
each subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and (except for directors'
qualifying shares and except as otherwise set forth in the Offering
Circular in respect of the minority interests described therein) are owned
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims (except for pledges securing indebtedness
as described in the Offering Circular under the caption "Description of
Existing Debt");
(f) The Securities have been duly authorized and, when issued and
delivered pursuant to this Agreement and authenticated and delivered by
the Trustee in accordance with the indenture to be dated as of May 29,
1997 (the "Indenture") between the Company and The Bank of New York, as
Trustee (the "Trustee"), will have been duly executed, authenticated,
issued and delivered and will constitute valid and legally binding
obligations of the Company entitled to the benefits provided by the
Indenture under which they are to be issued, which will be substantially
in the form previously delivered to you; the Indenture has been duly
authorized and, when executed and delivered by the Company (and assuming
due authorization, execution and delivery by the Trustee), the Indenture
will constitute a valid and legally binding instrument, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general equity
principles; and the Securities and the Indenture will conform in all
material respects to the descriptions thereof in the Offering Circular
and will be in substantially the form previously delivered to you;
(g) None of the transactions contemplated by this Agreement
(including, without limitation, the use of the proceeds by the Company
from the sale of the Securities) will result in a violation by the Company
of Section 7 of the United States Securities Exchange Act of 1934, as
amended (the "Exchange Act") or any regulation promulgated thereunder,
including, without limitation, Regulations G, T, U, and X of the Board of
Governors of the Federal Reserve System;
(h) The issue and sale of the Securities and the compliance by the
Company with all of the provisions of the Securities, the Indenture, this
Agreement and the Registration Rights Agreement (as hereinafter defined in
Section 1(r) hereof) and the consummation of the transactions herein and
therein contemplated will not result in a breach or violation of any of
the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument
3
<PAGE> 4
(including without limitation, any license, franchise, permit, consent or
similar authorization granted to the Company or any subsidiary of the
Company by any franchising or other governmental body) to which the
Company or any of its subsidiaries is a party or by which the Company or
any of its subsidiaries is bound or to which any of the property or assets
of the Company or any of its subsidiaries is subject, nor will such action
result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any statute or any order, rule
or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties; and no consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or body
is required for the issue and sale of the Securities in the manner
contemplated by the Offering Circular or the consummation by the Company
of the transactions contemplated by this Agreement, the Indenture, and the
Registration Rights Agreement except for the filing of a registration
statement by the Company with the Securities and Exchange Commission (the
"Commission") pursuant to the United States Securities Act of 1933, as
amended (the "Act") pursuant to Section 5(l) hereof, and such consents,
approvals, authorizations, registrations or qualifications as may be
required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Securities by the Purchasers;
(i) Neither the Company nor any of its subsidiaries is in violation
of its Certificate or Articles of Incorporation or By-laws or in default
in the performance or observance of any obligation, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement, lease
or other agreement or instrument (including without limitation, any
license, franchise, permit, consent or similar authorization granted to
the Company or any subsidiary by any franchising or other governmental
body) to which it is a party or by which it or any of its properties may
be bound, except for any such violation or default that individually or in
the aggregate would not have a material adverse effect on (i) the general
affairs, management, financial position, stockholders' equity or results
of operation of the Company and its subsidiaries or (ii) the rights of the
holders of the Securities;
(j) The statements set forth in the Offering Circular under the
caption "Description of the Notes", insofar as they purport to constitute
a summary of the terms of the Securities, and under the captions "Summary
- Recent Developments", "Risk Factors", "Business of the Company",
"Description of Existing Debt", "Regulatory Overview", and "Certain United
States Federal Income Tax Consequences to Foreign Holders", insofar as
they purport to describe the provisions of the laws, legal proceedings,
and documents referred to therein, are accurate and fair summaries of such
terms and provisions, respectively, and are complete in all material
respects;
(k) Other than as set forth in the Offering Circular, there are no
legal or governmental proceedings pending to which the Company or any of
its subsidiaries is a party or of which any property of the Company or any
of its subsidiaries is the subject which, if determined adversely to
the Company or any of its subsidiaries, would
4
<PAGE> 5
individually or in the aggregate have a material adverse effect on the
current or future consolidated financial position, stockholders' equity or
results of operations of the Company and its subsidiaries; and, to the
best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(l) When the Securities are issued and delivered pursuant to this
Agreement, the Securities will not be of the same class (within the
meaning of Rule 144A under the Act) as securities which are listed on a
national securities exchange registered under Section 6 of the Exchange
Act or quoted in a U.S. automated inter-dealer quotation system;
(m) The Company is not, and after giving effect to the offering and
sale of the Securities will not be, an "investment company", or an entity
"controlled" by an "investment company", as such terms are defined in the
United States Investment Company Act of 1940, as amended (the "Investment
Company Act");
(n) Neither the Company, nor any person acting on its behalf, has
offered or sold the Securities by means of any general solicitation or
general advertising within the meaning of Rule 502(c) under the Act or,
with respect to Securities sold outside the United States to non-U.S.
persons (as defined in Rule 902 under the Act), by means of any directed
selling efforts within the meaning of Rule 902 under the Act and the
Company, any affiliate of the Company and any person acting on its or
their behalf has complied with and will implement the "offering
restriction" within the meaning of such Rule 902;
(o) Within the preceding six months, neither the Company nor any
other person acting on behalf of the Company has offered or sold to any
person any Securities, or any securities of the same or a similar class as
the Securities, other than Securities offered or sold to the Purchasers
hereunder. The Company will take reasonable precautions designed to
insure that any offer or sale, direct or indirect, in the United States or
to any U.S. person (as defined in Rule 902 under the Act) of any
Securities or any substantially similar security issued by the Company,
within six months subsequent to the date on which the distribution of the
Securities has been completed (as notified to the Company by Goldman,
Sachs & Co.), is made under restrictions and other circumstances
reasonably designed not to affect the status of the offer and sale of the
Securities in the United States and to U.S. persons contemplated by this
Agreement as transactions exempt from the registration provisions of the
Act (the foregoing will not prevent offers and sales made pursuant to an
exchange offer or shelf registration statement in accordance with the
Registration Rights Agreement);
(p) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes;
5
<PAGE> 6
(q) KPMG Peat Marwick LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder;
(r) The Exchange and Registration Rights Agreement between the
Company and the Purchasers to be dated as of May 29, 1997 (the
"Registration Rights Agreement") has been duly authorized, and, when
executed and delivered by the Company (assuming due authorization,
execution and delivery by the Purchasers), will constitute a valid and
legally binding agreement of the Company enforceable in accordance with
its terms, subject, as to enforcement, to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or
affecting creditors' rights, to general equity principles and, as to
enforcement of rights to indemnity and contribution thereunder, to
limitations under applicable securities laws or public policy; and the
Registration Rights Agreement will conform in all material respects to
the description thereof in the Offering Circular;
(s) This Agreement has been duly authorized, executed and delivered
by the Company;
(t) No holder of any security of the Company has or will have any
right to require the registration of such security by virtue of any
transactions contemplated by this Agreement or the Registration Rights
Agreement other than any such right that has been expressly waived in
writing;
(u) Except as set forth in or contemplated by the Offering Circular
with respect to systems under development, each of the Company and its
subsidiaries has all material certificates, consents, exemptions, orders,
permits, licenses, authorizations, franchises or other material approvals
(each, an "Authorization") of and from, and has made all material
declarations and filings with, all Federal, state, local and other
governmental authorities, all self-regulatory organizations and all courts
and other tribunals, necessary or appropriate for the Company and its
subsidiaries to own, lease, license, use and construct its properties and
assets and to conduct its business in the manner described in the Offering
Circular, except to the extent that the failure to obtain any such
Authorizations or make any such declaration or filing would not,
singularly or in the aggregate, reasonably be expected to have a material
adverse effect on the current or future consolidated financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries. All such Authorizations are in full force and effect with
respect to the Company and its subsidiaries; to the best knowledge of the
Company, no event has occurred that permits, or after notice or lapse of
time could permit, the revocation, termination or modification of any such
Authorization; the Company and its subsidiaries are in compliance in all
material respects with the terms and conditions of all such Authorizations
and with the rules and regulations of the regulatory authorities and
governing bodies having jurisdiction with respect thereto; and, except as
set forth in the Offering Circular, the Company has no knowledge that any
person is contesting or intends to contest the granting of any material
Authorization; and
6
<PAGE> 7
(v) Neither the execution and delivery of this Agreement, the
Indenture or the Registration Rights Agreement, nor the consummation of
the transactions contemplated hereby or thereby nor compliance with the
terms, conditions and provisions thereof by the Company will cause any
suspension, revocation, impairment, forfeiture, nonrenewal or termination
of any Authorization.
2. Subject to the terms and conditions herein set forth, the Company
agrees to issue and sell to each of the Purchasers, and each of the Purchasers
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of 97.125% of the principal amount thereof, plus accrued interest, if
any, from May 29, 1997 to the Time of Delivery hereunder, the principal amount
of Securities set forth opposite the name of such Purchaser in Schedule I
hereto.
3. Upon the authorization by you of the release of the Securities, the
several Purchasers propose to offer the Securities for sale upon the terms and
conditions set forth in this Agreement and the Offering Circular and each
Purchaser hereby represents and warrants to, and agrees with the Company that:
(a) It will offer and sell the Securities only: (i) to persons who it
reasonably believes are "qualified institutional buyers" ("QIBs") within the
meaning of Rule 144A under the Act in transactions meeting the requirements of
Rule 144A or (ii) upon the terms and conditions set forth in Annex I to this
Agreement;
(b) It is an Institutional Accredited Investor; and
(c) It will not offer or sell the Securities by any form of general
solicitation or general advertising, including but not limited to the methods
described in Rule 502(c) under the Act.
4. (a) The Securities to be purchased by each Purchaser hereunder will
be represented by one or more definitive global Securities in book-entry form
which will be deposited by or on behalf of the Company with The Depository
Trust Company ("DTC") or its designated custodian. The Company will deliver the
Securities to Goldman, Sachs & Co., for the account of each Purchaser, against
payment by or on behalf of such Purchaser of the purchase price therefor by
electronic transfer to the order of the Company in Federal (same day) funds, by
causing DTC to credit the Securities to the account of Goldman, Sachs & Co. at
DTC. The Company will cause the certificates representing the Securities to be
made available to Goldman, Sachs & Co. for checking at least twenty-four hours
prior to the Time of Delivery (as defined below) at the office of DTC or its
designated custodian (the "Designated Office"). The time and date of such
delivery and payment shall be 9:30 a.m., New York City time, on May 29, 1997 or
such other time and date as Goldman, Sachs & Co. and the Company may agree upon
in writing. Such time and date are herein called the "Time of Delivery".
(b) The documents to be delivered at the Time of Delivery by or on behalf
of the parties hereto pursuant to Section 7 hereof, including the cross-receipt
for the Securities and any additional documents requested by the Purchasers
pursuant to Section 7(i) hereof, will be
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delivered at such time and date at the offices of Sullivan & Cromwell, 125
Broad Street, New York, New York 10004 (the "Closing Location"), and the
Securities will be delivered at the Designated Office, all at the Time of
Delivery. A meeting will be held at the Closing Location at 2:00 p.m., New York
City time, on the New York Business Day next preceding the Time of Delivery, at
which meeting the final drafts of the documents to be delivered pursuant to the
preceding sentence will be available for review by the parties hereto. For the
purposes of this Section 4, "New York Business Day" shall mean each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which banking
institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company agrees with each of the Purchasers:
(a) To prepare the Offering Circular in a form approved by you; to make
no amendment or any supplement to the Offering Circular which shall be
disapproved by you promptly after reasonable notice thereof; and to furnish you
with copies thereof;
(b) Promptly from time to time to take such action as you may reasonably
request to qualify the Securities for offering and sale under the securities
laws of such jurisdictions as you may request and to comply with such laws so
as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution of
the Securities, provided that in connection therewith the Company shall not be
required to qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York Business Day
next succeeding the date of this Agreement and from time to time, to furnish
the Purchasers with four copies of the Offering Circular in New York City and
each amendment or supplement thereto signed by an authorized officer of the
Company with the independent accountants' report(s) in the Offering Circular,
and any amendment or supplement containing amendments to the financial
statements covered by such report(s), signed by the accountants, and additional
copies thereof in such quantities as you may reasonably request, and if, at any
time prior to the completion of the distribution of the Securities (as notified
to the Company by Goldman, Sachs & Co.), any event shall have occurred as a
result of which the Offering Circular as then amended or supplemented would
include an untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such Offering Circular is
delivered, not misleading, or, if for any other reason it shall be necessary or
desirable during such same period to amend or supplement the Offering Circular,
to notify you and upon your request to prepare and furnish without charge to
each Purchaser and to any dealer in the Securities as many copies as you may
from time to time reasonably request of an amended Offering Circular or a
supplement to the Offering Circular which will correct such statement or
omission or effect such compliance;
(d) During the period beginning from the date hereof and continuing until
the date 90 days after the Time of Delivery, not to offer, sell, contract to
sell or otherwise dispose of, except
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as provided hereunder any securities of the Company that are substantially
similar to the Securities (other than as contemplated by the Registration
Rights Agreement) or any securities of the Company convertible or exchangeable
for securities of the Company that are substantially similar to the Securities
without the prior written consent of Goldman, Sachs & Co.;
(e) Not to be or become, at any time prior to the expiration of three
years after the Time of Delivery, an open-end investment company, unit
investment trust, closed-end investment company or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act;
(f) At any time when the Company is not subject to Section 13 or 15(d) of
the Exchange Act, for the benefit of holders from time to time of Securities,
to furnish at its expense, upon request, to holders of Securities and
prospective purchasers of securities information (the "Additional Issuer
Information") satisfying the requirements of subsection (d)(4)(i) of Rule 144A
under the Act;
(g) If reasonably requested by you at any time when any of the Securities
are (i) restricted securities, as defined in Rule 144(a)(3) under the Act or
(ii) securities that can only be sold pursuant to Regulation S under the Act,
Rule 144A under the Act or Rule 144 under the Act or in a transaction exempt
from the registration requirements under the Act pursuant to Section 4 of the
Act and not involving a public offering, to use its reasonable best efforts to
cause such Securities to be eligible for the PORTAL trading system of the
National Association of Securities Dealers, Inc.;
(h) To file with the Commission, not later than 15 days after the Time of
Delivery, five copies of a notice on Form D under the Act (one of which will be
manually signed by a person duly authorized by the Company); to otherwise
comply with the requirements of Rule 503 under the Act; and to furnish promptly
to you evidence of each such required timely filing (including a copy thereof);
(i) To furnish to the holders of the Securities as soon as practicable
after the end of each fiscal year an annual report (including a consolidated
balance sheet and consolidated statements of income, stockholders' equity and
cash flows of the Company and its consolidated subsidiaries certified by
independent public accountants) and, as soon as practicable after the end of
each of the first three quarters of each fiscal year (beginning with the fiscal
quarter ending after the date of the Offering Circular), consolidated summary
financial information of the Company and its subsidiaries for such quarter in
reasonable detail;
(j) During a period of five years from the date of the Offering Circular,
to furnish to you copies of all reports or other communications (financial or
other) furnished to stockholders of the Company, and to deliver to you (i) as
soon as they are available, copies of any reports and financial statements
furnished to or filed with the Commission or any securities exchange on which
any class of securities of the Company is listed; and (ii) such additional
information concerning the business and financial condition of the Company as
you may from time to time reasonably request (such financial statements to be
on a consolidated basis to the extent the accounts of the Company and its
subsidiaries are consolidated in reports furnished to its
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<PAGE> 10
stockholders generally or to the Commission);
(k) During the period of three years after the Time of Delivery, until
such time as the exchange offer closes or the resale registration becomes
effective, the Company will not, and will not permit any of its "affiliates"
(as defined in Rule 144 under the Act) to, resell any of the Securities which
constitute "restricted securities" under Rule 144 that have been reacquired by
any of them except pursuant to an effective registration statement under the
Act or any exemption therefrom;
(l) Pursuant to the Registration Rights Agreement, the Company shall file
and use its reasonable best efforts to cause to be declared or become effective
under the Act, on or prior to 60 days after the Time of Delivery, a
registration statement on Form S-4 providing for the registration of (i)
another series of debt securities of the Company, with terms substantially
identical to the Securities (the "Exchange Securities"), and the exchange of
the Securities for the Exchange Securities, all in a manner which will permit
persons who acquire the Exchange Securities to resell the Exchange Securities
pursuant to Section 4(1) of the Act or (ii) in the event that such exchange
offer has not been consummated within 135 days following the Time of Delivery,
and in lieu thereof, file and use its reasonable best efforts to cause to be
declared or become effective under the Act a registration statement relating to
the shelf registration of the Securities; and
(m) To use the net proceeds received by it from the sale of the
Securities pursuant to this Agreement in the manner specified in the Offering
Circular under the caption "Use of Proceeds".
6. The Company covenants and agrees with the several Purchasers that the
Company will pay or cause to be paid the following: (i) the fees, disbursements
and expenses of the Company's counsel and accountants in connection with the
issue of the Securities and all other expenses of the Company in connection
with the preparation and printing of the Preliminary Offering Circular and the
Offering Circular and any amendments and supplements thereto and the mailing
and delivering of copies thereof to the Purchasers and dealers; (ii) the cost
of printing or producing any Agreement among Purchasers, this Agreement, the
Indenture, the Blue Sky and Legal Investment Memoranda, closing documents
(including any compilations thereof) and any other documents in connection with
the offering, purchase, sale and delivery of the Securities; (iii) all
reasonable expenses in connection with the qualification of the Securities for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Purchasers in
connection with such qualification and in connection with the Blue Sky and
legal investment surveys; (iv) any fees charged by securities rating services
for rating the Securities; (v) the cost of preparing the Securities; (vi) the
fees and expenses of the Trustee and any agent of the Trustee and the fees and
disbursements of counsel for the Trustee in connection with the Indenture and
the Securities; (vii) any cost incurred in connection with the designation of
the Securities for trading as a PORTAL security and (viii) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section. It is understood, however,
that, except as provided in this Section, and Sections 8 and 11 hereof,
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<PAGE> 11
the Purchasers will pay all of their own costs and expenses, including the fees
of their counsel, transfer taxes on resale of any of the Securities by them,
and any advertising expenses connected with any offers they may make.
7. The obligations of the Purchasers hereunder shall be subject, in
their discretion, to the condition that all representations and warranties and
other statements of the Company herein are, at and as of the Time of Delivery,
true and correct, the condition that the Company shall have performed all of
its obligations hereunder theretofore to be performed, and the following
additional conditions:
(a) Sullivan & Cromwell, counsel for the Purchasers, shall have furnished
to you such opinion or opinions, dated the Time of Delivery, with respect to
the incorporation of the Company, the validity of the Indenture, the Securities
and the Registration Rights Agreement, the Offering Circular, and other related
matters as you may reasonably request, and such counsel shall have received
such papers and information as they may reasonably request to enable them to
pass upon such matters;
(b) Bryan Cave LLP, counsel for the Company, shall have furnished to you
their written opinion, dated the Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own its properties and conduct its
business as described in the Offering Circular;
(ii) The Company has an authorized capitalization as set forth in
the Offering Circular, and all of the issued shares of capital stock of
the Company have been duly and validly authorized and issued and are
fully paid and non-assessable;
(iii) Each subsidiary of the Company has been duly incorporated and
is validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation, provided that with respect to
subsidiaries incorporated under the laws of the State of Michigan or
Nevada subsidiaries, such counsel need only state that each such
subsidiary is a corporation validly existing in good standing under the
laws of its jurisdiction of incorporation; and all of the issued shares of
capital stock of each such subsidiary have been duly and validly
authorized and issued, are fully paid and non-assessable, and (except for
directors' qualifying shares and except as otherwise set forth in the
Offering Circular in respect of the minority interests described therein)
are owned of record by the Company directly or indirectly through one or
more subsidiaries of the Company, free and clear of any pledge noted on
the stock records of such subsidiary (except for pledges securing the
indebtedness described in the Offering Circular under the caption
"Description of Existing Debt") (such counsel being entitled to rely in
respect of the opinion in this clause upon opinions of local counsel,
provided that such counsel shall state that they believe that both you
and they are justified in relying
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<PAGE> 12
upon such opinions);
(iv) This Agreement has been duly authorized, executed and delivered
by the Company;
(v) The Securities have been duly authorized and executed by the
Company and when duly authenticated by the Trustee and delivered to the
Purchasers upon payment therefor by the Purchasers, will be duly issued
and delivered and will constitute valid and legally binding obligations of
the Company entitled to the benefits provided by the Indenture; and the
Securities and the Indenture conform in all material respects to the
summaries thereof in the Offering Circular;
(vi) The Registration Rights Agreement has been duly authorized,
executed and delivered by the Company and, assuming due authorization,
execution and delivery by the Purchasers, constitutes a valid and legally
binding obligation of the Company enforceable in accordance with its
terms, subject, as to enforcement, to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles and, as to
enforcement of rights to indemnity and contribution thereunder, to
limitations under applicable securities laws or public policy; and the
Registration Rights Agreement conforms in all material respects to the
summary thereof in the Offering Circular;
(vii) The Indenture has been duly authorized, executed and delivered
by the Company and, assuming due authorization, execution and delivery by
the Trustee, constitutes a valid and legally binding obligation of the
Company, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other laws of
general applicability relating to or affecting creditors' rights and to
general equity principles, including, without limitation, concepts of
materiality, reasonableness, good faith and fair dealing, and the possible
unavailability of specific performance, injunctive relief or other
equitable remedies, regardless of whether enforceability is
considered in a proceeding in equity or at law;
(viii) The issuance and sale of the Securities by the Company to the
Purchasers pursuant to this Agreement and the compliance by the Company
with all of the provisions of the Securities, the Indenture, the
Registration Rights Agreement and this Agreement and the consummation by
the Company of the transactions herein and therein contemplated will not
result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument known to such counsel to which
the Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries is bound or to which any of the property or
assets of the Company or any of its subsidiaries is subject, nor will such
actions result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any statute, rule or
regulation, or any order known to such counsel, of any court or
governmental agency or body having jurisdiction over the Company or any
of its subsidiaries or any of their
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<PAGE> 13
properties;
(ix) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the issuance and sale of the Securities as contemplated by
this Agreement and the Offering Circular or the consummation by the
Company of the other transactions contemplated by this Agreement, the
Indenture or the Registration Rights Agreement, except such consents,
approvals, authorizations, orders, registrations or qualifications as may
be required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Securities by the Purchasers, and such
consents, approvals, authorizations, orders, registrations and
qualifications as may be required under the Act, the United States Trust
Indenture Act of 1939 (the "Trust Indenture Act") and state or foreign
securities or Blue Sky laws in connection with the filing of a
registration statement by the Company with the Commission pursuant to the
Act in accordance with Section 5(l) hereof and the exchange offer or
resale registration contemplated by the Registration Rights Agreement
described in the Offering Circular;
(x) The statements set forth in the Offering Circular under the
caption "Description of the Notes", insofar as they purport to constitute
a summary of the terms of the Securities, and under the captions
"Description of Existing Debt" and "Certain United States Federal Income
Tax Consequences to Foreign Holders", insofar as they purport to describe
the provisions of the laws, legal proceedings and documents referred to
therein, are accurate summaries of such terms and provisions in all
material respects;
(xi) Assuming the accuracy of the representations of the Purchasers
set forth in Section 3 of this Agreement, no registration of the
Securities under the Act, and no qualification of an indenture under the
United States Trust Indenture Act with respect thereto, is required for
the offer, sale and initial resale of the Securities by the Purchasers in
the manner contemplated by this Agreement; and
(xii) The Company is not, nor will it be upon issuance of the
Securities and the application of the proceeds therefrom as set forth in
the first paragraph under the caption "Use of Proceeds" in the Offering
Circular, an "investment company" or an entity "controlled" by an
"investment company", as such terms are defined in the Investment Company
Act.
Such counsel shall also state that, during the course of the preparation
by the Company of the Offering Circular, such counsel has participated in
conferences with your representatives and counsel and with officers and
representatives of the Company, at which conferences the contents of the
Offering Circular were discussed, reviewed and revised, and, although such
counsel is not passing upon, and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements made in the Offering
Circular and has not made any independent investigation thereof, on the basis
of the information that was developed during the course thereof, considered in
the light of such counsel's understanding of applicable law and
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<PAGE> 14
the experience it has gained through its practice thereunder, that such counsel
has no reason to believe that the Offering Circular and any amendments or
supplements thereto, as of the respective dates thereof, contained or, as of
the Time of Delivery, contains any untrue statement of a material fact or
omitted or, as of the Time of Delivery, omits to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; provided, that such counsel need
not express an opinion or belief as to the financial statements and related
notes, or any other financial data contained in the Offering Circular.
(c) John C. Shapleigh, Esq., Executive Vice President-Regulatory, and
Corporate Development of the Company or Gregory J. Christoffel, Senior Vice
President and General Counsel of the Company, shall have furnished to you their
written opinions, dated the Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) To the best of such counsel's knowledge and other than as set
forth in the Offering Circular, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is a
party or of which any property of the Company or any of its subsidiaries
is the subject which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material
adverse effect on the consolidated financial position, stockholders'
equity, results of operations or general affairs of the Company and its
subsidiaries; and, to the best of such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others;
(ii) The Company has been duly qualified as a foreign corporation
for the transaction of business and is in good standing under the laws of
the States of Missouri and California;
(iii) To the best knowledge of such counsel and except as set forth
in or contemplated by the Offering Circular with respect to systems under
development, (a) each of the Company and its subsidiaries has all
Authorizations of and from, and has made all declarations and filings
with, all Federal, state, local and other governmental authorities, all
self-regulatory organizations and all courts and other tribunals, which
are necessary or appropriate for the Company and its subsidiaries to own,
lease, license, use and construct its properties and assets and to conduct
its business in the manner described in the Offering Circular, except to
the extent that the failure to obtain any such Authorizations or make any
such declaration or filing would not, singularly or in the aggregate,
reasonably be expected to have a material adverse effect on the
consolidated financial position, stockholders' equity, results of
operations or general affairs of the Company and its subsidiaries, (b) all
such Authorizations are in full force and effect with respect to the
Company and its subsidiaries, (c) no event has occurred that permits, or
after notice or lapse of time could permit, the revocation, termination or
modification of any such Authorization and (d) the Company and its
subsidiaries are in compliance in all material respects with the terms and
conditions of all such Authorizations and with the rules and regulations
of the regulatory authorities and
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<PAGE> 15
governing bodies having jurisdiction with respect thereto;
(iv) To the best knowledge of such counsel, neither the execution
and delivery of this Agreement, the Indenture or the Registration Rights
Agreement, the issuance and sale of the Securities by the Company to the
Purchasers, nor the consummation by the Company of the transactions
contemplated hereby or thereby nor compliance with the terms, conditions
and provisions thereof by the Company will cause any suspension,
revocation, impairment, forfeiture, nonrenewal or termination of any
Authorization; and
(v) The statements set forth in the Offering Circular under the
captions "Summary-Recent Developments" and "Regulatory Overview", insofar
as they purport to describe certain of the provisions of the laws, legal
proceedings and documents referred to therein, are accurate summaries of
such provisions in all material respects.
(d) On the date of the Offering Circular prior to the execution of this
Agreement and also at the Time of Delivery, KPMG Peat Marwick LLP shall have
furnished to you a letter or letters, dated the respective dates of delivery
thereof, in form and substance satisfactory to you, to the effect set forth in
Annex II hereto;
(e) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements included in
the Offering Circular any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Offering Circular, and (ii)
since the respective dates as of which information is given in the Offering
Circular there shall not have been any decrease or material increase in the
capital stock of the Company or any of its subsidiaries or any change in total
consolidated debt (in excess of $2,000,000) or decrease in total consolidated
assets (in excess of $5,000,000) or working capital (in excess of $25,000,000)
of the Company and its subsidiaries or any change, or any development involving
a prospective change, in or affecting the general affairs, management,
financial position, stockholders' equity or results of operations of the
Company and its subsidiaries, otherwise than as set forth or contemplated in
the Offering Circular (including the pro forma financial information contained
therein), the effect of which, in any such case described in Clause (i) or
(ii), is in the judgment of the Purchasers so material and adverse as to make
it impracticable or inadvisable to proceed with the offering or the delivery of
the Securities on the terms and in the manner contemplated in this Agreement
and in the Offering Circular;
(f) On or after the date hereof (i) no downgrading shall have occurred in
the rating accorded the Company's debt securities by any "nationally recognized
statistical rating organization", as that term is defined by the Commission for
purposes of Rule 436(g)(2) under the Act, and (ii) no such organization shall
have publicly announced that it has under surveillance or review, with possible
negative implications, its rating of any of the Company's debt securities;
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(g) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on the New York Stock Exchange; (ii) a general moratorium on
commercial banking activities declared by either Federal or New York State
authorities; (iii) the outbreak or escalation of hostilities involving the
United States or the declaration by the United States of a national emergency
or war, if the effect of any such event specified in this clause (iv) in the
judgment of the Purchasers makes it impracticable or inadvisable to proceed
with the offering or the delivery of the Securities on the terms and in the
manner contemplated in the Offering Circular; or (v) the occurrence of any
material adverse change in the existing, financial, political or economic
conditions in the United States or elsewhere which, in the judgment of the
Purchasers, would materially and adversely affect the financial markets for the
Securities and other debt securities;
(h) The Securities have been designated for trading on PORTAL;
(i) The Registration Rights Agreement shall have been duly authorized,
executed and delivered by the Company;
(j) The Company shall have furnished or caused to be furnished to you at
the Time of Delivery certificates of officers of the Company satisfactory to
you as to the accuracy of the representations and warranties of the Company
herein at and as of such Time of Delivery, as to the performance by the Company
of all of its obligations hereunder to be performed at or prior to such Time of
Delivery, as to the matters set forth in subsections (a) and (e) of this
Section and as to such other matters as you may reasonably request; and
(k) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of copies of the Offering Circular on the
New York Business Day next succeeding the date of this Agreement.
8. (a) The Company will indemnify and hold harmless each Purchaser
against any losses, claims, damages or liabilities, joint or several, to which
such Purchaser may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Offering Circular or the Offering
Circular, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact
necessary to make the statements therein not misleading, and will reimburse
each Purchaser for any legal or other expenses reasonably incurred by such
Purchaser in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that the Company shall
not be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any Preliminary
Offering Circular or the Offering Circular or any such amendment or supplement
in reliance upon and in conformity with written information furnished to the
Company by any Purchaser through Goldman, Sachs & Co. expressly for use
therein.
(b) Each Purchaser will indemnify and hold harmless the Company against
any
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losses, claims, damages or liabilities to which the Company may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in
any Preliminary Offering Circular or the Offering Circular, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in any Preliminary Offering Circular or the Offering Circular
or any such amendment or supplement in reliance upon and in conformity with
written information furnished to the Company by such Purchaser through Goldman,
Sachs & Co. expressly for use therein; and will reimburse the Company for any
legal or other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party
shall not relieve it from any liability which it may have to any indemnified
party otherwise than under such subsection. In case any such action shall be
brought against any indemnified party and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party (who shall not, except with
the consent of the indemnified party, be counsel to the indemnifying party),
and, after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses
of other counsel or any other expenses, in each case subsequently incurred by
such indemnified party, in connection with the defense thereof other than
reasonable costs of investigation. No indemnifying party shall, without the
written consent of the indemnified party, effect the settlement or compromise
of, or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified party is an actual or
potential party to such action or claim) unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from
all liability arising out of such action or claim and (ii) does not include a
statement as to, or an admission of, fault, culpability or a failure to act, by
or on behalf of any indemnified party. No indemnifying party shall be liable
for the cost of any settlement effected by an indemnified party without the
written consent of such indemnifying party, which consent shall not be
unreasonably withheld. In no event shall any indemnifying party be liable for
the fees and expenses of more than one firm or counsel (except to the extent
that local counsel, in addition to such firm or counsel, is required for
effective representation) to represent all indemnified parties with respect to
a single action or separate but substantially similar actions in the same
jurisdiction arising out of the same general allegations, which firm or counsel
shall be designated in writing by Goldman, Sachs & Co., on behalf of any
Purchasers and controlling persons, and by the Company, on behalf of itself and
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any of its officers, directors or controlling persons.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a)
or (b) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and the Purchasers on the other from
the offering of the Securities. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under subsection (c)
above, then each indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company on the one hand and the Purchasers on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Purchasers on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Purchasers, in each case as set forth in the
Offering Circular. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Purchasers on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Purchasers agree that it would not be just and equitable if
contribution pursuant to this subsection (d) were determined by pro rata
allocation (even if the Purchasers were treated as one entity for such purpose)
or by any other method of allocation which does not take account of the
equitable considerations referred to above in this subsection (d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions in respect thereof) referred to above in
this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Purchaser shall be required to contribute any amount in
excess of the amount by which the total price at which the Securities
underwritten by it and distributed to investors were offered to investors
exceeds the amount of any damages which such Purchaser has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. The Purchasers' obligations in this subsection
(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who
controls any Purchaser within the meaning of the Act; and the obligations of
the Purchasers under this Section 8 shall be in addition to any liability which
the respective Purchasers may otherwise have and shall extend, upon the same
terms
18
<PAGE> 19
and conditions, to each officer and director of the Company and to each person,
if any, who controls the Company within the meaning of the Act.
9. (a) If any Purchaser shall default in its obligation to purchase the
Securities which it has agreed to purchase hereunder, you may in your
discretion arrange for you or another party or other parties to purchase such
Securities on the terms contained herein. If within thirty-six hours after such
default by any Purchaser you do not arrange for the purchase of such
Securities, then the Company shall be entitled to a further period of
thirty-six hours within which to procure another party or other parties
satisfactory to you to purchase such Securities on such terms. In the event
that, within the respective prescribed periods, you notify the Company that you
have so arranged for the purchase of such Securities, or the Company notifies
you that it has so arranged for the purchase of such Securities, you or the
Company shall have the right to postpone the Time of Delivery for a period of
not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Offering Circular, or in any other documents or
arrangements, and the Company agrees to prepare promptly any amendments to the
Offering Circular which in your opinion may thereby be made necessary. The term
"Purchaser" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Securities.
(b) If, after giving effect to any arrangements for the purchase of the
Securities of a defaulting Purchaser or Purchasers by you and the Company as
provided in subsection (a) above, the aggregate principal amount of such
Securities which remains unpurchased does not exceed one-eleventh of the
aggregate principal amount of all the Securities, then the Company shall have
the right to require each non-defaulting Purchaser to purchase the principal
amount of Securities which such Purchaser agreed to purchase hereunder and, in
addition, to require each non-defaulting Purchaser to purchase its pro rata
share (based on the principal amount of Securities which such Purchaser agreed
to purchase hereunder) of the Securities of such defaulting Purchaser or
Purchasers for which such arrangements have not been made; but nothing herein
shall relieve a defaulting Purchaser from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Securities of a defaulting Purchaser or Purchasers by you and the Company as
provided in subsection (a) above, the aggregate principal amount of Securities
which remains unpurchased exceeds one-eleventh of the aggregate principal
amount of all the Securities, or if the Company shall not exercise the right
described in subsection (b) above to require non-defaulting Purchasers to
purchase Securities of a defaulting Purchaser or Purchasers, then this
Agreement shall thereupon terminate, without liability on the part of any
non-defaulting Purchaser or the Company, except for the expenses to be borne by
the Company and the Purchasers as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Purchaser from liability for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Purchasers, as set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall remain in full force and
19
<PAGE> 20
effect, regardless of any investigation (or any statement as to the results
thereof) made by or on behalf of any Purchaser or any controlling person of any
Purchaser, or the Company, or any officer or director or controlling person of
the Company, and shall survive delivery of and payment for the Securities.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Purchaser except, in
the case of the non-defaulting Purchaser or Purchasers only, as provided in
Sections 6 and 8 hereof; but, if for any other reason, the Securities are not
delivered by or on behalf of the Company as provided herein, the Company will
reimburse the Purchasers through you for all out-of-pocket expenses approved in
writing by you, including fees and disbursements of counsel, reasonably
incurred by the Purchasers in making preparations for the purchase, sale and
delivery of the Securities, but the Company shall then be under no further
liability to any Purchaser except as provided in Sections 6 and 8 hereof.
12. In all dealings hereunder, the parties hereto shall be entitled to act
and rely upon any statement, request, notice or agreement on behalf of any
Purchaser made or given by you jointly or by Goldman, Sachs & Co. on behalf of
you as the representative.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Purchasers shall be delivered or sent by mail, telex or
facsimile transmission ((212) 902-3000) to you in care of Goldman, Sachs & Co.,
85 Broad Street, New York, New York 10004, Attention: Registration Department;
and if to the Company shall be delivered or sent by mail, telex or facsimile
transmission ((314) 579-4654) to the address of the Company set forth in the
Offering Circular, Attention: Vice Chairman; provided, however, that any notice
to a Purchaser pursuant to Section 8(c) hereof shall also be delivered or sent
by mail, telex or facsimile transmission to such Purchaser at any address
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Purchasers, the Company and, to the extent provided in Sections 8 and
10 hereof, the officers and directors of the Company and each person who
controls the Company or any Purchaser, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Securities from any Purchaser shall be deemed a successor or assign by reason
merely of such purchase.
14. Time shall be of the essence of this Agreement.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such respective counterparts shall together constitute one
and the same instrument.
20
<PAGE> 21
If the foregoing is in accordance with your understanding, please sign and
return to us counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Purchasers, this letter and such acceptance hereof shall
constitute a binding agreement between each of the Purchasers and the Company.
It is understood that your acceptance of this letter on behalf of each of the
Purchasers is pursuant to the authority set forth in a form
21
<PAGE> 22
of Agreement among Purchasers, the form of which shall be submitted to the
Company for examination upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
Brooks Fiber Properties, Inc.
By: /s/ David L. Solomon
-----------------------------
Name: David L. Solomon
Title: Executive Vice President
Accepted as of the date hereof:
Goldman, Sachs & Co.
Salomon Brothers Inc
Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By: /s/ Goldman, Sachs & Co.
(Goldman, Sachs & Co.)
<PAGE> 23
<TABLE>
<CAPTION>
SCHEDULE I
PRINCIPAL
AMOUNT OF
SECURITIES
TO BE
PURCHASER PURCHASED
--------- -----------
<S> <C>
Goldman, Sachs & Co......................................... $ 93,750,000
Salomon Brothers Inc........................................ 93,750,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................ 62,500,000
Total....................................................... $250,000,000
============
</TABLE>
23
<PAGE> 24
ANNEX I
(1) The Securities have not been and will not be registered under the Act
and may not be offered or sold within the United States or to, or for the
account or benefit of, U.S. persons except in accordance with Regulation S
under the Act or pursuant to an exemption from the registration requirements of
the Act. Each Purchaser represents that it has offered and sold the
Securities, and will offer and sell the Securities (i) as part of their
distribution at any time and (ii) otherwise until 40 days after the later of
the commencement of the offering and the Time of Delivery, only in accordance
with Rule 903 of Regulation S, Rule 144A or pursuant to Paragraph 2 of this
Annex I under the Act. Accordingly, each Purchaser agrees that neither it, its
affiliates nor any persons acting on its or their behalf has engaged or will
engage in any directed selling efforts with respect to the Securities, and it
and they have complied and will comply with the offering restrictions
requirement of Regulation S. Each Purchaser agrees that, at or prior to
confirmation of sale of Securities (other than a sale pursuant to Rule 144A or
pursuant to Paragraph 2 of this Annex I), it will have sent to each
distributor, dealer or person receiving a selling concession, fee or other
remuneration that purchases Securities from it during the restricted period a
confirmation or notice to substantially the following effect:
"The Securities covered hereby have not been registered under the
U.S. Securities Act of 1933 (the "Securities Act") and may not be offered
and sold within the United States or to, or for the account or benefit of,
U.S. persons (i) as part of their distribution at any time or (ii)
otherwise until 40 days after the later of the commencement of the
offering and the closing date, except in either case in accordance with
Regulation S (or Rule 144A if available) under the Securities Act. Terms
used above have the meaning given to them by Regulation S."
Terms used in this paragraph have the meanings given to them by Regulation S.
Each Purchaser further agrees that it has not entered and will not enter
into any contractual arrangement with respect to the distribution or delivery
of the Securities, except with its affiliates or with the prior written consent
of the Company.
(2) Notwithstanding the foregoing, Securities in registered form may be
offered, sold and delivered by Goldman, Sachs & Co. in the United States and to
U.S. persons pursuant to Section 3 of this Agreement without delivery of the
written statement required by paragraph (1) above.
(3) Each Purchaser has also agreed that (i) it has not offered or sold and
will not offer or sell any Securities to persons in the United Kingdom except
to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes
of their businesses or otherwise in circumstances which have not resulted and
will not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995, (ii) it has
complied, and will comply, with all applicable provisions of the Financial
A-1
<PAGE> 25
Services Act of 1986 of Great Britain with respect to anything done by it in
relation to the Securities in, from or otherwise involving the United Kingdom,
and (iii) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issuance of
the Securities to a person who is of a kind described in Article 11(3) of the
Financial Services Act of 1986 (Investment Advertisements) (Exemptions) Order
1996 of Great Britain or as a person to whom the document may otherwise be
lawfully issued or passed on.
(4) Each Purchaser agrees that it will not offer, sell or deliver any of
the Securities in any jurisdiction outside the United States except under
circumstances that will result in compliance with the applicable laws thereof,
and that it will take at its own expense whatever action is required to permit
its purchase and resale of the Securities in such jurisdictions. Each
Purchaser understands that no action has been taken to permit a public offering
in any jurisdiction outside the United States where action would be required
for such purpose. Each Purchaser agrees not to cause any advertisement of the
Securities to be published in any newspaper or periodical or posted in any
public place and not to issue any circular relating to the Securities, except
in any such case with Goldman, Sachs & Co.'s express written consent and then
only at its own risk and expense.
A-2
<PAGE> 26
ANNEX II
Pursuant to Section 7(e) of the Purchase Agreement, the accountants shall
furnish letters to the Purchasers to the effect that:
(i) They are independent certified public accountants with respect to the
Company and its subsidiaries under rule 101 of the American Institute of
Certified Public Accountants' Code of Professional Conduct, and its
interpretations and rulings;
(ii) In their opinion, the consolidated financial statements and financial
statement schedules audited by them and included in the Offering Circular
comply as to form in all material respects with generally accepted accounting
principles;
(iii) The unaudited selected financial information with respect to the
consolidated results of operations and financial position of the Company for
the two most recent fiscal years included in the Offering Circular agrees with
the corresponding amounts (after restatements where applicable) in the audited
consolidated financial statements for such two fiscal years;
(iv) On the basis of limited procedures not constituting an audit in
accordance with generally accepted auditing standards, consisting of a reading
of the unaudited financial statements and other information referred to below,
a reading of the latest available interim financial statements of the Company
and its subsidiaries, inspection of the minute books of the Company and its
subsidiaries since the date of the latest audited financial statements included
in the Offering Circular, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters and such other
inquiries and procedures as may be specified in such letter, nothing came to
their attention that caused them to believe that:
(A) the unaudited consolidated statements of operations, consolidated
balance sheets, consolidated statements of cash flows and consolidated
statements of changes in shareholders' equity included in the Offering
Circular are not in conformity with generally accepted accounting
principles applied on the basis substantially consistent with the basis
for the audited consolidated statements of operations, consolidated
balance sheets, consolidated statements of cash flows and consolidated
statements of changes in shareholders' equity included in the Offering
Circular;
(B) any other unaudited income statement data and balance sheet items
included in the Offering Circular do not agree with the corresponding
items in the unaudited consolidated financial statements from which such
data and items were derived, and any such unaudited data and items were
not determined on a basis substantially consistent with the basis for the
corresponding amounts in the audited consolidated financial statements
included in the Offering Circular;
A-1
<PAGE> 27
(C) the unaudited financial statements which were not included in the
Offering Circular but from which were derived any unaudited condensed
financial statements referred to in Clause (A) and any unaudited income
statement data and balance sheet items included in the Offering Circular
and referred to in Clause (B) were not determined on a basis substantially
consistent with the basis for the audited consolidated financial
statements included in the Offering Circular;
(D) any unaudited pro forma consolidated condensed financial
statements included in the Offering Circular do not comply as to form in
all material respects with the applicable accounting requirements or the
pro forma adjustments have not been properly applied to the historical
amounts in the compilation of those statements;
(E) as of a specified date not more than five days prior to the date
of such letter, there have been any changes in the consolidated capital
stock (other than issuances of capital stock upon exercise of options and
stock appreciation rights, upon earn-outs of performance shares and upon
conversions of convertible securities, in each case which were outstanding
on the date of the latest financial statements included in the Offering
Circular) or any increase in the consolidated long-term debt of the
Company and its subsidiaries, or any decreases in consolidated net current
assets or stockholders' equity or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with amounts shown in the latest
balance sheet included in the Offering Circular except in each case for
changes, increases or decreases which the Offering Circular discloses have
occurred or may occur or which are described in such letter; and
(F) for the period from the date of the latest financial statements
included in the Offering Circular to the specified date referred to in
Clause (E) there were any decreases in consolidated net revenues or
operating profit (loss) or the total amounts of consolidated net income
(loss) or other items specified by the Representatives, or any increases
in any items specified by the Representatives, in each case as compared
with the comparable period of the preceding year and with any other period
of corresponding length specified by the Representatives, except in each
case for decreases or increases which the Offering Circular discloses have
occurred or may occur or which are described in such letter; and
(v) In addition to the examination referred to in their report(s) included
in the Offering Circular and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and (iv)
above, they have carried out certain specified procedures, not constituting an
audit in accordance with generally accepted auditing standards, with respect to
certain amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records of the
Company and its subsidiaries, which appear in the Offering Circular, and have
compared certain of such amounts, percentages and financial information with
the accounting records of the Company and its subsidiaries and have found them
to be in agreement.
A-2
<PAGE> 1
EXHIBIT 5.1
BRYAN CAVE LLP
ONE METROPOLITAN SQUARE
211 NORTH BROADWAY, SUITE 3600
ST. LOUIS, MISSOURI 63102-2750
(314) 259-2000
FACSIMILE: (314) 259-2020
June 17, 1997
Board of Directors
Brooks Fiber Properties, Inc.
425 Woods Mill Road South, Suite 300
Town & Country, Missouri 63017
Ladies and Gentlemen:
We are acting as special counsel for Brooks Fiber Properties, Inc., a
Delaware corporation (the "Company"), in connection with various legal matters
relating to the filing with the Securities and Exchange Commission (the
"Commission") of a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Act"), covering
an offer to exchange (the "Exchange Offer") $1,000 principal amount of the
Company's 10% Senior Notes due June 1, 2007 (the "Exchange Notes") for each
$1,000 principal amount of its outstanding 10% Senior Notes due June 1, 2007
(the "Private Notes"), of which $250,000,000 aggregate principal amount is
outstanding on the date hereof. The Exchange Notes are to be issued pursuant
to an Indenture, dated as of May 29, 1997 (the "Indenture"), between the
Company and The Bank of New York, as Trustee, which is filed as an exhibit to
the Registration Statement.
In connection herewith, we have examined and relied without independent
investigation as to matters of fact upon such certificates of public officials,
such statements and certificates of officers of the Company and originals or
copies certified to our satisfaction of the Registration Statement, the
Indenture, the Exchange and Registration Rights Agreement, dated as of May 29,
1997, between the Company and Goldman, Sachs & Co., Salomon Brothers Inc and
Merrill Lynch & Co., the Second Restated Certificate of Incorporation and
By-laws of the Company, proceedings of the Board of Directors of the Company
and such other corporate records, documents, certificates and instruments as we
have deemed necessary or appropriate in order to enable us to render the
opinions expressed below. In rendering this opinion, we have assumed the
genuineness of all signatures on all documents examined by us, the authenticity
of all documents submitted to us as originals and the conformity to authentic
originals of all documents submitted to us as certified or photostatted copies.
We express no opinion as to the applicability or effect of (i) any
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally, or (ii) general
principles of equity, including, without limitation, concepts of
reasonableness, materiality, good faith and fair dealing and the possible
unavailability of specific performance, injunctive relief or other equitable
remedies, regardless of whether enforceability is considered in a proceeding in
equity or at law.
<PAGE> 2
Brooks Fiber Properties, Inc.
June 17, 1997
Page 2
Based upon the foregoing and in reliance thereon and subject to the
qualifications and limitations stated herein, we are of the opinion that:
(1) The Company is a corporation validly existing in good
standing under the laws of the State of Delaware;
(2) When,
(i) the Registration Statement, including any amendments thereto,
shall have become effective under the Act;
(ii) the Indenture has been duly qualified under the Trust
Indenture Act of 1939, as amended; and
(iii) the Exchange Notes shall have been duly executed and
authenticated in accordance with the provisions of the
Indenture and duly delivered to the holders thereof in
exchange for the Private Notes;
then the Exchange Notes will be legally issued, fully paid and
non-assessable and binding obligations of the Company; and
(3) The material federal income tax consequences of the Exchange
Offer are accurately set forth under the heading "Certain United
States Tax Consequences to Foreign Holders" in the Preliminary
Prospectus dated June 17, 1997 included in the Registration
Statement.
In rendering the opinion expressed in clause (3) above, we have
relied upon the facts as set forth in the Registration Statement. Any
variation or difference in the facts from those set forth in the Registration
Statement could affect our opinion. Such opinion is also based on various
statutory provisions, regulations promulgated thereunder and interpretations
thereof by the Internal Revenue Service and the courts having jurisdiction over
such matters, all of which are subject to change either prospectively or
retroactively.
This opinion is not rendered with respect to any laws other than the
General Corporation Law of the State of Delaware and the federal laws of the
United States.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Validity of the Exchange Notes" in the Prospectus included as a part thereof.
We also consent to your filing copies of this opinion as an exhibit to the
Registration Statement with agencies of such states as you deem necessary in
the course of complying with the laws of such states regarding the Exchange
Offer. In giving this consent, we do not admit that we are in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission thereunder.
Very truly yours,
BRYAN CAVE LLP
<PAGE> 1
EXHIBIT 12.1
BROOKS FIBER PROPERTIES, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF DEFICIENCY OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1994 1995 1996
--------- ----------- --------
<S> <C> <C> <C>
Earnings: Loss before income
tax and minority interests $(3,975,000) $(10,636,000) $(45,433,000)
Add: Fixed Charges 693,000 3,820,000 33,301,000
Less: Capitalized Interest - - 1,994,000
----------- -------------- ------------
Earnings $(3,282,000) (6,816,000) (14,126,000)
Fixed charges:
Interest expense 693,000 3,704,000 32,164,000
Amortization of debt
expense
- 116,000 1,137,000
----------- -------------- ------------
Fixed charges 693,000 3,820,000 33,301,000
Ratio of earnings to fixed
charges - - -
Deficiency of earnings avail-
able to cover fixed charges (3,975,000) (10,636,000) (47,427,000)
<CAPTION>
Pro Forma (1)
-------------
Year Ended Three Months Ended March 31,
December 31, -------------------------------
1996 1996 1997
----------- ------------ ---------------
<S> <C> <C> <C>
Earnings: Loss before income
tax and minority interests $(53,699,000) $(7,163,000) $(24,674,000)
Add: Fixed Charges 33,301,000 3,852,000 15,792,000
Less: Capitalized Interest 1,994,000 9,000 987,000
------------ ---------- ------------
Earnings (22,392,000) (3,320,000) (9,869,000)
Fixed charges:
Interest expense 32,164,000 3,741,000 15,212,000
Amortization of debt
expense
1,137,000 111,000 580,000
------------ ---------- ------------
Fixed charges 33,301,000 3,852,000 15,792,000
Ratio of earnings to fixed
charges - - -
Deficiency of earnings avail-
able to cover fixed charges (55,693,000) (7,172,000) (25,661,000)
</TABLE>
- -----------------
(1) Pro forma data gives effect to the merger with MAN (which occurred on
May 5, 1997). See the Unaudited Pro Forma Combined Consolidated
Statements of Operations included on pages F-3 and F-4 of the
Prospectus.
<PAGE> 1
EXHIBIT 23.2
Independent Auditor's Consent
The Board of Directors
Brooks Fiber Properties, Inc.:
We consent to the use of our reports on Brooks Fiber Properties, Inc. and Metro
Access Networks, Inc. herein in the Registration Statement on Form S-4.
KPMG Peat Marwick LLP
St. Louis, Missouri
June 13, 1997
<PAGE> 1
EXHIBIT 25.1
THIS COFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED
PURSUANT TO RULE 901 (d) OF REGULATION S-T
================================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
----------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------
BROOKS FIBER PROPERTIES, INC.
(Exact name of obligor as specified in its charter)
Delaware 43-1656187
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
425 Woods Mill Road South, Suite 300
Town & Country, Missouri 63017
(Address of principal executive offices) (Zip code)
----------------
10% Senior Notes due June 1, 2007
(Title of the indenture securities)
================================================================================
<PAGE> 2
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE
TRUSTEE:
(A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO
WHICH IT IS SUBJECT.
- --------------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------------
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y.
12203
Federal Reserve Bank of New York 33 Liberty Plaza, New
York, N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7A-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R. 229.10(D).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
-2-
<PAGE> 3
6. The consent of the Trustee required by Section 321(b)
of the Act. (Exhibit 6 to Form T-1 filed with Registration
Statement No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
- 3 -
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 11th day of June, 1997.
THE BANK OF NEW YORK
By: /s/ MARY LAGUMINA
---------------------------------
Name: MARY LAGUMINA
Title: ASSISTANT VICE PRESIDENT
-4-
<PAGE> 5
EXHIBIT 7
________________________________________________________________________________
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business December 31,
1996, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S> <C>
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin .................. $ 6,024,605
Interest-bearing balances .......... 808,821
Securities:
Held-to-maturity securities ........ 1,071,747
Available-for-sale securities ...... 3,105,207
Federal funds sold in domestic offices
of the bank: .......................... 4,250,941
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................31,962,915
LESS: Allowance for loan and
lease losses ..............635,084
LESS: Allocated transfer risk
reserve........................429
Loans and leases, net of unearned
income, allowance, and reserve 31,327,402
Assets held in trading accounts ...... 1,539,612
Premises and fixed assets (including
capitalized leases) ................ 692,317
Other real estate owned .............. 22,123
Investments in unconsolidated
subsidiaries and associated
companies .......................... 213,512
Customers' liability to this bank on
acceptances outstanding ............ 985,297
Intangible assets .................... 590,973
Other assets ......................... 1,487,903
-----------
Total assets ......................... $52,120,460
===========
LIABILITIES
Deposits:
In domestic offices ................ $25,929,642
Noninterest-bearing ......11,245,050
Interest-bearing .........14,684,592
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 12,852,809
Noninterest-bearing .........552,203
Interest-bearing .........12,300,606
Federal funds purchased and securities
sold under agreements to repurchase
in domestic offices of the
bank and of its Edge and Agreement
subsidiaries, and in IBFs:
Federal funds purchased ............ 1,360,877
Securities sold under agreements
to repurchase....................... 226,158
Demand notes issued to the U.S.
Treasury ........................... 204,987
Trading liabilities .................. 1,437,445
Other borrowed money:
With original maturity of one year
or less .......................... 2,312,556
With original maturity of more than
one year ......................... 20,766
Bank's liability on acceptances exe-
cuted and outstanding .............. 1,014,717
Subordinated notes and debentures .... 1,014,400
Other liabilities .................... 1,721,291
-----------
Total liabilities .................... 48,095,648
-----------
EQUITY CAPITAL
Common stock ........................ 942,284
Surplus ............................. 731,319
Undivided profits and capital
reserves .......................... 2,354,095
Net unrealized holding gains
(losses) on available-for-sale
securities ........................ 7,030
Cumulative foreign currency transla-
tion adjustments .................. ( 9,916)
-----------
Total equity capital ................ 4,024,812
-----------
Total liabilities and equity
capital ........................... $52,120,460
===========
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the Board of Governors of the Federal Reserve System and is true and
correct.
J. Carter Bacot }
Thomas A. Renyi } Directors
Alan R. Griffith }
________________________________________________________________________________
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
BROOKS FIBER PROPERTIES, INC.
OFFER TO EXCHANGE ITS 10% SENIOR NOTES
DUE JUNE 1, 2007 ("EXCHANGE NOTES") FOR ALL OF ITS OUTSTANDING
10% SENIOR NOTES DUE JUNE 1, 2007 ("PRIVATE NOTES")
PURSUANT TO ITS PROSPECTUS DATED JUNE ____, 1997
<TABLE>
<S><C>
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON JULY ___, 1997,
UNLESS EXTENDED BY THE COMPANY (THE "EXPIRATION DATE"). TENDERS MAY BE
WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
</TABLE>
Delivery To: The Bank of New York, Exchange Agent
<TABLE>
<S> <C> <C>
By Overnight Courier or Hand: By Facsimile:
By Mail The Bank of New York (212) 571-3080
The Bank of New York One Wall Street - 27
One Wall Street - 27 Corporate Trust & Agency Services Window Confirm by Telephone
New York, New York 10286 New York, New York 10286 (212) 815-2742
Attention: Reorganization Section Attention: Reorganization Section
</TABLE>
List below the Private Notes to which this Letter of Transmittal relates.
If the space provided below is inadequate, the certificate numbers and
principal amount of Private Notes should be listed on a separate signed
schedule affixed hereto.
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------- --------------------- --------------------- ---------------------
DESCRIPTION OF PRIVATE NOTES 1 2 3
- ---------------------------------------------- --------------------- --------------------- ---------------------
Aggregate
Principal Principal
Name(s) and Address(es) of Registered Holder(s) Certificate Amount of Amount
(Please fill in, if blank) Number(s)* Private Note(s) Tendered**
Total
- ---------------------------------------------------------------------------------------------------------------------
------------- ----------------- ----------------
------------- ----------------- ----------------
------------- ----------------- ----------------
------------- ----------------- ----------------
------------- ----------------- ----------------
------------- ----------------- ----------------
------------- ----------------- ----------------
Total
- ---------------------------------------------------------------------------------------------------------------------
* Need not be completed if Private Notes are being tendered by book-entry transfer.
** Unless otherwise indicated in this column, a holder will be deemed to have tendered ALL of the Private Notes
represented by the Private Notes indicated in column 2. See Instruction 2. Private Notes tendered hereby must be
in denominations of principal amount of $1,000 and any integral multiple thereof. See Instruction 1.
</TABLE>
<TABLE>
<S><C>
/ / CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE
TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER
FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
-------------------------------------------------------------------
Account Number Transaction Code Number
------------------------------------- ---------
/ / CHECK HERE IF TENDERED PRIVATE NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name(s) of Registered Holder(s)
-----------------------------------------------------------------------
Widow Ticket Number (if any)
-------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery
---------------------------------------------------
Name of Institution which guaranteed delivery
---------------------------------------------------------
IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number Transaction Code Number
-------------------------------- ----------------
/ / CHECK HERE IF YOU ARE A BROKER-DEALER WHO HOLDS PRIVATE NOTES ACQUIRED FOR
YOUR OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES
AND WISH TO RECEIVE COPIES OF THE PROSPECTUS AND COPIES OF ANY AMENDMENTS
OR SUPPLEMENTS THERETO FOR USE IN CONNECTION WITH RESALES OF EXCHANGE
NOTES RECEIVED FOR YOUR OWN ACCOUNT IN EXCHANGE FOR SUCH PRIVATE NOTES.
Name:
------------------------------------------------------------------------------------------------
Address:
---------------------------------------------------------------------------------------------
Aggregate Principal Amount of Private Notes so held: $
-----------------------------------------------
</TABLE>
<PAGE> 2
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE,
OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE,
WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
LETTER OF TRANSMITTAL IS COMPLETED.
The Company reserves the right, at any time or from time to time, to
extend the Exchange Offer at its sole discretion, in which event the term
"Expiration Date" shall mean the latest time and date to which the Exchange
Offer is extended. The Company shall notify the holders of the Private Notes
of any extension by means of a press release or other public announcement prior
to 9:00 A.M., New York City time, on the next business day after the previously
scheduled Expiration Date.
This Letter of Transmittal is to be completed by a holder of Private Notes
either if certificates are to be forwarded herewith or if a tender of
certificates for Private Notes, if available, is to be made by book-entry
transfer to the account maintained by the Exchange Agent at The Depository
Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures
set forth in "The Exchange Offer--Book-Entry Transfer" section of the
Prospectus. Holders of Private Notes whose certificates are not immediately
available, or who are unable to deliver their certificates or confirmation of
the book-entry tender of their Private Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other
documents required by this Letter to the Exchange Agent on or prior to the
Expiration Date, must tender their Private Notes according to the guaranteed
delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery
Procedures" section of the Prospectus. See Instruction 1. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
2
<PAGE> 3
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to Brooks Fiber Properties, Inc., a
Delaware corporation (the "Company"), the aggregate principal amount of Private
Notes indicated in this Letter of Transmittal, upon the terms and subject to
the conditions set forth in the Company's Prospectus dated June ____, 1997 (the
"Prospectus"), receipt of which is hereby acknowledged, and in this Letter of
Transmittal, which together constitute the Company's offer (the "Exchange
Offer") to exchange $1,000 principal amount of its 10% Senior Notes due June 1,
2007, which have been registered under the Securities Act of 1933, as amended
(the "Exchange Notes"), for each $1,000 principal amount of its issued and
outstanding 10% Senior Notes due June 1, 2007, of which $250,000,000
aggregate principal amount was outstanding on the date of the Prospectus (the
"Private Notes" and, together with the Exchange Notes, the "Notes"). The
capitalized terms which are not defined herein are used herein as defined in
the Prospectus.
Subject to, and effective upon, the acceptance for exchange of the Private
Notes tendered hereby, the undersigned hereby sells, assigns and transfers to,
or upon the order of, the Company all right, title and interest in and to such
Private Notes as are being tendered hereby and hereby irrevocably constitutes
and appoints the Exchange Agent as attorney-in-fact of the undersigned with
respect to such Private Notes, with full power of substitution (such power of
attorney being an irrevocable power coupled with an interest), to:
(a) deliver such Private Notes in registered certificated form, or
transfer ownership of such Private Notes through book-entry transfer at
the Book-Entry Transfer Facility, to or upon the order of the Company,
upon receipt by the Exchange Agent, as the undersigned's agent, of the
same aggregate principal amount of Exchange Notes; and
(b) receive, for the account of the Company, all benefits and otherwise
exercise, for the account of the Company, all rights of beneficial
ownership of the Private Notes tendered hereby in accordance with the
terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Private Notes
tendered hereby and that the Company will acquire good, marketable and
unencumbered title thereto, free and clear of all security interests, liens,
restrictions, charges, encumbrances, conditional sale agreements or other
obligations relating to their sale or transfer, and not subject to any adverse
claim when the same are accepted by the Company. The undersigned hereby
further represents that any Exchange Notes acquired in exchange for Private
Notes tendered hereby will have been acquired in the ordinary course of
business of the person receiving such Exchange Notes, whether or not such
person is the undersigned, that neither the holder of such Private Notes nor
any such other person has an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes and that neither the
holder of such Private Notes nor any such other person is an "affiliate", as
defined in Rule 405 under the Securities Act of 1933, as amended (the
"Securities Act"), of the Company. The undersigned has read and agrees to all
of the terms of the Exchange Offer.
The undersigned also acknowledges that this Exchange Offer is being made
in reliance on interpretations by the staff of the Securities and Exchange
Commission (the "SEC"), as set forth in no-action letters issued to third
parties, that the Exchange Notes issued in exchange for the Private Notes
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by holders thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holders' business and such holders have
no arrangement with any person to participate in the distribution of such
Exchange Notes. However, the Company does not intend to request the SEC to
consider, and the SEC has not considered, the Exchange Offer in the context of
a no-action letter, and there can be no assurance that the staff of the SEC
would make a similar determination with respect to the Exchange Offer as in
other circumstances. If the undersigned is not a broker-dealer, the
undersigned represents that it is not engaged in, and does not intend to engage
in, a distribution of Exchange Notes and has no arrangement or understanding to
participate in a distribution of Exchange Notes. If any holder is an affiliate
of the Company, is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer, such holder (i) could not rely on the
applicable interpretations of the staff of the SEC and (ii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. If the undersigned is a broker-dealer
that will receive Exchange Notes for its own account in exchange for Private
Notes acquired as a result of market-making or other trading activities (a
"Participating Broker-Dealer"), it represents that the Private Notes to be
exchanged for the Exchange Notes were acquired by it as a result of
market-making or other trading activities and acknowledges that it will deliver
a prospectus in connection with any resale of such Exchange Notes; however, by
so acknowledging and by delivering a prospectus, such Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
The Company has agreed that, subject to the provisions of the
Registration Rights Agreement, the Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of Exchange Notes received in exchange for Private Notes
which were acquired by such Participating Broker-Dealer for its own account as a
result of market-making or other trading activities, for a period ending 90 days
after the Expiration Date or, if earlier, when all such Exchange Notes have been
disposed of by such Participating Broker-Dealer. In that regard, each
Participating Broker-Dealer by tendering such Private Notes and executing this
Letter of Transmittal, agrees that, upon receipt of notice from the Company of
the occurrence of any event or the discovery of any fact which makes any
statement contained or incorporated by reference in the Prospectus untrue in any
material respect or which causes the Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
therein, in light of the circumstances under which they were made, not
misleading, such Participating Broker-Dealer will suspend the sale of Exchange
Notes pursuant to the Prospectus until the Company has amended or supplemented
the Prospectus to correct such misstatement or omission and has furnished copies
of the amended or supplemented Prospectus to the Participating Broker-Dealer or
the Company has given notice that the sale of the Exchange Notes may be resumed,
as the case may be. If the Company gives such notice to suspend the sale of the
Exchange Notes, it shall extend the 90-day period referred to above during which
Participating Broker-Dealers are entitled to use the Prospectus in connection
with the resale of Exchange Notes by the number of days during the period from
and including the date of the giving of such notice to and including the date
when Participating Broker-Dealers shall have received copies of the supplemented
or amended Prospectus necessary to permit resales of the Exchange Notes or to
and including the date on which the Company has given notice that the sale of
Exchange Notes may be resumed, as the case may be.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Private Notes tendered hereby. All
authority conferred or agreed to be conferred in this Letter of Transmittal and
every obligation of the undersigned hereunder shall be binding upon the
successors, assigns, heirs, executors, administrators, trustees in bankruptcy
and legal representatives of the undersigned and shall not be affected
3
<PAGE> 4
by, and shall survive, the death or incapacity of the undersigned. This tender
may be withdrawn only in accordance with the procedures set forth in "The
Exchange Offer--Withdrawal of Tenders" section of the Prospectus.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, please deliver the Exchange Notes (and, if applicable,
substitute certificates representing Private Notes for any Private Notes not
exchanged) in the name of the undersigned or, in the case of a book-entry
delivery of Private Notes, please credit the account indicated above maintained
at the Book-Entry Transfer Facility. Similarly, unless otherwise indicated
under the box entitled "Special Delivery Instructions" below, please send the
Exchange Notes (and, if applicable, substitute certificates representing
Private Notes for any Private Notes not exchanged) to the undersigned at the
address shown above in the box entitled "Description of Private Notes."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF PRIVATE
NOTES" ABOVE AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE
TENDERED THE PRIVATE NOTES AS SET FORTH IN SUCH BOX ABOVE.
4
<PAGE> 5
<TABLE>
<S><C>
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4) (SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if certificates for To be completed ONLY if certificates for
Private Notes not exchanged and/or Exchange Private Notes not exchanged and/or Exchange
Notes are to be issued in the name of and Notes are to be sent to someone other than
sent to someone other than the person or the person or persons whose signature(s)
persons whose signature(s) appear(s) below on appear(s) below on this Letter of
this Letter of Transmittal, or if Private Transmittal or to such person or persons at
Notes delivered by book-entry transfer which an address other than shown above in the box
are not accepted for exchange are to be entitled "Description of Private Notes" on
returned by credit to an account maintained this Letter of Transmittal.
at the Book-Entry Transfer Facility other Mail: Exchange Notes and/or Private Notes to:
than the account indicated above.
Issue: Exchange Notes and/or Private Notes to: Name(s)_______________________________________
(PLEASE TYPE OR PRINT)
Name(s)_______________________________________
(PLEASE TYPE OR PRINT)
______________________________________________
(PLEASE TYPE OR PRINT)
______________________________________________ Address_______________________________________
(PLEASE TYPE OR PRINT)
Address_______________________________________ ______________________________________________
(ZIP CODE) (ZIPCODE)
/ / Credit unexchanged Private Notes delivered
by book-entry transfer to the Book-Entry
Transfer Facility account set forth below.
(Book-Entry Transfer Facility Account Number,
if applicable)
</TABLE>
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH THE
CERTIFICATES FOR PRIVATE NOTES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER
required DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY
THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETION.
<TABLE>
<S><C>
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(Complete Accompanying Substitute Form W-9 on reverse side)
__________________________________ ________________________________
__________________________________ ________________________________
__________________________________ ________________________________
Signature(s) of Owner Date
Area Code and Telephone Number________________________________________________________________
If a holder is tendering any Private Notes, this Letter of Transmittal must be signed by the registered holder(s) as the
name(s) appear(s) on the certificate(s) for the Private Notes or on a securities position listing or by any person(s) authorized to
become registered holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor,
administrator, guardian, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See
Instruction 3.
Name(s):_________________________________________________________________________________________________________________________
(Please Type or Print)
Capacity:_________________________________________________________________________________________________________________________
Address:__________________________________________________________________________________________________________________________
__________________________________________________________________________________________________________________________________
(Including Zip Code)
SIGNATURE GUARANTEE
(If required by Instruction 3)
Signature(s) Guaranteed by
an Eligible Institution: __________________________________________________________________________________________________________
(Authorized Signature)
__________________________________________________________________________________________________________________________________
(Title)
__________________________________________________________________________________________________________________________________
(Name and Firm)
Dated: ___________________________________________________________________________________________________________________, 199__
</TABLE>
5
<PAGE> 6
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER OF BROOKS FIBER
PROPERTIES, INC.
TO EXCHANGE ITS 10% SENIOR NOTES DUE JUNE 1, 2007 FOR ALL OF ITS OUTSTANDING
10% SENIOR NOTES DUE JUNE 1, 2007
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND NOTES; GUARANTEED DELIVERY
PROCEDURES.
This Letter of Transmittal is to be completed by holders of Private Notes
either if certificates are to be forwarded herewith or if tenders are to be
made pursuant to the procedures for delivery by book-entry transfer set forth
in "The Exchange Offer--Book-Entry Transfer" section of the Prospectus.
Certificates for all physically tendered Private Notes, or Book-Entry
Confirmation, as the case may be, as well as a properly completed and duly
executed Letter of Transmittal (or manually signed facsimile hereof) and any
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent at the address set forth herein on or prior to the Expiration
Date, or the tendering holder must comply with the guaranteed delivery
procedures set forth below. Private Notes tendered hereby must be in
denominations of principal amount of $1,000 and any integral multiple thereof.
Holders of Private Notes whose certificates for Private Notes are not
immediately available or who cannot deliver their certificates and all other
required documents to the Exchange Agent on or prior to the Expiration Date, or
who cannot complete the procedure for book-entry transfer on a timely basis,
may tender their Private Notes pursuant to the guaranteed delivery procedures
set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of
the Prospectus. Pursuant to such procedures, (i) such tender must be made
through an Eligible Institution (as defined below), (ii) prior to the
Expiration Date, the Exchange Agent must receive from such Eligible Institution
a properly completed and duly executed Letter of Transmittal (or a facsimile
thereof) and Notice of Guaranteed Delivery, substantially in the form provided
by the Company (by telegram, telex, facsimile transmission, mail or hand
delivery), setting forth the name and address of the holder of Private Notes
and the amount of Private Notes tendered, stating that the tender is being made
thereby and guaranteeing that within five New York Stock Exchange ("NYSE")
trading days after the date of execution of the Notice of Guaranteed Delivery,
the certificates for all physically tendered Private Notes, or a Book-Entry
Confirmation, and any other documents required by this Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent, and
(iii) the certificates for all physically tendered Private Notes, in proper
form for transfer, or Book-Entry Confirmation, as the case may be, and all
other documents required by this Letter of Transmittal, are received by the
Exchange Agent within five NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE PRIVATE NOTES
AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE TENDERING
HOLDERS, BUT THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED OR
CONFIRMED BY THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY
INSURED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO
THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE. DO NOT SEND THIS LETTER OF TRANSMITTAL OR ANY PRIVATE NOTES TO THE
COMPANY.
See "The Exchange Offer" section of the Prospectus.
2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF PRIVATE NOTES WHO TENDER BY
BOOK-ENTRY TRANSFER); WITHDRAWAL RIGHTS
Tenders of Private Notes will be accepted only in the principal amount of
$1,000 and integral multiples thereof. If less than all of the Private Notes
evidenced by a submitted certificate are to be tendered, the tendering
holder(s) should fill in the aggregate principal amount of Private Notes to be
tendered in the box above entitled "Description of Private Notes--Principal
Amount Tendered." A reissued certificate representing the balance of
nontendered Private Notes will be sent to such tendering holder, unless
otherwise provided in the appropriate box on this Letter of Transmittal,
promptly after the Expiration Date. ALL OF THE PRIVATE NOTES DELIVERED TO THE
EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN TENDERED UNLESS OTHERWISE INDICATED.
Except as otherwise provided herein, tenders of Private Notes may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective on or prior to that time, a written, telegraphic,
telex or facsimile transmission of such notice of withdrawal must be timely
received by the Exchange Agent at one of its addresses set forth above on or
prior to the Expiration Date. Any such notice of withdrawal must specify the
name of the person who tendered the Private Notes to be withdrawn, the
aggregate principal amount of Private Notes to be withdrawn and (if
certificates for such Private Notes have been tendered) the name of the
registered holder of the Private Notes as set forth on the certificate for the
Private Notes, if different from that of the person who tendered such Private
Notes. If certificates for the Private Notes have been delivered or otherwise
identified to the Exchange Agent, then prior to the physical release of such
certificates for the Private Notes, the tendering holder must submit the serial
numbers shown on the particular certificates for the Private Notes to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by
an Eligible Institution, except in the case of Private Notes tendered for the
account of an Eligible Institution. If Private Notes have been tendered
pursuant to the procedures for book-entry transfer set forth in "The Exchange
Offer--Book-Entry Transfer" section of the Prospectus, the notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawal of Private Notes, in which case a
notice of withdrawal will be effective if delivered to the Exchange Agent by
written, telegraphic, telex or facsimile transmission. Withdrawals of tenders
of Private Notes may not be rescinded. Private Notes properly withdrawn will
not be deemed to have been validly tendered for purposes of the Exchange Offer,
and no Exchange Notes will be issued with respect thereto unless the Private
Notes so withdrawn are validly retendered. Properly withdrawn Private Notes
may be retendered at any subsequent time on or prior to the Expiration Date by
following the procedures described in the Prospectus under "The Exchange
Offer--Procedures for Tendering."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any employees, agents, affiliates or assigns of the
Company, the Exchange Agent nor any other person shall be under any duty to
give any notification of any irregularities in any notice of withdrawal or
incur any liability for failure to give such notification. Any Private Notes
which have been tendered but which are withdrawn will be returned to the holder
thereof without cost to such holder as promptly as practicable after
withdrawal.
3. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES
If this Letter of Transmittal is signed by the registered holder of the
Private Notes tendered hereby, the signature must correspond exactly with the
name as written on the face of the certificates or on a securities position
listing without any change whatsoever.
6
<PAGE> 7
If any tendered Private Notes are owned of record by two or more joint
owners, all of such owners must sign this Letter of Transmittal.
If any tendered Private Notes are registered in different names on several
certificates or securities positions listings, it will be necessary to
complete, sign and submit as many separate copies of this Letter as there are
different registrations.
When this Letter of Transmittal is signed by the registered holder or
holders of the Private Notes specified herein and tendered hereby, no
endorsements of certificates or separate bond powers are required. If,
however, the Exchange Notes are to be issued, or any untendered Private Notes
are to be reissued, to a person other than the registered holder, then
endorsements of any certificates transmitted hereby or separate bond powers are
required. Signatures on such certificate(s) must be guaranteed by an Eligible
Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of any certificate(s) specified herein, such
certificate(s) must be endorsed or accompanied by appropriate bond powers, in
either case signed exactly as the name or names of the registered holder or
holders appear(s) on the certificate(s), and the signatures on such
certificate(s) must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any certificates or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
ENDORSEMENTS ON CERTIFICATES FOR PRIVATE NOTES OR SIGNATURES ON BOND
POWERS REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH IS A
MEMBER OF A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR TRUST
COMPANY HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES (AN "ELIGIBLE
INSTITUTION").
SIGNATURES ON THIS LETTER OF TRANSMITTAL NEED NOT BE GUARANTEED BY AN
ELIGIBLE INSTITUTION, PROVIDED THE PRIVATE NOTES ARE TENDERED: (I) BY A
REGISTERED HOLDER OF PRIVATE NOTES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE
OFFER, INCLUDES ANY PARTICIPANT IN THE BOOK-ENTRY TRANSFER FACILITY SYSTEM
WHOSE NAME APPEARS ON A SECURITY POSITION LISTING AS THE HOLDERS OF SUCH
PRIVATE NOTES) WHO HAS NOT COMPLETED THE BOX ENTITLED "SPECIAL ISSUANCE
INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS" ON THIS LETTER OR (II) FOR THE
ACCOUNT OF AN ELIGIBLE INSTITUTION.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders of Private Notes should indicate in the applicable box
the name and address to which Exchange Notes issued pursuant to the Exchange
Offer and/or substitute certificates evidencing Private Notes not exchanged are
to be issued or sent, if different from the name or address of the person
signing this Letter of Transmittal. In the case of issuance in a different
name, the employer identification or social security number of the person named
must also be indicated. A holder of Private Notes tendering Private Notes by
book-entry transfer may request that Private Notes not exchanged be credited to
such account maintained at the Book-Entry Transfer Facility as such holder may
designate hereon. If no such instructions are given, such Private Notes not
exchanged will be returned to the name or address of the person signing this
Letter of Transmittal.
5. TAX IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering holder whose
Private Notes are accepted for exchange must provide the Company (as payor)
with such holder's correct Taxpayer Identification Number ("TIN") on Substitute
Form W-9 below, which, in the case of a tendering holder who is an individual,
is his or her social security number. If the Company is not provided with the
current TIN or an adequate basis for an exemption, such tendering holder may be
subject to a $50 penalty imposed by the Internal Revenue Service. In addition,
delivery to such tendering holder of Exchange Notes may be subject to backup
withholding in an amount equal to 31% of all reportable payments made after the
exchange. If withholding results in an overpayment of taxes, a refund may be
obtained.
Exempt holders of Private Notes (including, among others, all corporations
and certain foreign individuals) are not subject to these backup withholding
and reporting requirements. See the enclosed Guidelines of Certification of
Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines")
for additional instructions.
To prevent backup withholding, each tendering holder of Private Notes
must provide its correct TIN by completing the Substitute Form W-9 set forth
below, certifying that the TIN provided is correct (or that such holder is
awaiting a TIN) and that (i) the holder is exempt from backup withholding, (ii)
the holder has not been notified by the Internal Revenue Service that such
holder is subject to backup withholding as a result of a failure to report all
interest or dividends or (iii) the Internal Revenue Service has notified the
holder that such holder is no longer subject to backup withholding. If the
tendering holder of Private Notes is a nonresident alien or foreign entity not
subject to backup withholding, such holder must give the Company a completed
Form W-8, Certificate of Foreign Status. These forms may be obtained from the
Exchange Agent. If the Private Notes are in more than one name or are not in
the name of the actual owner, such holder should consult the W-9 Guidelines for
information on which TIN to report. If such holder does not have a TIN, such
holder should consult the W-9 Guidelines for instructions on applying for a TIN,
check the box in Part 2 of the Substitute Form W-9 and write "applied for" in
lieu of its TIN. Note: Checking this box and writing "applied for" on the form
means that such holder has already applied for a TIN or that such holder intends
to apply for one in the near future. If such holder does not provide its TIN to
the Company within 60 days, backup withholding will begin and continue until
such holder furnishes its TIN to the Company.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the
transfer of Private Notes to it or its order pursuant to the Exchange Offer.
If, however, Exchange Notes and/or substitute Private Notes not exchanged are
to be delivered to, or are to be registered or issued in the name of, any
person other than the registered holder of the Private Notes tendered hereby,
or if tendered Private Notes are registered in the name of any person other
than the person signing this Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the transfer of Private Notes to the Company
or its order pursuant to the Exchange Offer, the amount of any such transfer
taxes (whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted herewith, the amount of such
transfer taxes will be billed directly to such tendering holder.
7
<PAGE> 8
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE PRIVATE NOTES SPECIFIED IN THIS LETTER
OF TRANSMITTAL.
7. DETERMINATION OF VALIDITY.
The Company will determine, in its sole discretion, all questions as to
the form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Private Notes, which determination
shall be final and binding on all parties. The Company reserves the absolute
right to reject any and all tenders determined by it not to be in proper form
or the acceptance of which, or exchange for which, may, in the view of counsel
to the Company, be unlawful. The Company also reserves the absolute right,
subject to applicable law, to waive any of the conditions of the Exchange Offer
set forth in the Prospectus under the caption "The Exchange Offer" or any
conditions or irregularity in any tender of Private Notes of any particular
holder whether or not similar conditions or irregularities are waived in the
case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will
be final and binding. No tender of Private Notes will be deemed to have been
validly made until all irregularities with respect to such tender have been
cured or waived. Although the Company intends to notify holders of defects or
irregularities with respect to tenders of Private Notes, neither the Company,
any employees, agents, affiliates or assigns of the Company, the Exchange
Agent, nor any other person shall be under any duty to give notification of any
irregularities in tenders or incur any liability for failure to give such
notification.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Private Notes, by execution of this Letter
of Transmittal, shall waive any right to receive notice of the acceptance of
their Private Notes for exchange.
9. MUTILATED, LOST, STOLEN OR DESTROYED PRIVATE NOTES.
Any holder whose Private Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Prospectus and this Letter of Transmittal, may be
directed to the Exchange Agent, at the address and telephone number indicated
above.
8
<PAGE> 9
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
PAYOR'S NAME: THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
=================================================================================================================
SUBSTITUTE PART 1-PLEASE PROVIDE YOUR TIN IN TIN:____________________________
FORM W-9 THE BOX AT RIGHT AND CERTIFY BY SOCIAL SECURITY NUMBER OR
DEPARTMENT OF THE TREASURY SIGNING AND DATING BELOW EMPLOYER IDENTIFICATION NUMBER
INTERNAL REVENUE SERVICE
PAYOR'S REQUEST FOR
TAXPAYER
IDENTIFICATION NUMBER
("TIN") AND
CERTIFICATION
PART 2--TIN APPLIED FOR [ ]
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
(1) the number shown on this form is my correct Taxpayer
Identification Number (or I am waiting for a number to be issued to
me).
(2) I am not subject to backup withholding either because: (a) I am
exempt from backup withholding, or (b) I have not been notified by
the Internal Revenue Service (the "IRS") that I am subject to backup
withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject
to backup withholding, and
(3) any other information provided on this form is true and correct.
SIGNATURE____________________________________ DATE___________
You must cross out item (2) of the above certification if you have been notified by the IRS that
you are subject to backup withholding because of underreporting of interest or dividends on your
tax return and you have not been notified by the IRS that you are no longer subject to backup
withholding.
=================================================================================================================
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of the exchange, 31
percent of all reportable payments made to me thereafter will be withheld until
I provide a number.
_____________________________________________ _____________________
SIGNATURE DATE
9
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY FOR
TENDER OF 10% SENIOR NOTES
DUE JUNE 1, 2007 OF BROOKS FIBER PROPERTIES, INC.
This form or one substantially equivalent hereto must be used to accept
the Exchange Offer of Brooks Fiber Properties, Inc., a Delaware corporation
(the "Company"), made pursuant to the Prospectus, dated June ___, 1997 (the
"Prospectus"), if certificates for the outstanding 10% Senior Notes due June 1,
2007 of the Company (the "Private Notes") are not immediately available or if
the procedure for book-entry transfer cannot be completed on a timely basis or
time will not permit all required documents to reach The Bank of New York (the
"Exchange Agent") on or prior to 5:00 p.m., New York City time, on the
Expiration Date of the Exchange Offer. This Notice of Guaranteed Delivery may
be delivered or transmitted by telegram, telex, facsimile transmission, mail or
hand delivery to the Exchange Agent as set forth below. See "The Exchange
Offer--Procedures for Tendering" in the Prospectus. In addition, in order to
utilize the guaranteed delivery procedure to tender Private Notes pursuant to
the Exchange Offer, a completed, signed and dated Letter of Transmittal (or a
manually signed facsimile thereof) must also be received by the Exchange Agent
on or prior to 5:00 p.m., New York City time, on the Expiration Date.
Capitalized terms used herein but not defined herein have the respective
meanings given to them in the Prospectus.
Delivery To:
THE BANK OF NEW YORK, Exchange Agent
<TABLE>
<S> <C> <C>
By Mail By Overnight Courier or Hand:
The Bank of New York The Bank of New York
One Wall Street - 27 One Wall Street - 27 By Facsimile:
New York, New York 10286 Corporate Trust & Agency Services Window (212) 571-3080
Attention: New York, New York 10286 Confirm by Telephone
Reorganization Section Attention: Reorganization Section (212) 815-2742
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA
FACSIMILE OTHER THEN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
Ladies and Gentlemen:
Upon the terms and conditions set forth in the Prospectus and the related
Letter of Transmittal, the undersigned hereby tenders to the Company the
principal amount of Private Notes set forth below, pursuant to the guaranteed
delivery procedures described in the Prospectus under the caption "The Exchange
Offer-- Guaranteed Delivery Procedures."
<TABLE>
<S> <C>
Principal Amount of Private Notes Tendered:*
$_________________________________________
If Private Notes will be delivered by
book-entry transfer to The Depository Trust
Certificate Nos. (if available) Company, provide account number.
Total Principal Amount Represented by
Private Notes Certificate(s):
$__________________________________________ Account Number___________________________
</TABLE>
_______________
*Must be in denominations of principal amount of $1,000 and any integral
multiple thereof
<PAGE> 2
________________________________________________________________________________
AN AUTHORITY HEREIN CONFERRED OR AGREED TO BE CONFERRED SHALL SURVIVE THE
DEATH OR INCAPACITY OF THE UNDERSIGNED, AND EVERY OBLIGATION OF THE UNDERSIGNED
HEREUNDER SHALL BE BINDING UPON THE HEIRS, PERSONAL REPRESENTATIVES, SUCCESSORS
AND ASSIGNS OF THE UNDERSIGNED.
________________________________________________________________________________
PLEASE SIGN HERE
<TABLE>
<S> <C>
X____________________________________ _______________
X____________________________________ _______________
Signature(s) of Owner(s) Date
or Authorized Signatory
</TABLE>
Area Code and Telephone Number:_____________________________________
Must be signed by the holder(s) of Private Notes as their name(s)
appear(s) on certificates for Private Notes or on a security position listing,
or by person(s) authorized to become registered holder(s) by endorsement and
documents transmitted with this Notice of Guaranteed Delivery. If signature is
by trustee, executor, administrator, guardian, attorney-in-fact, officer or
other person acting in a fiduciary or representative capacity, such person must
set forth his or her full title below.
PLEASE PRINT NAME(S) AND ADDRESS(ES)
<TABLE>
<S> <C>
Name(s):
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
Capacity:
_______________________________________________________________
Address(es):
_______________________________________________________________
</TABLE>
GUARANTEE
The undersigned, a member of a registered national securities exchange, or
a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the
United States, hereby guarantees that the certificates representing the
principal amount of Private Notes tendered hereby in proper form for transfer,
or timely confirmation of the book-entry transfer of such Private Notes into
the Exchange Agent's account at The Depository Trust Company pursuant to the
procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures"
section of the Prospectus, together with one or more properly completed and
duly executed Letter(s) of Transmittal (or a manually signed facsimile thereof)
with any required signature guarantee and any other documents required by the
Letter of Transmittal, will be received by the Exchange Agent at the address
set forth above, no later than five New York Stock Exchange trading days after
the date of execution hereof.
<TABLE>
<S><C>
______________________ _________________________________
Name of Firm Authorized Signature
______________________ _________________________________
Address Title
Name:
______________________ ____________________________
Zip Code (Please Type or Print)
Area Code and Tel. No. Dated:
____________________ __________________________
</TABLE>
NOTE: DO NOT SEND CERTIFICATES FOR PRIVATE NOTES WITH THIS NOTICE OF
GUARANTEED DELIVERY. ACTUAL SURRENDER OF PRIVATE NOTES MUST BE MADE
PURSUANT TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND DULY EXECUTED
LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
<PAGE> 1
EXHIBIT 99.3
BROOKS FIBER PROPERTIES, INC.
OFFER TO EXCHANGE ITS 10% SENIOR NOTES
DUE JUNE 1, 2007 FOR ALL ITS OUTSTANDING
10% SENIOR NOTES DUE JUNE 1, 2007
To: Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Brooks Fiber Properties, Inc., a Delaware corporation (the "Company"), is
offering, upon and subject to the terms and conditions set forth in the
Prospectus, dated June ____, 1997 (the "Prospectus"), and the enclosed Letter
of Transmittal (the "Letter of Transmittal"), to exchange (the "Exchange
Offer") its 10% Senior Notes due June 1, 2007 (the "Exchange Notes"), which
have been registered under the Securities Act of 1933, as amended, for any and
all of its outstanding 10% Senior Notes due June 1, 2007 (the "Private Notes"
and together with the Exchange Notes, the "Notes"). The Exchange Offer is
being made in order to satisfy certain obligations of the Company contained in
the Exchange and Registration Rights Agreement dated May 29, 1997, between the
Company and the initial purchasers of the Private Notes referred to therein.
We are requesting that you contact your clients for whom you hold Private
Notes regarding the Exchange Offer. For your information and for forwarding to
your clients for whom you hold Private Notes registered in your name or in the
name of your nominee, or who hold Private Notes registered in their own names,
we are enclosing the following documents:
1. The Prospectus;
2. The Letter of Transmittal for your use and for
the information of your clients;
3. A Notice of Guaranteed Delivery to be used to
accept the Exchange Offer if certificates for Private Notes
are not immediately available or time will not permit all
required documents to reach the Exchange Agent prior to the
Expiration Date (as defined below) or if the procedure for
book-entry transfer cannot be completed on a timely basis;
4. A form of letter which may be sent to your
clients for whose account you hold Private Notes registered in
your name or the name of your nominee, with space provided for
obtaining such clients' instructions with regard to the
Exchange Offer;
5. Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9; and
6. Return envelopes addressed to The Bank of New
York, the Exchange Agent for the Private Notes.
YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00
P.M., NEW YORK CITY TIME, ON JULY ___, 1997, UNLESS EXTENDED BY THE COMPANY
(THE "EXPIRATION DATE"). PRIVATE NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER
MAY BE WITHDRAWN AT ANY TIME BEFORE THE EXPIRATION DATE.
To participate in the Exchange Offer, a duly executed and properly
completed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees and any other required documents, should be sent to the
Exchange Agent and certificates representing Private Notes should be delivered
to the Exchange Agent, all in accordance with the instructions set forth in the
Letter of Transmittal and the Prospectus.
If holders of Private Notes wish to tender, but it is impracticable for
them to forward their certificates for Private Notes prior to the expiration of
the Exchange Offer or to comply with the book-entry transfer procedures on a
timely basis, a tender may be effected by following the guaranteed delivery
procedures described in the Prospectus under "The Exchange Offer--Guaranteed
Delivery Procedures."
The Company will not pay any fees or commissions to brokers, dealers or
other persons for soliciting exchanges of Notes pursuant to the Exchange Offer.
The Company will, however, upon request, reimburse brokers, dealers,
commercial banks and trust companies for reasonable and necessary costs and
expenses incurred by them in forwarding the Prospectus and the related
documents to the beneficial owners of Private Notes held by them as nominee or
in a fiduciary capacity. The Company will pay or cause to be paid all stock
transfer taxes applicable to
<PAGE> 2
the exchange of Private Notes pursuant to the Exchange Offer, except as set
forth in Instruction 6 of the Letter of Transmittal.
Any inquiries you may have with respect to the Exchange Offer, or requests
for additional copies of the enclosed materials, should be directed to The Bank
of New York, the Exchange Agent, at its address and telephone number set forth
on the front of the Letter of Transmittal.
Very truly yours,
BROOKS FIBER PROPERTIES, INC.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR
ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF OF EITHER
OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS EXPRESSLY
MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.
Enclosures
<PAGE> 1
EXHIBIT 99.4
BROOKS FIBER PROPERTIES, INC.
OFFER TO EXCHANGE ITS 10% SENIOR NOTES
DUE JUNE 1, 2007 FOR ALL ITS OUTSTANDING
10% SENIOR NOTES DUE JUNE 1, 2007
To Our Clients:
Enclosed for your consideration is a Prospectus, dated June ___, 1997 (the
"Prospectus"), and the associated Letter of Transmittal (the "Letter of
Transmittal"), relating to the offer (the "Exchange Offer") of Brooks Fiber
Properties, Inc., a Delaware corporation (the "Company"), to exchange its 10%
Senior Notes due June 1, 2007, which have been registered under the Securities
Act of 1933, as amended (the "Exchange Notes"), for any and all of its
outstanding 10% Senior Notes due June 1, 2007 (the "Private Notes"), upon the
terms and subject to the conditions described in the Prospectus and the Letter
of Transmittal. The Exchange Offer is being made in order to satisfy certain
obligations of the Company contained in the Exchange and Registration Rights
Agreement dated May 29, 1997, by and among the Company and the initial
purchasers of the Private Notes referred to herein.
This material is being forwarded to you as the beneficial owner of the
Private Notes carried by us in your account but not registered in your name. A
TENDER OF SUCH PRIVATE NOTES MAY ONLY BE MADE BY US AS THE HOLDER OF RECORD AND
PURSUANT TO YOUR INSTRUCTIONS.
Accordingly, we request instructions as to whether you wish us to tender
on your behalf the Private Notes held by us for your account, pursuant to the
terms and conditions set forth in the enclosed Prospectus and Letter of
Transmittal.
Your instructions should be forwarded to us as promptly as possible in
order to permit us to tender the Private Notes on your behalf in accordance
with the provisions of the Exchange Offer. THE EXCHANGE OFFER WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON JULY ___ , 1997, UNLESS EXTENDED BY THE
COMPANY (THE "EXPIRATION DATE"). ANY PRIVATE NOTES TENDERED PURSUANT TO THE
EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE THE EXPIRATION DATE.
Your attention is directed to the following:
1. The Exchange Offer is for any and all Private
Notes.
2. Any transfer taxes incident to the exchange of
Private Notes pursuant to the Exchange Offer will be paid by
the Company.
3. The Exchange Offer expires at 5:00 p.m., New York
City time, on July ___, 1997, unless extended by the Company.
If you wish to have us tender your Private Notes, please so instruct us by
completing, executing and returning to us the instruction form enclosed herein.
THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATION ONLY AND MAY NOT
BE USED BY YOU TO TENDER PRIVATE NOTES.
<PAGE> 2
INSTRUCTIONS WITH RESPECT TO
THE EXCHANGE OFFER
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer made by Brooks
Fiber Properties, Inc. with respect to its Private Notes.
This will instruct you to tender the Private Notes held by you for the
account of the undersigned, upon and subject to the terms and conditions set
forth in the Prospectus and the related Letter of Transmittal.
Please tender the Private Notes held by you for my account as indicated
below:
10% Senior Notes due June 1, 2007............. Aggregate Principal Amount
of Private Notes
/ / Please do not tender any Private ____________________________
Notes held by you for my account.
Dated:____________, 1997
______________________________
Signature(s)
______________________________
______________________________
______________________________
Please print name(s) here
______________________________
______________________________
Address(es)
______________________________
Area Code and Telephone Number
______________________________
Tax Identification or
Social Security No.(s)
NONE OF THE PRIVATE NOTES HELD BY US FOR YOUR ACCOUNT WILL BE TENDERED
UNLESS WE RECEIVE WRITTEN INSTRUCTIONS FROM YOU TO DO SO. UNLESS A SPECIFIC
CONTRARY INSTRUCTION IS GIVEN IN THE SPACE PROVIDED, YOUR SIGNATURE(S) HEREON
SHALL CONSTITUTE AN INSTRUCTION TO US TO TENDER ALL THE PRIVATE NOTES HELD BY
US FOR YOUR ACCOUNT.
<PAGE> 1
EXHIBIT 99.5
June ___, 1997
EXCHANGE AGENT AGREEMENT
The Bank of New York
Corporate Trust Trustee Administration
101 Barclay Street - 21st Floor
New York, New York 10286
Ladies and Gentlemen:
Brooks Fiber Properties, Inc., a Delaware corporation (the "Company"),
proposes to make an offer (the "Exchange Offer") to exchange up to $250,000,000
aggregate principal amount of its 10% Senior Notes due June 1, 2007 (the
" Exchange Notes"), for a like principal amount of its outstanding 10% Senior
Notes due June 1, 2007 (the "Private Notes"). The terms and conditions of the
Exchange Offer are set forth in a prospectus (the "Prospectus") included in the
Company's registration statement on Form S-4 (File No. 333- ), as amended
(the "Registration Statement"), filed with the Securities and Exchange
Commission (the "SEC"), proposed to be distributed to all record holders of the
Private Notes. The Private Notes and the Exchange Notes are collectively
referred to herein as the "Notes." Capitalized terms used herein and not
defined shall have the respective meanings ascribed to them in the Prospectus.
The Company hereby appoints The Bank of New York to act as exchange agent
(the "Exchange Agent") in connection with the Exchange Offer. References
hereinafter to "you" shall refer to The Bank of New York.
The Exchange Offer is expected to be commenced by the Company on or about
June ___, 1997. The Letter of Transmittal accompanying the Prospectus is to
be used by the holders of the Private Notes to accept the Exchange Offer and
contains instructions with respect to the delivery of certificates for Private
Notes tendered.
The Exchange Offer shall expire at 5:00 P.M., New York City time, on
July ___, 1997, or on such later date or time to which the Company may extend
the Exchange Offer (the "Expiration Date"). Subject to the terms and
conditions set forth in the Prospectus, the Company expressly reserves the
right to extend the Exchange Offer from time to time and may extend the
Exchange Offer by giving oral (confirmed in writing) or written notice to you
before 9:00 A.M., New York City time, on the business day theretofor scheduled
as the Expiration Date.
The Company expressly reserves the right, in its sole discretion, to amend
or terminate the Exchange Offer, and not to accept for exchange any Private
Notes not theretofore accepted for exchange. The Company will give oral
(confirmed in writing) or written notice of any amendment, termination or
nonacceptance to you as promptly as practicable.
In carrying out your duties as Exchange Agent, you are to act in
accordance with the following instructions:
1. You will perform such duties and only such duties as are specifically
set forth in the section of the Prospectus captioned "The Exchange Offer" or as
specifically set forth herein; provided, however, that in no way will your
general duty to act in good faith and without
1
<PAGE> 2
gross negligence or willful misconduct be limited by the foregoing.
2. You will establish an account with respect to the Private Notes at The
Depository Trust Company (the "Book-Entry Transfer Facility") for purposes of
the Exchange Offer within two business days after the date of the Prospectus,
and any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of the Private Notes by causing
the Book-Entry Transfer Facility to transfer such Private Notes into your
account in accordance with the Book-Entry Transfer Facility's procedures for
such transfer.
3. You are to examine each of the Letters of Transmittal and certificates
for Private Notes (and confirmation of book-entry transfers of Private Notes
into your account at the Book-Entry Transfer Facility) and any other documents
delivered or mailed to you by or for holders of the Private Notes, to ascertain
whether: (i) the Letters of Transmittal, certificates and any such other
documents are duly executed and properly completed in accordance with
instructions set forth therein and that such book-entry confirmations are in
due and proper form and contain the information required to be set forth
therein, and (ii) the Private Notes have otherwise been properly tendered. In
each case where the Letter of Transmittal or any other document has been
improperly completed or executed, or where book-entry confirmations are not in
due and proper form or omit certain information, or any of the certificates for
Private Notes are not in proper form for transfer or some other irregularity in
connection with the acceptance of the Exchange Offer exists, you will endeavor
to inform the presenters of the need for fulfillment of all requirements and to
take any other action as may be necessary or advisable to cause such
irregularity to be corrected.
4. With the approval of the Vice Chairman and Chief Executive Officer or
the Executive Vice President and Chief Financial Officer of the Company (such
approval, if given orally, to be confirmed in writing) or any other party
designated by such an officer in writing, you are authorized to waive any
irregularities in connection with any tender of Private Notes pursuant to the
Exchange Offer.
5. Tenders of Private Notes may be made only as set forth in the Letter of
Transmittal and in the section of the Prospectus captioned "The Exchange Offer
Procedures for Tendering", and Private Notes shall be considered properly
tendered to you only when tendered in accordance with the procedures set forth
therein. Notwithstanding the provisions of this paragraph 5, Private Notes
which the Vice Chairman and Chief Executive Officer or the Executive Vice
President and Chief Financial Officer or any other designated officer of the
Company shall approve as having been properly tendered shall be considered to
be properly tendered (such approval, if given orally, shall be confirmed in
writing).
6. You shall advise the Company with respect to any Private Notes received
subsequent to the Expiration Date and accept its instructions with respect to
disposition of such Private Notes.
7. You shall accept tenders:
(a) in cases where the Private Notes are registered in two or more
names only if signed by all named holders;
(b) in cases where the signing person (as indicated on the Letter of
Transmittal) is acting in a fiduciary or a representative capacity only when
proper evidence of his or her authority so to act is submitted; and
(c) from persons other than the registered holder of Private Notes
provided that customary transfer requirements, including any applicable
transfer taxes, are
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fulfilled.
You shall accept partial tenders of Private Notes when so indicated and as
permitted in the Letter of Transmittal and deliver certificates for Private
Notes to the transfer agent for split-up and return any untendered Private
Notes to the holder (or such other person as may be designated in the Letter of
Transmittal) as promptly as practicable after expiration or termination of the
Exchange Offer.
8. Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Company will notify you (such notice if given orally, to be
confirmed in writing) of its acceptance, promptly after the Expiration Date, of
all Private Notes properly tendered and you, on behalf of the Company, will
exchange such Private Notes for Exchange Notes and cause such Private Notes to
be canceled. Delivery of Exchange Notes will be made on behalf of the Company
by you at the rate of $1,000 principal amount of Exchange Notes for each $1,000
principal amount of the Private Notes tendered promptly after notice (such
notice if given orally, to be confirmed in writing) of acceptance of said
Private Notes by the Company; provided, however, that in all cases, Private
Notes tendered pursuant to the Exchange Offer will be exchanged only after
timely receipt by you of certificates for such Private Notes (or confirmation
of book-entry transfer into your account at the Book-Entry Transfer Facility),
a properly completed and, except as described in the section of the Prospectus
captioned "The Exchange Offer - Procedures for Tendering", duly executed Letter
of Transmittal (or facsimile thereof) with any required signature guarantees
and any other required documents. Unless otherwise instructed by the Company,
you shall issue Exchange Notes only in denominations of $1,000 or any integral
multiple thereof.
9. Tenders pursuant to the Exchange Offer are irrevocable, except that,
subject to the terms and upon the conditions set forth in the Prospectus and
the Letter of Transmittal, Private Notes tendered pursuant to the Exchange
Officer may be withdrawn at any time on or prior to the Expiration Date in
accordance with the terms of the Exchange Offer.
10. The Company shall not be required to exchange any Private Notes
tendered if any of the conditions set forth in the Exchange Offer are not met.
Notice of any decision by the Company not to exchange any Private Notes
tendered shall be given (and confirmed in writing) by the Company to you.
11. If, pursuant to the Exchange Offer, the Company does not accept for
exchange all or part of the Private Notes tendered because of an invalid
tender, the occurrence of certain other events set forth in the Prospectus or
otherwise, you shall as soon as practicable after the expiration or termination
of the Exchange Offer return those certificates for unaccepted Private Notes
(or effect appropriate book-entry transfer), together with any related required
documents and the Letters of Transmittal relating thereto that are in your
possession, to the persons who deposited them (or effected such book-entry
transfer).
12. All certificates for reissued Private Notes, unaccepted Private Notes
or for Exchange Notes (other than those effected by book-entry transfer) shall
be forwarded by (a) first-class certified mail, return receipt requested, under
a blanket surety bond obtained by you protecting you and the Company from loss
or liability arising out of the nonreceipt or nondelivery of such certificates
or (b) by registered mail insured by you separately for the replacement value
of each of such certificates.
13. You are not authorized to pay or offer to pay any concessions,
commissions or other solicitation fees to any broker, dealer, commercial bank,
trust company or other nominee or to engage or use any person to solicit
tenders.
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14. As Exchange Agent hereunder, you:
(a) shall have no duties or obligations other than those specifically
set forth in the Prospectus, the Letter of Transmittal or herein or as may be
subsequently agreed to in writing by you and the Company;
(b) will be regarded as making no representations and having no
responsibilities as to the validity, sufficiency, value or genuineness of any
of the certificates for the Private Notes deposited with you pursuant to the
Exchange Offer, and will not be required to and will make no representation as
to the validity, value or genuineness of the Exchange Offer;
(c) shall not be obligated to take any legal action hereunder which
might in your reasonable judgment involve any expense or liability, unless you
shall have been furnished with reasonable indemnity;
(d) may reasonably rely on and shall be protected in acting in
reliance upon any certificate, instrument, opinion, notice, letter, telegram or
other document or security delivered to you and reasonably believed by you to
be genuine and to have been signed by the proper party or parties;
(e) may reasonably act upon any tender, statement, request, comment,
agreement or other instrument whatsoever not only as to its due execution and
validity and effectiveness of its provisions, but also as to the truth and
accuracy of any information contained therein, which you shall in good faith
believe to be genuine or to have been signed or represented by a proper person
or persons;
(f) may rely on and shall be protected in acting upon written or oral
instructions from any officer of the Company;
(g) may consult with your counsel with respect to any questions
relating to your duties and responsibilities, and the written opinion of such
counsel shall be full and complete authorization and protection in respect of
any action taken, suffered or omitted to be taken by you hereunder in good
faith and in accordance with the written opinion of such counsel; and
(h) shall not advise any person tendering Private Notes pursuant to
the Exchange Offer as to whether to tender or refrain from tendering all or any
portion of Private Notes or as to the market value, decline or appreciation in
market value of any Private Notes that may or not occur as a result of the
Exchange Offer or as to the market value of the Exchange Notes; provided,
however, that in no way will your general duty to act in good faith and without
gross negligence or willful misconduct be limited by the foregoing.
15. You shall take such action as may from time to time be requested by
the Company or its counsel (and such other action as you may reasonably deem
appropriate) to furnish copies of the Prospectus, Letter of Transmittal and the
Notice of Guaranteed Delivery (as defined in the Prospectus) or such other
forms as may be approved from time to time by the Company, to all persons
requesting such documents and to accept and comply with telephone requests for
information relating to the Exchange Offer, provided such information shall
relate only to the procedures for accepting (or withdrawing from) the Exchange
Offer. The Company will furnish you with copies of such documents at your
request.
16. You shall advise by facsimile transmission or telephone, and promptly
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thereafter confirm in writing to David L. Solomon, Executive Vice President and
Chief Financial Officer of the Company and such other person or persons as the
Company may request, daily (and more frequently during the week immediately
preceding the Expiration Date and if otherwise requested) up to and including
the Expiration Date, as to the aggregate principal amount of Private Notes
which have been duly tendered pursuant to the Exchange Offer and the items
received by you pursuant to the Exchange Offer and this Agreement, separately
reporting and giving cumulative totals as to items properly received and items
improperly received. In addition, you will also inform, and cooperate in
making available to, the Company or any such other person or persons upon oral
request made from time to time prior to the Expiration Date of such other
information as it or he or she reasonably requests. Such cooperation shall
include, without limitation, the granting by you to the Company and such person
as the Company may request of access to those persons on your staff who are
responsible for receiving tenders, in order to ensure that immediately prior
to the Expiration Date the Company shall have received information in
sufficient detail to enable it to decide whether to extend the Exchange Offer.
You shall prepare a final list of all persons whose tenders were accepted, the
aggregate principal amount of Private Notes tendered, the aggregate principal
amount of Private Notes accepted and the identity of any Participating Broker-
Dealers and the aggregate principal amount of Exchange Notes delivered to each,
and deliver said list to the Company.
17. Letters of Transmittal, book-entry confirmations and Notices of
Guaranteed Delivery received by you shall be preserved by you for a period of
time at least equal to the period of time you preserve other records pertaining
to the transfer of securities, or one year, whichever is longer, and thereafter
shall be delivered by you to the Company. You shall dispose of unused Letters
of Transmittal and other surplus materials as instructed by the Company.
18. You hereby expressly waive any lien, encumbrance or right of set-off
whatsoever that you may have with respect to funds deposited with you for the
payment of transfer taxes by reasons of amounts, if any, borrowed by the
Company, or any of its subsidiaries or affiliates pursuant to any loan or
credit agreement with you or for compensation owed to you hereunder.
19. For services rendered as Exchange Agent hereunder, you shall be
entitled to such compensation as set forth on Schedule I attached hereto.
20. You hereby acknowledge receipt of the Prospectus and the Letter of
Transmittal and further acknowledge that you have examined each of them. Any
inconsistency between this Agreement, on the one hand, and the Prospectus and
the Letter of Transmittal (as they may be amended from time to time), on the
other hand, shall be resolved in favor of the latter two documents, except with
respect to the duties, liabilities and indemnification of you as Exchange
Agent, which shall be controlled by this Agreement.
21. The Company covenants and agrees to indemnify and hold you harmless in
your capacity as Exchange Agent hereunder against any loss, liability, cost or
expense, including attorneys' fees and expenses arising out of or in connection
with any act, omission, delay or refusal made by you in reliance upon any
signature, endorsement, assignment, certificate, order, request, notice,
instruction or other instrument or document reasonably believed by you to be
valid, genuine and sufficient and in accepting any tender or effecting any
transfer of Private Notes reasonably believed by you in good faith to be
authorized, and in delaying or refusing in good faith to accept any tenders or
effect any transfer of Private Notes; provided, however, that anything in this
Agreement to the contrary notwithstanding, the Company shall not be liable for
indemnification or otherwise for any loss, liability, cost or expense to the
extent arising out of your gross negligence or willful misconduct. In no case
shall the Company be liable under this indemnity with respect to any claim
against you unless the Company shall be notified by you, by
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letter or cable or by facsimile which is confirmed by letter, of the written
assertion of a claim against you or of any other action commenced against you,
promptly after you shall have received any such written assertion or notice of
commencement of action. The Company shall be entitled to participate, at
its own expense, in the defense of any such claim or other action, and, if the
Company so elects, the Company may assume the defense of any pending or
threatened action against you in respect of which indemnification may be sought
hereunder, in which case the Company shall not thereafter be responsible for
the subsequently-incurred fees and disbursements of legal counsel for you under
this paragraph so long as the Company shall retain counsel reasonably
satisfactory to you to defend such suit; provided, that the Company shall not
be entitled to assume the defense of any such action if the named parties to
such action include both you and the Company and representation of both parties
by the same legal counsel would, in the written opinion of your counsel, be
inappropriate due to actual or potential conflicting interests between you and
the Company. You understand and agree that the Company shall not be liable
under this paragraph for the fees and expenses of more than one legal counsel
for you.
22. You shall arrange to comply with all requirements under the tax laws
of the United States, including those relating to missing Tax Identification
Numbers, and shall file any appropriate reports with the Internal Revenue
Service. The Company understands that you are required, in certain instances,
to deduct thirty-one percent (31%) with respect to interest paid on the
Exchange Notes and proceeds from the sale, exchange, redemption or retirement
of the Exchange Notes from holders who have not supplied their correct Taxpayer
Identification Number or required certification. Such funds will be turned
over to the Internal Revenue Service in accordance with applicable regulations.
23. You shall notify the Company of the amount of any transfer taxes
payable in respect of the exchange of Private Notes and, upon receipt of a
written approval from the Company, shall deliver or cause to be delivered, in a
timely manner to each governmental authority to which any transfer taxes are
payable in respect of the exchange of Private Notes, your check in the amount
of all transfer taxes so payable, and the Company shall reimburse you for the
amount of any and all transfer taxes payable in respect of the exchange of
Private Notes; provided, however, that you shall reimburse the Company for
amounts refunded to you in respect of your payment of any such transfer taxes,
at such time as such refund is received by you.
24. This Agreement and your appointment as Exchange Agent hereunder shall
be construed and enforced in accordance with the laws of the State of New York
applicable to agreements made and to be performed entirely within such state,
and without regard to conflicts of law principles.
25. This Agreement shall be binding upon and inure solely to the benefit
of each party hereto and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other person any right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement. Without
limitation of the foregoing, the parties hereto expressly agree that no holder
of Private Notes or Exchange Notes shall have any right, benefit or remedy of
any nature whatsoever under, or by reason of, this Agreement.
26. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, and all of which taken together shall
constitute one and the same agreement.
27. In case any provision of this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
28. This Agreement shall not be deemed or construed to be modified,
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amended, rescinded, canceled or waived, in whole or in part, except by a
written instrument signed by a duly authorized representative of the party to
be charged.
29. Unless otherwise provided herein, all notices, requests and other
communications to any party hereunder shall be in writing (including facsimile
or similar writing) and shall be given to such party, addressed to it, at its
address or telecopy number set forth below:
If to the Company:
Brooks Fiber Properties, Inc.
425 Woods Mills Road South, Suite 300
Town & Country, Missouri 63017
Facsimile: (314) 579-4654
Attention: David L. Solomon, Executive Vice President and
Chief Financial Officer
With a copy to:
Bryan Cave, LLP
211 N. Broadway, Suite 3600
St. Louis, Missouri 63102-2750
Facsimile: (314) 259-2020
Attention: John P. Denneen, Esq.
If to the Exchange Agent:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Facsimile (212) 815-5915
Attention: Corporate Trust Trustee Administration
30. Unless terminated earlier by the parties hereto, this Agreement shall
terminate 90 days following the Expiration Date. Notwithstanding the
foregoing, paragraphs 17, 19, 21 and 23 shall survive the termination of this
Agreement. Upon any termination of this Agreement, you shall promptly deliver
to the Company any certificates for Notes, funds or property then held by you
as Exchange Agent under this Agreement.
31. This Agreement shall be binding and effective as of the date hereof.
(the remainder of page intentionally left blank)
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Please acknowledge receipt of this Agreement and confirm the arrangements
herein provided by signing and returning the enclosed copy.
BROOKS FIBER PROPERTIES, INC.
By:________________________________
Name: David L. Solomon
Title: Executive Vice President and
Chief Financial Officer
Accepted as the date
first above written:
THE BANK OF NEW YORK, as
Exchange Agent
By:___________________________________
Name:
Title:
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SCHEDULE I
FEE SCHEDULE FOR
EXCHANGE AGENT SERVICES
I. ACCEPTANCE FEE Waived
Our Acceptance Fee includes review of all relevant documentation, closing
of transaction, setting up records and opening accounts.
II. ADMINISTRATIVE FEE $2,500
Our administrative fee covers all duties of the Agent including
distributing exchange offer documents to DTC, receipt and examination of
required exchange offer documentation, reporting to company, calculation
of and delivery to participants and DTC. Fees shall be billed upon
closing.
III. OUT OF POCKET EXPENSES
All out-of-pocket expenses including but not limited to postage, express
mail, telecopier, long distance telephone, wire transfer charges, courier
expenses, or other expense incurred by the Bank during its acceptance and
administration shall be billed at cost as incurred.
IV. EXTRAORDINARY SERVICES
Charges for the performance of any service not of a routine
administrative nature or not contemplated at closing and specifically
covered elsewhere in this schedule of fees will be determined by
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